March/April 2020 Chief Executive Magazine

Best Ideas 2020: Tech | Supply Chain Rethink | Health Cost Cures | K Street: A Guide

MARCH/APRIL 2020

The Voice of America’s CEO Community

PLUS: Patrick Lencioni asks uncomfortable CEO questions Ram Charan reveals the truth about company culture

INSIDE THE GROWTH MACHINE Stryker CEO Kevin Lobo doubled revenue by building the highest-revving M&A engine in business.

Here’s how he did it­­­--and how you can, too.

Our Members return each year as faithfully as the tides.

From the moment you enter the palm-studded harbor, touch down on the runway or pass through the gates of Ocean Reef Club, you begin to sense a very Unique Way of Life. One that has been attentively upheld, polished and passed down to succeeding generations of Members.

Situated on the northern reaches of Key Largo, beside America’s only living reef, Ocean Reef Club boasts a world-class marina and yacht club. Its own private airport and accompanying flying club. Two championship golf courses. A tennis and games center. An art league and cultural center, croquet, racquet and rod and gun clubs. A museum, library and theater, medical center, restaurants and gracious residences. Even a school for your children and a vet for your pet. In essence, all the comforts and services of a small but sophisticated town.

There are also comforts of a different kind. Among them, a tangible sense of privacy, security, tradition and values, and perhaps most important, a sense of belonging unlike any other club on earth.

There are only two ways to experience Ocean Reef Club’s Unique Way of Life – as a guest of a Member or through the pages of Living magazine. Visit OceanReefClubLiving.com or call 305.367.5921 to request your complimentary copy.

C ONTENT S

M A R C H/A P R I L 2020 No. 305

FEATURES COVER STORY 22 GROWTH ENGINE Kevin Lobo nearly doubled Stryker’s revenue with a high-revving acquisition machine that shows no signs of slowing.

He takes us under the hood.

Interview by Dan Bigman

22

BEST PRACTICES 32 MOVING THE CHAINS Trade, tech and disease have CEOs rethinking their supply networks.

Some strategies.

By Dale Buss

LEADERSHIP 44 WHAT’S YOUR MOTIVE? At a pivotal time for leadership in America, bestselling author Patrick Lencioni digs into the most existential, uncomfortable question of all: Why do you want to be a CEO in the first place?

Interview by Dan Bigman

WASHINGTON 44

50 K STREET CONFIDENTIAL These days, everyone needs eyes, ears and a voice in the nation’s capital.

Here’s how to find yours.

By Dan Fisher

BEST IDEAS 2020 56 TECHNOLOGY &

CYBERSECURITY One way or another, every leader today is in the tech trenches. CEOs share lessons from the front lines.

56

C O NTE NT S EDITOR

Dan Bigman EDITORS-AT-LARGE

Jennifer Pellet Jeffrey Sonnenfeld DIGITAL EDITOR

C.J. Prince PRODUCTION DIRECTOR

Rose Sullivan CHIEF COPYEDITOR

Rebecca M. Cooper ART DIRECTORS

DEPARTMENTS

8

Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR

Melanie Nolen

6 EDITOR’S NOTE

CONTRIBUTING EDITORS

The SaaS Tax

8 LEADERS 8 Game, Change / Dale Buss These companies are winning on engagement by bringing play into the workplace. You can, too.

14 Law Brief / Daniel Fisher Saved From the States

Dale Buss Ram Charan Fred Engelfried Daniel Fisher Craig Guillot EDITOR EMERITUS

J.P. Donlon PUBLISHER

Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net

16 Performance / Ram Charan Do a Culture Audit

VICE PRESIDENT

Phillip Wren 203-930-2708 | pwren@chiefexecutive.net

18 On Leadership / Jeffrey Sonnenfeld Should I Stay or Should I Go?

DIRECTOR, BUSINESS DEVELOPMENT

Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net

ECONOMIC DEVELOPMENT

DIRECTOR, BUSINESS DEVELOPMENT

62 REGIONAL REPORT: THE NORTHEAST Things are looking up—slightly—for the nation’s Northeast, which was losing workers and flat on growth last year.

By Craig Guillot

Liz Irving 203-889-4976 | lirving@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

Marc Richards 203-930-2705 | mrichards@chiefexecutive.net

CEO EVENT 67 HEALTHY CHOICES Three CEOs share their cost-trimming strategies for an out-of-control healthcare spend.

By Russ Banham

MANAGER, STRATEGIC PARTNERSHIPS

Rachel O’Rourke 615-592-1198 | rorourke@chiefexecutive.net CLIENT SUCCESS ASSOCIATE

Jake Holmon 203-889-4974 | jholmon@chiefexecutive.net

LAST WORD 72 FAILURE IS AN OPTION For we Type-A CEOs, rejection is a blip to overcome, or even a motivator—but others may need a hand coping with setbacks.

By Fred Engelfried

CHIEF EXECUTIVE GROUP EXECUTIVE CHAIRMAN

Wayne Cooper CHIEF EXECUTIVE OFFICER

Marshall Cooper DIRECTOR OF EVENTS / PUBLISHER, CORPORATE BOARD MEMBER Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 305 March/April 2020. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2019 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33.

Back issues are $33 each. Periodicals postage paid at Stamford, CT, and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth, MN 55447.

Subscription Customer Service Chief Executive Group, PO Box 47574, Plymouth MN 55447

p: 800-869-6882 e: cex@kmpsgroup.com w: chiefexecutive.net/magazine

Jamie Tassa CHIEF CONTENT OFFICER

Dan Bigman MANAGING DIRECTOR

Scott Budd VICE PRESIDENT, HUMAN RESOURCES

Melanie Haniph

SOMETIMES YOU HAVE TO CHANGE COURSE TO GET AHEAD.

GO.

The pressure to innovate is constant. It can be crippling, or it can be a catalyst for your best thinking. Harvard Business School Executive Education can help you compete and win on innovation and propel your life’s work.

