He has about him the air of a country doctor -- sympathetic, avuncular, and wise. His diagnoses are laced with homespun aphorisms delivered in a Nebraska drawl. But don't be fooled by the disarming demeanor, for behind it lurks a skilled physician who almost always prescribes radical surgery and bitter medicine for his ailing patients. And almost always the patients survive.
The patients in this case include more than a dozen high-technology companies that, to most practitioners, once looked as if they were headed for the morgue. Q. T. Wiles leaves it to his partner, venture capitalist William Hambrecht, to negotiate the terms of his consultation -- inevitably a large transfusion of new cash in return for management control, and a big equity stake for Wiles and his fellow investors if successful. Once the deal is sealed, most of the therapy is administered on site by a team of emergency management technicians who are assigned to many of the top management jobs and are well schooled in Q. T.'s rather elaborate set of "disciplines." Periodically, Wiles will make house calls on each of his patients, during which he prods, cajoles, berates, and flatters managers who gather to report to him one by one on their failings and their successes.
It was his training as a chemist and mathematician that taught Wiles to break any problem down to its smallest components. He first applied his management techniques at his own company, a capacitor manufacturer in Ogallala, Nebr., during the 1950s before selling Goodall-Electric to TRW Inc. Then, as a TRW executive for 12 years, he helped the conglomerate acquire young electronics companies and turn them into a group of profitable divisions. His association with Hambrecht & Quist began in 1972 and was formalized with the formation of the firm's Phoenix Ventures turnaround fund in the early 1980s.
Senior writer Robert A. Mamis and senior editor Steven Pearlstein spoke with Wiles at his clinic in Sherman Oaks, Calif.
INC.: You've been brought into a number of different companies. Is there a common thread in terms of the problems you find?
WILES: Well, remember, these are mostly technology companies that, at some point, were unable to keep up with a marketplace that was changing very fast. Either they hadn't managed a new product correctly, or their technology had become obsolete, or they hadn't been able to deliver the new product on time and missed the window of opportunity.
INC.: And how does the person who is running the company, and who meets you at the door, view that situation?
WILES: Generally, he thinks that all he needs is a little bit of time and money and he can solve his problem.
INC.: Is that it?
WILES: In the end, it is a management problem, and he really has no idea of how to handle the situation. Remember, now, that most of these companies had been growing at 35% and 40% a year for a number of years, and all they knew was a growing market. Now, they've hit a flat market or a down market, and they aren't equipped for that, emotionally and otherwise. The organization, more often than not, is still the CEO and a bunch of helpers versus a genuine management team, and they have no idea how to handle the situation.
INC.: Is it really that the CEO doesn't know what to do?
WILES: The first problem is that he underestimates the size of the problem. Rather than say to himself, "What different management style do I need?" he says, "How am I going to work harder in the same style I've always had?" And hell, there isn't any time for him to work harder -- he is already working 18 hours a day.
And then he hits the second problem. The company's going down, and he's faced with a series of decisions that look very hard and painful for him to make. Maybe he's going to have to make some layoffs. Maybe he is going to have to fire some of his top people -- people who've been with him from the beginning. Maybe he's going to have to pull the plug on a new product. But he can't do those things -- emotionally, I'm speaking now -- so he vacillates, or he tries to avoid them by trying other things, and that only makes things worse.
INC.: And that's when Q. T. arrives on the scene.
WILES: Usually about that time, yes.
INC.: And what does the CEO think your role is?
WILES: He thinks maybe I'm coming in to help him, which is only partially true. Because in these turnarounds, we have really bought control of his company. And so the first understanding he has to have is that I'm going to be the boss no matter what my title is. The question now is what his role is going to be, not the other way around.
INC.: Why should this come as any surprise? After all, he's been involved in the negotiations that led up to your arrival.
WILES: Honestly, we aren't completely candid with ourselves or with the people we're negotiating with when we set these things up. You really hope that you are going to be able to use the people who are there -- you hope that things will work out. But they seldom do.
WILES: Because it is seldom that he can stand the pressure of implementation -- the intensity we come in with. There's very little emotion in our decision. And his decisions are mostly emotion. And so 90% of the time he goes away. Then, after it is all over, he says to himself, "God, that was easy. I could have done that if they had just given me a little time."
INC.: Does he really think that?
WILES: Absolutely -- I think all of them think that. The general consensus among them is that Q. T. just got lucky -- he was there at the right time.
INC.: And are they right or wrong?
WILES: They're wrong as hell. After all, they're human. They don't see their own weaknesses, and so they can't go to work on the things that they are weak at. Remember, these are guys who start companies that go from zero to $100 million in three years. How could they be wrong?
INC.: They're no dummies.
