Perspectives: A Conversation with CEO Thomas Charlton

Turning around high-potential, under-performing organizations

Thomas Charlton is chairman and CEO of PHD Virtual Technologies. PHD Virtual provides award-winning backup software solutions in virtual IT environments. The company was founded in 2005 and has grown to 2,000 customers of all sizes using its products globally across all industry verticals.

 

Prior to PHD Virtual, Thomas was president and CEO of Shunra Software; CEO of VoiceGenie Technologies; CEO of Trailblazer Systems; and CEO of Tidal Software.

 

Shunra Software was funded in 2004, but revenues were flat and losses significant. Thomas assumed control in 2007 and, after nine record quarters of revenue growth, returned the company to profitability in 2009.

 

VoiceGenie Technologies had received venture funding as well. However, sharp losses ensued with little change in revenue. Under Thomas’ leadership, the company enjoyed a return to profitability and six quarters of record growth. VoiceGenie was acquired in 2006 by Alcatel.

 

Trailblazer Systems was a founder-run company that lacked the appropriate systems to support growth. Thomas hired new teams and doubled revenue over 12 months. Trailblazer was acquired in 2004 by NuBridges.

 

Tidal Software offered Thomas his first CEO opportunity. He joined the team as VP of sales and within two years approached the board with a plan to assume control over the financially struggling company. Thomas returned the company to profitability and continued strong growth. Tidal was acquired in 2009 by Cisco.

 

Thomas began his career at US Surgical where he advanced by seeking out opportunities to turn around under-performing divisions. At the time of his departure, he was responsible for a unit with revenues of $220M.

 

We recently spoke with Thomas about what it takes to turn around an underperforming high-tech company.

As a turnaround CEO, what are some of the common threads you see when you walk into an underperforming company?

All five of the companies where I’ve been CEO have been unprofitable when I took over – sales were either flat or downward trending. None of the companies specialized in the same type of technology; however, they all had one core factor in common: fractured, dysfunctional, or broken communication between sales, marketing, product management, and development. In situations like these, you have products going into the market that don’t meet customer needs. Or you have great products that are unsuccessful due to the lack of a well-coordinated release process.

What areas do you address immediately?

Each situation is different. I’ve worked in very different markets – Canada, Israel, Philadelphia, New York, and San Francisco – with different types of products. That said, there are very specific strategic steps I go through in order to execute on organizational change.

First and foremost, I form a hypothesis of what might be causing poor performance and also of what might be right. Then I begin to test the hypothesis and add new data to my assessment. What problems might be fixed? What’s going well and how can we accentuate that? I then prioritize very quickly what needs to be addressed based on greatest impact. I’ve seen other CEOs come up with a list of wrongs — but not a list of rights — and prioritize changes that further stalled the company. You have to focus on the good things, as well as the negative.

I also evaluate the existing management team very quickly to assess whether they are going to commit to the necessary changes. If not, I make changes very quickly, sometimes within the first 24 hours of taking over.

Next, I clearly communicate the changes that will take place and lay out the goals and strategies for the next 90 to 120 days. During this phase, I also share my own action items and deliverables. I tell everyone what I am going to do personally, in order to develop top-down accountability.

In addition, I align incentives at all levels of the organization, so that performance is tied to deliverables. It has to be. Without this alignment, you could have people in development and marketing who don’t care about sales. And that results in a break in communication. The salespeople might be out selling like crazy, but marketing isn’t supporting them properly. Or the developers are creating products based on their abilities, as opposed to what needs to be developed for the market. So getting everyone aligned, establishing and communicating goals, and holding people accountable really starts to move the organization to a performance-based culture.

What areas do you stay most focused on?

It’s crucial to stay focused on your core market. Too often you’ll see a company that has reached $8 or $10M in sales in a few short years want to move into other markets. I say stay focused on the core market that has led you to your initial success until it’s tapped out – then find a way to exit. If sales are flat in your core market, has something changed with the product? Why don’t your customers want to buy it anymore? Too often you’ll hear, ‘we just thought we’d go to another market.’ My advice is to get back to the market that you had your initial success in, and figure out how to get those customers to buy more. That’s not to say you won’t be developing new products, but doing both at the same time is ideal.

Here’s an example: One of the companies I joined was performing poorly in its core market. It had gotten up to $10M in sales rather quickly and 24% of its customers were Fortune 500 companies. However, there were problems with the technology, problems with distribution, and they were on their second CEO. Revenues were flat and the company was unprofitable. The senior team was trying to raise $8M from the board to build a new product for a new market.

The first thing I did was get on the phone with current customers. We found that the customers loved the current product, but were frustrated that it couldn’t be accessed over the Web. The people who had been running the company had been there since its founding, so to them, the product was simple to use. But to a new user, it was incredibly difficult. So we built an easier-to-use interface, made it Web-based, and added consulting services because the people who were buying it needed training. The consulting services alone produced an additional $3M in annual revenue. So yes, there had been a problem in this company — but it had been misdiagnosed. Once we went in and fixed the real problem, we were able to increase revenues and return the company back to profitability.