LEARN

MORE

AND

APPLY

WWW.EXED.HBS.EDU/GO

CH I EF E XECUT IV E RE SE A RCH AD INDEX

A JUMP IN CONFIDENCE Insights from Chief Executive Group’s CEO Confidence Index, a widely followed monthly poll of CEOs, and the Chief Executive Network (CEN), our nationwide membership organization that helps C-Suite executives improve their effectiveness and gain competitive advantages. For more information, visit ChiefExecutiveNetwork.com.

FOR MORE THAN A YEAR, STUMBLING TRADE NEGOTATIONS and fear of a potential recession have cast a shadow over CEO perceptions of an otherwise buoyant economy. That’s no longer the case.

An early February poll of 230 CEOs finds Chief Executive’s CEO Confidence Index surging to 7 out of 10, up 4 percent compared to the prior month and 3 percent since the same time last year. CEO confidence in the year ahead is now at levels unseen since 2018, when a then-new corporate tax cut and robust economic fundamentals boosted business morale to its highest point in a decade.

CEOs we talked to cited low interest rates, lessened regulatory burdens, strong consumer spending, low energy prices, new trade deals, business-friendly policies, a strong dollar, plenty of liquidity and the end of impeachment proceedings as factors for the positive outlook.

It isn’t all perfect: Among the CEOs we polled, 52 percent said the outcome of the presidential election is the factor that will have the most impact on their business strategy in 2020 (CEOs are very concerned with the possibility of a far-left candidate being elected), followed by labor availability, at 47 percent. The fear of a potential economic downturn also remains a concern for some. Chalk that up to the record length of the current expansion.

West Coast CEOs in states like high-cost California and Oregon are the least optimistic about 2020 business conditions but are just 3 percent behind the national average. Northeastern CEOs are the most confident, about 1 percent higher than the average. Healthcare CEOs and those operating in the construction, engineering and mining sectors are among the most confident in the future, ranking their outlook 7.7 out of 10.

Overall, the proportion of CEOs with improving revenue and profit forecasts surged 12 percent month over month to the highest level since the spring of 2019. Similarly, the number of CEOs planning to add to their workforce in 2020 is on the rise, along with those expecting to increase capex. The main challenge for business in this environment remains labor. In addition to struggling to find qualified talent, the majority of CEOs (51 percent) say rising labor costs are the factor that will put the most pressure on their profitability in 2020.

CEO CONFIDENCE LEVEL IN BUSINESS CONDITIONS ONE YEAR FROM NOW TRAILING 12 MONTHS

6.78

7.00

6.84

6.72 6.66

6.74

6.61

6.55 6.24

6.46

Mar.

Apr.

May

June

July

Aug.

Sept.

6.36

Oct.

Chief Executive’s CEO Confidence Index is measured on a scale of 1-10.

4 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

Nov.

Dec.

CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES chiefexecutive.net/compreport 12, 13 CEO TALENT SUMMIT chiefexecutive.net/ceotalent 39 DISRUPTIVE TECH SUMMIT chiefexecutive.net/disruptivetech 35 ESGR esgr.mil 19 GALT & COMPANY galtandco.com 20, 21 HARVARD BUSINESS SCHOOL exed.hbs.edu/go 3 INSPIRATO inspirato.com 11 LEADERSHIP CONFERENCE chiefexecutive.net/leadershipconference 55 MANUFACTURING BENCHMARKS chiefexecutive.net/kpireport 5 NATIONAL SHOOTING SPORTS FOUNDATION nssfrealsolutions.org 7 NEXT LEVEL LEADERS Nextlevelleadersseminar.com 30, 31 OCEAN REEF CLUB oceanreefclubmagazine.com INSIDE FRONT COVER PE-BACKED CEO SUMMIT chiefexecutive.net/pebackedsummit 41 PURE INSURANCE pureinsurance.com/ OUTSIDE BACK COVER RHR INTERNATIONAL rhrinternational.com 15 SMART MANUFACTURING SUMMIT chiefexecutive.net/sms 42, 43 THE AMAZON MANAGEMENT SYSTEM ram-charan.com/books/the-amazonmanagement-system 61

6.59

6.18

Feb. '19

CHIEF EXECUTIVE NETWORK chiefexecutivenetwork.com 37

Jan. '20

Feb.

TRUE OFFICE trueoffice.com 17 VARI vari.com/CEO INSIDE BACK COVER

Key Benchmarks For Manufacturing Companies Identify opportunity areas for your company to improve price realization, profit margins and asset and inventory utilization.

This report puts 305 KPIs in 45 categories at your fingertips, including 315 easy-to-read charts that bring the data alive.

Key Benchmarks for Manufacturing Companies is the groundbreaking analytical and strategic tool you’ll use to: • Identify opportunity areas that can transform your company • Set performance goals and compete more effectively • Gauge company performance and set goals for the future • Improve price realization

• Increase profit margins • Measure asset and inventory utilization • Uncover cost-reduction opportunities • Get the most from your R&D, marketing, and sales • And more

Save $500 with code CEO500MA

To learn more or to order, visit ChiefExecutive.net/KPIreport

ED I TOR ’ S NOTE CHIEF EXECUTIVE OF THE YEAR

THE SaaS TAX WHEN CHIEF EXECUTIVE GROUP MOVED INTO NEW offices in Stamford, Connecticut, a few years ago, we needed a way to lock the front door. Exploring our options, we found a security company that would install a keypad that would provide 24x7 digital access and a host of snazzy features to let top management—for a monthly fee—dig into data on who was using the door and when.

But something about paying monthly for a lock stuck in our CEO’s craw. He went online and found a keypad and digital logging system for $1,000. He installed it himself. We haven’t looked back—and remain burglar free—nearly five years on.

There’s a reason SaaS has become the go-to business model for our age. As Salesforce, Microsoft, Slack and 1,000 other tech firms demonstrate, SaaS is the ultimate cash machine, a steady drip-drip-drip that scales into a river with near-zero friction on customers’ wallets. Gartner forecasts global revenue from SaaS will hit $151 billion in 2022, up from $85.6 billion in 2018.

All that growth comes from somewhere. One CEO I recently spoke to has seen his once-tame IT budget nearly double over the past five years—as best as he can tell, at least—with little in the way of productivity gains. The reason? Subscriptions. Ofttimes, he finds these costs hidden away in little-noticed lines of expense accounts and other areas where you’d never expect it.

