My Last Hurrah at Ameritech: A Case Study of Strategic Analyses and Recommendations
Five years after I joined Ameritech, I gave the company notice that I planned to resign to join an independent venture group. I promised to stay for another six months to help find my replacement and ensure a smooth transition. At about the same time, Ameritech decided to embark on an ambitious plan to acquire four companies. I was asked to complete the acquisitions before I departed. What transpired made me postpone my departure for an additional full year.
Six years earlier, before I joined Ameritech, the company acquired an up-and-coming database management software (DBMS) company called ADR. DBMS refers to a software program or utility used for creating, editing, and maintaining computer database files and records. This type of software allows users to store data in the form of structured fields, tables, and columns, which can then be retrieved directly and/or through programmatic access.
Nowadays practically all data stored on computers—large and small—use DBMS. In those days, however, most data was stored in a “linear” manner, without any structure and “linkages.” Thus, when needing to search for specific data, the computer had to search each piece of data linearly, until it found a match. Large databases would require significant amounts of time to do such searches. The DBMS organized and linked the data with a special organizational structure and tags. When specific data was needed, the DBMS would look for the tag and link, zeroing in on the data immediately and thus shortening the search time significantly. Such DBMS capability had just started to emerge in those days.
Ameritech paid $200 million for the acquisition, which in those days was a large acquisition with an expensive price tag. The rationale was to expand into new growth industries with proprietary technologies. Ameritech, being a large corporation, was a large user of software and databases. However, the company knew little about how software products were sold and the competitive dynamics in the software industry. The company was naïve enough to think that just because it knew how to use the software, it could easily and successfully manage a software company in a highly competitive industry.
At that time, IBM was the only company that offered large commercial database software. ADR and a number of new start-up companies began to offer competitive products with some new technical capabilities and attractive features. ADR developed a DBMS product to compete with IBM’s offering, and it began to show promise for commercial success. ADR grew from zero to about $100 million in revenues during the first five years, all the while competing against IBM. Just to put it in perspective, IBM’s database business was in the billions of dollars annually. So, Ameritech expected that it could grow ADR substantially and reasonably quickly. Ameritech assumed that since ADR showed early success with limited cash resources, then it could aggressively invest additional funds in this business and grow it even faster.
Coincidently, a number of years earlier, at the dawn of the mobile telephone industry, Ameritech had launched its own mobile company, called Ameritech Mobile Corporation. The industry was growing quickly. From a strategic point of view, all the competitors had the same technology, so their success depended on the efficacy of their marketing and sales strategies to reach consumers. Hundreds of agents were hired, and retail stores opened to allow registrations of new customers. Ameritech had the best brand-name recognition in its region, since it was the local telephone landline provider of telephone services, and thus it had a competitive advantage that contributed to strong growth in the mobile market. The president of Ameritech Mobile Corporation, a rising star, was asked to head up ADR to replicate his marketing and sales success at Ameritech Mobile. The first thing the newly appointed president of ADR did was to replicate the marketing and sales strategies that contributed to Ameritech Mobile’s success. It worked great there; it should work well with ADR as well was the thinking.
The company immediately started growing the marketing and sales organization. Within a single year, the salesforce grew from 40 to 180. Additionally, ADR adopted Ameritech’s corporate structure with layers of management. Within a single year, the payroll cost of ADR grew from about $50 million to over $100 million annually. ADR viewed it as an investment for growth—that revenue growth would make up for the additional costs.
Unfortunately, expected revenue growth didn’t materialize, and the company started losing millions of dollars a year. Four years later it brought in a software consulting firm to study what had gone wrong and how to correct it.
The consulting firm spent a full year on the project and made a number of fundamental recommendations. The recommendations were first presented to the president of ADR, who endorsed all the findings, conclusions, and recommendations. They were then presented to the president of Ameritech, to whom the president of ADR reported, and the executive vice president of corporate strategy for Ameritech. Both approved the consultant’s recommendations. They then presented all the findings and recommendations to the chairman and CEO and the board of directors. The recommendation called for an additional $200 million to acquire four start-up software technology companies, which they believed would reverse the trends and losses at ADR. That’s when I was called in. I was responsible for mergers and acquisitions, and so I was asked to acquire the four companies.