WILES: Hell, no. But they're egomaniacs -- they had to be to leave their old jobs to go out to start companies.
INC.: And if you succeed in turning things around, presumably they are still egomaniacal enough to take their proceeds and go out to try it again.
WILES: Except that most of them can't do it a second time.
INC.: Why is that?
WILES: Because they forget how hard it was. You see, when they do it the first time, they're very humble, and they are probably scared to death that they will fail. But the second time out, they say to themselves, "Hell, I did it once before. It wasn't that tough. I've got the magic formula." But by this time they've gotten used to the cars and the vacations and the nice life. And that's when they go to pot as entrepreneurs, in my opinion.
INC.: Let's talk about them as managers. It is obvious from your rules that you have a different idea from most CEOs of what a CEO should do.
WILES: Yup. And in my opinion, that's because they really don't want to be CEOs. They're having so much fun being the COO that they don't recognize there is another job up there as the company grows. They like the operating jobs they have, but since CEO looks like the biggest job, they think they ought to do that.
INC.: You've reduced the CEO's job to administering a set of rules and disciplines. If you had to boil these rules down to their essence, what would it be?
WILES: What I say when I start is, "Gentlemen, I'm going to break this down into small enough pieces so that even you guys who couldn't do anything right before can run it." Our whole system is actually a matter of breaking down a business into its component businesses, and setting for each of them clear and attainable goals that you can look at weekly and monthly and quarterly, and know how you're doing and how much further you have to go. And if there are 35 pieces in a business, and 20 of them can be winners and 15 don't win, then overall you're still a winner, because you don't really expect all 35 of them to win. Whereas if you look at it simply as one business and you're organized that way, and it goes to hell, then you really, truly have got a major problem to fix.
INC.: And no way to fix it.
WILES: Of course, even before you fix it, you have to be able to define what the problem is, and with most people, that's the hardest thing I have to do -- getting them to write down what they think the problem is.
INC.: Literally write it down?
WILES: Yup, everybody.
INC.: Why is it so important to write it down?
WILES: Remember, I'm trying to take the emotion out of management. And it's hard to write down your emotions -- not too many people are good at that. So writing tends to get the emotion out of it.
INC.: I imagine you get some resistance from people who think it a bit too much like grammar school, writing out their definition of the company's problems or their "five most important tasks."
WILES: All the time. I remember the manufacturing guy at Granger [Associates, a manufacturer of telecommunications equipment]. I couldn't get him to write. So I sat down and wrote what I thought the basic definition of the problem was in his area and brought it to him. And I remember his comment was, "Oh, my God, I knew all that 20 years ago. Why do I need to write it down now?" And I said to him, "You need to write it down now because you're talking to a new boss." And we went through some pretty tough times getting him to understand that he had to go back that far, to the basics, because like most people he would rather have skipped that step and jumped right into implementing a solution without having a fix on what the problem was. But anyway, this fellow and I worked things out. We learned how to communicate with each other, and he happens to be one of my better friends today.
INC.: Is it that most people have trouble articulating what the problem is, or that they don't have the foggiest idea what it is in the first place?
WILES: Well, let's take ADAC Laboratories -- that's one of ours. The CEO there was Chuck Cantoni, and Chuck's problem, or so he thought, was that he was out of money. Before he had really analyzed what that was all about, he was ready to rush headlong toward a solution, which in his mind was generating six new products, each of which would have cost as much money to develop as we had brought in.
INC.: And how did you define his problem?
WILES: His problem was that he was shipping money.
INC.: You mean he was selling something for less than it cost to make -- and trying like hell to sell more of it?
WILES: No question. And the reason was that the company had no controls and hadn't spent any money on improving the technology that would have allowed it to make the product cheaper -- integrated circuits rather than individual circuits, double-sided boards, that sort of thing.
INC.: Why not simply charge more for the product?
WILES: Because you couldn't -- this was medical equipment and the market was shrinking, it was fully mature. But since we owned 40% of this market, I decided we could be one of the survivors. And so, as I do in most situations, I immediately divided the business into the base business and the growth business. I took Chuck clear out of the base business, put some new people in there, gave them some money, and with three of the four basic products, we were eventually able to turn it around.
INC.: And what about Chuck?
WILES: I said to him, "Chuck, now you've got this much money to try to run this growth business." Well, he never could bring himself to pick out which one of those six new products was the right one -- he wanted to do all six. Eventually, he left the company.
INC.: The base business, you said, was shipping money. How was it that nobody in the company had a handle on that?
WILES: That was another dimension to the situation, which was obvious as soon as I got there. Here he was, the president and CEO, but he was really just one of four partners who were treated equally. I asked Chuck why, and he said it was because they had all started the company together, and so each of them had to have a top management job. Well, one of them, the CFO, was a disaster. After 17 years, he was still telling the CEO what he thought the CEO wanted to hear.
