AFC: Different Kinds of Businesses

This is the first time I am going to post this blog on both LinkedIn and WordPress. So, welcome if you are new to this blog. You can find the rest on jimsackman.wordpress.com.

One of the challenges with an acquisition is that the businesses in their inherent financial condition are different. In this case, I will use the ONT business that we had with FiOS as that business. The ONT business was a 20% gross margin business at best. The rest of AFCs business was 45% GM. When Tellabs acquired AFC, this was worse as Tellabs worked from 60% GM or so.

Now, people will immediately describe how bad the ONT business was. It was not, on its own, a great business. However, the ONT business supported the OLT business at FiOS which was a 70% GM business. On top of that, the costs to operate the ONT business were very low. The normal AFC business was a low to moderate volume high mix business. The ONT business was a high volume, low mix business. Other than the versions that Verizon had us make but never deploy, we only built 1 version at a time.

I could also argue that there was no need for Sales and Marketing with ONTs. There was no compatibility with 3rd party products, so when Verizon bought our OLT they had to buy our ONT. Nobody called on Verizon to sell ONTs. No advertising campaigns were made for them. The operations teams involved were very small. Even the Engineering Teams were small. As long as we could end up with less than 20% OPEX on the ONTs, we made money.

There were two other benefits from this kind of business. First, suppliers fought for the business and gave AFC and then Tellabs all kinds of discounts to get ONT business. This meant that other products received cost benefits from the ONT business. The other gain is best demonstrated by the way Tellabs did cost accounting. Tellabs allocated “Corporate Costs” in a flat percentage to all products. ONTs used almost none of these services, so the rest of the product line let ONTs carry costs that were not related to them.

Which leads us to talk about how to manage this kind of product line within an organization that has a very different financial profile. The best way is to segment the business into a separate reporting structure, even if that structure is internal only. That way resources can be appropriately assigned and managed. The same will be true the other way around. A smaller revenue, high margin software business will not be managed easily within a larger revenue, lower margin hardware business. The cost structures are simply to different to allocate costs fairly.

Have a great day!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

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AFC: Surviving Transitions

I thought about what would be important to write about this week and it came to me that the changes in a company are so important to understand. Many companies get stuck in one mode or another, particularly if they are successful up to that point.

I want to start this with the state that I found Hardware Engineering when I arrived. I joke that it seemed that every card in the system was in CAD when I got there. Even the little board that simply connected the craft terminal to the system. This really was a triumph of philosophy. The Hardware Engineering group was built for with “Time to Prototype” as the metric. Anything that saved even hours was implemented. It created a development flexibility to respond to issues that was unmatched.

My problem was that nothing was “Done”. Now developments will be never be done, but they can be stable for an extended period of time. To me “Done” is a binary state and those who know me have heard me joke about this before. I used to argue with my son about his homework. I would ask if his homework was done. He would say it was almost done. I told him there is is done and not done. Almost done is not done. And that was the state of most of the hardware. But if you are optimizing prototype efficiency this is not an issue.

But at the time, AFC was doing around $80M a quarter in revenue. Greg Steele and I made an agreement that we would we move the philosophy was going to be “Time to Profitable Volume”. What this meant is that products would get into production and not change. That the yields that they made were high and field returns were low.

This was a big change for the team and many people resisted it. It meant that our schedules stretched from what people expected. The good news was that over time the Engineers saw that they could quit going back to things that they had already worked on. We could then spend our time on new designs or cost reductions. That made Engineering more top and bottom line productive. This transition took about 12 months and was my focus.

What is important here is not the actual change. What is important is that we were able to recognize that the situation of the company had changed and made the old system obsolete. The old system was good and produced great results. This was especially true during the true startup days of AFC. But a mid-sized company can not operate like a startup. Systems and People have to evolve to meet the new needs of the company.

This is a natural process in a business defined by something called the Sigmoid Curve which is also called the Business Lifecycle. People need to understand where they are on the Lifecycle and figure out what they need to do to move forward. If you are stuck, give me a call.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

 

AFC: Crisis Management

When I got to this point of the story, I thought I would write about the things that were right about AFC when I got there and then about the things that were wrong. I have decided that most of these things were two halves of the same coin.

In this case, I want to talk about Crisis Management. When I arrived at AFC, it was a Crisis Management machine. There was the well known 5 o’clock meeting that was a daily get together to report out the results of the last 24 hours and set the plan for the next 24 hours. Engineering had morning meetings that dealt with the results from overnight and set the plan for the daytime.

This meant that AFC essentially micro-managed the work that was most important to the company. On top of that the employee base knew what was most important and worked their tails off on it. Everybody knew the progress that was happening and we could adjust plans based on progress. I recall examples of us sending people out ahead of time with cards. We would then email out software to the person and they would upgrade the cards in their hotel room. They would then put the cards in the customer hands the next day.

