Labcast: Is Your Company’s Operating Model Built to Last?

November 10, 2011

In our latest episode of Labcast, OpenView founder Scott Maxwell talks candidly with Bill Conroy, former CEO of Initiate Systems, about some of his best lessons for young companies and entrepreneurs. Bill currently serves on the board of both AtTask and Prognosis Health Information Systems, two companies you can learn much more about at OpenViewPartners.com.

Labcast 52_ Bill Conroy on the Keys to Priming a Company for Exit

For more thoughts and ideas from Bill on taking a company to exit, check out our previous Q&A interview.

Podcast Transcript

Brendan Cournoyer: Hello once again everyone, and welcome to this episode of Labcast. I am Brendan Cournoyer, and today’s conversation features OpenView Venture Partners founder, Scott Maxwell, and seasoned executive, Bill Conroy.

In today’s conversation, Scott and Bill cover a number of different topics, including tackling big ideas at young companies, operating models for CEOs, and the keys to choosing the right board of directors. Here are Scott and Bill.

Scott Maxwell: Bill, thanks for coming in.

Bill Conroy: You’re welcome. Good to be here.

Scott: Bill, you just sold Initiate Systems to IBM. It’s been about a year?

Bill: It has been a little over a year, about 18 months.

Scott: You have been involved with building companies for 30 years at this point?

Bill: I am old, yes.

Scott: But you have a lot of perspectives because you have been on boards of emerging growth companies, you have built one as a CEO yourself, you have been the CEO of a couple of companies that you have built up, you have been an investor, you worked at large companies, Oracle, most specifically. What are the two or three or four common points that you see that all of the companies can benefit by?

Bill: I think number one is most companies start with a founder, an entrepreneur, and they like talking about big ideas, because that is how companies are founded. They are founded around big ideas. Eventually, they get started, and they start actually selling product that reflects that big idea and they have very few resources. They are not able to have a lot of people, etc., and so when they want to close a deal, when they want to solve a product problem, they basically gang tackle it. Everybody in the company gets involved with that sale and gets involved with that product resolution, etc. But eventually, as they grow, that just does not scale and the guy that brags about staying up all night to solve a problem is a guy that shows that it doesn’t scale. So process, and having something that is truly an operating model of how you are going to execute is important. I think that is number one.

“You have always got to be trying to broaden your markets, and by that I don’t just mean an adjacent market to sell the stuff. I mean partners, I mean geographies, I mean industries — just anything that you can get multiple revenue streams.”

— Bill Conroy

I think number two is despite how busy you are, despite how you might say that your market is much larger and you can continue to grow, you have got to pick a new market. You have always got to be trying to broaden your markets, and by that I don’t just mean an adjacent market to sell the stuff. I mean partners, I mean geographies, I mean industries, just anything that you can get multiple revenue streams.

If I had to pick two, those are the two. One is to get process in there when you need it, and number two is to always look for new markets.

Scott: Great. What about the team, setting up the team, making sure that the team has the right long-term aspirations that align with the company, align with each other and getting them all moving in the right direction?

Bill: I think that in small companies the culture of the company is the CEO’s personality, and there is not a lot that you can do about that. The first thing you have to do is make sure that the CEO’s personality is consistent with where the company is going. That sounds easy and trite. But as an example, if it is a services company and they have made all of their money off of services and the CEO has a 100% services background, and the strategy is to convert to product, I would suggest that the culture is probably not right to convert to product.

So, number one is the culture has to be right. If the culture is right, and therefore the CEO’s personality is right, then it becomes kind of easy in that he just has to or she just has to hire people that are like them. If so, I think that your mission statement and the culture flow naturally.

One is, I think, make sure the culture is right and then hire people like yourself. Two is, over-hire. I think that most CEO’s have to have a discussion with the board about what type of people they need, how expensive they might be, get agreement on that and to over hire. I always believe that, as much as you can afford, that you should hire the leaders first as opposed to hiring the individual contributors and waiting until you have X many, and then hiring the leader. So I think that over hiring or hiring people that allow you to grow, as opposed to hiring people that after you get a certain number of them you need a manager, I think that is the wrong way to do it.

