Trouble's inevitable. What do you do when a crisis hits? Take advantage of it -- and hang on tight.
One morning in January 2001, Sandra Brittain woke up and realized that she had three weeks to save her company. Her Cheyenne, Wyo., business, Denali Ventures (#133), had ended the previous year with revenues of $1.7 million. In February, unless Brittain did something fast, it would have no sales. Zero.
Denali prepares foreclosed houses for sale -- a niche that makes it vulnerable to the whims of large clients like the U.S. Department of Housing and Urban Development (HUD). HUD accounted for 98% of Denali's sales until early in 2000, when Brittain landed her first large private-sector contract with the Associates, a financial-services company. So when Brittain's relationship with HUD's prime contractor began souring, late that year, she felt confident enough to walk away from the $3-million government contract.
Then, in January, Brittain got word that the Associates contract would be canceled on February 1. She recalls thinking, "Oh, shit -- I just turned down $3 million in business." Just in time, Denali nailed a juicy 48-state contract with Horizon Mortgage Services. But unfortunately, that was just the beginning of more problems.
To handle the bank's business, Brittain set up field offices in 24 states, hired 70 employees, bought a fleet of new trucks and trailers, and equipped her employees with cell phones and credit cards. That model had worked perfectly for the HUD contract, and she assumed it would serve her private-sector client just as well. She was wrong. HUD's properties had been close together; Horizon Mortgage Services' weren't. Denali's employees weren't working fast enough, and by July, Denali had lost more than $700,000. Horizon told Denali: Perform or lose the contract. "Our entire business was about to collapse," says Brittain. Again.
From her perspective, there was only one solution: shut down the field offices immediately and restructure Denali using contractors. But her partner and then husband, Charley Dickey, disagreed. "In August we had the final showdown," recalls Brittain. "I told him, 'That's it -- these changes need to happen with or without you." Dickey relented, seeing finally that their business model was "a lost cause," he says. Brittain closed all but two field offices, laid off 50 employees, redesigned her quality-control system, and hauled all her field assets back to Cheyenne, where the idle trucks and office equipment were a constant reminder of wasted resources. She then began radically changing the company's business model, signing on independent contractors and selling off capital assets to them. Horizon was placated. Denali turned the corner in October of last year and has been profitable since then. Still, the company paid a high price for its miscalculations: a $900,000-plus loss last year on revenues of $4.2 million."I know I made the right decisions," says Brittain, "but they were awfully painful."
16 % of the Inc 500 CEOs surveyed said their company was in the same business and had the same target market as when it was launched.
For Brittain, those twists and turns ended up being growing pains rather than death throes. In that, she's a typical Inc 500 entrepreneur. If there is a single defining characteristic of an Inc 500 company builder, it is resilience -- the ability to stand up to the punch of change when it hits you in the face and not just survive it but turn it to your advantage. And the 2002 Inc 500 CEOs certainly have seen their share of change. Of those CEOs who responded to this year's survey, only 16% are still selling the same products or services to the same markets as they set out to do when their companies were founded. The rest said their companies had expanded into new markets (34%), added new products or services (41%), or changed so substantially that they are now in a different industry (7%), with the remaining companies reporting that they had altered their course in some other way.
Interestingly enough, for many Inc 500 CEOs, the point at which they transformed their companies was also the moment when liftoff occurred; many of the businesses puttered along at stasis for years and then suddenly accelerated full tilt following a change of industry, product, or organization.
Consider the story of Don Helfgott, who cofounded Inspiration Software (#310). For 12 years, the Portland, Oreg., company grew at a respectable 50% rate annually and gave him and his cofounder, ex-wife Mona Westhaver, a good living. But in 1996 their product, which helped people map out ideas visually, was becoming increasingly expensive to market. Sales were flagging. Helfgott took a deep breath and revised the software and pushed it aggressively into the more robust educational K-12 market. "We were about 75% done with the last version of the software for the business market when we decided to completely change the direction of the company," he recalls. What if the education market, which then accounted for just 10% of the company's revenues, didn't pan out? Helfgott took the chance, and Inspiration, 15 years after he founded it, truly realized its potential. In the past five years it's grown 745%, to $17 million in 2001 sales, with profit margins greater than 25%. Today the education market accounts for 97% of Inspiration's sales.
