Sometimes The Bull Wins

“The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa.”
Werner Heisenberg, Uncertainty Paper, 1927

There were only a few months to go until our March 31 year-end, and we had planned a meeting with our corporate attorney to tie up a few loose ends. For the moment, as Jon Peacock and I rode together down Minnesota Drive toward downtown Anchorage, our eyes were fixed on the horizon. Bathed in the alpenglow of mid-afternoon, the city and surrounding mountain scenery had stolen our attention. Our schedules were so interrupt-driven at the office, that the drive and the view were a welcome escape — a 15-minute vacation.

It was hard to believe that nearly two years had passed since our entrepreneurial journey began. Right from the start, we were swept up by a breathtaking pace as our associates went into an emergency response mode to support the State of Alaska after the Exxon Valdez disaster. With no more than a simple signature on a hastily written list, our computer inventory was essentially commandeered by State of Alaska employees. Every available technical resource we had was assigned to support the State agencies as they dealt with the environmental catastrophe in Alaska’s Prince William Sound.

Not all the work was animated by as much passion, but nevertheless it was critical to our progress. Our sales team in Fairbanks leveraged the last vestiges of provincial bidding preferences along with our good reputation with the University of Alaska and landed a large multi-year contract. New regionally exclusive K-12 and higher education distribution agreements were executed with Apple and IBM. In our second year, we assembled an all-star statewide team to bid the State of Alaska contract, and their efforts were rewarded with the dominant position on the State’s technology catalog. IT engineering projects at both Arco and British Petroleum were started. And a public relations breakthrough was developed. We successfully petitioned our computer manufacturer partners to repurpose our advertising coop funds to allow us to acquire and donate large computer labs to the University, which produced very favorable statewide press.

There was much more. Our largest office was relocated into a 12,000 square foot space. Loan and credit facilities were successfully established and expanded. Administration and accounting were centralized and automated. Business process was streamlined and control points were established. We were writing off inventory and depreciating assets at nearly 350K per year. Even with the inventory write-downs, the annual million dollar losses prior to acquisition disappeared. We were profitable and producing enough cash that the convertible subordinated debenture held by GCI would soon be paid off to the surprise and delight of their chief financial officer.

And after the initial set of staff changes, the mood of the workforce improved dramatically. It was showing in large and small ways. The signs of pride and extra effort were visible everywhere. Their cars were filling up the parking lot early and were still there well into the evening. The esprit de corps was more than apparent in what had become our traditional Friday after-hours gathering to wind down the week, and at the holiday parties and the summer picnics. Spouses and children were coming by the office for potluck lunches. The employees were challenged and having fun again.

We shared some of this upbeat report with our corporate counsel, Steve O’Hara. Steve followed our update with the details of a buy-sell agreement he had designed; and we discussed the cross-beneficiary life insurance coverage for the principals necessary to support that agreement. He then pointed out that with all the good news, he was disturbed with one aspect of the story we had just shared. We listen to his strong opposition to our Friday in-office employee happy hour that I had inadvertently mentioned. Needless to say, after a vivid description by Steve of the ridiculous risk we were taking with that “tradition”, it ended on advice from counsel.

As our meeting wrapped up, Jon and I buttoned up our wool overcoats and marveled at Steve’s 9th story view of the intensifying sunset. The sun had already been down for over an hour, but as the stars emerged, the winter sun continued to illuminate Mt. McKinley with a deep rose-colored hue. We walked down to Jon’s car, pulled the parking ticket off his windshield, and I listened as he argued for variance to company expense policy on the matter of parking violations caused by overly talkative partners. To settle the matter, we decided to go to dinner at Jon’s favorite restaurant, the Marx Bros Café to catch a remaining glimpse of Mt. McKinley and further company discussions.

As we settled into our wine selection, hors d'oeuvres, and conversation, Jon asked, “Have you heard of Werner Heisenberg, the German physicist?” This was not an altogether surprising subject coming from Jon, since he had earned a Ph.D. in physical and computational chemistry from UC Irvine. He explained his question, “Heisenberg famously stated in 1927 that when it comes to atomic particles “The more precisely the position is determined, the less precisely the momentum is known…” Today, that is known as the Heisenberg Uncertainty Principle.”

I thought myself, oh boy, here we go, and I poured another glass of wine. Jon then initiated the conversation that literally changed everything.

“Tim, there are all sorts of fun corollaries to Heisenberg’s Uncertainly Principle, but one in particular relates to business strategy and tactics. Heisenberg’s business corollary might be, ‘The more you know about where you are, the less you know about where you are going, and vice versa’. The point is actually a serious one. If you evaluate the overwhelming tactical execution pace we have been engaged in over last two years, our success has a trajectory. Think of this trajectory as a classic business bell-curve.”

“Okay Jon, I think you may be referring to the product life-cycle curve with “embryonic” and “rapid acceleration”, “market maturity” and “decline” phases.”

Jon confirmed, “Yes, that is it. But I think there is a similar bell-curve for every business model – including our business model. To your point, the bell-curve for our business model may be the compilation of all the service practice and product bell-curves. Anyway, one way to think about part of our respective roles is it is our job to optimize the firm’s performance on this trajectory, this curve.”

Then Jon asked the central question, “Do you think we are spending enough effort determining when to change from the current business model to the next?”

Not entirely getting his direction quite yet, I asked, “Jon, what are you thinking about changing now? We have virtually changed everything over the last two years — and the business is growing rapidly, we are profitable, and we are producing cash. Everyone is working at full throttle. I don’t think we have the mindshare to change a thing right now.”

