Case Study: Principled Entrepreneurship and Shared Leadership: The Case of TEOCO (The Employee Owned Company)
Read the case study located on page 361 of the section titled Case Studies in your textbook and prepare a 4-page report in a Microsoft Word document based on the following situation:
The CEO Atul Jain has made some very radical decisions recently that he believes will help to move TEOCO forward in ways that were previously unavailable to the company. He has asked you to serve as a consultant over the next 12-24 months as TEOCO navigates working with their new investor group TA and as they seek to incorporate the new acquisition TTI into their corporate culture.
To familiarize yourself with the client; your first task is to prepare a background report which analyzes TEOCOs business environment and strategy. Your report should include the following:
Analyse and discuss the external forces and industry conditions that have impacted TEOCOs performance over the years?
Analyze and discuss how the internal organization and culture at TEOCO influence its performance?
Discuss how TEOCO has strategically responded to its competitive environment and internal capabilities?
What strengths and weaknesses do you perceive Jains management style lends to TEOCOs overall effectiveness?
What issues do you expect to arise given TAs recent investment in TEOCO? What recommendations do you have to assist with these issues?What issues do you expect to occur while incorporating TTI into the TEOCO culture? What recommendations do you have to assist with these issues?What challenges to you foresee in maintaining TEOCOs strong corporate culture given the need for continued organizational change?In your report you should be able to demonstrate an insightful look at TEOCOs situation make recommendations for incorporating TAs requirements into TEOCOs unique management style and recommendations for incorporating the employees of TTI into TEOCOs organizational culture.
CASE 28: Principled Entrepreneurship and Shared Leadership: The Case of TEOCO [The Employee Owned Company]1
Prof. Thomas Calo Ed.D.
Perdue School of Business Salisbury University
Prof. Olivier Roche PhD
Perdue School of Business Salisbury University
Prof. Frank Shipper PhD
Perdue School of Business Salisbury University
Introduction
Fairfax October 6 2009. Atul Jain founder of TEOCO a provider of specialized software for the telecommunications industry had been meeting all day to finalize a partnership agreement with TA Associates a private equity firm. For Atul the pace of activities had been relentless on this special day.2 By all accounts the last 12 hours had been hectic but the closing of the transaction was a success. The event had started with back-to-back meetings between TEOCOs senior management and their new partners representatives and had culminated with the usual press conference to mark the occasion. The senior management teams of both organizations announced to the business community that TA Associates [TA] had made a minority equity investment of $60 million in TEOCO. It was indeed a memorable day the culmination of intense and uneven negotiations between two organizations that did not have much in common except for deep industry knowledge and a shared interest in seeing TEOCO succeed.
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This new partnership marked the end of a marathon but Atul did not feel the excitement that usually comes with crossing the finish line. It was late and he was tired. Back in the quiet of his office he reviewed once again the draft of the press release relating the days event. As he read the various statements captured from the meetings he still had the uneasy feeling that comes with making life-changing decisions when one does not have all the required information. There were so many unknowns. Partnering with the right investor like many other entrepreneurial endeavors was not a decision made in a vacuum. It was all about good timing cold analysis gut feeling and luck; the latter was last but by no means least. Despite all the uncertainty Atul felt that this was a worthy endeavor.
Atul had come a long way since his humble beginnings in India and a lot was at stake not only for him but also for the 300 employees of the company. The TEOCO enterprise had been a successful business endeavor and at the same time a very personal journey. What had begun as a result of frustration with his old job in Silicon Valley 15 years ago had become one of the fastest growing businesses in the telecom software industry; the fast pace of the companys development had not gone unnoticed. For quite some time now TEOCO had been on the radar screen of investors looking for high-growth opportunities. However Atul had never cultivated a relationship with potential external investors; he had remained congruous with his long-held business beliefs 361362that an alliance with external financiers was rarely in the best interest of a company and its employees.
Atul [CEO & Chairman]: I am often asked why we didnt approach an investor for money or seek venture capital. I have two answers to this question. My first answer is: thats not our way of doing business. I believe that every entrepreneur must aspire to be debt-free and profitable from the very first day. My second answer is: nobody would have given me the money even if I had asked! I also had a fear that external investment might impact the culture and values that I wanted TEOCO to promote and cherish. I wanted to steer the TEOCO ship along a very different course. My dream was to set up an enterprise based on a model of shared success. TEOCOs success wouldnt just be my success; it would be our success. TEOCO wouldnt just have one owner; it would be owned by each of its employees who would therefore be called employee owners.
But several months earlier events had taken an unexpected turn; unsolicited financiers approached TEOCO once again this time offering to invest a substantial amount of capital. Still Atul was reluctant to engage in negotiations with a party that as far as he knew did not share TEOCOs values.
