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Stories from the field

Year-end Bonuses – A cautionary tale…

Dec 27th, 2011
by ChuckPapaG.

The Operator’s Blog

As the end of the year draws closer, I‘ve had a number of discussions with clients, and fellow executives and entrepreneurs about year-end performance bonuses. The conversations, for the most part, revolved around the formulas used to calculate the amount, or the benchmarks used to determine the actual performance achieved.  Having been on both sides of the equation multiple times – the recipient of the bonus as well as the determinant of the amount – these “mechanics” conversations are relatively simple and straight forward to have.  What never ceases to amaze me, however, is how often there is relatively little thought invested into understanding what long term behavior the year-end bonus plan encourages, or how the thinking in the design does not extend beyond the current bonus-plan year.  I think that short-sightedness is a failure of executive teams in understanding human nature.  After all, as Upton Sinclair once proclaimed, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it” let alone get the man, or woman, to do something about it that would impact it negatively in such an obvious time frame; twelve months.

Over the years I have seen one-too-many times executives make decisions totally against the long-term interest of their firm, their shareholders, their employees, or their customers, and sometimes downright unethical, just to reach some poorly designed short term objective that impacted their individual year-end bonus.  The sad part, had some forethought been applied to the establishment of the plan by the executive team – instead of assigning the task to some poor HR analyst and hoping he gets it right even though in many cases he doesn’t understand the business – many of the problems could have been averted.

The story below is a cautionary tale and a classic example of what happens when the year-end bonus is not well thought out.  Any language in “brackets” is from company records or interviews and, as usual, comments are welcomed either on the website, or via e-mail.

The new year-end bonus plan for this particular company (not an Ideasphere client at the time) was developed by HR and launched with great fanfare.  Everyone who was on the bonus program took it apart and quickly realized that it assigned almost 90% of the formula to achieving revenue growth.  Both the CEO and the CFO, even though familiar with the Balanced Scorecard framework, signed off on this un-even weighting approach for a “good reason.”  The company planned to file for an IPO within the next couple of years and revenue growth velocity was a critical component of the eventual valuation by the underwriters.  Since the CFO and CEO had a significant equity position in the company, a high valuation was their “retirement ticket”, as one of them put it in an interview.  So starting at the top, the incentives were not tied to profitability, long term customer satisfaction, production quality, or any other associated performance metric.

Even to someone not as sophisticated as these two executives, it was obvious the Ying of Revenue was not harmonized with the Yang of Profitability, and the whole plan could backfire; but that too was rationalized because, after all, this was only a two year approach until the IPO.  After the IPO, the company would have the right environment to “do it right and restore a Balanced Scorecard approach.”  To further “secure alignment up and down the chain,” the plan weighting was applied universally to all managers across the company, regardless if they were in sales or in operations.

Things went great the first year, revenue grew exponentially and year-end bonuses were the highest they have ever been.  It looked like the plan was working as expected, so it was simply re-deployed for the second year without any changes.  Unfortunately, by the time the end of the second year rolled around, the IPO market dried up and, along with it, the potential of a public offering.  Also unfortunate was the fact that because of the focus on the IPO nobody spent any time reviewing the bonus plan, so HR, to meet their deadline of publishing the plan by January 1st,  released it unchanged for the third year.  By the middle of third year profitability had dropped to unsustainable levels, and customer satisfaction, after an initial spike up, went down through the floor into the bowels of hell.  By the end of the third year, finding themselves in a negative cash flow position, the company had to be put up for sale at a “fire-sale price,” as the CFO put it.

So what happened?  During a due diligence performed on the company by yours truly on the behalf of a potential buyer, it became clear that the year-end bonus plan the CEO and CFO hatched a few years prior was the major culprit in the company’s demise.  Because the plan was almost exclusively based on revenue growth:

  • Sales teams focused on selling any deal they could, at any price, to meet the revenue objectives, frequently undercutting, even their lower-priced, competitors by 15-25%.
  • Sales managers frequently approved ridiculously low-priced deals that would normally be rejected, by classifying them as “loss leader deals” justifying the frequent exceptions on imaginary “expected pull-through incremental revenue” from the client.
  • Operating managers, whose bonus was also based on a similarly structured plan, and who were supposed to “pull the cord on potentially unprofitable deals” during the operational risk review process, also ignored the low pricing and approved the deals based on “expected cost savings from operational optimization and economies of scale after on-boarding”.  This basically meant laying off the more senior, and higher paid, customer support folks and the off-shoring of work to the lowest bidder.  To compound the problem,
  • Market Executives, who owned the revenue levels after the deal was sold, approved the deployment of numerous dedicated customer support teams for large clients who threatened to switch because of the bad service, which drove the cost up and wiped out any savings from the layoffs and the off-shoring.