I needed to understand the logic for the acquisitions, so the consulting firm was asked to present its findings and recommendations to me and my staff. The consulting firm was small and specialized in what was then called computers and data processing. It was a relatively new firm, and one I was not familiar with, and I wondered why such a small consulting firm was selected for such a challenging assignment.
When I greeted the senior partner of the consulting team, my jaw dropped. I had worked with him at Booz Allen, where he was the senior partner responsible for the practice related to computers and data processing. His stellar reputation explained the rationale for the firm’s selection for this assignment. He was as surprised to see me as I was him. We exchanged warm greetings. He led the presentation to my group.
I need to digress a bit to put some things into perspective. Booz Allen had a number of primary overall organizational practices. They included the corporate strategy practice, which dealt with all corporate marketing and competitive strategic issues, and which was the organization where I worked; the compensation and organizational practice, which dealt with board-level corporate organizational structures and executive compensation strategies; the operations group, which dealt with corporations’ operational issues, such as manufacturing, distributions, warehousing, etc.; the banking group that dealt with banks and financial institutions; the government group; and the computers & data processing group.
In those days, companies built and managed their own data centers to house their computer technology. The IT department of each corporation had two distinct groups that oversaw computers and related software: the computer operations group and the systems and development group.
The computer operations group was responsible for the hardware and the management of the data centers. The systems and development group maintained the applications software that ran on the computers, such as payroll, accounting, human resources, financial processing, inventory, distribution, manufacturing, and so on. The computer operations group was comprised mostly of technical computer people, while the systems and development group was comprised mostly of software designers, software developers, and programmers.
The two practices had little in common. Each had a unique set of skills and expertise. One group was responsible for deciding what kind of computers to buy, how many of them, how many data centers to build and where to build them, how to connect them in a network, and everything else associated with the efficient and cost-effective operation of those computers.
The other group was strictly a user of those computers and maintained the application programs. The application programs, at the time, were written mostly by IBM. They were generic in nature and were sold as such. Customizing those generic application programs and subsequently maintaining them and changing them as the need arose was the responsibility of the corporation’s internal systems and development staff. The Booz Allen practice exclusively dealt with the computer operations side.
Every now and then, Booz Allen was called to do work where computer operations were a critical element in the overall corporate strategy. When that was the case, Booz Allen assembled a team that comprised people from the strategy group and the computer operations group. The strategy group devised the strategies, while the computer operations group assessed the effectiveness of how computers were deployed in terms of cost efficiency and their overall capabilities. Because of my previous EDS background, I was one of the few people at Booz Allen who worked for the strategy group and who also understood computers. Thus, often when a combined team was needed, I was assigned to it. That is how I worked with and got to know the senior partner who made the presentation to us at Ameritech.
The above elaboration was necessary to make a nuanced point. The issues that faced ADR were strategic in nature, and dealt with marketing and competitive dynamics. They had nothing to do with computer operations. The Ameritech executives who hired the small consulting firm and the ex-senior Booz Allen partner, like most management at the time, had no inkling of the above nuance. My former colleague at Booz Allen was involved with enough combined teams, and sat in on enough “combined” presentations, that he became familiar with the overall concepts of corporate and competitive strategies. He knew the top-of-the-wave lingo and concepts, but never practiced the nuances of analyzing and formulating competitive corporate strategies. I knew the difference and I knew his experience, so I listened to his presentation with a high degree of skepticism.
The presentation lasted close to two hours, and it was true to the quality of one produced at Booz Allen. Findings and recommendations were supported with graphs, charts, and detailed data. Here are the key observations and conclusions:
•ADR had a very large marketing and sales organization that came with a huge price tag. Almost 80 percent of the losses attributed to ADR stemmed from the cost of that department.
•Dividing ADR’s revenues by the number of salespeople, which was 180, yielded a “revenue-per-salesperson” number.
•The consulting firm compared the revenue-per-salesperson with many other software companies. The comparison revealed that ADR’s ratio was five times smaller than the norm for the industry. The consultants concluded that the sales organization was therefore not operating at the same sales efficiency as its competitors, leading to ADR not being competitive on a cost basis. This is also what contributed to the huge losses experienced by ADR in the last few years. They therefore also concluded that to correct the above, ADR needed to increase product sales significantly so as to bring the revenue-per-salesperson ratio in line with industry competitive norms.