“Tim, I think we may be talking at cross-purposes, but in a way you are making my point. To answer your question directly, there isn’t anything we are about to change; and it is quite predictable that everything eventually will change. What I am suggesting is when we are both enveloped in the tactics of optimizing the model we are in, especially when all is seemingly going well; it is hard to see the imperatives for change to a new state. And my point is the opposite is true as well. If one were entirely enveloped in the effort of business strategy or determining the next state, it would be hard to tune into the tactics and timing of optimizing the current business model.”

Jon really had me leaning forward into the conversation now, so he just pulled off another contextual layer. “If we are going to succeed with this business over the long term, I think we are going to break and recast our model many times over the next decade. It is my opinion that if we continue to simply split all the tactical roles between you and me; we will both get swept up into the day-to-day optimization of our current model. That is actually a serious problem because it is impossible for one executive in our industry with a company this size or larger to focus on the future state, while simultaneously concentrating on optimizing the present state. I think there will be two artifacts of this approach, and both are a concern. First, no matter how carefully we divide the responsibilities, we will find ourselves working at cross purposes. And, the greatest risk of all is that we will miss the next critical strategic step.”

Now that it was apparent Jon was leading the conversation toward a reorganization of responsibilities, I jumped ahead and asked a number of specific questions. Instead, Jon took it back a notch. “Tim, a rising revenue line for a business over time is actually made up of bell-shaped curves that were changed into a sequence of “S curves” by cutting off the model’s decline stage, or the right half of the bell. Changing bell-curves into S curves comes down to knowing when to jump from one curve and onto the next. Picture a sequence of four or five business models side by side. To echo your point, each successive business model is a bell-curve that moves through an incubation phase, a rapid acceleration phase, market maturation phase and a decline phase. Now think of each successive business model as having the potential to drive to higher levels of revenue at maturity, and produce a much better return on capital. It just wouldn’t make sense to optimize one model, ride the back half of the curve down while destroying capital and workforce, and then step on to the next model after the financial resources and team are depleted. Instead it makes more sense to leap from one business model to the next just about when everything is going well, and manage the risk and effort with your best people and available capital. Still, the immediate impact of a leap can be a performance decline. But done right, this disappointment curve will be followed by a quick recovery and a new, higher, optimal state.”

“If we are both responsible for the current state,” Jon said, “we will see solutions only in the context of current state. You like to say that our industry’s change rate is being driven by Moore’s law. If so, it may be the case that any optimized business model may be effective for less than 18 months. If we wait four quarters to react to a decline of any current model’s momentum, my view is change may come too late.”

Now I understood where Jon was heading. So I asked how he saw us dividing up the tasks.

“I am suggesting we stop splitting the tactical leadership 50-50.” He explained, “I trust your ability to execute — you always find a way. Your job will be the current state…to organize, optimize, and communicate. You are already at capacity in my view, so we will need to invest in you doing even more. I think the answer is to provide you more staff so this can be accomplished. In turn, I will focus on the next state. When everything seems to be going right, but growth rate is changing, or your efforts seem to stall, it will pay us to have the next state formulated. My job will then be to break the status quo by forcing us to the next state. Once a strategic decision is agreed to by the board, the plan is defined, and we have taken the first steps, then you will again be responsible to implement and optimize what would then be the new current state. Between the two of us, we will create a perpetual loop of learning the next state, applying change, optimizing, and repeating the processes again.”

We finished the memorable conversation and dinner at the Marx Bros Café with a toast to Werner Heisenberg and his Uncertainty Principle.

The next day, Jon brought a gift – a copy of the May-June 1990 HBR issue. There was no doubt on first glance it was a classic. In that one issue there was an article by Peter Drucker, another by Gary Hamel and C. K. Prahalad on “The Core Competence of the Corporation” and an article by John Kotter titled, “What Leaders Really Do.” Peacock’s Heisenberg corollary was the perfect lead in to Kotter’s research. In Kotter’s piece, he emphasized that managers and leaders are complementary. Managers promote stability and optimization of existing state, and leaders press for change to future state. To take advantage of our respective natures and interests, we divided up the tasks according to our preferences that Kotter had neatly segmented into the two roles. We repeated that exercise every few years to keep it interesting for each of us.

Most importantly, we accelerated our leaps from one S curve to the next. The impact was almost immediate. Our firm broke into the top 49 Alaska-based businesses. We continued to rise up the ranks of Alaskan businesses to the top 15 until we moved our corporate headquarters from Alaska to Arizona. The following year, in addition to being recognized as Alaska’s “Business Leader of the Year“, our firm was recognized as national business of the year by our franchisor. We soon earned a place in the top 50 of the “VAR 100″ from 1994 forward as one of the fastest growing value added resellers in the US marketplace. Over the course of time, we eliminated our retail division, focused on our most profitable market segment — clients with an installed base between 300-5000 computers, consolidated our Alaska locations into the Anchorage office, developed nine distinct IT service practices organized around our mid-enterprise clientele’s IT service requirements, and opened or acquired new offices in the largest cities of Oregon, Washington, Maryland, Northern Virginia, Northern California, and Arizona. Our revenue grew from 9.1M to 250M. And in the winter of 1997-1998, before the collapse of the Y2K and dot.com bubbles, we found a way to sell our business to a Fortune 500 company at its peak value for 11x earnings.

Werner Heisenberg’s Uncertainty Principle gave us the guidance to effectively divide the duties of our executive team along the lines of “where we are” and “where we were going”. As a result of that structure, in an industry with rapidly changing fundamentals, we did a better job of optimizing to both current and future state.

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©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next: A strategic epiphany.

Tags: Business, Entrepreneur, Marketing, MBA, Motivation, MSP, Sales, Start-ups, Technology, VAR

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