CRISIS POINT: "Our entire business was about to collapse," says Sandra Brittain of Denali Ventures.
So adaptability and opportunism are the keys to fast growth, yes? To win, one must embrace the long-held notion that, in business as in life, the only constant is change?
Well, not exactly. Almost a decade ago Jim Collins busted that myth in his best-selling book Built to Last. "A visionary company," he wrote, "almost religiously preserves its core ideology -- changing it seldom, if ever.... The basic purpose of a visionary company -- its reason for being -- can serve as a guiding beacon for centuries, like an enduring star on the horizon." So what gives? We know from the past two decades of research on Inc 500 companies that the majority of the organizations are hardly fast-growth stars that burn out after a few dazzling years. Rather, they stick around, and many become the household names at the heart of the American economy. So, if Collins was right, how can the bulk of Inc 500 companies change so much and yet do so well? Indeed, how can we possibly claim the reason for their outstanding growth is their embrace of change?
There are two clues to the answer. One, of course, lies in the bold ways in which the companies adapt to change, both the kind forced on them and the kind they choose. The other may well be even more important: it is that the Inc 500 CEO is by definition a persistent animal. Moreover, he or she instinctively knows where to direct that persistence: toward the survival of the company, not to the survival of the first big idea. Visionary CEOs, wrote Collins, must "be prepared to kill, revise, or evolve an idea ... but never give up on the company. If you equate the success of your company with success of a specific idea -- as many businesspeople do -- then you're more likely to give up on the company if that idea fails; and if that idea happens to succeed, you're more likely to have an emotional love affair with that idea and stick with it too long, when the company should be moving vigorously on to other things."
Progressing vigorously on to other things was just what Nolia Brandt wanted to do in 1998, when she persuaded her husband, Bill Brandt, to let her take the helm of their Tallahassee, Fla., information-technology company. Brandt Information Services (#481), which Bill had founded in 1985, had been chugging along fine since then with a solid customer base of Florida government agencies, 10 employees, and steady, if unimpressive, revenues. Here was a classic case of an idea that worked well -- but whose time had probably come and gone. Nolia had bigger things in mind.
Nolia Brandt took over her husband's role as CEO. He got a backseat, a bruised ego, and a rapidly expanding company in return.
Nolia, then a part-time vice-president at the business, had been pushing Bill for years to grow the company. Now that they were approaching their fifties, the time seemed right. The government market, which was interested in harnessing the power of new technology, was hungry for their services. Nolia, a perpetual student, was completing a Ph.D. program -- a multidisciplinary melange of studies in human-resources development, organization theory, and economics -- and she was eager to apply what she had learned. "If we ever want to grow this company," she declared to Bill, "we should do it now."
There was just one ticklish problem: Bill was, by his own admission, ill suited to company-building tasks. "He's technically brilliant," observes Nolia, "but he doesn't like handling personnel issues, recruiting, strategic planning, and organizing." Nolia does. The couple agreed to switch roles; Nolia became president and CEO, and Bill became director of technology and a vice-president. They even restructured the company's ownership, putting a majority of shares in Nolia's name (a strategy that would also allow the company to qualify for government contracts for female business owners).
Not surprisingly, the couple struggled with the transition. "There are certain ego issues you have to get over," says Bill, who admits to having a stomach pang the first time he had to tell his longtime employees to "check with Nolia."
The company, which was then bringing in approximately half a million dollars in revenues, had been plagued by thin margins but had always operated debt free; Nolia was determined to grow it on cash flow. A government conference on supplier diversity opened her eyes to outsourcing, which she saw as a cost-effective way to add functions that the company had previously done without. She found companies to help her with financial forecasting, marketing, and strategic planning; she also outsourced payroll and human resources. To help her navigate Florida's government bureaucracy, she hired a political adviser, who taught her how to keep abreast of legislative changes that would affect how she sold her consulting services to government clients. She went to the Jim Moran Institute for Global Entrepreneurship, at Florida State University, and asked its executive director, Jerry Osteryoung, to teach her how to analyze a spreadsheet, market her company, and price her services. "If you have to learn just through trial and error, it's going to be very slow," she says. "If you can take a course or hire good advisers, then the learning curve is shortened."