There are a few more details to the story that also contributed to the demise of the company, but if one was to point to the turning-point event that started the death spiral, the launch of the year-end bonus plan is the clear winner.

So, as much as I believe in providing performance-based incentive compensation to as many people in the company, I also believe the year-end bonus plan must be carefully considered and designed with more than twelve months of performance in mind.

Resume vs Reality – Don’t believe everything you read

Dec 12th, 2011
by ChuckPapaG.







“Don’t believe everything you read.” That’s good advice at any time, but as I was reading this article about the 8 traits that trump the resume, it made me think about some of the resumes and cover letters I’ve seen that made me laugh out loud.  Having read, literally, thousands of resumes and cover letters over the last fifteen years, unfortunately, it seems the more perfect the resume the more scrutiny it deserves. It may be just me, but I have come to believe that a resume is a marketing/PR tool that can be manipulated to say just about anything, so everything needs to be fact checked with people who can provide “color” to any text.

So looked through some old files and found some classic examples from real resumes from people I know and could compare their resume to reality.  These are some examples (slightly edited by removing company or product names).

PS – Any resemblance to text from a reader’s resume is purely coincidental.

People Skills

What the resume says:  As the manager of the help desk, I worked with other managers to build relationships with many departments across our global organization.  I developed a team that was recognized as one with great team spirit and strong relationships and as a result I was assigned to a new group that was struggling with similar issues.

What it should have said:  When I was the manager of the help desk I spent most of my time personally handling any help desk calls that came from senior executives of our company.  I was the personal help desk engineer for our C-Level executives and spent most of my time on their floor.  My department was so poorly managed that the entire team united against me and complained to HR, which resulted in an intervention and my eventual transfer to another department where I no longer manage people.

Grace Under Pressure

Resume: As a part of the CFO team that managed the three acquisitions completed in the last four years I was with the company, I have become adept at handling complex transactions and high pressure situations.

Reality: I was the CFO’s regular golfing partner, so every time I was at risk of being laid-off he found something for me to do on special projects.  Unfortunately, during the last acquisition I managed to upset the CFO of the company we were acquitting so much with my whining, he asked for my removal from the team.

Integrity and Moral Fiber

Resume: As the President of our largest division I was responsible for the operations of the company across the world.  Because of the high standards I set for performance, and personal and regular visits to our operating facilities, the division met all revenue and profitability objectives and was the most profitable group in the company.

Reality: As the President of the division, I did everything I could to bury bad news and manipulated the cost structure of our products by reducing quality and selling an inferior product to our customers to make my numbers look good.  I had multiple extra-marital affairs and used my regular “operations review” trips as the cover for my visits to my various “friends” across the globe.  My expense report regularly included “client entertainment” expenses even though I rarely met with actual clients.

Work Ethic

Resume: Because of my work ethic, great understanding of operations, and strong performance I was promoted to VP of Operations.

Reality: I regularly claimed to be “working from home” and that I was on multiple conference calls early in the morning with our Asian operations and therefore not available for any meetings before 10:00am.  After about six months of successfully working less than a couple of hours per day, during a re-organization project, the outside consultant working with our CEO figured it out and I was fired. Oh, the reason I was promoted to VP initially was because I found a way to automate an operations report and cut the time required to complete it from hours to minutes so my reports were always on time (even though I had no idea what they meant).

Charisma:

Resume: As a sales person, my good sense of humor and easy going personality enables me to interact with many levels inside the manufacturing organization and deliver great service to my clients.

Reality: I had a great relationship with the team on the manufacturing floor workers and we frequently exchanged sexually explicit jokes and pictures via e-mail.  Unfortunately when I was promoted and transferred to an office environment, and was asked to sell to a higher level within client organizations, I offended so many people they had to transfer me back to selling to production floor supervisors. (How my client allowed this one to keep his job, I am still trying to figure out)

Ambition:

Resume: My career with the company spanned six years in a number of positions with progressively larger responsibilities.