That meant that we could walk tightropes to deliver on the very tight deadlines that we had. This method of working was a huge adreniline rush all the time. It was a kind of drug that could make you feel like a hero when you met one of the deadlines and delivered.

That hero work was the way people were judged. You worked on the important things. You did whatever was necessary to deliver. People would be glad you did and you would go up in their perception.

The challenge with this is that the only things that people cared about were those things that we in Crisis. This meant that the next set of Crises were already heading towards us. This meant that the burn out factor was very high. You can only run at a sprint for a period of time. It also meant that we were eventually going to fail. You can’t be perfect forever.

On top of that there were huge cost to our way of operating. We used to buy prototypes Printed Circuit Boards (PCBs) on 24 hour turnaround at $1,000 each. If we had been able to use 7 day turnaround, then the cost might have been $100 each. This on top of everything else that were rushing around on.

I have often wondered if the stress from this was good for any of us. It definitely made for an environment I have never worked in before or since.  If your company operates from Crisis to Crisis, then that is something to look at.  It can be attractive, but may be stressing your team and your wallet.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

AFC/Tellabs: Another Thing I Learned

This whole bit of posting is not in a story arc, it is about giving people some things that I took away from my learnings. I have tried to put them into the story arc, but I think reminder of the main lessons is important. This one is that luck and timing have a lot to do with success and failure.

Rick Johnston used to say that he was going to write a book about AFC and he would call it “And They Succeeded Anyway”. He always makes me laugh even though I am much better than he is at Fantasy Football. There is a lot to that in the AFC story. We were definitely not perfect. We screwed up many times, but we were right about enough stuff to take advantage of many situations.

For example, the company was originally started with the idea of rebuilding the former Yugoslavia’s Telecom Infrastructure. But found a foothold in the Independent Operating Companies (IOCs). This was especially true in the smaller companies which were still using older Accounting practices (Rate of Return). This process required companies to go through and upgrade their equipment periodically to keep up the rate they charged consumers. AFC came onto the scene near the start of one of these cycles. There was another cycle going on where these IOCs were trying to offer new services and AFC allowed them to do that.

AFC did not create those business cycles nor was it created to take advantage of them. However with a little luck and timing it was in place to execute against them. That is where the blood, sweat and tears of those early into the company took over. If you get an MBA, nobody is going to tell you that this is the right way to build a business. But this is how AFC got started.

From my own time, you would have to say that we were “ready” with product when the BPON RFP happened. We had our first prototypes ready for a trade show in June of 03, and the RFP happened in July of 03. Hard to have planned that any better. Of course, we didn’t plan the RFP. We were simply executing on our strategy. The fact we chose the technology that was espoused in the RFP was also both luck and planning. I knew the RBOCs (Regional Bell Operating Companies) would go with a standard and there was a choice between 3. I could have just as easily chosen EPON, but though the RBOCs would not choose that standard simply by the way the standard was made.

We were both lucky and made our own luck. No business will be built the way that one was as each instance is unique. So, I want to focus next on what was good about the firm and bad. Hopefully you can all learn from that.

Happy St. Patrick’s Day!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

AFC/Tellabs: One of My Learnings

I thought I would start with one thing that sticks out from my time at AFC and Tellabs. This learning is around what Executives are actually supposed to do and how that translates into what leadership actually is.

Most people look at Executives and are curious to what their job is. They think they know what they want the Executive is supposed to do. But the Executive Team is truly responsible to the Board of Directors most directly. The Board of Directors represents the Shareholders. So simply, the job of the Executive Team is to run the business in a way that satisfies the shareholders. Pretty simple right?

I want to point out that doing this is not always actually in the best interest of the Executive. I want to use Sycamore Networks as an example. Sycamore went public during the Optical Bubble and ended up with about $1B in cash on its Balance Sheet. The bubble popped, the market for the product collapsed, and a huge percentage of people were laid off. There was a stump of a company with less than 100 employees that generated around $20M of revenue a year.

The business could continue to operate like that for a really long time. Dozens of years. And all the employees would still be getting paid, even those Executives. The jobs would likely be boring and their would not be growth, but if you just wanted a steady paycheck there is nothing wrong with it. I want you to now take the perspective of a shareholder. What is the plan to grow the share price? Well, there was none. So why be a Sycamore shareholder? I have no idea unless you wanted to roll the dice on someone paying a premium for Sycamore.

That leads to the job of the Executive Team. This is the Creation, Communication and Execution of plans. These plans need to deliver results first to the shareholders. Customers, Vendors and Employees are also people that are interested. But Employees work for the shareholders, not the other way around. So as an Executive or a Small Business Owner, Do you have a plan? Have you told others about your plan? How are you tracking against your plan?