INC.: And the manufacturing people never had an inkling?
WILES: Maybe they did, and somebody convinced them that it wasn't that way. In all fairness, the manufacturing people assumed they were making money because the P&Ls said they were making a lot more money than they were.
INC.: How do you instill financial awareness in a company that has never had any?
WILES: What we do, once we get into a company, is to break it up into pieces that make sense. And we develop controls that will give the managers of each of those separate pieces a system that allows them to keep score. Then we put somebody in every one of those little businesses who is called a controller, whose only job is to keep score and to report back to me on how they are doing.
INC.: How do you mean, keep score? Is it simply a P&L?
WILES: They keep P&Ls, yes. But we break it down even further than that. Let's assume we're talking about a specific product line. Maybe 70% of the sales price of his product goes for material, 2% for labor, and his overhead is 10%. What does he have to control? In this case, the only thing is really the cost of his materials. So we try to break those costs down into specific numbers and set a system so he can set some goals, give us a budget and a timetable, and then watch how he's doing.
INC.: Presumably you're watching, too. And what happens when a particular division is not meeting its goal?
WILES: Once a quarter, we have what we call a dash meeting. . . .
INC.: Does dash stand for something?
WILES: Yes, the meetings are held quarterly: '88 dash 1, '88 dash 2, and so forth. And we get everyone together -- it may be one day, it may be two or three, depending. Everybody gives projections for the next three months, and reports on how he did during the past three. And then we talk about it, which often gets to be a lot of fun. I like to kid around with people, bring a little humor into the thing.
INC.: The idea, presumably, is to make sure that you don't become the brunt of that humor.
WILES: That's one way to look at it.
INC.: Between the dash meetings, a lot can happen. How do you exercise control?
WILES: Every month, the controllers meet to report on what has happened and give us a short-term look, and we add it all up. And if it looks like we're going to be short of our goals for the quarter, we go back and begin to work on people. Maybe we go back to Joe, and Joe is right, he's not ever going to make his number. So we go to Sam and say, "Joe isn't going to make his number. Can you, Sam, make a bigger number? What do we have to do to help you make a bigger number?" What we really do is management by exception.
INC.: What are the hardest departments to deal with under that kind of system?
WILES: Sometimes it's the salesmen, because they try to treat me the same way they treat a customer: they want to give me a snow job. Other times it's the financial department -- the history people, I like to call them. Understand now that by the time I arrive, the financial people, in order to keep the company alive, have almost always had to learn how to cheat. Now, all of a sudden, cheating is not in the program. And to make matters worse, I move in with all these controllers, who are separate from the accounting department, taking away what they thought was their turf. And what happens, is that, almost always, the chief financial officer goes away.
INC.: What is striking about your approach is how detailed the reporting gets. Every time somebody goes on a trip or has a meeting, you require him to file a written "what I heard" report that, theoretically, goes to you. Why bother with that?
WILES: It is a matter of getting people to communicate better -- and in the same language. Maybe we would send a salesman, an engineer, and a division manager to see an account. And at the meeting, they promise to do something. Invariably, the salesman has a different idea from the engineer or the division manager of what was promised. Under the old system, the first person who was likely to find out about this problem was the customer -- and at that point, the damage was done.
INC.: Do you actually read all those reports?
WILES: Sometimes I read them, sometimes I don't. And with the ones I read, I'll often write back a note saying, "Did you really hear this?" or "My God, you're in deep trouble. Why don't you pick up the phone and talk to me about it?"
INC.: On your list of Q. T.'s disciplines, there are a number of other reports -- receivables, key accounts, recruiting. What is the logic there?
WILES: In the case of receivables, it is less a question of money than the underlying reason for the delay. Many times the money hasn't been collected because the product doesn't work, which is something you want to know. Or maybe the salespeople or credit people aren't doing a good job about qualifying their accounts. I find the receivables list is a good place to look for trouble all through the company. Key accounts, the same thing.
INC.: What's so crucial about the recruiting list?
WILES: Because once you decide to make a change in a particular area, it often means a change in people, and that's most often where things bog down. It gives me a chance to say, "Why is this still on here?" -- that's number one. Number two is that it gives me an opportunity to suggest that we promote from within -- especially for management positions.
INC.: Why is that a good thing?
WILES: Because to find somebody better than a guy we've already got, we've got to go to somebody who is probably a little older with a little more experience, and his preconceived idea of how to run the operation is probably quite different from mine. So this guy comes in fighting the system.
INC.: How often is it that you find you can promote from within?
WILES: It is about half and half. A lot depends on how many reorganizations went on in a company before we got there.
INC.: Meaning what?
