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Cadence Design Systems

Leadership

How to Unite your Team: Advice from Napoleon

Silicon Valley is littered with small (and large) companies that want to create a revolution. It might be a revolution in commerce – like Square trying to “Architect a revolution,
thoughtfully”, or being the enablers of a revolution like social media was for the Arab Spring, or creating a revolution in music delivery the way Apple did with the iPod.

But what is it that unites a team of people to try to create a revolution in the world of technology?

Napoleon believed that “There are only two forces that unite men — fear and interest” (from Napoleon: In His Own Words 1916) because “all great revolutions originate in fear, for the play of interests does not lead to accomplishment.”

I think he was right, but in reverse order.

In the world of the technology startups the dominant, unifying force is interest. Most people I have ever worked with were a part of the company because of shared interest. They have a common end in mind (to use one of Covey’s 7 habits).

At Simplex (bought by Cadence in 2002) our interest was in the electrical modeling that semiconductor companies needed to make faster, more reliable chip designs – and so sell more chips at lower cost. Everyone in the team was interested in how to get the technology to work (a non-trivial series of math and computer science challenges), and work in the hands of customers at ever decreasing, truly less-than-the-width-of-a-hair, geometry sizes. Chip modeling was a “big data” problem before we talked about big data. Geeky, but very interesting.

The best technology leaders – usually the CEO or founders – unite their employees with a vision for what’s possible. They have a uniting concept that everyone gets interested in – like salesforce.com with their “no software” platform to move CRM to the cloud, or Amazon with a vision that we’d all be buying books, and then everything else too, on line. Both visions were compelling, interesting to work on, and right.

So “the play of interest” does lead to accomplishment when you are building a technology company. I think it’s the only thing. You can’t unite people around money (well not for long anyway) and you can’t unite them with fear in a market when they can walk down the street and find another interesting job.  You have to do it with interest.

The great general was right that fear plays a role too but it’s only at the tactical level, in the moment, or in the sleepless times of the night. Fear of losing a deal, fear of failure, fear of missing a deadline you’ve committed to another team or a customer, fear of being wrong in the path you took to solve a problem. Everyone in a startup feels it. If they say they don’t they’re lying. Everyone experiences The Struggle. But you can’t unite people with fear because, in the end, this is a game. It’s not life and death, it’s not the control of empires or the defense of your homeland. It’s a business, with a dream, but a business.

Napoleon had to unite his men to fight through the mud and risk their
own lives to (almost) bring continental Europe under his command –  he used both fear and interest. You
need to unite them to work grueling hours and take huge personal risk to
try out new ideas – and in technology that means uniting your team with interesting work and a meaningful goal.

Boards

Autonomy, Revenue Recognition and the Duping of HP

HP’s acquisition of Autonomy, and subsequent write down of $8.8B amid allegations of fraud by the Autonomy management team, is going to show up as a business school study one of these days, and so it should.

The practice of revenue recognition in software, and how you can be misled by it, is simply not well understood by enough senior management and board members. And as companies shift their software products from license to subscription revenue it becomes imperative that board members do understand it or they can be easily misled.

In the Autonomy case, it appears they did two things that, while not illegal (I think HP will have a hard time proving fraud) are questionable…unethical…short term thinking… pick your poison.

The first is recognizing revenue up front. I interviewed a VP sales candidate from Autonomy a couple of years ago. He was proud of how they were growing their revenue so fast — and I was horrified. They were signing long deals – 6+ years long – and structuring them so they could take the license revenue up front.

As he proudly described to me, he had recently won a very large contract with a global bank to use Autonomy to analyze internal data following the 2008 recession. Sign a 9 year deal, structure it so you take the license revenue up front and maintenance over time (here’s a primer on revenue recognition if it will help), report the revenue on your call as a great deal and never tell anyone that it’s 9 year’s worth, because you are not required to tell them. Pay the sales team commission, the stock goes up, everyone’s happy. Except the analysts who smell a rat but can’t prove it — they will be cautious on your stock.