2020 SELECTION COMMITTEE ADAM ARON President and Chief Executive, AMC

DAN GLASER President and Chief Executive, Marsh & McLennan

FRED HASSAN Former Chairman, Bausch & Lomb; Partner, Warburg Pincus

NEAL KEATING President and Chief Executive, Kaman

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries

MAX H. MITCHELL President and Chief Executive, Crane Co.

ROBERT NARDELLI Chief Executive, XLR-8

THOMAS J. QUINLAN III Chairman, President and Chief Executive, LSC Communications

JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management

ARNE SORENSON Growing Pains

To be sure, there’s plenty to like about SaaS and its cloud-based relatives. It’s allowed millions of businesses access to systems and software that would have been prohibitively expensive a decade ago. New features and improvements are immediately available without costly upgrades and product-cycle cul-de-sacs that render older code unusable on newer hardware.

But there’s plenty to be wary of as well—all easily glossed over—as you sign on the dotted line (or your senior VP of sales swipes that corporate card). Back when people actually bought software or developed it themselves, it could be depreciated as capital expense. Not SaaS, which remains an unending, EBITDA-eating operating expense. That becomes a bigger issue in slowdowns— tough to cut—or when you try to sell your business. Ever try to migrate from one SaaS solution to a rival? It’s excruciating—deliberately so—because you house none of the data. Expect to spend big on a consultant to make it happen. It also has a tendency to grow. What starts as a reasonable cost for a small company can be a big deal a decade down the line. Even “free” productivity software like Google’s suite of products can pull you on to an escalator of costs thanks to storage milestones that require you to spend more—or risk stalling your operations.

Still, for most companies, SaaS is simply a part of life now—for good and bad. The trick is to avoid complacency and inertia—the core of the SaaS business model. Make it someone’s job to keep an eye on SaaS spending company-wide. Ask them to watch long-term trends—not just spikes—in costs.

Don’t budget for the present; model for growing usage over a long period of time. And remember, sometimes the best “door lock solution” for your company is just a lock on the door. —Dan Bigman, Editor

6 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

President and Chief Executive, Marriott International 2019 CEO of the Year

CARMINE DI SIBIO Global Chairman & CEO, EY Exclusive Adviser to the Selection Committee

TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners

CONTACT US CORPORATE OFFICE Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701 ChiefExecutive.net LETTERS TO THE EDITOR letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 Fax: 847.730.3666 advertising@ChiefExecutive.net REPRINTS Phone: 203.889.4974

WE ARE THE FIREARMS INDUSTRY

WE ARE ADVOCATING FOR

REAL SOLUTIONS & SAFER COMMUNITIES FixNICS® FixNICS® is a program NSSF developed to improve the reporting of all prohibiting record to the FBI’s National Instant Criminal Background Check System (NICS).

FixNICS® has helped improve background checks across 16 states and resulted in a 240% increase in records submitted to the FBI. This effort was the model for the Fix NICS Act passed by Congress on a bipartisan basis and signed into law by the President in 2018.

Project ChildSafe® Project ChildSafe® promotes responsible firearms storage and is a nationwide effort that aims to help prevent firearms accidents by providing free information and gun locks—to date, more than 38 million free gun locks have been distributed.

Operation Secure Store® Operation Secure Store® works with Federal Firearms Licensees and the Bureau of Alcohol, Tobacco Firearms and Explosives (ATF) to prevent thefts, and keep criminals from stealing guns by making gun stores more secure.

Don’t Lie For The Other Guy™ The “Don’t Lie for the Other Guy” campaign, run in cooperation with ATF, helps educate retailers to detect and prevent illegal “straw” purchases and conducts outreach to the public through in-store, outdoor, radio and social media advertising.

Suicide Prevention The firearms industry actively partners with local and national suicide prevention organizations to help communities engage in safe firearm-storage practices and understand risk factors and warning signs related to suicide. The Department of Veterans Affairs and NSSF are also launching a pilot program to help prevent suicide among active servicemen and women and Veterans.

nssfrealsolutions.org

L E ADERS

GAME, CHANGE These companies are winning on employee engagement by bringing play into the workplace. You can, too. BY DALE BUSS UNITED NATURAL FOODS HAD A secret weapon in its $2.9 billion acquisition of SuperValu last year: a mobile-game app. The contest asked SuperValu workers multiple-choice questions about their new employer, such as, “About how many new items per month is UNFI first to market with?” Four options ranged from 500 to 10,000.

The correct answer was 1,000. Those who answered questions correctly most often won points toward gift cards—and UNFI got better-informed new workers.

“Setting up an environment of competing against others fuels the desire of employees to go out and learn,” says Jeremy Ford, vice president of people and change for the Providence, Rhode Island-based distributor. “A lot of it is just doing things

8 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

in a novel and different way that they haven’t seen before.”

There’s a difference between making work fun and making a game out of work.

Fun is “Bring Your Pet to the Office Day” and factory-wide ping-pong tournaments.

“Gamifying” work is integrating elements of play, competition and digital technology directly into jobs to engage employees, communicate effectively and save time and money—or all of the above.

It can be turning information conveyance into a quiz, with leaderboards and prizes.

It can be a software hackathon. It can be applying virtual-reality simulation to any training. And it can be war-gaming how to operate a new product—or how to run a machine tool that makes a new product.

By any definition, gamification is hot.

LE A DE RS

“Sometimes things can get mundane,” says Martin Woll, chief operating officer of AXA, a New York City-based insurer that uses an online gamification platform to motivate internal wholesalers and runs their individual sales results leaderboard, ticker-style, across all the computer monitors in the office. “Gamification reinvigorates the competitive spirit and individuals competing because it’s fun. They can even trash talk.”

Catherine Monson agrees. “This is the best, coolest way to deliver training and increase retention,” says the CEO of FastSigns International, a Carrollton, Texas-based franchisor of custom-graphics stores that uses three-minute quizzes on mobile apps to get employees to remember important stuff. “And that’s what we as CEOs want to do.”