•The product that ADR sold unfortunately experienced slower growth than expected. Other competitors in the same market segment also showed slower growth. Thus, ADR needed to look elsewhere to find additional revenue growth opportunities.
•The consulting firm identified an emerging technology called artificial intelligence (AI) software. It was the new buzzword in the industry, and the market for AI products promised unlimited potential.
•Four start-up companies had built a reputation and name recognition in this new field. Because they were start-ups, their technologies had not yet been fully developed and therefore were not fully commercialized and had no revenues to this point.
•As a result, ADR could purchase the four companies at a reasonable price and establish a dominant leadership position in this field. ADR would therefore be the only benefactor of the expected growth.
•The consulting firm forecasted performance for the combined company. The numbers were huge. Forecasted revenues would improve ADR’s revenue-to-salesperson ratio to competitive levels. They would also stimulate and ensure continued new growth that would last for many years to come.
•To purchase the four start-ups would cost Ameritech about $200 million. This was a tremendous amount of money in those days, in excess of a billion dollars today.
•Ameritech was a very large company and could easily afford such a price, and the acquisition of the four companies would be one way to take advantage of its cash-rich position. However, it was made clear that the strategy would only work if ADR purchased all four companies; otherwise, a preeminent position without competition could not be guaranteed.
As I mentioned, these analyses and recommendations were endorsed by the president of ADR and approved by the president of Ameritech and the EVP of corporate strategy. They presented the same package to the chairman and CEO of Ameritech and then to the board of directors. The recommendations were formally approved by the board. I was called upon to execute on the approved strategy—to buy the four start-ups.
At the conclusion of the presentation, I asked to meet with the EVP of corporate strategy, whom I worked with closely before and who was one of my strongest supporters at Ameritech. I went up to his office and said the following: “I have a real dilemma I need to share with you, and I need you to make a decision for me.” He looked surprised and asked me to continue.
I said, “I listened to the presentation by the consulting firm regarding ADR. My job is not to critique the presentation, nor to challenge the conclusions. My organizational responsibility is to execute on the approved recommendations. However, as you well know, I was a strategic consultant for many years. I saw four major potential flaws in the presentation that lead me to believe that the overall recommendations may be wrong for Ameritech. I can investigate it with my own people and confirm the recommendations or refute them. I have my suspicions about this, and I understand that if my suspicions are confirmed, you may lose face personally. This is the last thing I would care to bring onto you. However, I felt compelled to let you know. If you tell me to ignore my suspicions and just go ahead and buy the companies, I will do so, and I will speak to nobody else about this matter again. What would you like me to do?”
He picked up the phone and asked the president of Ameritech to come to his office. He did, and I restated my views. Both were people of high professional integrity, and both knew me well enough to take my suspicions seriously. Without hesitation, they asked me to conduct my own independent study to either confirm or refute my suspicions.
I pretty much knew that they were not just suspicions. I was very sure that I was right. I only needed to collect all the data to prove them beyond any reasonable doubt. Too much was at stake and too many people stood to be embarrassed. I asked for one thing—that they direct the president of ADR to work with me and meet all my data requests. I knew that I had to convince him first. They agreed.
I picked nine of my best people for the team, which included a number of ex-consultants, including four from Booz Allen. I instructed them to drop all of their work and be dedicated to this project. I gave ourselves a three-week deadline, and we worked nonstop for the next three weeks.
We indeed worked hard and long hours. The president of ADR, while he had the most face to lose, worked with us to find the truth. Three weeks later, I wrote the final report and presented it to the president and EVP, corporate strategy, of Ameritech. It took about an hour to make the presentation.
My analyses and recommendations were not questioned. The EVP said he would take my findings to the chairman and board. Below is a summary of what I presented in my report with supporting data. It confirmed my suspicions that the consultant’s presentation was flawed in its logic.