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Atul: [In the early days]we took a conscious decision not to accept venture capital. I have always had a healthy disdain for venture capital because it numbs the entrepreneurs competitive edge and enfeebles him. I still remember TEOCOs early battles with [competitors] Vibrant and Broadmargin and how difficult it was for us to compete with all that extra money flowing into the rivals coffers. But we took the hard road and survived. What then went wrong with Broadmargin or Vibrant? If I have to over-simplify Id say that both were done in by venture capital. VC is an impatient master; it forces you to always go for the home run and always push hard on the gas. With certain kinds of businesses this works; indeed it might be the only way. Think of Google: their business space is so vast that only continuous and unbridled growth can sustain the venture. But TEOCOs space is very different; there is no exponential growth here that everyone can go chasingI would guess that the size of the telecom Cost Management business is no larger than $100 million per year; so to survive you have to be patient and play your cards carefully. This isnt the place to be if you are in a tearing hurry to grow. While this strategy of focusing on niche markets significantly limits our market potential it does keep the sharks away. The big companies are not bothered by niche products for telecom carriers; they dont want to swim in small ponds.
Atuls comment reflected the situation a few years ago; TAs recent partnership offer was made in a new context. In this rapidly changing industry there are constantly new directions in technology and the landscape continually shifts. The industry consolidating quickly required that in order to remain a viable player TEOCO would have to change gears sooner rather than later.
Until now the primary focus of the company had been on the North American telecom carriers. However with the anticipated consolidation of the telecom industry in North America TEOCO needed to focus on international expansion. In addition to leverage TEOCOs deep expertise in cost revenue and routing the company would soon need to fish outside the pond and enter the global business support system / operations support system (BSS/OSS) market. Here TEOCO could find itself in competition with much larger players and it would be valuable to have a strong financial partner.
Indeed the company had reached an important threshold in its organizational development. But if TEOCO was at a crossroads so was its founder. Atul was in his late forties and he was not getting any younger. In this industry Atul had known many entrepreneurs who like himself had rapidly grown their businesses only to find out that you are only as good as your last call. For a few of these entrepreneurs one or two poor decisions had triggered a descent that had been as swift as their earlier ascent and they ended up with very little to show for their efforts. These were the intangibles. During rare moments of quiet reflection Atul realized that his risk return profile had changed imperceptibly over time. Having all his eggs in the same basket and going for all or nothing had been fun in his mid-thirties when everything was possible but it would be much less so in his early fifties when starting from scratch would be a very unappealing scenario for Atul and his family. Furthermore he felt an obligation to create liquidity for the employees who had supported him on this fifteen-year journey and had their own dreams and goals. At the end of the day any business has only three exit options: it could get listed be sold or go bankrupt! And the latter option is not particularly appealing.
It was in this context and mindset that he had agreed to listen to what TA Associates had to offer. Founded in 1968 TA had become one of the largest private equity firms in the country. The company was managing more than $16 billion in capital by 2009 and it had an extensive knowledge of the industry. Atul was impressed by TAs approach its willingness to take a minority position and Kevin Landry Chairman and the spirit of TA. This private equity firm not only managed capital; it also had 362363an impressive network of relationships. In addition TA executives had been adamant that Atul remain in charge and he was keen on continuing as the controlling shareholder. The fund would appoint two board members (see Appendix 1) but TEOCOs current management team would still lead the company as it had in the past.
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Reviewing the details Atul could not spot any flaws in the logic of the transaction. It was neither a marriage of love nor a shotgun wedding just a pragmatic alliance between two companies with complementary skills and resources at a time when such an alliance was valuable to both parties: TA looking for a good investment and TEOCO shareholders looking for partial liquidity. As Atul re-read the press release and a few of his quotes he reflected that he meant every word.
Atul: We are pleased to welcome TA as our first institutional investor. As a company that has avoided external capital for 15 years we are delighted to find a partner that will strengthen TEOCO without changing the culture of our organization. We see this as the beginning of a new phase in TEOCOs history where we look to add even greater value to communications service providers worldwide.
This was definitely a new era and there would be no turning back. For better or for worse this partnership had to work. Atul made minor corrections to the wording of the document and authorized its release.
Company Background and Activities
TEOCOs predecessor Strategic Technology Group (STG) was founded as an S corporation in 1994. The companys initial focus was to provide high quality consultancy for IT projects. STGs first clients included Mobil Siemens Cable & Wireless SRA TRW and Freddie Mac. The company started operations in April 1995 and three years later in March 1998 the company name was changed to TEOCO (The Employee Owned Company). At the same time TEOCO made the strategic decision to shift its business from consultancy to product development and to focus on the telecommunications industry. This was achieved through the acquisition of a fledgling software product that processed invoices of telecom payables. BillTrak Pro would ultimately become TEOCOs best-selling network cost management software.