Then three is I’d say you have got to hire brilliant people. I think too often people try to get by. I think you have to hire as many brilliant people as you possibly can, and you have to recognize that at points of maturation within the company, people are going to peak and you have to deal with that as fast as you can. Some people continue to move on. Some people have peaked, and unfortunately, even though they might have been the most valuable people in the past, you have to let them go and move on.

Scott: Great. Bill, we have known each other for about 11 years, almost 12 years at this point.

Bill: Wow!

Scott: I think that there has been a recurring theme when we chat over time. It has to do with these dashboards, CEO’s dashboards, management and so on. Can you just talk to that?

Bill: Yeah, that is what I call under the title of an operating model. An operating model is an obvious thing that a company should have, and it is a simple and straightforward thing. As I mentioned earlier, founders and entrepreneurs don’t want to talk about simple. They want to talk big ideas. But in order to scale, you just have to have it, and there are some basic components. One is a control book. I am repeatedly on board calls where a director will ask for a new number to be reflected a different way and the CEO says, “Sure.” Some days later after some effort, that is created. I am repeatedly in companies where everybody is running up and down the hallways trying to create a board book eight hours before the board meeting is going to begin.

“I am repeatedly in companies where everybody is running up and down the hallways trying to create a board book eight hours before the board meeting is going to begin.”

— Bill Conroy

I think that all the management reporting should be the board meeting. I think they should have a management meeting, just days, one or two days prior to the board meeting, and 80% of the board meeting is what is in the management meeting. That creates a lot of extra time for people to be focused externally as opposed to internally.

One of the most important things is a control book. To me, what a control book is, is a source of truth. There are no other books. It is the book. What it would have in it is page one would be performance metrics, evaluation metrics that the board and management team use on a day-to-day basis. It is published monthly to the board, as well as to the management team, and therefore, there is no dun-datta-duh, before the Board meeting because the directors have been getting the control book in the same format all of the time. So, page one is performance metrics.

Page two would be a P&L. Page three would be a cash statement. Page four might be a retention report. Page five might be growth drivers. When you guys put together the budget, you made certain bets as to where the growth would come from. Well, let’s revisit those and see if the growth is coming as we anticipated. Did we invest correctly in the right markets, etc.? I think if that control book is used all of the time, then there is not a discussion about what the numbers are in the board meeting, which is a total waste of time, but the discussion is about what the numbers mean.

The agenda, I think, for a good management meeting would be one, somebody who is capable of being very neutral talking about the market, what is going on in the market. Are we winning or losing market share? Two, would be the product guy stands up. He has two slides. Here is the product roadmap. This is what I showed you a month or a quarter ago. This is what is happening. Three would be the sales guy who stands up and very simply, not handing you the Salesforce.com pipeline, talks about what he committed for the quarter, what has been closed, what the accounts are he is still counting on, and what the upside is. It is very simple and straightforward. Then the CFO stands up and doesn’t tell you what the numbers are, but has two slides to tell you about what the numbers mean to him, what he is concerned about. Lastly, the CEO comes up and says, “Hey, we have some strategic initiatives. I have shared those with the company and the board. Here’s how we are doing against those.”

Now if you go through all of those things in a management meeting, have a discussion, fine tune them, and then you have a board meeting and the exact same people give the exact same reports, that is the board meeting. It is an efficient way of just sliding right through it.

The other important part about an operating model is processes. There are probably seven or eight processes at any software company that you need, and I find that most companies don’t have them when they are young. I will go in and I’ll say, “Let me see your sales process.” They say, “Oh, we have a sales process and it is great.” But when I talk to a few people, I find out that they all have different versions of it and it is not written. I am not going to get into a long tirade about processes, but I think that the operating model is something that is written. It declares how you make decisions, with what reporting, and it is surrounded by processes.

“I think that any meetings that are used to discuss status are a waste of time.”

— Bill Conroy

Scott: Great. That is great. What about the board meeting and the use of the board meeting to discuss strategy, to kind of get off the book. Is the board meeting a good point to do that, or is it better to have separate sessions with the board or with outside advisors or both? How do you think about that, the possible strategies that the company is not executing against but could be executing against?

