How an entrepreneur from Singapore opened my eyes to what I have to do to remain competitive in Springfield.
FACING FACTS Jack Stack—CEO of SRC Holdings, a $400 million business in Springfield, Missouri—realized he had to make some changes.
Courtest ESYS Technologies
WORLD BEATER Vikas Goel has 112 offices in 33 countries—and a highly creative financing plan.
I can pinpoint the moment last June when I had the uneasy feeling that I had just gotten a glimpse of the future of business, and it wasn't what I'd expected. The occasion was a meeting in Monte Carlo with one of the company founders competing to be named World Entrepreneur of the Year. I was there as the American judge on the panel brought together by the program's sponsor, Ernst & Young. The winner would be announced at an awards ceremony attended by hundreds of entrepreneurs from around the world. Although I've been helping to select the U.S. Entrepreneur of the Year for more than a decade, I had never been involved in the international judging, and I'd spent a fair amount of time trying to get prepared. But nothing could have prepared me for Vikas Goel.
Goel is the 36-year-old CEO of a Singapore-based company called eSys Technologies, which he founded in 2000. Born in India, he had arrived in Singapore in 1996 with no capital and no contacts. Four years later, he launched eSys with one employee and a part-time staff member working in a one-room office. On the surface, his timing could hardly have been worse, since right about then the bottom dropped out of his chosen line of business, the distribution of computer components.
But where others saw potential disaster, Goel saw opportunity. And by 2005, the company had sales approaching $2 billion, 112 offices in 33 countries, and four manufacturing plants where its employees assembled the products it had begun to sell under its own brand name, including a PC that went for about $250 at retail. Goel had accomplished this, moreover, without taking on any long-term debt or bringing in any outside investors--and while operating with a gross margin of as little as 3 percent. Yes, 3 percent. With his cost of goods sold running at 97 percent of sales, he had to cover all his expenses--sales and marketing, engineering, G&A, the works--out of the meager 3 percent left over. Yet, even so, the company had been profitable every year. Its net pretax margin was less than 1 percent, but the fact that eSys had net profit at all was incredible. In all my years in business, I'd never seen such a feat. That record had earned Goel his designation as Singapore's Entrepreneur of the Year in 2005 and made him a leading candidate for World Entrepreneur of the Year in 2006.
Even more amazing than what Goel had done was how he'd done it, coming up with a slew of innovative techniques that had allowed him to slash not only his cost of goods sold but also virtually every other expense. One such technique was something he called Total Business Outsourcing, which involved centralizing business functions at a single facility in a low-cost, high-skilled country. Thus, for example, a visitor arriving at the eSys office in, say, Chino, California, would be greeted by a receptionist in India who appeared on a plasma screen and communicated with the guest via VoIP.
Goel had been equally creative in developing a low-cost, centralized Enterprise Resource Planning system that connected and monitored all of eSys's facilities through the Internet, thus allowing the entire company to operate in real time and online. He had harnessed other technology to automate computer manufacturing plants in Dubai, New Delhi, Singapore, and Los Angeles and to build a revolutionary distribution system--integrating manufacturing facilities with regional supply chain hubs--that, according to the company, gave it the lowest inventory holding costs in its industry and got its products to market faster than any of its competitors. Indeed, Goel claimed that eSys was 500 percent more efficient operationally than the rest of the industry, with the thinnest gross margins and the lowest expense-to-sales ratio. I didn't doubt it.
What really bowled me over, though, was the way Goel had financed the business. He began with the observation that vendor credit is the cheapest financing money can buy: It costs nothing. In contrast, bank credit comes with an annual interest expense of about 6 percent and long-term credit costs about 8 percent. Equity is the most expensive capital, since investors usually expect compounded annual returns of 20 percent or more. Clearly vendor credit is the way to go, provided you can get it. One way is to demonstrate through your performance that you have the potential to become a very large and reliable customer. Goel did that and then went a crucial step further. He realized he could make vendors and lenders even more comfortable about extending credit by buying insurance on whatever the company owed them and making them the beneficiaries. This gave eSys access to additional capital at a fraction of the usual cost--the equivalent of about 2 percent annual interest.
It was this innovative low-cost or no-cost positive cash flow model, as Goel called it, that allowed eSys to grow as fast as it did and get established in so many countries in such a short span of time. After five years of breakneck expansion, the company had $350 million in vendor credit and $150 million in bank lines, and not even a penny of long-term debt or outside equity. With this relatively cheap capital, eSys had acquired 12 money-losing businesses in markets around the world, turned them around by applying its innovative cost-cutting methods, and become a global business virtually overnight.
It was, in fact, the first truly global start-up I'd ever seen. By that I mean it was the first company I knew of to operate worldwide almost from day one, taking advantage of the cost savings available in different countries. Goel and his people went about their cost-cutting methodically. They would break down every aspect of the business into a set of processes, figure out how to make the processes as efficient as possible, and then use the latest Internet-based technology to set up the operation wherever the company could achieve the greatest savings. Accordingly, eSys located its distribution hubs in Dubai, New Delhi, Los Angeles, Singapore, and Amsterdam in order to reduce inventory holding costs. For credit insurance, it went to Switzerland and Germany, where it could get the best rates. It set up IT services and back-office operations in India. It handled finances out of Singapore, which has the lowest effective tax rate in the world--below even that of Hong Kong and Ireland. And if Singapore ever raises its taxes, eSys can move the corporate offices to any country that offers a better deal.
Contributing editor Jack Stack is president and CEO of SRC Holdings Corp., based in Springfield, Missouri. The company's innovative style of open-book management -- financial information is shared among managers and employees -- is summarized in Stack's book The Great Game of Business, coauthored with Inc. editor at large Bo Burlingham.
Bo Burlingham: Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business. @boburlingham
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