Her efforts paid off. In four years Brandt Information Services grew from 10 to 35 employees and expanded its customer base from 2 states to 12; last year its revenues reached $3.2 million. The company has also developed three software programs, which Nolia hopes will one day account for a much larger share of Brandt's revenues than their current 20%. Ultimately, she thinks, product sales provide a steadier stream of recurring revenues than billable personnel hours do. "That's where real wealth is created," she says. Although she predicts that revenues will increase only slightly this year, she's aiming for a 50% increase next year. Is it a realistic goal? "No," she shoots back. "None of my goals are realistic. But I keep meeting them anyway."
ON FAITH: Inspiration Software's Don Helfgott revamped a 14-year-old product and entered a new market, and his company took off.
The Brandts moved purposely out of their comfort zone and reaped the rewards they had hoped for. But more often, change is thrust on you by the kind of adversity that tests not only your resilience but your ability to catapult back. Such was the case for Bob Lokken. The CEO of ProClarity (#59), a software developer in Boise, Idaho, vividly recalls the day he first learned that Microsoft might soon enter his marketplace. "There was a feeling deep in my gut that my whole world was about to be turned upside down," he says. Lokken and his eight employees had spent two and a half years creating software that helped companies store and analyze sales and marketing data. When Lokken founded the company with four partners, in 1995, the Redmond giant hadn't tapped the analytic-database market. By late 1997, ProClarity had won such customers as Hewlett-Packard and the Veterans Hospital Administration in Seattle. Lokken was feeling good.
But in March 1998, Microsoft announced that it had acquired an Israeli company whose technology would compete directly with Pro-Clarity's. "It took me about three seconds to realize that this was going to change everything we had worked on," Lokken says. He briefly considered adapting his own product to a specific industry, such as health care, but quickly concluded that no matter what he did, Microsoft would eventually dominate the market.
Within 48 hours, he and his partners decided not to compete with Microsoft. They would exploit the company's entry into the market instead. But to do so, they would have to scrap the fruits of ProClarity's labor and develop an entirely new product, a front end that would work with Microsoft's back-end analytic database. "At that point, many of us weren't even drawing a salary," Lokken says. "And we took our first revenue-generating product and threw it away."
|For Fast Growth, Sell Smart|
|Percentage of Inc 500 CEOs surveyed who said that one of their growth strategies was to|
|Actively and systematically search out new products or services||45 %|
|Actively and systematically search out new markets for existing products or services||71 %|
|Concentrate on selling "more of the same" to existing customers||38 %|
|Seek growth through an acquisition or merger||12 %|
Still, Lokken didn't even think of closing his doors, and he refused to lay anyone off. He finagled another $2 million for product development out of his original group of private investors, and he put his customer-service staff out on the street as IT consultants. "We made payroll out of consulting revenue," he says.
Eighteen months later ProClarity had developed new software. Next, Lokken needed to persuade Microsoft to help market the new product. So the company's spartan sales force went back to a handful of their old customers and offered them ProClarity's product free when they purchased the Microsoft database, hoping for a little promotional help in return. They got it. Their satisfied customers agreed to become subjects in case studies, which ProClarity produced, showing the ways in which they were using ProClarity's software with Microsoft's technology. ProClarity then presented the case studies to Microsoft.
It wasn't an easy sell. The world is filled with tiny companies like ProClarity that are eager to breathe the rarefied air of a Microsoft alliance. But ProClarity's case studies provided Microsoft with a marketing tool for its own customers. "We didn't ask them for anything," says Lokken. "But we added value to what they were doing in the marketplace." The upshot: Lokken says that five other companies tried to execute a strategy similar to ProClarity's. Today four have gone out of business and the fifth has stopped selling software that competes with ProClarity's offerings.
ProClarity, which will break even this year, has in five years grown 2,641%, to $12 million; Lokken expects revenues of $18 million this year. "If we were going to change, we needed to change completely and focus every bit of energy we had on the new product," he says. Was the transformation disruptive to his company? Sure. But, says Lokken, "we wouldn't be in business right now if we hadn't done it."