Reality: Everyone thought I was a smart person so they moved me around to get exposure and find my niche.  After failing to impress multiple supervisors, they finally figured out I was all talk and no action so they fired me.

Leadership Abilities:

Resume: My experience in the military has honed my leadership abilities and prepared me for any position of responsibility.

Reality: I was a desk clerk with a Non-Commissioned-Officer rank because I had a college education.  I never lead anyone and the only responsibility I had was to submit inventory reports on time.

Positive Attitude

Resume: During the final stages of the company reorganization I was put in charge of the team that closed a number of plants.  Despite the challenging environment, I maintained good relationships with the workforce and managed the plant closure without any negative incidents.

Reality: I was put in charge of the plant closure team because nobody wanted me around the office because of my negative attitude.  Thankfully the HR director on the transition team was a real people person and he kept everyone positive.

 

What are your favored examples?





When you are too stupid to know better, don’t try to be clever!

Oct 28th, 2011
by ChuckPapaG.

I generally believe most people, even ones with average intelligence like my self, are smart enough to watch out for, and protect, their own self-interest in most cases. But not all people do it, and not in all cases. It’s a bell curve distribution of: Some people do it all the time and all people do it some of the time, but not all people do it all the time, and certainly none do it none of the time. Of course there is always that 1/10th of 1 % special class of people who simply don’t know what’s in their best interest, let alone know to watch out for it. They are the ones who need help figuring their interest out before they decide whether or not to protect it. Some people, like small children and people with legitimate mental disabilities fall under this category; they are the ones we, as a society, need to actively protect. But some are either simply knuckle-drugging, dumb-as-a-rock individuals who are too stupid to know better or have such a super-inflated sense of ego they think they are invisible and indestructible. And some, the worse combination, are both too stupid and with an un-justified high perception of their mental capacity to protect their own interest. It’s a situation with one of those individuals that got me started on this blog.
Joe (not his real name) and Jack (not his real name either) both were involved with, and have an equity interest in a company (SmallCorp) that had been wronged, and was in the process of suing MegaCorp. A win by SmallCorp would not only be the morally right thing to do, it would have most likely resulted in monetary compensation to SmallCorp, which would raise the value of Joe and Jack’s respective interest in the company.
Independently Joe has an on-going dispute with Jack that is moving through the court system and has nothing to do with the MegaCorp case. Joe loaned Jack money and wants it paid back. Jack refuses to pay it back because he believes it was not a personal loan, despite the cancelled checks made out to him personally and many witnesses to numerous conversations confirming the personal nature of the loan.
Fully aware of the dispute between them, but because the were both active participants in the transaction, the SmallCorp attorneys nevertheless ask Joe and Jack to provide their respective testimony to support their case against MegaCorp.
Joe cooperates but Jack proceeds to send the following e-mail (slightly edited to remove real names) to the SmallCorp attorneys (grammatical errors not corrected):

Dear SmallCorp attorney,
Thank you for your call this afternoon. After careful consider of our conversation, the amount of time that has lapsed, as well as Joe’s most recent threat of a law suit against me for an alleged personal debt that I dispute, my memory of many of the facts are unclear without being refreshed.
Please feel free to share with Joe, that should he be willing to release me (in writing) from his alleged claim I’m hopeful I can refresh my memory.
Jack.

Now, by most standards, the above would be viewed as a vailed attempt of extortion, but the ethical and legal implications of the content of this e-mail are not the subject of this blog (even though I would love to hear what you think about it). The issue is whether or not Jack is a legitimately mentally challenged person, simply too stupid to know better than to put something like these comments in an e-mail, or he is an egomaniac convinced he is being clever.
Here is my take: The fact that he thought enough to come up with a plan to leverage one transaction to get something in the other one, indicates he is not mentally challenged. That leaves the second or third option. I think it’s a combination of both! You see anyone who knows anything about the legal system in the US would recognize that offering to, in effect, sell your testimony for a price taints it, and potentially exposes you to legal action. It would have been a clever play, but for the fact that putting it in the e-mail above made Jack’s testimony practically useless because, even if he was to tell the truth, the defense attorneys would destroy his credibility by exposing this e-mail, which is subject to discovery.
That’s exactly what made the SmallCorp attorneys drop their case against MegaCorp rather than risk losing a legitimate case because of Jack’s tainted testimony. So the “clever” game backfired. The dropped case means that SmallCorp and therefore both Joe and Jack, lost any potential gain from the lawsuit. To make things worse, Joe is now even more upset and steadily proceeding with the court case to collect on the loan. Jack failed to protect his self-interest and managed to lose on both counts.
I think one of the morals of the story is this: If you are too stupid to know what’s in your best interest, and don’t actually have the intellectual capacity to pull it off, don’t start playing “clever” games . Your chances of success are low and they will most likely backfire. Oh, and if your ethical standards are this low as to resort to extortion, you deserve what you get.
What do YOU think?