Waltham, Massachusetts-based Raytheon leverages what Harry Buhl, its lead investigator for synthetic training, calls the “gaming savvy of this generation of [military] recruits” by gamifying soldiers’ training on weapons ranging from helicopters to its Patriot air- and missile-defense system, making them operate very much like popular video games.

Rockwell Automation essentially bought a company just for gamification. Last year, the Milwaukee-based industrial giant acquired Emulate3D, a UK-based concern whose software enables customers to virtually test machine and system designs before incurring manufacturing and automation costs and committing to a final design.

There are some critics of corporate gamification. “The practice has the potential to degrade meaningful and fulfilling work and vital co-worker connections,” says Reid Blackman, a corporate-culture consultant.

“It can be viewed as an attempt to squeeze greater efficiency out of workers in a thoughtless way.”

CEOs who’ve gotten gaming to work offer these tips on getting it right:

salespeople. Now it’s using games to onboard new franchisees, with quizzes around toughto-teach topics such as product knowledge and advice for signing a real estate lease.

“In three to five minutes, they learn something,” Monson says. “All of this information has been in a 60-page booklet that we send new franchisees. Twenty years ago, people read the booklet. Today, they don’t.”

Facilitate training. FastSigns is rolling out

Show them the money. Workers tend

a gamification platform across various functions after successfully using it with outside

to value monetary prizes most. “Point systems and virtual rewards and the

Encourage information retention. Just like

in school, employees pay more attention if they know they’re going to be quizzed on something.

“You spend $20,000 on a speaker, and he might make six great points that you want people to understand, but people are checking their phones and email as they listen,” Monson says.

“So we create a game out of questions about the key points. People want to get the highest score.”

Use it for recruiting.

In a recent survey by TalentLMS, 78 percent of respondents said that gamification in the recruiting process would make a company more desirable. There’s even a moniker for it: “recruitainment.”

Rockwell, for instance, in December hosted a hackathon it called 24toCode, with a $10,000 grand prize aimed at recruiting software writers.

“We were leveraging the comfort of new generations with digital technologies and evaluating their performance and seeing how well they might be able to do for our company,” says Dave Vasko, Rockwell’s director of advanced technology.

AT LEFT: Rockwell awarded a $10,000 prize to the winner of its “24toCode” hacakthon.

ABOVE: FastSigns Quiz app help new franchisees get up to speed on products and practices.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

/

9

LE A D ER S

Do it yourself. While

Gamification companies like Mivation turn product knowledge into quizzes and scoring methodologies.

like aren’t what people want,” says John McKnight, a professor at the Harrisburg University of Science and Technology, in Pennsylvania. “They would rather have actual bonuses.”

Equivalents such as trips, gift cards and iPads also appeal. And employers shouldn’t sweat the outlays. “There’s not a big financial investment required to drive these games,” says Brian Hamilton, vice president of Ramsey Solutions, a Nashville-based provider of financial-literacy programs. “Do a $25 gift card giveaway each day, and it’s only $700 over a month.”

he likes the concept of gamification, CEO Scott Moorehead decided that Round Room, a smartphone retailer based in Carmel, Indiana, would do its own. “It’s easy to do in Excel, and cheaper,” he says.

United Natural Foods wanted to create a gamelike video for orientation of distribution-center workers but saved tens of thousands of dollars by creating its own instead of outsourcing the project, strapping a VR camera to a drone and then to a box making its way through the warehouse.

Beware a ho-hum reaction. While much

gamification leverages consumers’ recent experiences with gamification by brands and the interest of younger workers in digital games, those advantages may disappear with Generation Z. “They’ve grown up with them so they’re very savvy customers of online games and consumer apps,” McKnight warns. “They’re on to all the techniques, and many see them as phony and manipulative.”

Update continuously. Players want to

Take an ethical approach. Blackman

know where they stand at the moment, not just periodically. “It’s important to give people real-time updating of their standing on the leaderboard because then they know if they stay an extra hour or come in earlier, they can beat the competition,” Woll says. “And that’s good for us because it helps motivate them.”

worries that gamification can “harm a company’s overall people strategy” by “breeding a lot of unhealthy competition among employees.” For example, he says, “If the game looks like it’s supposed to be fun and about points, but it actually has an effect on your bonus or promotion, then you’re playing the game for the wrong reasons.”

Outsource the task. Turnkey providers

such as 1Huddle and Mivation will take any pile of corporate information, create quizzes out of it, maintain scoring and help clients communicate with players. “We enable you to set up competitions on any metric you can track,” says Seth Preus, senior adviser to Spokane, Washington-based Mivation.

10 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

Don’t use it as a crutch. Gamification

shouldn’t try to compensate for work that isn’t interesting per se, Blackman argues.

“Ideally what people want is intrinsically motivating work,” he says. “Gamifying it may just tell workers that their work isn’t intrinsically interesting.” CE

Luxury vacation homes, experiences, and so much more

INSPIR ATO.COM

2019-2020 CEO & SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES

Save $500 on the brand new edition with code:

CEO500MA

The information you need to make critical talent retention and recruiting decisions.

You won’t find a resource like this anywhere else.

With more than 35,000 data points—including values by industry—this resource will allow you to structure the right combination of salary, bonus, benefits, perks and equity incentives to attract top talent and retain the talent you have.

The new 2019-2020 CEO & Senior Executive Compensation Report for Private Companies reveals how the absolute dollar amounts and mix of components vary by position and: • • • •

Company annual revenue Number of employees Industry Geographic region

• Type of ownership • Revenue growth • Profitability margins • and other key factors

To order your copy of the report, call 615-592-1169 or visit:

chiefexecutive.net/compreport

RESEARCH

LE AD ERS LAW BRIEF \ DANIEL FISHER

SAVED FROM THE STATES

How a lawsuit playing out in an obscure Minnesota jurisdiction could bring a reprieve from product liability lawsuits.

Daniel Fisher, a former senior editor at Forbes, has covered legal affairs for two decades.

SOMETIME THIS SPRING, THE U.S. Supreme Court will hear arguments in a case that could fundamentally change how product liability lawsuits are handled in U.S. courts. It involves the seemingly arcane subject of jurisdiction, or whether a court has the authority to decide a case.