WILES: The more reorganizations, the less apt there are to be good people left, since the old management invariably hired the wrong people.
INC.: You come in, you maybe have just met some of these people, and right away you have to start filling some key management slots as people quit or are let go. What do you look for?
WILES: Basically, you look for somebody to take ownership of a situation. You sit at a dash meeting and somebody gets up and starts complaining about the way things are being done. So you ask him, "Why don't you run that particular area?" And the reaction you get helps you decide. If he hems and haws, you probably don't have a candidate. If he says, "Hell, I've been trying to do that for two years," you've got a start. And then the question is really whether he has the people skills, which is the other crucial thing, in my opinion.
INC.: Although you've reduced this notion of a turnaround to what looks to be a simple set of rules and some very precise disciplines, there has to be more seat of the pants to it than that.
WILES: No question about it. You come in and you've got these decisions to make -- decisions that often mean screwing up people's lives -- and you've got to make them with what amounts to a minimum of information.
INC.: And presumably without letting on to anybody else that you're not absolutely sure of what you're doing.
WILES: The con game is the most important part of the whole thing -- yes, especially for the first four to six weeks. Really, what you're working with is your past experience. And I'm just lucky enough, I suppose, to have more experience than most. That's the reason I can do what I do.
Most people with my experience want to go to the beach when they reach my age, or they want to be the chief executive officer of a very large company, or at the least they want to be running a smaller company that is doing well. That's the fun stuff. What I do is something other than fun. It is very, very tough emotionally. In fact, sometimes when one of my companies is in particular trouble, I often find myself making an excuse to to go back to see how things are doing at one of the well companies. That way I can call a few shots and remind everyone how good we are. That makes the ego feel good.
INC.: And what is it that makes you feel bad?
WILES: Telling somebody who's running a company, or who thinks he's running it, that he's got to leave.
INC.: That must be a difficult conversation, no matter how many times you've been through it.
WILES: The worst one, I remember, was Chuck Cantoni, at ADAC. He'd been the founder, built it up for 17 years, had taken hardly any money out of the company, worked for a fairly low salary, had never cashed in any stock. Nice man -- a very nice man.
I made the decision after almost nine months of working with him. And that's the most difficult thing, ambling up to the decision -- it's much more painful than actually delivering the bad news. I think that is true of all the tough decisions you make in a business.
INC.: In terms of turnarounds, have you had any failures?
WILES: Yes, although you probably couldn't figure out which ones they were. None of the companies has gone broke, but we've walked away from several of them.
Sometimes you can fix them up only to find that they really had nowhere to go. Sometimes you can't even fix them up, so you look for a way to keep them alive long enough to sell them off. For instance, we had a fishing-reel business once, and, after we poured too much money into it, we finally sold it to the employees, and they ran it for seven or eight years before they finally closed it. As a little tiny business, it was good for them. But I wouldn't call that a big success for us.
INC.: There has been, as you know, some criticism of Hambrecht & Quist for double-dipping in these turnarounds. First Hambrecht & Quist is in there raising capital for a company, and then, if things don't turn out the way you projected to these investors, you're in there again with Phoenix Ventures for the turnaround.
WILES: And that's why we do it, because you have some responsibility to these investors, having brought the company public or having put together the venture capital. It is part of your obligation to your customer.
INC.: Yet it's hardly charity work -- it's another bite at the same apple. After all, you're in there negotiating, in effect, with your old customers for control of the company, which you obtain at highly discounted prices.
WILES: Sure, but by now we're not very sensitive to opinions like that. Remember, they always have the alternative of letting the company go under if they don't like the deal.
INC.: When you're trying to decide which ones to try to rescue, what kind of time frame do you look for?
WILES: What we say is that we have to see a way to have break-even by the end of two quarters -- that is the rough target going in.
And we have to have two quarters of profit before we know for sure that the turnaround is finished. But in our minds, we know when the turnaround is done before anyone else does. Even before you see it in the numbers, you see it in the people.
INC.: In what way?
WILES: When people start understanding that these are their methods of operation, and their disciplines -- not Q. T.'s methods or Q. T.'s disciplines -- then I know we've turned the corner. You can sense the enthusiasm, you can see the teams finally taking shape, you hear people talking as if they believe they can kill the world. And that's when the fun starts, at least for me.
Q. T.'s 13 Disciplines
1) Weekly Business P&Ls
2) Weekly Status Reports
3) Quarterly Dash Meetings
4) "What I Heard" Memos
5) Forecast and Plan
6) Five Most Important Tasks
7) Monthly Activity Reports
8) Top 10 Key Accounts
9) Trip Reports
10) Top 10 Receivables
11) Monthly Head Count Report
12) Recruiting and Priority List
13) Quarterly Employee Meetings