Territorial Games People Play…

Aug 23rd, 2011
by ChuckPapaG.

Meetings with three different client organizations over the last couple of months reminded me of this article I wrote in 1998. Funny how some things never change. Here it is; slightly edited from the original version with the definitions for the major games at the bottom of this blog entry. As usual, your comments and thoughts are welcome to c.papageorgiou@ideasphere.com
Your pulse speeds up; your heart starts pounding; and you feel anxious in your stomach. Your primordial “fight or flight” system has been activated and your body shifts into overdrive. No, you are not about to be eaten by a saber-tooth tiger; it’s just Freddie from the accounting department trying to understand your budget, or a consultant asking you to explain your department’s strategy. So you put on your best political smile and start “the kabuki dance.” You are fighting for your territory as if it was fighting for your life.
The desire to protect our territory, whether physical, political, or psychological, is a built-in trait for human beings. Since we no longer forage for our survival, the workplace has become a major environmental component of who we are. Our workplace, place of worship, or political party is now providing the equivalent of the physical territory of our ancestors. As Maslow’s hierarchy of needs goes, psychological and emotional security has replaced physical security. Our natural instinct to protect ourselves is now focused on those aspects as opposed to our physical well-being. After all, how many nasty saber-tooth tigers do you see cruising through the halls of major corporations today – with the exception maybe of Freddie in the accounting department.
Let’s face it; eliminating territorial games is futile and pretending they do not exist is foolish. And, for you idealistic youngsters out there, refusing to deal with them is career suicide. Territorial games exist in every organization and nothing intensifies them more than an impending transaction such as an outsourcing deal, a potential M&A transaction, or just simply the hiring of an outside consultant or a new executive. My many years of experience at Ideasphere Partners in high stake change initiatives and projects have taught me a few lessons about how territorial games can torpedo a deal, a project, or a new initiative.  Despite all the teamwork and kumbaya rhetoric that exists at the corporate level of organizations, territorial games are always going on and they are one of the critical factors that determine the outcome of any project.

Having a good strategy, a good contract, a good plan, a strong outsourcing partner, or even substantial financial gains for the outsourced employees can all be undermined. Many outsourcing contracts that were based on seemingly solid foundations between strong industry players have failed to produce the expected results. A closer look at the state of affairs and the reasons for the failure often show that territorial games was an important factor that was ignored.
This is an example from a real client (names altered to protect both the guilty and the innocent). After negotiating for nine months, the senior executives at WidgetsRus reached an agreement with ServExec to outsource their data center and network operations. The plan was to leverage ServExec’s size for better pricing and transfer about a hundred people to their payroll without any layoffs for at least two years. By all accounts it was a great deal for all involved. WidgetsRus would focus on their core competency of building better electronic mousetraps and ServExec would deliver more cost effective network and computing resources, while provide a better career path for the transitioned employees.
With great fanfare, both companies signed the agreement and issued appropriately rosy press releases of the event. Things went along for about three months and all was well; until WidgetsRus begun experiencing problems with network availability. The number of network failures was increasing, as was the mean-time-to-repair, and the network availability was the lowest it had ever been. Network availability was not a small thing because manufacturing facilities depended heavily on timely, almost real-time, information on part inventory for their Just-In-Time processes. When the network was unavailable, production efficiency declined, which had a financial impact on the company. After a couple of months of escalations and tense meetings, the WidgetsRus executives started demanding penalty payments for lost productivity based on the Service Level Agreement (SLA) they put in place with ServExec. Before long, WidgetsRus and ServExec executives found themselves sitting in front of an arbitration panel trying to resolve their issues. Unfortunately the relationship was beyond repair; the agreement was eventually scuttled; and ServExec begun the process of disengagement. By the time the “divorce” was over, both companies had lost significant amounts of money, let alone the reputation damage they both suffered.
So what happened? Why did this fail? After all, the deal was hailed as one of the best structured agreements and a win-win-win for both companies as well as the IT employees of WidgetsRus. Sad but true, this is how it played out…
The ServExec IT organization was a conservative, traditional group who had developed a reputation of service excellence and commitment to customer satisfaction. For those in the know, it was also viewed as a highly political organization. Charlie, the ServExec CIO was characterized by its peers as a “political animal” who did not take kindly to people threatening his territory. He had been able to use his tenure and position himself as an authority with most IT shops his organization absorbed and generally never felt threatened by a new team coming in. The WidgetsRus situation however was different. WidgetsRus IT team had developed from the ground up focusing on leading edge manufacturing and advanced electronics technologies.  For those in the know, it was considered a fast moving innovative group with very little politics.  In just a few weeks, ServExec executives started thinking of Jerry, the CIO at WidgetsRus as a “great manager” and there had been rumors that Jerry could be the heir apparent to Charlie.