In Ford v. Bandemer, the Minnesota Supreme Court decided that Ford Motor Co. could be sued in state court over a 2015 accident in which Adam Bandemer was injured after the 1994 Crown Victoria he was riding in slammed into the back of a snowplow. Bandemer claims the Crown Vic’s airbag failed to deploy.

Ford doesn’t deny it made the car. But it says the auto was manufactured in Ontario, sold in North Dakota and only wound up in Minnesota after 17 years and several transactions on the used-car market. While Ford sells thousands of cars each year in Minnesota, it didn’t sell this car, the company argues, and it shouldn’t be forced to appear before a potentially unfriendly Minnesota jury to defend itself.

A decade or so ago, this argument would have been laughable. Generations of judges and legal scholars had established the idea that companies could be sued over products they released “into the stream of commerce,” as courts put it, regardless of where they were based or where the products were made. The foundational decision also involved a car: In MacPherson v. Buick Motor Co., Justice Benjamin Cardozo, then a New York judge, ruled the Detroit auto manufacturer could be sued in state court after the wooden wheel on the plaintiff’s 1909 runabout fell apart, rejecting arguments that the customer could only sue the New York dealer that sold him the car.

14 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

State courts soon became an arm of the regulatory machine, handing down expensive verdicts that plaintiff attorneys and their academic supporters said provided an important check on corporate greed.

California, ever the tort law innovator, edged toward imposing strict liability for any product a hypothetical “reasonable” person would find dangerous. Lawyers started gathering plaintiffs from multiple states and even foreign countries in “magic jurisdictions” known to deliver hefty jury verdicts.

Then, the conservative majority on the U.S. Supreme Court stepped in. Citing the 14th Amendment’s guarantee of due process, the high court ruled companies must be have “continuous and systematic” connections with a state to be sued there, and state courts can only exercise so-called “specific jurisdiction” over cases involving activities that occurred within the state.

Now, manufacturers and business associations like the U.S. Chamber of Commerce are urging the Supreme Court to go a step further and set boundaries on what constitutes an activity within the state.

“Ford had nothing to do with the fact the car ended up in Minnesota,” says Andrew Pincus, an attorney with Mayer Brown who has filed briefs in Ford v. Bandemer on behalf of the Chamber. “Our whole theory is the company’s activities in the state must have a sufficient connection to the plaintiff’s claim in order to subject the company to personal jurisdiction.”

Minnesota’s highest court said it was enough that Ford sold lots of cars in the state and ran advertising urging Minnesotans to buy more. But Ford says there has to be a more direct link to the injuries it is being blamed for causing. Will the Supreme Court agree? Doing so could dramatically change the fate of product-liability litigation in the U.S.—and, not incidentally, put a dent in the income of some of the nation’s richest and most powerful lawyers. CE

NUMBER

790

RITCH ALLISON CEO, DOMINO’S

‘THERE ARE THREE THINGS I BELIEVE’ In this latest installment of our series of interviews with high-performing members of the CEO1000, leaders of the 1,000 largest U.S. companies by revenue, new Domino’s CEO Ritch Allison talks about handling the company’s challenges—and following an excellent predecessor.

RITCH ALLISON BECAME CEO OF DOMINO’S IN JULY 2018 at a challenging moment. His predecessor had just led the company on a very successful 10-year tear. And third-party home food-service delivery was becoming a hugely disruptive competitive challenge for the Ann Arbor, Michigan-based leader of the global pizza business.

But Allison has reaffirmed Domino’s dedication to handling its own delivery and to relying on home-grown digital technology to expand and streamline how customers can order and receive pizzas. “Fundamentally, I don’t want to put another entity between Domino’s Pizza and our customers,” says Allison, who was co-leader of the restaurant practice of Bain & Co. before joining Domino’s in 2011 and soon becoming president of the chain’s immense international operations. And the 52-year-old has already put his stamp on the CEO job at Domino’s, including appearing in one of the brand’s TV ads.

What did you learn from heading international operations that you now apply to running the entire Domino’s business?

A lot of American companies fail internationally because they assume everyone else will like what Americans like or assume we can just send expats around the world to show them what we do. We have taken a different approach.

We try to recognize that good ideas come from all over the world and don’t just originate in Ann Arbor. We try to accelerate the transfer of good ideas and best practices from around the world to maximize our potential overall as a brand.

Domino’s now has more staffers involved in digital tech than food development—or anything else. Did you know you’d be running a tech company?

Allison’s approach to leadership is an amalgam. “I’ve tried to take the best elements I’ve observed in leaders I’ve worked for and avoid those I thought were the least productive, blend them in with my own philosophy and personality, and make them my own,” says Allison, No. 790 on our CEO 1000 list.

In a tech-enabled world, the rollout of a new platform or ad campaign that’s tech-enabled demands a cross-functional effort across a company. People have to be much more adept at cooperating with their peers from other parts of the company, who have very different backgrounds and experiences and skills. As leaders, we have to blend them into an effective team.

In these excerpts from a recent interview, Allison discussed his management principles and challenges. (The full interview is available at ChiefExecutive.net/CEO1000.)

What has it been like following Patrick Doyle, who really turned around Domino’s as CEO?

What’s your approach to leadership with your senior executive team?

I try to be empowering, and by that I mean there are three things I believe I need to do in that capacity. First, I’m responsible for setting a vision and a set of objectives for the business, both in the long term and also with near-term waypoints to get there. Second, I believe it’s my duty to ensure that my team has the resources and capabilities to achieve that vision and those objectives. And third, I then need to hold the team—and their support teams along the way—accountable. If I can stay aligned with my team in that way, we can be successful.

With a company that already was performing well under a great leader, I could come in without having to restructure or make a radical change early on. That gave me the time to really think about how we accelerate the things that are working really well and about what additional changes we might want to make as we drive the business forward.

For more information about RHR International, visit rhrinternational.com or call +1 312-924-0800

®

LE AD ERS PERFORMANCE \ RAM CHARAN

DO A CULTURE AUDIT

CEO focus on the business buzzword of the decade isn’t helping improve actual performance.

Here’s what will.

