2011 is a wrap! The good, the bad, and the great

[Apologies if you've already received this in email format]

2011 is a wrap, and here's hoping 2012 has treated you well so far. We had a good year at The Directive group, helping our clients in several sectors with business strategy, growth blueprints, financing services, and various strategic activities driving revenue growth. Although many of the companies we came into contact with were still reeling from the economic downturn with continued revenue declines, we also worked with companies in hot sectors such as SaaS, healthcare software, batteries / power storage, and industrial goods.

One of my personal successes was a SaaS client with major turnaround work coined a "DNA change" by the CEO. The engagement helped the client target deals that were 10x their average deal size, and within a few months, the company was targeted by two independent unsolicited acquisition offers. See more of our success stories on our website. 

2011 also seemed to be the year of Smart Grid. I was invited to participate in numerous Smart Grid events as a moderator for panel topics such as wireless, integrated communications, and EV integration. We will continue to watch the Smart Grid sector, and continue to help companies targeting this hot sector.

Nonprofit work

I also wrapped up my work with a long term nonprofit client with a strategic plan earlier in the year. After over 20 years of working with revenues and profits, I felt great accomplishment helping a highly scientific nonprofit organization with their growth blueprint

Also, in 2011, I was honored to be elected to the Board of Directors of the Los Angeles Boys and Girls Club, a 60 year old nonprofit organization helping disadvantaged youth with academics, sports, and citizenry programs. Just to give an idea, some of the children served are from families who make less than $16,000 a year - for a family of six!

So I'd like to ask for some information.

If you work for a company that offers nonprofit giving at a corporate level or encourages their employees to participate in annual giving, please drop me a note. I'd like to add the LABGC to the roster of nonprofits at your company. Of course you can always make an individual donation: every dollar will help build a safety net to keep these kids off the streets and on their way to a better future.

Shameless plug

Many of you may know that I paint as a hobby. At the insistence of family and friends, I finally decided to sell my artwork, and in the first two weeks I sold 8 pieces! (who knew?) Soon after, I was invited to show my work at the 10th anniversary of a major group show in Los Angeles on February 11th. If you're in town and interested in the arts, this is a fun event to attend.

Staying in touch

Whether in the world of cyber networking, or in person, we'd love to hear from you. Feel free to drop a note and say hello.

If your company or a client company needs to improve their business results, I'd love to chat with you. Please spread the word!

All my best,
-- Kat Shoa

HP CEO Leo Apotheker making the right strategic moves

Less than a year after Apotheker took the helm at one of the largest US tech companies, HP announces major strategic changes to its product lines – finally, some good moves out of HP.

It  seems HP has been mired with controversy over the last decade, and each CEO made their mark with their own mistakes. Carly Fiorina who was a media darling at the time, pushed HP deeper into the hardware business through the Compaq acquisition, a move she never quite recovered from. And Mark Hurd, who was brought in for his efficient management style, was let go abruptly in 2010. Enter Leo Apotheker, the CEO of SAP, a major player in the software industry.

Let’s back up a little. No matter what analysts would like you to believe, HP has been a hardware company at its roots, and typically, the hardware business shows high revenues and low margins, and products that quickly become commoditized. OK hardware companies usually sell software too, but there’s a huge difference between a software-only company like SAP, and a hardware company like Dell, so let’s not get too technical about that.

Both Fiorina and Hurd came from a hardware background. Even though Hurd oversaw the acquisition of EDS back in 2008, the company still ran as a hardware company. Apotheker, on the other hand, has lived and breathed software. He knows how to run a software business, and he gets the nuances of running a software and services business. This is a major advantage.

The disadvantage is that changing a company’s focus from hardware products to software and services is messy business. The revenues will take a hit, major chunks of business will have to be spun off, major chunks of business will have to be acquired or developed. And most importantly, organizations need to be rearranged. IBM did this in the 90s, with great results I might add (I think HP is following IBM’s footsteps in many regards).

In the sweeping changes for his strategic move to turn HP around, Apotheker has not held back. HP today announced multiple changes to several major product lines. Here’s the list:

Intention to sell off the PC business . This is huge. Remember, HP’s PC business is a combination of the original HP PC business plus the Compaq business acquired by Fiorina almost a decade ago. Spinning off the PC business makes perfect sense due to the mature nature of the business and lowered margins. IBM sold its PC business many years ago to the Chinese conglomerate Lenovo (ironically, around the time HP acquired Compaq). It’ll be interesting to see who will acquire this line of business, and for how much.

Acquisition of Autonomy. HP has bet 80% of its cash on this British software company – to the tune of $10.25B. Autonomy provides data search and analytics solutions for cloud computing, eCommerce, and other enterprise systems. With high margins and a repeatable revenue generation model, it becomes clear that HP is swapping its PC business for a more lucrative software business. Excellent move.