Charlie did not take kindly to hearing that information and that’s how the games begun.

Charlie played them all.  First he started the occupation game. Every time Jerry planned a meeting with his former bosses, now clients of ServExec, Charlie showed up and monopolized the meeting. When WidgetsRus executives requested ServExec’s participation in IT strategy sessions, Charlie would attend without inviting Jerry. Then came the camouflage game. During Jerry’s first performance review discussion, Charlie told him he was very unhappy with the way the ServExec applications group managed their change control process and asked him to spend time understanding what the problem was and how to improve it. So for the next several weeks Jerry spent the majority of his time in meetings discussing change control processes and not focusing on the WidgetsRus business he was supposed to oversee. At the same time, Charlie started a shunning game. He publicly ignored Jerry’s suggestions; did not invite him to critical staff meetings; always referred to him as “Jerry from WidgetsRus,” and, in general, positioned him as an outsider who could not be trusted.

Charlie was so good at playing these games, Jerry had no chance, and half the times did not even know he was part of a game. When he finally realized something was up, he was still out-maneuvered by Charlie. When Jerry complained about not being included in the WidgetsRus planning meetings, Charlie would tell him they were routine client relations meetings and would assure him when strategy was discussed he would be included. When Jerry complained about the meaningless change control project assignment, Charlie made him look like he was a whiner and not a team player, who did not want to take on important projects. When Jerry felt Charlie was excluding him from ServExec group activities he was told to stop being a cry-baby and not be so sensitive about minor social issues.
And so it went for several months, until Jerry decided he had enough and left the company.

That made Charlie very happy.  He proceeded to appoint one of his trusted “insiders” to lead the WidgetsRus group and stopped paying attention to that unit. Since the new ServExec manager was a traditional ServExec buraucrat with no expertise in technology, let alone the leading edge technology WidgetsRus used, he focused on administrative aspects and cost cutting projects.  Without a strong leader at the top, the group floundered, some of the best people left, and the service levels fell to the floor.  And that was how Service and WidgetsRus ended up in the arbitrator’s office.
This did have a somewhat of a happy ending however. It was that deal that finally made the ServExec Sr. management team realize that Charlie was more interested about protecting his turf than the interests of the company, so they unceremoniously fired him. And Jerry? Well, as soon as the deal was unwound, WidgetsRus hired him back to be the manager responsible for the performance of the new outsourcing partner and eventually promoted him to group CIO.

Definitions of Territorial Games
The occupational game – “Marking” territory; maintaining an imposing physical presence; acting as the gatekeeper for vital information; monopolizing relationships, resources, or information
The information manipulation game – Withholding; putting a spin on, covering up, or giving false information to prevent or direct action
The intimidation game – Growling, yelling, staring someone down, scaring someone off, or making threats (overt or covert)
The powerful alliances game – Using relationships with powerful people to intimidate, impress, or threaten others; using name dropping; making strategic displays of influence over important decision makers
The invisible wall game – Actively creating counterproductive perceptions so that an agreed upon concept is very difficult, if not impossible to implement
The strategic non-compliance game – Agreeing up front to take action but having on intention of doing it; or agreeing just until you find a reason to avoid taking that action
The discredit game – Using personal attacks or unrelated criticism as a way of creating doubts about another person’s competence or credibility
The shunning game – Subtly, or not so subtly, excluding an individual in a way that punishes them; orchestrating a group’s behavior so another person is treated as an outsider
The camouflage game – Creating a distraction by emphasizing the inconsequential or triggering someone’s anxiety buttons just to distract them
The filibuster game – Using excessively verbiage to prevent action; out talking any objectors at a meeting; talking until time for discussion is exhausted, or simply wearing others out by out-talking them

Legal contracts and common sense…

Aug 2nd, 2010
by ChuckPapaG.