Ram Charan is a worldrenowned business adviser, author and speaker who has spent the past 35 years working with many of the top companies, CEOs and boards of our time.

His latest book, The Amazon Management System (Ideapress, 2019), was a Wall Street Journal bestseller.

ON BOEING’S RECENT Q4 EARNINGS call, an analyst asked CEO David Calhoun a simple, difficult question: “How do you change the culture of a big organization?”

“Boy, is that a big question,” he responded.

And it is. Culture is the most-discussed issue facing business leaders right now. From #MeToo to motivating millennials, leaders are being asked to create “purpose-driven” cultures that innovate, grow, respect and, in some cases, flat-out love one another.

Yet, these discussions give CEOs little help in actually homing in on what’s driving their organization. That’s because they encourage CEOs to look in the wrong places. If you really want to know what’s going on in your organization, you need to do what I call a culture audit.

Culture Shock

Let’s step back. What are we talking about when we talk about culture? Whenever two or more people work together, their work together has a social architecture. What is it?

How do they interact with each other, trust each other? Who dominates, and why? How well do they debate and create? What data or unwritten rules do they use in making decisions? What are their motivations, and how driven are they? That’s a lot.

A larger team brings still more elements.

Team members change. They may be from different functional silos, with different backgrounds and access to different sets of data. Many don’t communicate well, or at all.

People from all over the world bring elements of their national cultures. There is often unhealthy competition within teams, and some members may take shortcuts that come to haunt the entire company, as happened at Volkswagen, Wells Fargo and Boeing.

Let’s stick with Boeing for a minute.

Lots of people suggest that what happened with the 737 Max was a “result of the culture.”

That isn’t really useful in helping leaders make meaningful changes. How do they ensure a similar problem doesn’t happen again?

16 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

Decision Points

The answer is to look in the right places, where the elements of culture matter most. In examining Boeing, I would focus on the decision points that resulted in the problems—not the decisions themselves, but the circumstances that produced the decisions. To fix what ails Boeing, you don’t need to understand the whole of Boeing, but you do need to understand where and how it makes key decisions.

To monitor culture, monitor decision points.

The culture at each decision point in the company is what drives corporate performance, what drives output. It can be the intersection among silos where decisions get made. It could be a flow of decisions before a final decision. Ask: Who is involved? Who ultimately makes the decision? How? What data is used? What behaviors are used?

What are those interactions like? Is there intimidation? Do some people dominate?

Through interviews at each decision location in the company’s architecture, you can see the spots that are good and the spots that are not. That’s the culture audit. Then you can start to monitor those areas, maybe quarterly or annually. (Full disclosure, I am working on a software tool to facilitate culture audits. It is being tested in two companies.)

The CEO must get his CFO and CHRO together to define the network of decisions in their areas. They should start from the top down, looking at the decisions the CEO and his or her direct reports are making. Dig in on something common, like pricing. How do these choices get made? What are your decision points? Who exerts influence and who makes the final decision? What information is brought to bear, and what is the behavior of those involved?

Then you can chart decisions about promotions. What is the culture around deciding who will progress? Go to each decision point, and you will see, over time, how clean that process is. This is where—and how—to look at your culture. And how to actually do something about it. CE

Risk shouldn’t be a guessing game.

Make sure you know your score.

You can't manage what you can't measure, so why don't more organizations measure and correlate human behavior to risks? It’s time to handle people risk the same way you handle the rest of your business decisions…with data.

True Office Learning extracts behavioral analytics from everyday training, and brings it together with other data to help you create a comprehensive risk scorecard for your organization.

Ready to take the guesswork out of risk? That’s where we come in.

www.trueoffice.com

LE AD ERS ON LEADERSHIP \ JEFFREY SONNENFELD

SHOULD I STAY OR SHOULD I GO?

What to think about when timing your exit.

Jeffrey Sonnenfeld is senior associate dean, leadership studies, Lester Crown professor in management practice at Yale School of Management, president of the Yale Chief Executive Leadership Institute and author of The Hero’s Farewell.

Follow him on Twitter @JeffSonnenfeld

SURELY THE CLASH, AN ENGLISH punk rock band, had CEOs in mind with their 1982 No. 1 hit “Should I Stay or Should I Go?” This new decade launched with the news that CEOs of varied iconic firms as IBM, United Airlines, Boeing, T-Mobile, L Brands, Bridgewater and NBCUniversal were stepping down in 2020.

This stream of departures is perhaps not surprising, given that average CEO tenure has fallen to five years at larger companies—somewhat disturbing when research suggests it takes roughly two years to truly master the job. Last year, 1,640 CEOs stepped down, a 12 percent jump over 2018—which itself was a record year.

As always, some exits were forced, but the vast majority of prominent departures were voluntary—which begs the question: How do you, as the boss, know when it’s time to go?

I wrote a book on different CEO departure styles called The Hero’s Farewell 30 years ago—recommended reading for any CEO stepping down—but it didn’t address that question. However, working with CEO successions over the past 40 years has surfaced five key sets of motives: 1) Quitting while ahead 2) Mentors passing baton to colleagues 3) Skills changes for sea changes 4) Exhaustion from a fractious board 5) Hostile activist shareholder base 6) New compelling missions 7) A health or family crisis TV host Johnny Carson set a great model for CEOs considering the quit-while-ahead path. After a great 30-year run, while still king of late night, Carson saw competition cutting his audience by 42 percent over five years and advertiser rates falling. In May 1992, 67-year-old Carson made a surprise announcement: “Everything comes to an end. Nothing lasts forever... it’s time to get out while you are still on top of your game.”

Surely, Indra Nooyi’s highly profitable mar-

18 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

ket triumphs coupled with the ESG model of “performance with purpose” reign represented similar career gratification.

Regarding those who pass the baton, inspiring CEOs like Anne Mulcahy of Xerox, Microsoft founder Bill Gates and John Legere of T-Mobile each told me that while they did not feel their missions were complete, they had made a commitment to successors who deserved a chance. Had they stayed on longer, they would have blocked such opportunities.