Subsequently the company grew rapidly. As the number of employees exceeded 75 the maximum numbers of shareholders an S corporation can have the company changed its status to a C corporation to enable a broad-based employee ownership. Over the years preceding the burst of the Dot.com bubble TEOCO not only expanded its client base for its basic products but also invested substantial amounts of capital in three startups. These entities were: netgenShopper.com for online auctions; Eventrix an event planning portal; and AppreciateYou.com to support employee retention. These internet startups functioned as separate entities each at their own location with their own business goals and core values managed by different entrepreneurs/managers; at the same time they each relied on TEOCOs cash flow for their development.
Ultimately none of these ventures emerged as viable businesses and this left TEOCO in a difficult financial situation. As a result TEOCO registered its first year of losses in 2000.
Atul: This failure was devastating but also a humbling experience. I learned the hard way that no entrepreneur can survive inside a technology incubator. We had to pay a price for all these transgressionsOur revenues were still impressive but the money in the bank was dwindling rapidly We were truly caught in deep and dangerous waters. I have often wondered what went wrong. It wasnt as if we made one big mistake.I guess we just took our eyes off the ball. Somewhere along the way we lost our focus; we tried to do too many things at the same time and ended up getting nothing right. We had to quickly get back to our knitting. The question was: how?
Under Atuls leadership TEOCO made the judicious decision to refocus its activities on its core industry expertise and its largest clients. To achieve this the organization solidified its position in the telecom sector by improving its services and developing new products. In 2004 research and development efforts resulted in the patented XTrak technology which today represents the core of the companys invoice automation solution. In addition TEOCO was able to migrate from software licensing to the far more lucrative software-as-a-service model. Instead of a fixed licensing fee the company charged a recurring monthly fee based on the volume of data processed for each client. As the recurring revenue model took hold it became much easier to grow revenues from year to year and improve the companys profitability.
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In 2006 TEOCO acquired Vibrant Solutions bringing in cost management and business intelligence assets with its 24 employees. Ultimately this resulted in the important development of TEOCOs SONAR solution for cost revenue and customer analytics. Finally in 2008 Vero systems was acquired adding routing management and its 36 employees to the repertoire of communication service provider solutions.
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This stream of acquisitions and internal development left TEOCO with a staff of about 300 employees and a portfolio of three major activities: cost management least cost routing and revenue assurance.
Cost Management
Cost management solutions include invoice automation and payable processing. Powered by XTrak TEOCOs invoice automation solution processes over 1000000 invoices annually. This facilitates the audit and analysis of billions of dollars in current billings due to each telecom company. While the usual scanning of paper bills relies on optical character recognition technologies that routinely require hands-on intervention to correct misrepresented characters on complex invoices the XTrak technology mines the original formats which produced the paper to create files for loading into cost management solutions. By eliminating the tedious costly and error-prone task of manual invoice data entry telecom companies increase productivity and reduce costs by increasing the number of disputes filed and resolved and by reducing late-payment charges. In addition TEOCO also processes payables on behalf of clients by managing the full life-cycle of invoice payment including account coding management review and payment reconciliation. TEOCOs employees audit client invoices comparing rates inventory and usage with other source data to identify and recover additional savings. Finally the company manages disputed claims on behalf of its clients from creation through resolution. TEOCO has the technical capability to capture all correspondence between parties and can review and track every claim to resolution.
With regard to cost management it is worth noting that the Sarbanes-Oxley Act of 2002 requires every listed company to implement a reliable reporting system. TEOCOs services support this compliance by improving the details and timeliness of the reports generated by/for telecom companies. TEOCOs rapid development in this area coincided with a market need that was augmented by the legal requirements imposed by the Act.
Least Cost Routing
TEOCOs routing solutions help telecom companies determine the optimal route between two customers with regard to cost quality of service and margin targets. Capable of supporting multiple services and various networks the company is able to monitor CDRs (Call Detail Records) in near real time to identify bottlenecks re-route traffic and improve the quality of services for greater satisfaction of its clients customers.
Revenue Assurance
Communications service providers can lose 5-15% of gross revenue due to revenue leakage. TEOCOs SONAR solution is an industry first in supporting switch-to-bill reconciliation. TEOCO combines its specialized industry expertise with high-capacity data warehouse appliances to create a unified CDR and makes a high volume of current and historical CDR data available on a single platform for in-depth analysis. This helps telecom companies uncover billing discrepancies detect fraudulent behavior reveal usage patterns understand customer profitability conduct margin analysis and determine the financial viability of reciprocal compensation agreements.