Have there been any areas where you’ve gotten lucky?

Yes, of course. When I think of luck, VoiceGenie is at the top of the list. Revenues were flat and they were losing money. The COO and VP of worldwide sales had just resigned. The CEO was the founder. He suggested I talk to the COO and VP to see if they would stay – they said they would stay under a new CEO. However, I decided to accept their resignations within the first 12 hours. Then I pulled a regional sales manager and put him into the VP role. But other than that, there was zero turnover on the senior team. This was the only company I had ever walked into where, aside from the two roles that resigned, every single executive was outstanding. In the business of turnarounds, finding an entire team of highly skilled executives in place – people who you’d really want around you – is very rare. It turned into an awesome experience. We were able to double sales very quickly and return the company to profitability – the company was then acquired by Alcatel.

Have there been any key people who have had a major impact?

Lacy Edwards was chairman at Tidal when he convinced me at age 30 to do a total career change. I came from the surgical sales industry and I wasn’t completely convinced that a career in the high-tech industry was the way to go. Tidal wasn’t a hot and sexy company, but it had real revenues and good customers. I came in as VP of sales and we were able to double sales in 18 months. However, the company was incredibly bloated; they had 60 days of cash left and the senior management team was asking the board for more money. The board had lost confidence in the CEO. I made a presentation to the board to take over as CEO, and Lacy told the board that he’d sign on as executive chairman if they’d give me a shot. I was a young CEO with only a few years experience in high-tech, so Lacy oversaw the operations. In addition to our regular meetings, we met every Saturday morning from 9 am to noon for an entire year. He helped me and instructed me and introduced me to the people at Insight Venture Partners. Later, he consulted with me at another company and helped me through my first acquisition.

Another key person has been Paul Throldahl, who is currently the Sr. VP of global sales at PHD Virtual. He has been involved with either Insight or me for the last 13 years. Unlike many other sales VPs, who usually specialize in either inside, enterprise, channel, or consulting sales, Paul is expert in all four. He’s incredibly versatile and that’s incredibly rare.

What strategies do you use to keep your people aligned?

My managers and I all lay out our strategy and goals for the year. At the end of last year, I said that ‘within the first 90 days of the new year, I will do X, Y, and Z.’ The Q2 meeting starts off with a list of things I said I would do, and a list of things I actually did. This is so refreshing and drives accountability at every level. We all know the destination. Everyone knows what’s expected of them. Everyone is accountable.

Are there any product development, management, or design techniques that you find particularly valuable?

When you see a great technology that doesn’t sell, or a technology that doesn’t meet the requirements of the marketplace, it can be a result of broken communication between marketing, development, and product management. At PHD Virtual, we have a Product Action Committee in place comprised of sales, product management, marketing, development, and senior executives. Their job is to get the company in a position to release a technology. They follow a very rigorous process and strict criteria to determine what enhancements to make, what new products to build, how to deploy resources, etc. It’s a process-based versus a power-based way of decision making. I’ve given talks on this. In a power-based environment, the strongest department or person makes unilateral decisions on the technology and generally doesn’t consult with anyone. They don’t consider the marketing and sales groups. The product ‘escapes’ into the market. It might even be a good product, but there are no effective plans in place to market, sell, service, and manage it.

What are some of the key mistakes you’ve made as a CEO, and what have you learned from them?

I’ll give you three.

First Mistake

The first was when I hired the wrong VP of sales.I realized quickly that this person’s skill set did not meet those required to be successful in the job. We had promoted the existing VP and hired this person from outside. It was right on the heels of having received a round of venture, and everyone on the board interviewed him. I realized within 30 days that I had made a mistake. I wasn’t comfortable going to the board about it after just having hired him, so I started to limit his responsibilities. He started to damage the company very quickly so I took away international and inside sales and had those people reporting to me. He was fired within 90 days and I took over the entire sales function. The lesson I learned was not to depart from a formal interviewing process. When I interview, I am very thorough. However, because this was a sales role – and sales is where I started out – I was not as thorough as I should have been.

Second Mistake

The second mistake involved lack of alignment at the board level. I had a situation as a young CEO where I failed to effectively interview the board members to make sure everyone was on the same page in terms of what they wanted for the business. So I went in, established a team, turned the company around, found a buyer, presented a good offer with term sheets to the board – only to find out that half wanted to sell, and the other half had no intention of selling. A lack of alignment … huge mistake. I had to either change the board or leave. I hired a new CEO and moved on.