Others leave to bring needed skills into the corner office. Ginni Rometty of IBM believed a cloud/AI computer scientist with business leadership skills was the right leadership profile for the company she transformed. Boeing CEO Dennis Muilenburg realized he had hit such wall of credibility with regulators and air carriers that his chairman, a battled-tested, trusted former CEO, would bring a new voice.

The CEO’s job is far less fun than the old days of secure stature, fancy clubs and modest travel. Jeff Kindler, former CEO of Pfizer, confided to simply being fed up with the constant backstabbing on his board, crushing scrutiny and governance politics, plus 200 days a year on the road.

A CEO of a huge travel industry firm told me that, despite loving the job, when his ownership base became 40 percent activists, he had no choice other than to get shareholders a great stock price by selling out to a competitor.

Then, there are those lured by a challenge, such as Dave Cote, who left TRW to turn the troubled industrial conglomerate Honeywell around, and former eBay CEO John Donahoe leaving ServiceNow to take the helm at Nike.

Finally, there’s “spending more time with family,” especially common among CEO when they or loved ones face a health crisis. Starbucks entrepreneur Howard Schultz, Verizon transformer Ivan Seidenberg, BNSF’s Mike Rose and Dunkin Brands’s Nigel Travis all exited voluntarily to enjoy family and spend time pursuing other life interests.

Increasingly, CEOs realize their identities are not defined by their business cards and titles. And that is a healthy trend. CE

T H O U G H T L E A D E R S H I P P R O V I D E D B Y G A LT & C O M PA N Y

CREATING SHAREHOLDER VALUE THROUGH M&A—AND BEYOND

M

OST ACQUISITIONS by public companies fail to create long-term value for their shareholders. However, a few companies have demonstrated the ability to consistently generate shareholder value through inorganic investments. What distinguishes these companies is a set of decision standards and integration skills that lead to outstanding returns on external investment.

How are value-creating acquirers different?

Value-creating corporate M&A programs focus on three key deal requirements: • Attractiveness: What are the economic profit pools in the target’s market, what is the level and driver of the target’s share of those economic profit pools, and how does the target’s business model align with the acquirer’s?

• Affordability: What are the opportunities to recapture acquisition premiums and how do they compare to the transaction price?

• Integration: What are the key actions needed to align the company’s strategy, operations and governance in order to improve cash flow and re-capture the control premium associated with most acquisitions?

When deals fail to create value for the acquirer, it’s usually because one or more of these considerations has been overlooked or insufficiently vetted. The most common problems are: 1) Strategy Failures: Buying companies that are exposed to markets with limited economic profit pools and/or have little ability to capture share of those economic profit pools. This often occurs when management pursues topline growth without fully understanding the concentration of profit pools in the target’s markets and where and why the target captures share of those profit pools.

2) Pricing Failures: Paying transaction prices that exceed the value of the target after accounting for all combination benefits and costs. This is usually the result of overly optimistic assumptions about the size of cost and revenue synergies, the incremental investment that may be needed and especially the time required to realize those opportunities. It can also be due to internal political pressure to “get the deal done” that makes it more difficult for well-intentioned managers to walk away from deals when prices become economically unattractive.

3) Integration Failures: Failing to define the actions and accountabilities needed to align strategies and operations of the combined business and establish the governance conditions to track integration, manage performance commitments and drive further value creation post-integration.

Acquirers who consistently create shareholder value recognize these challenges and use repeatable, systematic processes, prescribe required deal information and set clear decision “gates” with explicit go/no-go criteria to develop thorough plans for integrating both operations and strategy well in advance of the deal close. Most importantly, executive management and Boards of these companies constantly reinforce the discipline to stick to these governance standards.

What governance conditions and leadership characteristics ensure disciplined M&A practices are followed?

Clear definition of winning: Successful acquirers begin with a clear understanding that “winning” means sustainably creating more shareholder value than peer companies. They also know that “winning” in the capital markets requires “winning” in their product and customer markets—by creating more value for customers and capturing a larger share of the resulting profit pool than competitors. They also “win” with employees, attracting and retaining talent better than competitors. When companies do so, they build a reinvestment advantage that strengthens their competitive position and drives superior shareholder returns over time.

TransDigm Group, a highly acquisitive provider of commercial and military aerospace components, is one such company. Management and the Board set the clear objective of delivering “Private Equity-Like Growth in Value with Liquidity of a Public Market” and target total shareholder returns of 15 to 20 percent per year. The company exceeded that goal over the last 10 years, delivering compounded annual total shareholder returns over 35 percent, well above its peers and in the top decile of the S&P 500.

Focus on where and why shareholder value is being, or can be, created: Over 100 percent of the value of most businesses is generated by less than 40 percent of employed capital, while 25 to 35 percent of employed capital often destroys shareholder value. Successful acquirers

understand that value is concentrated. They begin with a granular and quantified view of where and why the markets, products and customer segments in their own business, as well as the target’s, are and are not economically profitable over time.

A robust understanding of these concentrations provides useful due diligence intelligence and builds a concrete understanding of where and how to improve the value of the combined businesses. This value growth “agenda” of opportunities sets a clear upper limit for the transaction price and helps the company build specific and robust integration plans well ahead of close.

Illinois Tool Works (ITW) employs its “80/20 Front to Back” process to identify the 20 percent of its businesses, markets, products and customers where profit, growth and value are concentrated. Following its process, ITW selectively pursues acquisitions that will be accretive to its long-term organic growth and where it can improve profit margins to ITW-caliber returns. ITW aims for its acquisitions to match its own margins by the end of year seven and generate a 10-year return on invested capital above 20 percent. As a result, ITW has grown economic profits by 14 percent compounded annually over the last five years, nearly triple the rate of its peers, and delivered top quartile shareholder returns.

Manage to a continuous value growth agenda: Having already identified and defined plans for realizing the largest value creation opportunities in the combined business, upon closing these acquirers can immediately begin executing the required integration actions. This provides clear direction and structure for post-close activities, including accountability for achieving each opportunity and managing progress of each initiative against strategic and financial objectives.

The same process that helped form this integration agenda also drives additional organic value growth post-integration. By updating key facts about where and why value growth opportunities are concentrated in the combined business and adjacent markets, management can refresh its value growth agenda with new opportunities, evaluate new strategy alternatives and resource allocation choices, and continue managing execution.