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Industry Landscape: Continuous Change
Competitors
TEOCO operates in a fragmented and highly competitive industry. Appendix 2 lists its competitors in each of the three major business segments. TEOCO operates mostly in North America; therefore the main competitors in the cost management segment are Razorsight Connectiv and Subex. These same companies compete for revenue assurance as well as others such as cVidya and Wedo. Finally in the least cost routing segment TEOCO faces a different set of competitors: Pulse Networks Global Convergence Solutions and Telarix.
Brian [Marketing & Communications Department]: So [from the customers point of view] what we bring to the table is just end-to-end solutions that reach all of these different categories. While we still compete with certain people its on a specific product; not across the board.
Indeed with the possible exception of Subex none of the above competitors operates in the same three business segments as TEOCO and Subex does not provide a domestic least cost routing in North America. Since TEOCO derives 50% of its revenue from cost management and 25% from revenue assurance Razorsight and Subex could be considered TEOCOs main business competitors. Faye summarizes TEOCOs current market position.
Faye [General Manager/Account Management]: In North America we dominate the cost management space. Weve got a decent lock on least cost routing which is a very operational and technical function that bridges between network and finance.
One of the ways TEOCO differs from most of its VC-backed competitors is its focus on internal cost 364365management. This manifests itself in two different ways. The management begins the year by making a conservative revenue plan for the year. The company then manages its expenses to be a fixed percentage of the projected revenues. Investments in Sales Marketing and R&D are adjusted throughout the year to ensure that expenses stay within the pre-defined limits. The second way cost management manifests itself is how the cost of each individual transaction is closely managed and monitored whether it be purchasing hardware leasing office space renewing supplier contracts recruiting new employees or planning business travel.
One of the consequences of this strong discipline of cost management is that TEOCO is consistently profitable something most of its competitors struggle to accomplish. This enables the company to focus its energy on clients and innovation.
Clients
TEOCO operates in an industry where clients are known and clearly identifiable. One of the key reasons clients buy from TEOCO is because its solutions have a strong ROI (Return on Investment). In other words TEOCOs products quickly pay for themselves and then begin to generate profits for the companies that subscribe to them.
Faye: The telecommunication space is who we sell to exclusively and within that space we have a relatively known and discrete customer list or target list if you will. We dont sell cookies. Not everybodys going to buy what were sellingI know who those customers are and I can identify groups within that addressable market that fall into natural tiers. So either because of their size or because of the market that they cater to themselves whether theyre wireless or wire line or whether theyre cable companies I can identify who they are and then try to focus products and services that I think will best meet their needs.
There are four telecom companies that drive about 65% of TEOCOs domestic revenue: Verizon Sprint AT&T and Qwest; these are the platinum accounts. For obvious reasons they get a lot of attention from both the engineering and product delivery standpoints. Thirty-five other companies including Cricket Global Crossing Metro PCS Level 3 and Bell Canada account for the remaining balance of revenues.
TEOCO like most of its competitors is client-centered. Smooth customer interactions are not only critical to increase sales and garner new relationships but also to develop new products. Over the years most of the ideas for new products or improvements to existing products have come out of discussions with customers.
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Conclusion
The challenge for any organization with a strong culture and a loyal work force is to sustain them and adapt them 376377in the face of organizational change. Over a very short period of time TEOCO has changed its capital structure and expanded its business. How and to what extent TEOCO manages these changes will determine whether it maintains its competitive advantage and finally what will be its overall fate.
1.
The authors would like to thank the employee owners of TEOCO who graciously shared their knowledge experiences and perspectives about the company. Their viewpoints were invaluable in ensuring that this case provides a true representation of the culture and practices of the company.
2.
All employees are referred to in this case by their first name including the CEO because that is standard practice at TEOCO.
3.
http://www.billingworld.com/articles/2010/09/teoco-ceo-reversal-on-acquisitions-complete.aspx
4.
Ibid.
5.
Ibid.
6.
Ibid.
7.
Jainism is the least populous of the Indian religions; comprising approximately 0.5% of the population (Hindus represent approximately 80% Muslims approximately 12% and Christians approximately 3%).
8.
James C. Collins and Jerry I. Porras. Built to Last: Successful Habits of Visionary Companies New York: Harper Collins Publishers 1994.
9.
As Peter Drucker said All organizations now say routinely people are our greatest asset. Yet few practice what they preach let alone believe it. The New Society of Organizations Harvard Business Review Sept/Oct 1992.
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