One last part of the problem is that many people can create close in Executable Plans. Many people have a challenge with is creating an overarching strategy that links all these plans to get somewhere useful. If you are having problems with this then call me.  I want to know your goals and set up a plan to help you get to them!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

 

Tellabs: I Exit Stage Left

Krish Prabhu had already exited when this had come to pass. Carl DeWilde got moved to Sales to replace Steve McCarthy. I was transferred with him. All of this was temporary while Rob Pullen got hired. Eventually Carl retired and I floated without a boss until Vikram Saksena was hired.

I was told about the hire and reached out to Vikram through LinkedIn. He responded and we chatted on a call for about 15 minutes prior to his starting. The most important part of the conversation to me was an exchange over my location. Vikram asked where I was and I told him California. He asked if I was in Santa Clara. I said, “No, I am in Petaluma and was part of the AFC acquisition.” Vikram replied, “I thought we completely exited that business.” Given that exchange, I knew I was not going to be employed at Tellabs much longer.

During the interim, I was assigned to help try to figure some things out. There were the first thoughts around the Optical LAN and potential work with some Systems Integrators for the government with that. There was some work around where Content was heading and ways for Carriers to improve their part of the revenue picture with that. The other big push for Access was to get the UMC 22 state approved inside of AT&T. At the time, the UMC was not approved for use inside the BellSouth properties. Since AT&T was not going to put DISC*S into the non-BellSouth properties, it seemed better to push the UMC to take over new deployments in BellSouth. This took a lot longer than you might think but has happened at this point.

One of the challenges with the latter was that all the plans were not incremental for the carriers. People would come up with plans that only made money once the carrier had replaced all their relevant routing infrastructure. That seemed to be a bad plan for me. Lots of Capex spending with a future promise of some new revenue maybe.

The last thing I worked on was the diligence on WiChorus. I visited WiChorus in San Jose, I thought they had a reasonable technology platform. The challenge that I saw was that the company had focused on WiMax as a technology. Tellabs was really only interested in WiChorus for deployment in 4G Wireless networks. I had already seen announcements from AT&T and Verizon about selecting vendors. WiChorus said they were 12 months from a product, which meant more like 18 – 24 months to me. If the big vendors had already made selections, I recommended that Tellabs pass on the opportunity. It seemed to me that we were just going to miss the market given the timing.

Eventually, I got a strange calendar event in October of 2009. I recognized it for what it was – the exit plan for me. I took a lot of my stuff home the night before to save time. Things were smooth on the exit and that ended my time at AFC/Tellabs. I will wrap up my learnings from the experience over the next post or two.

I won’t be able to post on Wednesday (as I have to travel) but will get my Sonoma County report out Thursday.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
Register for my Systemize Your Business Webinar – HERE!

 

“Reduces Opex”

 

My favorite phrase when it comes to a new product or technology. Reduces Operational Expenses. It sounds so wonderful. It is almost always untrue.

What most people mean by “Reduces Opex” is:

Our analysis of how you are doing something with the stuff that you have will take a larger Opex than if you change our to our solution.

There is no analysis if the purchasing all the new equipment to replace the old equipment is more than the Opex savings for a number of year. An alternate meaning is this:

Our analysis of how we think you should do a new business allows us to reduce your Opex over your current paradigm.

All of these Opex Reductions make all kinds of assumptions. One that they don’t make is that there is an actual Opex Reduction. As I said most of the time they mean, a reduction in the increase in Opex. It is one of the reasons that these kinds of business cases never fly with customers. Opex Reductions means personnel cuts. Anybody who tells you different is not being honest.

One of the challenges with this is that people don’t like to admit it or understand it. I was on a panel with a guy named Nan Chen from the Carrier Ethernet Forum. I said, “Well, Carrier Ethernet can help Enterprises reduces Opex. IT departments can lay off the person who knows about the T-Carrier Telco Interfaces.” Nan said, “We are not about layoffs.” I said, “What do you think Opex Reductions are?” An audience chuckle ensued.

But in reality, most companies can attribute about 70% of their Operating Expenses with headcount. Outside of that the biggest expense that is easily changed is the cost of travel. Which is why Travel restrictions are the first things that happen in belt tightening. Something to know as an employee!

People make Opex based arguments for products and services all the time. Why? It is simple. They want to keep their pricing up. If you can use an Opex Argument to justify your pricing, then you can claim a lot more money for your product.

The alternatives to this are a Capex or price savings over an existing product or the ability to create new revenue. The former situation can be responded to by the existing vendor lowering their price. Alcatel used to do that to AFC all the time. We would show up with a better widget and Alcatel would beat us by dropping the price on their existing one. They made less money but they had to spend almost no effort to beat us. The last reason to sell is the best and most precarious. The customer has to believe that they will make more money and that this new money is either significant or easy to get.

So as you focus on your message to your customers think about how you are going to achieve their goals through your product or service. Unless you think you can have them “Reduce Opex” absolutely, then don’t use it as an argument!

Have a great weekend!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
Register for my Systemize Your Business Webinar – HERE!