Case Study: His Board and His COO Advised Against It, but Dave Kvederis Felt He Had to Act Fast
Dave Kvederis stood looking out the window of his office in San Francisco's financial district. Driving rain had slowed traffic and flooded the streets. But on the morning of February 15, 2005, Kvederis was more concerned with the storm he was about to unleash at his financial services and technology firm, BankServ.
Kvederis had called an all-hands meeting for 8:30 to break the news that BankServ would be undergoing a major reorganization--for some of the 47 employees, the second one in a year. Naturally, he was uneasy. Was he heading off an inevitable crisis, or creating an unnecessary one? The hardest time to make a big change, after all, is when none is required. As a dot-com survivor, he also knew that big changes are easier to make when a company is healthy.
Kvederis had founded his automated payments, wire transfer, and check-processing firm in 1996, after noting the popularity of online airline tickets. He thought more sophisticated transactions were likely to go paperless, as well. His hunch proved correct, and though BankServ nearly flamed out during the dot-com bust, by late 2004 the company had 300-plus customers--mostly banks, brokerages, and thrifts--in 51 countries. Revenue was in the neighborhood of $15 million.
But despite the growth, something was wrong at BankServ. Kvederis had noticed his formerly happy employees seemed less content. In October 2004, a key technical manager jumped ship to a competitor. Two months later, another top manager announced that she was leaving for a vice president post at a financial services start-up. He managed to convince her to stay but was shaken by the incident. Compensation wasn't the issue for either of the two disaffected employees. Their main beef? There was no room for career development at BankServ.
That struck Kvederis as odd. BankServ was a two-time Inc. 500 company and he was expecting revenue to grow 30 percent in the last quarter of 2004. The company's board was satisfied with the trajectory. But long discussions with the unhappy manager and subsequent conversations with other BankServ execs caused Kvederis to scrutinize the operational structure of the company.
It wasn't the first time he had done so. In the fall of 2004, BankServ's chief operating and financial officer, Peter Hosokawa, had proposed a plan to reorganize the company's product-development efforts, consolidating technology teams working on three different product lines in an effort to get the entire company behind new initiatives. Kvederis, who spent most of his time running the sales side of the organization, approved the idea, and Hosokawa began laying the groundwork for the plan, which would take several months to implement. Kvederis had faith in his COO, whom he credited with saving the company from oblivion during the dark days of the dot-com bust by making hard decisions about where to cut and instituting strict spending rules that called for the CEO or COO to sign off on just about everything.
BankServ had survived and begun to grow again. In 2004, the company acquired two London-based companies to expand its global presence. Now that the crisis had passed, the spending strictures and centralized decision making started to feel counterproductive. Some of this was because of the increasingly global nature of BankServ's business. California tends to be asleep when Europe is awake and vice versa. "A sales guy who needed to buy a $90 plane ticket to get from London to Barcelona to call on a customer had to get clearance from the CEO," Kvederis says. "It sometimes took two or three days."
Ambitious employees subjected to this heavy-handed treatment began to feel that the company was slowing them down. Even worse, they started to harbor thoughts that their drive would better serve them at other companies where they might be rewarded with enhanced responsibilities, something that BankServ seemed unable to provide.
And that wasn't the only problem. In the wake of Hosokawa's new plan, a schism had developed between managers dictating product development and some of the company's technology troops. The tech staffers felt excluded from important decisions and argued the company was focusing too much on flashy Web projects and not enough on nuts-and-bolts technology development. Kvederis, who was busy running sales, didn't learn about the problems until the exit interview with his erstwhile tech manager. When Kvederis asked his own sales teams, they too felt that many product-development decisions were being made without their input.
Rather than intervening in the dispute, he stepped back and examined his company's organizational structure. It seemed clear that decision-making power was concentrated in too few hands. Perhaps BankServ needed a major restructuring.
Of course, a major reorganization could lead to complete chaos. Strict controls have benefits--namely, keeping costs in line. Several of his most trusted top managers, including Hosokawa, expressed misgivings, particularly with the company performing so well in its existing form. BankServ's board also expressed strong doubts. Why, they asked him, was he trying to fix something that wasn't broken? If the reorganization offended more than it helped, employee morale, already low, would get even worse. Only one key manager had left thus far. What would happen if the new organizational structure caused other key senior executives to quit? Would the chaos caused by their departure outweigh the potential creativity and productivity benefits of a reorganization?