Third Mistake

I think that every senior manager or CEO has made a bad hire, faced a dysfunctional board, or has taken a job that they shouldn’t have. But this third mistake is something less obvious. It involves underestimating the power of the marketplace. Scott Maxwell, who I first met at Insight, taught me this: If a company’s technology is reasonably good and the market is large, it can succeed even if the management team is not the greatest (the early days of Facebook or Google may be a good example of this). Conversely, no matter how great the technology or how strong the management team, there is nothing you can do to change a small market. Maybe you can grow revenues up to $10 or $20M, but eventually you will hit a wall and you cannot change the final outcome. The only thing you can do is take money into a new market, or position your product in the existing market over a very, very long period of time – or execute toward a good exit.

Those are just a few of the mistakes I’ve made – I’ve made plenty more. The key is to recognize mistakes and make changes quickly. I do think, however, that you learn more from your failures than your successes.

You just mentioned your recruiting process. What’s it like?

As I mentioned, it is very formal and structured. I’ve given talks on this as well. When I go into a new company, I have to build entirely new teams. Therefore, I’ve taken a lot of care to develop a very structured behavioral and skills analysis. All too often, you’ll see people go to a recruiter with five or six bullet points describing the perfect candidate. I present them with very specific skill sets and personality traits that I am looking for in the candidate.

If you’ve ever gone into an unmanaged interview process, you know how confusing it can be. That doesn’t happen with us. Candidates go through four or five interviews in a variety of different settings. They meet with key people internally, managers they would report to, people they would interact with, and/or people who will give them information about the job. They might even talk to a counterpart who currently holds the job. The final step involves passing an entrance exam. You read materials about our company, take a test, and if you get a passing grade of 90% or more, you’re in. If not, you get terminated that day. It starts the whole process of instilling the performance-based process. We’ve been told we interview like a Fortune 500 company. We’re glad to hear it.

Please describe your management style.

Visible — The senior executive needs to be visible. In the absence of visible leadership, people will listen to the loudest person around. When you are in the middle of executing organizational change there can be a number of loud employees that don’t exactly share your new vision for the company.

Objective — People need to feel safe in order to perform well. I create an environment where performance is observable and is measured objectively. Nothing is subjective. You don’t have to worry if someone doesn’t like you, if you don’t golf, drink beer, or play pool. If you’re doing a great job, you’ll be recognized for it.

Fair – Based on the feedback I’ve received over the years, people like to be held accountable for their performance … to know that if they are performing they will be recognized, and if they are not performing, someone will ask why. If it’s a competency issue, we’ll figure out what the person needs to learn. If it’s a lack of commitment, another discussion needs to take place. I can’t stress how important of a role the behavioral interview process plays in all of this. Without a consistent and formal interviewing process, hiring is a total crap shoot – and too many people think and accept that it’s a crap shoot, but it doesn’t have to be that way. You can breathe some predictability into the process.

What words of advice do you have for senior managers of young technology companies?

The first thing I would say is that the larger your area of responsibility, the less your individual contributions matter. So your focus shouldn’t be on you, but on bringing in great people and giving them a framework to be successful. That’s what I do as a CEO. So many times I go in and there is so much focus on the CEO. If it’s only about the CEO, then why have a team?

Second, pace yourself. Running a software company is not a marathon, but a series of well-timed sprints. Each leg of the relay has to be run effectively and that in turn will have a positive, cumulative effect. Sprint to a release date. Sprint through a quarter. Trying to keep a very level balance is not possible or desirable. You want to motor your people up for specific events, and then let them relax for periods. Those who make it a marathon have it wrong.

I also say ‘listen.’ I can’t tell you how often I’ve heard other CEOs going into a new company say things like, ‘at the last company I turned around,’ as opposed to, ‘let’s look at this company, do a good analysis, and listen to the people.’ In every situation, bar none, some of the answers for the turnaround are there. In most cases, someone within the organization knows what needs to be done – they might not even realize they have the answers, but they do. For instance — if you ask your developers why people aren’t buying your product, they’ll say they don’t know. But Ed in Support knows – it’s because people can’t install your product as easily as they can install your competitor’s. Ed knows exactly what the problem is, but the developers either don’t know or don’t understand because they’re not listening — there’s that break in communication that I mentioned earlier … the break that occurs when departments are not aligned.

Next I would say to set goals and hold people accountable. What are the goals for the company? What do you want to achieve next quarter? Next year? What are your personal goals and how do they correlate? There are three keys to successful execution: 1) set clear and understandable goals, 2) make sure that everybody knows why those goals are important and what they are expected to do to achieve those goals, and 3) deliver consequences for both positive and negative performance. Deliver consequences in a respectful way, but know that if you do not have consequences for poor performance you will not have positive results in your execution.

Finally, in terms of execution, make sure you are focusing not only on the things that need to be changed within the company, but also on the good things. Certainly illuminate the negative so fix actions can take place, but also attempt to point out positive aspects of the people or business. Yes, change the things that are not going well, but accentuate your successes as well.