The biggest flaw stemmed from the very first strategic observation that the consulting firm made. It concluded that the revenue-per-salesperson ratio was way too low, which made ADR extremely uncompetitive in the marketplace from a cost structure standpoint. There are two major flaws with the logic. First, revenue-per-salesperson is not a strategic imperative that drives any competitive decisions. It is a mathematically calculated ratio that at best shows a problem, but nothing that should be relied upon to reach a conclusion. It is a symptom of something larger, and fixing it is in no way a cure. Second, the idea that having that ratio increase by adding revenues is a mathematically correct observation, but doesn’t lead to any strategic resolutions. The most likely conclusion is that there are too many salespeople. If the number of salespeople had not been increased so dramatically, that ratio would have been competitive. This should have been the consulting firm’s first conclusion. Then the firm should have studied why the product was not selling as expected. Had it become somehow uncompetitive?
The idea that the new AI software companies would affect that ratio was nonsensical. It was a completely different product and represented a completely different strategic market segment. The purchasers were different; the purchase decision was different; and the marketing and sales team required completely different expertise. It would require its own independent marketing and sales organization to effectively sell the product. The current ADR salespeople would not be able to sell it. Only a naïve person who sees all software products as similar would draw such a conclusion.
The assumption that purchasing four start-ups would give Ameritech a preeminent position in the artificial intelligence segment, at a cost of $200 million, was also naïve, because this figure was just the estimated acquisition price of the companies. These start-ups had no revenues, and the products still needed to be fully developed. Finishing the development and commercialization of the products would cost Ameritech an additional $50 million per company, or $200 million, with a very high-risk profile, since there were no guarantees that the technology would be successfully developed and subsequently find widespread acceptance in the marketplace.
Since this was a new field, Ameritech would need to assume that other start-up technologies would emerge, sooner or later. To continue to maintain a preeminent position, Ameritech would need to stand ready to purchase all these new companies that would find early success as well. This may cost another $200 million to $500 million.
The assumption that entry into the AI field via the four acquisitions would change the revenue-per-salesperson ratio did not make any sense from another perspective, too. The product was under development, and time to market was an unknown. It would take years before the product would be fully developed and commercially available. Even if there would be commercial success realized, it would take a minimum of five years. By then, ADR would lose another $200 to $300 million. It would most likely go out of business before then.
Worse yet, artificial intelligence was a new concept. The likelihood that the concept would somehow be translated into a specific product with well-defined functionality and features to be purchased as an independent software to solve commercial problems was quite remote and very unlikely to yield commercial success in the foreseeable future.
The consultant’s study was completely silent on why ADR’s previous success had slowed down. This question was never raised or studied. We conducted our own study and concluded that the reason for the slowdown was because of fundamental changes in the marketplace. First, IBM changed its product to be more competitive with ADR’s. Also, there were a number of new start-up companies that entered the database market. Some had very interesting features and were beginning to make commercial inroads. One of them was called Oracle (yes, the currently famous Oracle, which became the largest in this space over the years).
Thus, our conclusion was that ADR’s subpar performance was a result of losing competitive position. Ameritech would be much better off selling ADR. Should Ameritech decide to accept the consultant’s acquisition strategy, it should be prepared to invest close to an additional $500 million to $1 billion over the following five years and accept a high degree of risk.
My recommendations were accepted, and I was then tasked with selling ADR. The president of ADR and I worked together for nine months to find a buyer. We traveled the world together. It was a challenging sale since ADR had substantial operational losses. The bad news was that the sale of ADR postponed my departure from Ameritech and my start date with my new independent venture group.
The good news is that I sold ADR to Computer Associates (CA). I dealt directly with the founder, chairman, and CEO, Charles Wang. He took a liking to me and we became friends, for reasons I have yet to understand; he was a kingmaker, and I was a nobody. He invested half-a-million dollars in the fund my new partners and I raised after I left Ameritech. We stayed in close touch and had dinner at least twice a year in New York. Four years later, he encouraged me to start my own independent venture fund. He committed to invest a substantial amount of personal money in the fund himself, and called on some of his friends to do the same. I raised $100 million within two weeks. That was a reasonably large fund in those days. Just to put it in perspective, the fund that I had previously shared with three other partners was a $25 million fund. Charles had two daughters at the time, Jasmine and Kimberly. We decided to name my fund after our daughters—Jasmine, Kimberly & Beth—JK&B Capital. The rest is history.