Maybe it’s just me, but, how would you feel if a sales executive, from a company you are considering doing business with, told you that his company should be allowed to, knowingly and negligently, deliver one of the parts you designed/built into your product, based on their specifications and warranties, that is defective and/or will not function as specified; and if/when they do that, and if your product fails, and the consequences have a significant impact on your company, they expect you not to hold them liable for any of the damage they caused you.

I am sure, like me, you would probably have a strong negative reaction and consider not doing business with the company, or simply just throw the sales person out the door. And yet, company attorneys insert this kind of language into the contracts that eventually follow most business discussions and agreements, without a second thought. Here is an sample below from one client:

IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, WHETHER DIRECT OR INDIRECT, ARISING OUT OF THE USE OF, OR INABILITY TO USE, PRODUCTS SOLD OR EQUIPMENT OR SERVICES PROVIDED BY COMPANY HEREUNDER, WHETHER SUCH DAMAGE, LOSS OR EXPENSE RESULTS FROM BREACH OF WARRANTY, NEGLIGENCE OR ANY OTHER CAUSE AND WHETHER OR NOT COMPANY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH LOSS, EXPENSE OR DAMAGE.

My reaction to language similar to this one on another project got a conversation started with one of our attorney partners, whom I have worked with for years and have great respect for, about the role of attorneys, and the General Counsel in today’s business environment. As usual, clients and names are altered to protect the innocent, but comments and feedback are welcomed.

I, and my trusted attorney friend, happen to believe there are two types of business lawyers.  Those who see their role as a facilitator to make business happen within the boundaries of the law, and those who see themselves as being the final arbiter of all company decisions, based on the assessment of legal risk. In my role at Ideasphere Partners, and as a corporate executive, I can work, and have worked, with both types but I clearly prefer the first.

In my experience, the relationship between the Chief Executive Officer (CEO) and the General Counsel (GC), whether employee or outside attorney, is a partnership very critical to the success of any business.  The current litigious environment notwithstanding however, the CEO and the operating team still must have the final responsibility for making business decisions and being held accountable for them. My simplified view of the relationship is that the GC is responsible for understanding and explaining/quantifying the legal risk of any transaction, contract, or business document, and proposing legal strategies and contract language to mitigate it, and the CEO, with additional input from the executive team and the Board, is responsible for the final decision of whether to accept it or not.

At least, that’s how I have worked with GC’s and other legal experts over my years as an executive inside companies, or as an executive consultant in M&A and Turn-around situations with Ideasphere Partners. In its simplest term, the job of the GC is to protect the company by providing counsel and competent legal advice; hence the title. Even though some GC’s go beyond that, and add incremental value to the business by driving certain operations/transactions, or acting as the independent consciousness of the company when it comes to ethics and business practices, that is not always a requirement for the job.

Running a business requires taking some calculated risks. Fear of litigation is just one more factor the CEO and the operating team must consider when making decisions. A good CEO needs to listen to their GC and, especially, if even the potential of interpretation of an activity as illegal exists, follow their guidance. However, a management team can not hide behind their GC, or delegate the decision of accepting/refusing /mitigating risk to her. Unfortunately, some CEO’s, are using the fear of litigation, as an excuse to do exactly that. They ask, or allow, their GC to attempt to mitigate all risks, at the risk of violating common sense, through legal means such as contract language and agreements. That is an exercise in futility that also makes doing business with these companies more difficult. By definition, the law is not perfect and can not contemplate all possible scenarios; therefore legal language is an imperfect means to protect the company in all cases and from all risk at all times.