Lokken could find a resilient compatriot in Greg Hasley, who had a similar experience. Back in 1994, Hasley had a brilliant idea. He would start a traditional business -- a courier company -- but eschew the industry model of using contract drivers. By hiring drivers as employees, he reckoned, he'd have better control of them and of his company, EagleOne (#316).
This year that brilliant idea almost killed his business.
Hasley didn't see it coming. After all, his Fort Smith, Ark., courier service grew 732% in the past five years. Not bad for a low-tech business. And he had accountability; he knew where his employees were and what they were doing. He could control it all. That is, until last January, when his insurance agent called with bad news: coverage for his fleet of courier trucks would increase more than 250%, from $4,800 a month to $17,000. He had one week's notice. "After 9/11, no one wanted to insure trucks," says Hasley.
He might have been able to absorb the cost if it weren't for what had happened the previous autumn: his workers' compensation insurance had jumped 400%. "In three years we had two large claims that were just horrific," he says. His previous carrier had refused to renew the company's policy, and the new quote, from a different company, was the lowest his agent was able to negotiate. "When we got the notice about the automobile insurance, that was the final straw," recalls Hasley. "There's no doubt that those premiums could have put us out of business."
Just a few days after receiving the insurance notice, he announced to his 70 drivers that they would have to become independent contractors within 60 days or lose their jobs. He had three criteria for the transition: it had to be seamless to customers, good for the drivers, and profitable for the company. "We sat down with the drivers, and we did a P&L for each route, showed them what they were making now and what they could make under the new system," says Hasley. "It was 10% to 40% more profitable for them after they pulled out expenses for insurance and vehicles."
Still, not everyone has the wherewithal or the desire to be an independent business owner. As it turned out, only 40% of his drivers were game, but the number could have been far less if Hasley hadn't handled the transition the way he did. He counseled his drivers and offered a $300 incentive to anyone who converted to independent contractor the first week. Some drivers bought vehicles from the company's fleet with bank loans guaranteed by Hasley. A third-party administrator was hired to pay the drivers and set up tax- escrow accounts. Drivers could also purchase from the administrator job-accident insurance for $20 a week and health insurance at market rates. Still, concedes Hasley, "we had a couple of weeks that were a little bumpy."
EagleOne now has just 24 employees -- down from almost 100 in February -- and 65 independent contractors. Hasley says his former employees are making more money than ever and that his customers are better served. Because drivers are now paid a percentage of what the company makes on their deliveries, drivers are motivated to be on time and make more deliveries.
The transition forced Hasley to be more efficient as well. "One of the things we had overlooked was our overhead costs," he says. "We didn't factor that into route profitability." He's consolidated routes to decrease overhead, making them as profitable as possible for both the company and its contractors. And everyone watches his own bottom line. "For us to be successful, the drivers have to be successful," says Hasley. "In the first six months since the transition, we've been more profitable than all of last year." He expects revenues to increase slightly this year, to $4.5 million, and is projecting profitability in the 4%-to-6% range next year.
In retrospect, those exorbitant insurance rates may have been a blessing in disguise. "It forced us into doing something we probably should have done five years ago," says Hasley.
But without a threat hanging over his head, would Hasley have ever revamped his business? It was imminent disaster that compelled him to abandon an idea that he once thought would distinguish his company from its competitors. Who dares to reject today's formula for success in favor of the unknown? Most of us need a kick in the pants, whether it's from a competitor, a customer, or a partner.
It's comforting to assume, too, that once a company reaches a particular stage, you can breathe a little easier. Don't believe it. Look, for instance, at Hasley, whose place on the Inc 500 list was established before his insurance debacle hit. He might have easily joined the tiny but telling group of Inc 500 companies that go out of business before the list is published. And Sandra Brittain, who boasted at the end of 2000 that "if I make one more dollar next year, we'll be at 187 on the Inc 500 list," was soon to experience the most tumultuous year of her company's history. "It was a year of education," she says ruefully. "Harvard would have been cheaper."
But probably not as useful. Because if you've survived a major business transformation once, chances are that you'll do it better the next time around. And maybe next time, you'll even see it coming.
Donna Fenn is a contributing editor at Inc.
The Ride of Your Life
Six Ways to Outrun the Competition
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DONNA FENN is the author of Upstarts! How Gen-Y Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.