The meeting began promptly at 8:30. It was standing room only as BankServ's San Francisco staffers crowded into the company's long, narrow conference room and spilled out into the next room through open double doors; others were conferenced in from London. The mood was tense. Kvederis got straight to the point. BankServ would be reorganized into three separate units built around the company's three strongest customer segments: international banking, wire transfer, and enterprise payment services.
The unit heads would have profit-and-loss responsibility and would be able to hire employees and spend money as they chose as long as they remained within budget. The company also created a separate CFO position for the first time. Kvederis would assume a more strategic role and step back from the day-to-day management of sales. This would allow each unit to run its own sales team and, theoretically, foster stronger connections between sales and product development. Top managers would take a larger percentage of their salaries as performance bonuses, and their salaries would go up or down based on the P&L of their unit. Hosokawa would head the enterprise payment services unit. The former CEO of one of the London-based acquisitions would head the international unit. And a third manager would head wire services.
At first, Kvederis's fears of chaos seemed to come true. The plan was a difficult pill to swallow for some managers, who were accustomed to doing their jobs across the entire organization rather than for a specific department. Salespeople were unhappy that they'd no longer be reporting directly to Kvederis. And the new business-unit heads struggled to get their footing, especially when it came to customer contract negotiations, something that Kvederis had handled himself. "They were very uncomfortable and unsure of themselves," he says.
Within four months, two of the five new senior managers had left the company. One was the head of the international unit. The other was Hosokawa, who had argued that by splitting into three small units, BankServ would lack the critical mass needed to compete against larger rivals. He also felt that his own reorganization plan had never been given the chance to succeed. Hosokawa took a job as CFO at a fast-growing mobile-payments start-up called Obopay. The move was painful for Kvederis. "When the dot-com meltdown happened and we were in our darkest hour," he says, "Pete was crucial to our survival." All told, about 10 percent of the BankServ work force left, and Kvederis was worried. "It wasn't clear that the reorganization was the smartest thing to do," he says.
Fortunately, his board members were supportive. They understood that it took time for reorganizations to work. And by June 2005, things seemed to be falling into place. To head the enterprise payment unit, Kvederis tapped a former colleague he had known for 25 years, and he hired an executive at a longtime supplier to head the international division. It didn't take long for the new unit heads to settle into a rhythm.
To be sure, the new structure created some inefficiencies. Salespeople from the three different business units, for example, might call on the same customer. But Kvederis says the positives far outweigh the negatives. Product development gathered a new head of steam. Long stalled projects--including a currency swapping tool and a way for Quicken users to export data from BankServ transactions directly into QuickBooks ledgers--were put on the front burner. And since he freed himself from daily sales chores, Kvederis has been able to think more strategically about customers and products. He expects BankServ's growth rate to climb to 40 percent in 2007. "I don't think we would have sustained our growth rate had we not made the change," he says. "The company might have continued doing well, but today there is a whole new level of excitement."
The Experts Weigh In
Too much, too soon
Typically, you don't do these things all at once, especially when the business is doing well. You usually spring off one unit and let it run separately. You find a good manager to head it, and you use it as a model. When you do everything at once, a lot of people get indigestion. Reorganizing may have been the right solution, but Kvederis did it rather awkwardly. That's why he had some problems and lost some good people.
Professor of management and organization
USC Marshall School of Business
Open the kimono more
It was definitely a sound business decision, especially from an employee-empowerment perspective. It's just the way that he went about it that could have been done better. Kvederis could have solicited more input and really involved all his employees. He could have opened up his kimono a little bit and said, "People are leaving and I'm concerned." If he would have more effectively communicated ahead of time, they would not have had to speculate on what this reorg meant and there would have been less confusion and perhaps less turnover."
Roberts Golden Consulting
Good for growth
When an organization hits a particular point in its growth curve, it needs to adapt and become more sophisticated. That's clearly something Kvederis identified. And I am very much an advocate of trying to push decision making out to the field. It's a key factor I've seen in successful growing companies. Regarding the COO who left, usually someone who is good at pulling you through a crisis is not the best guy to put in charge of expansive growth.
COO of global sales
Citigroup Alternative Investments
New York City
What do you think? Was Kvederis right about reorganizing his company? Sound off at email@example.com.