Discontinue TouchPad. Just weeks after launching TouchPad, a direct competitor to iPad, HP makes the gutsy move to discontinue it. The product has shown disappointing results, and HP decided to let Apple reign as the king of tablets.

Discontinue WebOS. WebOS was HP’s mobile platform acquired through the $1.2B acquisition of Palm (yes, HP at the time paid $1.2B cash for a company that was at the bottom of the market totem pole and on the verge of bankruptcy – why the shareholders at HP weren’t livid at the time, is beyond logic… but I digress…). Apparently HP realized they’re not making it in the mobile business, and decided to cut the business loose. It helps that Apotheker was not the one in charge of that acquisition.

For the first time in a long time, I think HP is making all the right strategic moves in repositioning itself as a software and services business. At this point, the trick becomes operational in terms of integration, organizational changes, and refocusing the business lines for better results. Of course, Wall Street, with its myopic “quarterly” views, has dinged the stock, as these moves probably won’t show solid bottom line results for another 6-8 quarters.

All the media discussions about HP are leaving out one major business line. What will HP do with its printer business? (I happen to know more about this business than I’d like to admit). The printer business has gone through a brutal commoditized stage over the last decade, and although the hardware sales are really there to generate toner and ink revenues (the razor/blade business model), at some point, the printer business won’t fit into the big picture at HP. But HP is probably done with major changes for a while. Time to roll up the sleeves and get to the operational work.

Everyone will be watching.

Corporate board of directors: how to formulate them for success

These days, more than ever, boards of directors carry the responsibility for the company’s health, fiscal responsibility, and future expansion. This is particularly true for public companies. Over the years, I’ve worked with boards of both for-profit and nonprofit organizations. While some boards work better than others, there are key factors to consider to guide and support the board’s success.

Specialist vs. generalist

Many advisors recommend a board with people with specific areas of expertise, but I couldn’t disagree more. I believe board members should have very broad experience in various types of businesses that are similar to the ones on the boards of which they sit whether in the way they operate, their vertical, or their geographies. When specialists are needed, smaller companies can allocate them to their board of advisors, and larger companies should have the means to hire consultants or outside service providers for their specific needs. If the board members have enough experience, they’ll know just where to find help when they need it.

Size

While size does matter, there’s no universal agreement on the optimal size for the board of directors. According to BoardSource, the average board size is 15, and according to the Corporate Library’s Study, the average board size is just under 10 members (clearly, these two studies were not using the same research base, but I digress…). For smaller companies, any governing body larger than 5-7 members becomes ineffective. Larger/public companies typically have larger boards, however, there are many committees for the board members to participate in (in particular an audit committee and a compensation committee, which are becoming more and more important in the governance of companies), so larger boards for larger companies become necessary. Any board larger than 15 members becomes difficult to manage and typically ineffective. As an example, IBM’s corporategovernance guidelines indicate that “10-14 directors on the board is optimal”. I happen to agree.

Independence from the company

The board of directors is a body of elected or appointed members who jointly oversee the activities of the company, including the CEO. Stacking the board with insiders inherently creates conflicts in oversight of the company and its CEO. Having majority or all outsiders on the board will help the board objectively guide the company in the right direction. An outsider is someone who has never worked at the company, is not related to any of the key employees, and has never worked for a major supplier, customer or service provider.

Tenure

Many companies don’t call out a particular time-frame for their board’s tenure, however, with the fast changing nature of business, it is best they refresh their talent in the boardroom regularly. While there are benefits to continuity in the boardroom, becoming stale and complacent towards the company’s interests can pose risks to the company’s health and growth. Many boards hold reelections every year. I think having a maximum tenure of 7-10 years will help keep the board’s perspective fresh and objective. This also keeps away career board members who may lose their once-honed operational expertise by supporting themselves solely by sitting on corporate boards (I’d like to have that lifestyle, wouldn’t that be nice!).

Compensation

Yes they do. Quite nicely, as it turns out. Board compensation can vary greatly based on the company size, location, and industry. Also, the composition of the compensation can vary widely from mostly cash to mostly stocks. According to a study by C-Suite Insights, the level of board compensation increases with the company’s market cap. On average, small-cap board members received $101,750 per annum, their mid-cap peers earned $138,500, and large-cap board members made $190,000. These figures include cash retainer fees, annual equity awards, and total meeting fees paid for service on the board. They exclude any fees paid for committee service. Keep in mind these are averages for public companies. Private companies do not publish their board’s compensation, so it can vary widely. Some Fortune 100 companies are known to pay 7 figures to their board members.

I recently wrapped up a strategy engagement with a long term client, and the board’s composition was the topic of many discussions. Clearly, it’s difficult for the board to self-regulate, and unfortunately, many boards wait for an external event (usually a negative one) to self examine. The best way to ensure a strong and objective board is to regularly examine the board’s composition, and update the bylaws as needed.