Software revenue recognition rules are sufficiently complex now that this is not hard to do, it’s all in how you write the contract terms. And because it’s not illegal the auditors, like Deloitte, will not technically cry foul. As Dennis Nally of PwC told the FT last year:

“There
are professional standards out there [and] an audit is not designed
under those standards to detect fraud,” he says, pointing out that
detecting fraudulent behaviour rests on other indications including a
company’s governance, management tone and control systems.”

I agree, it’s all about management tone.

The practice of overly aggressively recognizing revenue up front is not new. Cadence did it for years to inflate their value, and nearly pulled it off.  Before Cadence crashed in October 2008, they were in negotiations with KKR for KKR to take the company private. My network told me (so it’s hearsay) that the deal broke apart on $1 per share. KKR offered $24, Cadence management and board held out for $25. But it was not long afterwards that the board figured out just how much Cadence had been advancing revenue and fired the entire management team.

It takes character and spine to convert your business from up front license revenue to ratable revenue. If you start the business as a SaaS business (like salesforce.com, or FirstRain) your revenue starts out low, but it grows exponentially and you never have to make the switch. But to switch from license to subscription means at some point you have to slow down your growth rate. Both Oracle and SAP are dealing with this right now, and the Autonomy management team must have decided it was easier (and more personally lucrative) to sell to a mug than deal with it themselves.

The second practice reported by AllThingsD is channel stuffing. Again, not fraud but really short term because it creates a future problem every time.

Channel stuffing is selling product on to distributors before they have found a buyer. So this means you sell to your distributor (who is never going to use your product themselves), they pay you, you take revenue and it sits on their shelf until they can find a buyer. This is unforgivable in software.

This practice developed in hardware years ago because the distributor wanted to have the product ready for delivery so they’d buy it from the supplier, but these days, with modern reporting systems, there is no need because your product can sit on your distributor’s shelf while you still own it, and in software there is no reason at all to do it…. unless you are trying to inflate your revenue in the near term and you are willing to bet your revenue will grow fast enough to cover the stuffing.

In the end this is about business judgement and advice. As Reuters headlined a story this morning: In HP-Autonomy debacle, many advisers but little good advice.

Autonomy had the best advisers in the business. They don’t come any better than Frank Quattrone, George Boutros and the Qatalyst crew. I have worked with them on both sides of deals, on my side selling and against me when I was buying, and they know how to develop the case to extract maximum value for the asset they are selling.

Time will tell now whether this colossal acquisition write down was the result of fraud — and so reputations will be destroyed on both sides — or whether it was an overly aggressive tone at Autonomy that inflated the value. But the resulting destruction of value and reputation is the same in both cases.

Career Advice

Another marketing organization rip up and retry

How to organize marketing of B2B high tech products is always challenging. The best products rarely come from marketing people and the deeper the technology the more the R&D team is in the inventive role and driving marketing.

As a result, where to have marketing report is an ongoing political battle in many companies – and Cadence Design Systems marketing revolving door is a fresh example of this. According to the online gadfly DeepChip.com, editor John Cooley reports “Cadence CMO Bruggeman rumored ousted in unexpected palace coup”, confirmed also by Gabe Moretti on his EDA blog because of the decision to put “product marketing within the three divisions responsible for product development. According to Pankaj [Mayor, chief of staff to the CEO], who will act as Head of Marketing in addition to his other role in the interim, this is the event that precipitated John’s departure”.

Product marketing belongs close to R&D, but as companies grow they often oscillate between a functional org chart (all R&D in one team, all marketing in another) and a BU org chart (all R&D and marketing for a business line working in one unit). Having been a part of this oscillation more than once in my tenure in marketing I have seen both sides. There are advantages and disadvantages both ways, but the deeper the technology the more important it is that R&D and product marketing work very closely together and so I favor marketing within the business unit.