Just like the example above! This clause attempts to perfectly isolate the company, at the expense of common sense. I am sure I will get e-mails from some of my attorney friends explaining to me that this is standard language designed to protect the company; that other sections of the contract should allow for holding the partner accountable; etc. etc. etc. I know all that, and, in the particular case I am talking about, we made sure we added language in other sections of the contract to protect the client; but please, read this from a business executive’s perspective and consider your reaction if you had to do business with someone who walked into a meeting with you and with a straight face yelled at you (notice this is in all caps) that:

IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, WHETHER DIRECT OR INDIRECT, ARISING OUT OF THE USE OF, OR INABILITY TO USE, PRODUCTS SOLD OR EQUIPMENT OR SERVICES PROVIDED BY COMPANY HEREUNDER, WHETHER SUCH DAMAGE, LOSS OR EXPENSE RESULTS FROM BREACH OF WARRANTY, NEGLIGENCE OR ANY OTHER CAUSE AND WHETHER OR NOT COMPANY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH LOSS, EXPENSE OR DAMAGE.

Again consider this; if that message was delivered verbally in a meeting between executives from the two companies, the reaction would have been one of absolute shock. This language is a real sample of contract language. It is similar to the one in the contract that got me started on this.  In all the meetings, the company executives praised their quality control systems, their engineering prowess, their attention to “doing business the right way,” etc. etc. etc. In all the meetings they talked about partnering with this client and being an “integral part of the success of this new product.” And after the deal was agreed to, the attorneys, well intentioned, or instructed, as they may have been to protect the company from everything possible that could went wrong, sent a document with language similar to the one above.

Of course they fully expected that section would be modified by my client’s attorney’s, or even negotiated out, but imagine the reaction of the business team who did the first review of this document. Some of the engineers on the team, before our attorney calmed them down, just wanted to drop the partner and look elsewhere. Cooler heads prevailed, and in the end, the deal was done, but creating language in other sections of the contract to counter the impact of this paragraph took away valuable weeks of productive time and increased the legal costs significantly.

And in the end; for what? Does any one really think that if the company knowingly and negligently ships bad parts that are off spec and cause the product to fail, there will not be litigation? Does anyone really think that they can permanently hide incompetence, unethical behavior, or stupidity behind legal language? This Kabuki dance goes on all the time and really accomplishes nothing other than test the ability of the lawyers from each side to write clever language to counter the other party. But then again, what do I know?  I am just an operator!

Private Equity Groups – Green, Gray, and Red Money

Jan 31st, 2008
by ChuckPapaG.

A question my partners and I at Ideasphere have been getting more frequently by operating executives at our client companies is whether an acquisition by a Private Equity Group (PEG) is a good or a bad thing for them.  Based on our experience with many transactions over the last ten years, our answer is, it depends on who the buyer is. Just like assessing Venture Capital (VC) firms who invest in some of our startup clients, the answer depends on the type of money the PEG represents: Green, Gray, or Red.  Depending on that, an acquisition can be good, great, or a really bad thing….Green, Gray, or Red Money? Please allow me to elaborate.

·          Green Money is just that:  A financial buyer who recognizes an opportunity to buy an asset that will grow over time and generate returns with little need for direct involvement by the buyer.

·         Gray Money is green money plus brains:  A financial buyer who recognizes an opportunity to increase the value of an asset by bringing intellectual capital (their business network and access to management talent) to the table, along with real capital (their money).

·         Red Money is like getting in bed with the Devil; No matter what you do, you’ll wake up with horns. Red Money is a financial buyer who recognizes the value of an asset can be increased through non-value-adding financial and operational engineering that consciously cripples the asset in the long term, but generates a short term pop in value that can be exploited for a great return.

(more…)

Vision or Hallucination – Visionary or a Dreamer

Jun 10th, 2007
by ChuckPapaG.

A couple of years ago a group of managers at a client company asked me to help them deal with their boss who suffered a bad case of Visionaritis, a disease affecting some managers who confuse vision with hallucination.  The output of that intervention (successful if I may add) was a workshop presentation I gave at their management training workshops and  a public presentation I gave at management seminars.  The title of the presentation was “Vision or Hallucination, Visionary or a Dreamer.”  I thought I would share it and see what you think.  As usual, you can send me your feedback at c.papageorgiou@ideasphere.com

The Ugly

Dec 18th, 2006
by ChuckPapaG.

The Bad

Dec 18th, 2006
by ChuckPapaG.

The Good

Dec 18th, 2006
by ChuckPapaG.