Just to close the story, the anticipated commercial success in AI never materialized, and as a result the four companies targeted for acquisition went bankrupt. The president of ADR left Ameritech about a year later and joined another Baby Bell company, Bell Atlantic, based in New Jersey, to head up its mobile company. Many of the Baby Bells, including Ameritech, Bell Atlantic, Bell South, and GTE, subsequently merged into a single company called Verizon Communications, Inc., one of the largest communications companies next to AT&T. He rose in the ranks and years later became the president and COO of Verizon.
Before I conclude this section, and as a final example, I thought that it might be interesting for you to see how I used the methodology described in this section VII to help me raise my last fund at JK&B. You can see an exact copy of the presentation in appendix III. It serves to demonstrate how many of the principles of the methodology I offered in this section come into play. Pay particular attention to how the trend analysis supports the key success factors and thus the differentiation of my fund, JK&B Capital. Next, competitive analyses relative to the key success factors and other factual data are presented that support other important differentiation aspects.
Also observe that the presentation is succinct, but each page is easily and fully understood so that a presenter is not required to explain every single detail. The graphs and charts also serve the same purpose.
I hope that you will also notice all the “little things” that are in the presentation to help influence perception and convince a potential investor that JK&B is indeed unique and worthy of their investment.
Congratulations! You endured, and we have reached the end of what I intended to bring to your attention. I’ve given you all the ammunition you need to go out there and “conquer the world” (the business world, that is). I wish you the best of luck!
The remainder of the book comprises three appendices, which I believe offer significant value and are worth reading. Appendix I deals with how to avoid becoming a “talker” and a “loser” and instead becoming a “doer” and a “winner.” It was specifically written to target teenagers and young adults. The goal is to allow you to gain a perspective that should aid in your ability to positively influence teenagers and young adults you care about, such as family members, friends, acquaintances, neighbors, students, and so on. You might consider letting them read appendix I.
Appendix II illuminates important aspects about my personal journey to success and some of the ups and downs I’ve encountered along the way and how I overcame them. I believe that a glimpse into my personal journey and who I am as a person will give you a better, more complete perspective on how to reflect on the content of this book. I also believe that, in addition to enhancing your own perspective, it could be of substantial value to teenagers and “foreigners” (people raised in different countries and cultures) who wish to develop a successful career in the United States. Thus, you may consider also sharing appendix II alongside appendix I with teenagers you care about, and potentially any “foreigners” in your circle of friends and acquaintances.
Appendix III, as mentioned at the conclusion of this last section, provides a real-life illustration of what was taught in section VII and the art of translating the concepts into a real-life summary presentation deck.
Now that we have reached the end, just as with any good show, I thought that a “grand finale” would be appropriate before finally closing the curtain on this book. I debated and struggled quite a bit with what might be an appropriate grand finale. Since I have already presented all the important things I wanted to share with you, how can there be a grand finale that will surpass it? It appears to be an oxymoron! However, two things occurred to me, which I believe would be appropriate to address at this juncture.
This book focuses solely on a single dimension—insights—and how to become more insightful. As a result, it may not have properly emphasized an obvious observation. The book strongly emphasized that attaining insights is mostly achieved through an iterative process of dissecting and analyzing situations, utilizing some sound conceptual “methodologies,” paying closer attention to nuances and potential exceptions, and “thinking out of the box.” It also reasonably well emphasized another dimension: that insights are simple to arrive at and that they are driven by pure, simple logic. However, insightfulness (aka, insights with a high degree of consistency) requires two additional dimensions that constantly interplay with the “insights” and “logic” dimensions. The two additional dimensions reflect what I refer to in the book as perspective (wisdom that comes through experience) and pragmatism.
The importance of this simple observation is to drive home a point I made earlier in the book—that one need not be a genius to achieve insightfulness. It takes a combination of four factors to achieve insightfulness, and only one—logic—may reflect “brainpower.” (Although even that one requires only simple logic and not that of a rocket scientist.) This is exactly why I claimed in the Author’s Note that “anybody and everybody who reads and puts to practice what the book teaches will most likely increase greatly their probability for success in business. Just how much so will depend on you as an individual.” So, if by any chance you might have felt overwhelmed by the amount of insightfulness in this book and may have begun to wonder whether it even is within your reach, then to you I say: Yes, indeed it is! Just remember the acronym LIPP (Logic, Insights, Perspectives, and Pragmatism) should you ever begin to wonder again.