The reason for this is that in very complex technology products R&D is leading the customer, not the other way around. The classical view that product marketing goes out and talks to customers, figures out what they need and then comes back and specifies a product for R&D to build is the road to a mediocre, losing product.

With breakout products customers don’t know what they need. Sometimes they know the problems they are going to face, sometimes they can describe the performance, time-to-market or cost problems they are facing but they can rarely describe how to solve the problem.

Consider Salesforce. Did CRM users know they needed a cloud based product they could easily configure themselves? No, when Salesforce was emerging customers were asking for more and more features on their Seibel systems. And yet Salesforce dramatically reduced the cost of deployment and support of CRM systems.

Consider Synopsys. Did logic designers know they needed to radically change the way they described chip logic by moving up to the RTL level instead of drawing gates? No, they asked for more and more features to draw gates faster within their Daisy or Mentor systems and yet the move to RTL based design dramatically changed the complexity of designs that were possible.

Centralized marketing makes sense for all the cross functional responsibilities. Communications needs to be one voice with common positioning and messaging. Third party business development – coordinating partnerships and industry initiatives – needs to present the company as one entity to partners. Market research and competitive intelligence is more cost effective and can serve the sales force with one set of tools and content (like FirstRain) if the intranet and intelligence are run centrally.

But product marketing needs to be close to R&D, sitting with R&D and not confused about their role. Design collaboration with R&D, interface specification, customer introduction, field training and support all need to be done working hand in glove with the R&D team that is pushing the envelope of the technology. Org charts should not, in theory, change behavior but they do.

Organizational change is also almost always good and keeps people on their toes – and shows you a lot about the organization. Holden powerbase selling methodology teaches sales people that change illuminates the power structure in an organization. Any time you see a reorg someone wins and someone loses. If you want to really understand where the power lies take note of which executives build a little bit of power every time. Subtle, continuous, increases are a sign of someone strategically building power.

It’s true that product marketing has an important role to play. Much of the time the work to be done is incremental, and then it does not really matter where product marketing reports. But when you are building a product that has to leapfrog your competition and stay on the bleeding edge you are reliant on the R&D and conceptual brains to figure out the leap and product marketing needs to be part of the leaping team.

Leadership

Ben Horowitz: CEO psychology – or Don’t Quit!

Terrific article in TechCrunch this week by Ben Horowitz – What’s the Most Difficult CEO Skill? Managing your own psychology.

Managing inside my own head is by far the most difficult thing I do as a CEO and I appreciate Ben being so out and candid about what’s going on inside. As he says “Over the years, I’ve spoken to hundreds of CEOs all with the same experience. Nonetheless, very few people talk about it, and I have never read anything on the topic. It’s like the fight club of management: The first rule of the CEO psychological meltdown is don’t talk about the psychological meltdown.”

Ben covers classical psychoses like “If I am doing a good job why do I feel so bad?”, and the cliche (and truism) “It’s a Lonely Job” – especially when you are facing a crisis like the worst recession since the great depression and you have to make the decision to cut staff which impacts the livelihoods of the very people you are working so hard for and care about.

The piece of advice I liked that was new to me – is Focus on the road not the wall. It it so easy to stare at all the things that can kill your company – and at any moment in time, even great times, any number of things can wipe out a small company. It is this single difference that makes being a CxO in a large company feel so emotionally different than being a CEO of a small company and I have done both. Large companies have mass and momentum – you have time to recover from mistakes most of the time. (Note for Cadence Design Systems (CDNS) which crashed and fired it’s entire executive team on one day – it’s coming back because of the resiliency of the installed base and the R&D leadership team’s commitment to great products.)

The aspect Ben writes about that I have had in my head many times in the last 15 years which I can testify never goes away is A Final Word of Advice – Don’t Punk Out and Don’t Quit As CEO, there will be many times when you feel like quitting. I’ll add though that the most effective management tool I have found for this personal challenge is to get in the pool and pound the laps until my head is clear – which can be anywhere between 1 and 2 miles before I am calm.


If you have an ambition to be CEO one day read the article very carefully several times.