Bill: I think that any meetings that are used to discuss status are a waste of time. The way you avoid that internally is I have always used something called one-on-one templates. Those templates have the metrics, as an example, that engineering is being measured against. It has the corporate objectives that the management team agreed upon, and those that are assigned to engineering and what the status is. It has other things that they have accomplished and other challenges that they are dealing with, and it has some personnel rankings, etc. That one-on-one template is reviewed with their direct report, in this case the CEO, monthly, and then it is distributed immediately to that person’s peers. Everybody gets to see the status via that report. Now, the only thing that I do do is I eliminate the personnel discussion.

So, I think internally you can avoid discussing status by delivering status reports. I think in board meetings, most of the status is around the numbers, and that is where I see board meetings getting bogged down, and therefore, the control book, if it is distributed monthly, as opposed to once a quarter or once right before the board meeting, should give the directors plenty of time to make calls to the CFO, etc.

That being all said, if you can eliminate the droning of the status, then I think board meetings are the strategy sessions. I think it is too time consuming for CEOs to have one strategy session and then the board meeting, etc. I think board meetings should be full days. I think they should not focus on status. I think the directors need to be educated, and if they are presented with the market, they are presented with what the CFO says, what the product roadmap is, how the CEO thinks the initiatives are, what the sales pipeline is, then they are educated enough to have a meaningful rest of the day. I think it is about three hours of going through that and having a discussion, and then the rest of the day of for strategy.

Scott: Great. Do you have a perspective on what the ideal number of board members for a company is, or the ideal backgrounds of various people to sit on the board for a company?

Bill: No is the direct answer, but I think some venture capitalists oversell what their capabilities are in terms of really understanding how to operate the company, etc., and I think others don’t. I think others have a tremendous value-add there. But I think as long as everybody participates up to and not beyond where they can add value and are not trying to just occupy time acting like they are smart or whatever, I think it works pretty doggone well. I think diversification on a board is absolutely the most important thing. Somebody that has been in the market you are selling to, somebody that can do your job as the CEO, and then just some other smart people to really help you with putting together a strategy.

I think there are two kinds of boards. One you go in and you try to get out of that Board meeting as fast as possible, and sometimes that is okay, because you have so many issues that are right in front of your face and obvious that you can’t deal with much strategic anyhow. Then the other kind of board is one that truly you pick up the phone a lot and you bounce your ideas off them, etc., so that when the board meeting comes along you have already been strategizing with them, and they are your trusted advisors.

Scott: Great. What about the number of VCs on the board? I have got this personal perspective that the fewer the better. But do you have a viewpoint on it?

Bill: Well, like I said before, some VCs have a lot of current subject matter. So let’s divide that group out. Then there are other VCs that don’t, and I think that in general, if the VC value-add is uniquely the money, then the fewer the better.

Scott: There is a lot of talk in the public company circles about having a director who is on the board that is very good from a financial perspective, and I am a personal believer, in any size company, that having somebody who sits on the board that can be responsible for the audit committee, perhaps be responsible for the compensation committee or governance committee, is a good thing. Do you have a point of view on that at all?

Bill: Yeah, I should have mentioned that earlier. I absolutely agree with you. The other thing that I think you try to do with the board is supplement where you are weak and to use the board in a check-and-balance way. I think the reason why you have somebody financial on the board is to check up on the CFO, to talk directly to the auditors, and make sure everything is okay such that you, as the CEO, can ask the auditor, can ask the CFO, and can ask his board member, “Is everything okay? Is there something that we can be doing better?”

I think in the same token, as an example, if you are not particularly technical and you want to check-and-balance with the head of engineering or your CTO, then it is valuable to have somebody that is kind of technical on the board also. Again, I think the board is a check-and-balance, and it gives you varied opinions and allows you to check up on how you are operating, that maybe you are blind to. I think finance is a great example.

Scott: Yeah, great. Excellent. Well, Bill, thanks for coming in. Great seeing you again.

Bill: Good to see you buddy.

Scott: Talk to you soon.

Bill: All right.

Content Strategist

Brendan worked at OpenView from 2011 until 2012, where he was an editor, content manager and marketer. Currently Brendan is the Vice President of Corporate Marketing at <a href="https://www.brainshark.com/">Brainshark</a> where he leads all corporate marketing initiatives related to content, creative, branding, events, press and analyst relations, and customer marketing.