Dec 202011

Transparency Rules

Transparency Rules

I think each and every one of our 13 core values at Return Path is important to our culture and to our success.  And I generally don’t rank them.  But if I did, People First is a leading contender to be at the top of the list. The other leading contender would be this last one in the series:

We believe in being transparent and direct

The big Inc. Magazine story about us last year talked a lot about our commitment to transparency and some of the challenges that come with being transparent and direct with people. I’d like to highlight here some of the benefits of being transparent, and the benefits of being direct (sometimes those two things are the same, sometimes they are different).

Transparency’s benefits are so numerous that it’s hard to pick just one or two themes to write about, but my favorite benefit is empowerment.  Especially in a world where information is increasingly available and free, hoarding it comes at a high cost.

  • If everyone in the company knows that you’re short of plan and disappointed about that, the majority of people will exercise hawkish judgment about expenses.  The opposite is true as well.  If people know you’re running ahead of plan, they will be more willing to take risks and make investments. Without transparency of financials, people are just more in the dark and looking for all answers and judgment to come from above
  • If everyone on your staff understands the process you went through to make a tough call about an element of your strategy, they are not only more likely to understand and support the decision, but they learn from you how to make decisions in the first place
  • If your Board knows you’re having a tough quarter from the get go, they’re not surprised at the quarterly meeting and don’t force you to spend painful and precious minutes in the meeting On the firing line reporting on the details. Instead, they can spend time leading up to the meeting thinking about the details of the problems and how they can help or what insights they can bring to bear

Transparency does have some limits, even today.  There are three main limits we run into. One is compensation — still too touchy and wrapped up in people’s self esteem to post on the wall (though I have heard about a couple companies that do that, believe it or not). Another is terminations. Although you might want to tell the company that you fired Sally because she wasn’t carrying her weight, the long term value you derive from dignity and kindness trump any short term value you might derive from such a statement (plus, people know when Sally isn’t carrying her weight, anyway). The third limit to transparency is around half-baked ideas. Although you might sometimes want to try ideas on for size publicly, you have to be careful not to send people scurrying off in the wrong direction just because you blurted something out in a meeting.

The second half of this value statement is about being direct.  Being direct mostly has benefits in terms of efficiency. You can be direct and still be polite and kind.  But being direct means not beating around the bush, being political, or being conflict avoidant.  It means nipping problems in the bud and saving yourself time or money in the long run.

  • If you are direct with an employee who is not performing well with data to back it up, the employee has a much better shot at improving than if you delegate the feedback to HR, wait for the next annual performance review, or go passive and skip the feedback entirely
  • If you are direct with a boss who you think is treating you unfairly, your odds of fixing the situation go way up
  • If there’s bad news to deliver, be direct about it — look the other person in the eye, deliver the news crisply and succinctly, and as quickly as you can after finding it out or deciding on it yourself

Avoid euphemisms at all cost. Telling someone you “might have to rethink things” is not the same as saying “I will have to fire you if xyz don’t happen in the next 30 days.” Saying “xyz would be good for you to do” is not the same as saying “the way for you to get promoted is to consistently do xyz.”

Being transparent and direct are increasingly table stakes for successful companies full of knowledge workers who want to be empowered and clear on where they stand.

I’ve really enjoyed writing all of these values out in living color. I will do a wrap up post shortly.

Dec 032010

Selling a Line of Business

Selling a Line of Business

It’s been a couple of years since Return Path decided to focus on our deliverability business by divesting and spinning out our other legacy businesses. That link tells some of the story, and the rest is that subsequently, Authentic Response divested part of the Postmaster Direct business to Q Interactive.  Those three transactions, plus a number of experiences over the years on the buy side of similar transactions (Bonded Sender, Habeas, NetCreations), plus my learnings from talking to a number of other CEOs who have done similar things over the years, form the basis of this post.  The Authentic Response spin-out was also partially chronicled by Inc. Magazine in this article earlier this year.

It’s an important topic — as entrepreneurs build businesses, they frequently end up creating new revenue opportunities and go off on productive tangents.  Those new lines of business might or might not take off; but sometimes they can take off and still, down the road, end up being non-core to the overall mission of the company and therefore candidates for divestiture.  Even if they are good businesses, the overall enterprise might benefit from the focus or cash provided by a sale.  Look at the example of Occipital building the Red Laser app, then selling it to eBay to finance the rest of their business.

Here are some of the signs of a successful divestiture:

  • Business is truly non-core or relies on starkly different competencies for success (e.g., one is B2B, the other is B2C)
  • Business is growing rapidly and requires assistance to scale properly (either technology, or sales)
  • Business has its own culture and operations and “a life of its own”

Conversely, here are some of the reasons why a divestitures of a business unit might stall or fail:

  • Lack of a very compelling story as to why you’re selling the business unit
  • Stand-alone financials of the unit are too hard for the buyer to determine with confidence
  • Operations of the unit too tethered to the mothership
  • There is some problem with the leadership of the unit (there is no stand-alone leader, the leader isn’t involved in the divestiture, the leader isn’t squarely behind the divestiture)
  • Business performance weakens during the process

I have a couple points of advice to entrepreneurs in this situation.  The first is to clarify for yourself up front:  are you selling a true line of business, or are you selling assets?  If you are selling assets, you need to clearly define what they are, and what they aren’t, and you need to make sure all legal details (contracts, IP, etc.) are buttoned up before the process starts.

If you are selling a true line of business, beware that buyers will not be interested in doing any hard work, or if they feel like they have to do hard work, the price they pay for the business will reflect that in the form of a steep, steep discount.  The financials must be understandable and credible on a stand-alone basis.  The business must be completely separated from the core already.  The business must have its own management team, completely aligned with the decision to sell.

You also have to be extremely cognizant of the human aspects of what you’re doing.  Every culture is different, and I’m not advocating one style over another, but selling or spinning out a business is very different than selling a company.  There’s going to be a big difference in reactions, perceptions, hopes, and fears between the people in the core who are staying, and the people in the business unit that’s going.  Having a heightened awareness of those differences and factoring them into your communications plan is critical to success, as a poorly managed effort can end up harming both sides.

In terms of valuation expectations, don’t expect to get any credit for synergies.  You have to present them and sell them, and they may make the different between getting a deal done and not, but they will most likely not impact the price you get for the divestiture.

Finally, remember that buyers understand your psychology as well.  They know you’re selling the business for a reason (you need to raise cash, you’re concerned about its future performance, it’s become a distraction or has the potential to suck scarce resources out of your core, etc.).  They will completely understand the costs you carry, whether financial, opportunity, or mental, in continuing to own the business.  And they will factor that into the price they’re willing to offer.  Of course, as with all deals, the best thing you can do to maximize price is have multiple interested parties bidding on the deal!

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