The second thing I realized is that this book imparts hundreds of “teaching” moments, nuanced observations, concepts, recommendations, methodologies, etc., with the single purpose of enabling you to become more insightful. There are so many of them that it is inevitable that you may not remember some of them. It is for this reason that I recommended in the introduction to this book that you will benefit from reading and rereading it, and practicing and re-practicing what it teaches. However, under the assumption that it would still be impractical to assume that a reader will not forget some of the many insightful things the book teaches, I decided that the grand finale should reflect and highlight the single most important and practical (as opposed to conceptual) element for achieving insightfulness.
So, if you happen to forget everything else, you should at least remember this one single, most important, and overarching insight—the one that trumps all other observations, lessons, and recommendations. I had a hard time isolating such an element, but then the proverbial lightning struck, and I found it! It comprises a visual image and an insightful observation already mentioned in the book, but being one of the plethora of many other observations made in this book, it may have gotten lost in the shuffle and may not have struck the necessary chord and recognition.
The Grand Finale
Henceforth, I would like you to equate the process of achieving insightfulness to an image of an inverted four-sided pyramid (the tip at the bottom and the wide base at the top) perfectly balanced on its tip (see page 384). The tip at the bottom represents the beginning of the insightfulness process, which grows, widens, and spreads upward, as the four LIPP dimensions and numerous analyses lead through the various branches of the decision-trees, and result in the broader set of conclusions and recommendations that surface and emerge at the top.
In my mind, this image depicts the essence of how insightfulness is achieved. First, it is not easy to guide the inverted pyramid into perfect balance. Second, a seemingly minor push will likely tilt it to fall out of balance. Third, the strength and width of the tip is the most critical element in being able to get the pyramid into a balanced position. The same holds true for insightfulness; it is not easy, nor trivial, to get it to “perfectly balance.” It requires an iterative process in trying to help “guide” and achieve the ultimate balance. Yet any minor “push” in the wrong direction, as the book so vividly demonstrated can easily occur in “pedestrian” business analyses, will easily cause it to lose balance and tilt over. And, because as stated, the most important element of achieving the balance lies in the strength and width of the tip, the question is whether there exists a single element that is the most critical in the process of achieving insightfulness—the one single element that could justifiably represent the tip of this pyramid. Indeed there is, and if you remember anything from this book, then do remember this image of the inverted pyramid and the importance of this one element in reaching insightfulness. More importantly, make sure to remember what it really means and comprises.
As suggested, this element was already discussed in the book. So, for added emphasis, allow me as a grand finale to refresh your memory and repeat verbatim what I wrote when I first addressed it in section VII, so it will forever be front and center in your mind’s eye and ingrained in your brain. I introduced the adage “garbage in, garbage out,” reflecting the importance of data as a basis for achieving correct analyses. Indeed: The data represent the most important, most critical element in any analysis aspiring to reach correct conclusions. Any compromise in the data used will, unquestionably, compromise the quality of the outcome. Conversely, ensuring that the data meet all the requirements I enumerated in the book will substantially increase the probability of reaching correct and insightful results. With that in mind, below is how it was described in section VII:
So, unequivocally, the highest priority in regard to data is to make sure that data do not comprise “garbage.” In my experience, most of the failings occur because the practitioners view the adequacy of data from a narrow perspective, mostly whether it is accurate. In my mind, data must be viewed from a much broader perspective in order to produce a quality result. Data need to meet four criteria to pass the adequacy test:
•Be most relevant
•Be complete
•Be accurate
•Be organized
Each and all of the criteria require sound thinking and critical judgment. In most situations, it is not a straightforward undertaking. The process is prone to mistakes and, indeed, mistakes are made frequently.
So, from this point forward, if you remember one thing, remember the image of the inverted balanced pyramid as representing insightfulness, which will remind you of the importance of the tip, which will remind you of the importance of the data, and that adequate data comprise the four elements above.
Always be mindful of the above, both as a practitioner as well as a manager who is presented with the analyses, and you will significantly increase the probability of attaining insightfulness. This observation holds true not just in business but life in general.
And now for the final closing of the curtain, I would like to repeat what I said a few paragraphs ago: I’ve given you all the ammunition you need to go out there and “conquer” the business world. I wish you the best of luck!