Danaher Corporation uses its Danaher Business System (DBS) to guide the company’s culture, organic growth and M&A activity. The company implements DBS across its entire portfolio, describing it as “who we are and how we do what we do”, and uses it to drive “a never-ending cycle of change and improvement”. This dis-

Danaher, ITW and TransDigm Total Shareholder Returns vs Peers As os 12/31/2019

1-Yr TSR

3-Yr TSR

5-Yr TSR

Danaher

49.6%

26.1%

19.3%

Weighted Peer Average

31.5%

25.7%

18.6%

S&P 500

31.4%

5.3%

11.7%

Danaher Outperformance vs. Peers

+18.1%

+0.4%

+0.7%

ITW

45.6%

16.4%

16.3%

Weighted Peer Average

37.2%

15.3%

10.8%

S&P 500

31.4%

15.3%

11.7%

ITW Outperformance vs. Peers

+8.4%

+1.1%

+5.5%

Transdigm

84.4%

39.7%

30.5%

Weighted Peer Average

31.0%

19.1%

14.6%

S&P 500

31.4%

15.3%

11.7%

Transdigm Outperformance vs. Peers

+53.4%

+20.6%

+15.9%

Source: Company Financials, Factset

ciplined and continuous approach to managing the value of its businesses has helped Danaher deliver compounded total shareholder returns of 19 percent over the past five years, outperforming the S&P 500 by nearly 8 percent.

Implement differentiated business models and differentially allocate resources: TransDigm, ITW and Danaher are examples of firms with distinct and disciplined management processes. These capabilities lead to highly differentiated business models and disciplined allocation of resources and enable M&A to contribute to shareholder value growth long after acquisition integration, resulting in sustainable shareholder returns well above their peers.

Sharpen organizational conditions and capabilities: Mergers and acquisitions are inherently challenging and require a disciplined focus on execution long after closing the transaction. Ultimately, the success of the deal and continued value creation of the acquirer depend on a culture where employees think and act like entrepreneurial owners. When continually applied, the same principles and processes that help make value creating acquisitions also build the ongoing management capabilities that maximize organic value creation and ultimately create a formidable reinvestment advantage that is difficult for competitors to overcome.

The Authors

Marc Bromstad, Director, Galt & Company and Reid Swanger, Consultant, Galt & Company.

C OVE R STORY

GROWTH ENGINE Kevin Lobo nearly doubled Stryker’s revenue with a high-revving deal machine that shows no signs of slowing. He takes us under the hood.

S

ince Kevin Lobo became CEO of medical device company Stryker in 2012, revenues have grown from $8 billion to over $15 billion—a phenomenal track record. Ask him how he’s done it—as we did at our recent Healthcare CEO Summit—and the answer is pretty simple: deals, each and every one made with an intense focus on customers.

In the medtech industry in which Kalamazoo, Michigan-based Stryker plays, he says, innovation “can only be derived if you’re very, very closely collaborating with customers… We don’t want to invent anything without iteration with our clinical customers.” For Lobo, that translates to a decentralized structure that that pushes power and acquisition strategizing down through the organization and as close to the customer as possible.

“We spend 6.5 percent of our revenue on R&D but don’t have any central R&D at all,” he says. “And even though we do a lot of deals, we only have two people in corporate business development. All the other business development people—28 people—sit in each of our divisions.”

The result? Stryker excels at identifying emerging opportunities across a broad spectrum of medtech categories. And Lobo has built

22 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

ANGELO MERENDINO

INTERVIEW BY DAN BIGMAN

MARCH/APRIL 2020 / CHIEFEXECUTIVE.NET

/ 23

a culture capable of repeated success in deal-making. During his tenure, he’s done 55 deals across a spectrum of products and companies—robotics, surgical devices, pharmaceuticals—each and every one strategically chosen to strengthen a category position.

The acquisitional tear shows no sign of abating. In November, Stryker announced

“If you’re gonna be put in as division president, you better be spending a good percentage of your time looking at deals.” plans to acquire Wright Medical, which develops medical devices for the extremities and biologics markets, for $4.7 billion.

The move came shortly after the company closed on a $500 million deal to purchase Mobius Imaging and its robotics-oriented sister company, GYS Tech.

“It’s really by design that wherever we play we want to be absolute leaders in the field,” Lobo explains of Stryker’s “tuck-in” approach to deal-making. “When a hospital customer is thinking, ‘Who should I be partnering with for neurosurgery or orthopedic surgery?’ We want to be the obvious choice. All these deals, frankly, have just strengthened our category position just as much as a new product would. It’s just bought versus made.”

Chief Executive recently had the opportunity to talk with Lobo about his approach to deal-making. Excerpts of that conversation, edited for clarity and length, follow.

Since 1941, Stryker has found a way to kind of see the next bend in the road and deliver growth every year. How do you sustain that kind of performance?

The simplest way of describing it is customer focus, that first pillar of the strategy.

I have customer focus, I have innovation, I have globalization, and then cost transformation. We do customer focus structurally.

Every single business has their own sales, their own marketing, their own R&D, their own business development. They have this whole sense of accountable businesses,

24 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

and they’re very close to their customers.

So when customers are changing, we see things early. At my previous company, occasionally we would hear about a competitor buying a company. I would call and say, “What’s this company they’re buying?”

[They’d say], “We don’t know who they are.

But let’s go find out.”

In my years at Stryker as CEO, never once have they said, “We don’t know.” Our businesses always know who they are, they know the owner, we don’t like it because it’s too expensive, or we have intellectual property problems or an internal project that we think is gonna be better than that. I get those three answers every time.

How does that play out on the ground?

They sit in the same building. Sales, marketing, R&D, business development, they’re all in the same building. Salespeople say, “Hey, I saw this great product in surgery.”

They call marketing, marketing looks over to R&D and says, “Hey, did you hear about this product?”

If R&D says no, they say, “Well, let’s go visit them.” Then they get on a plane. If it looks interesting, they call the BD people in.

But they’re not asking anybody at corporate. We’re not involved. They can do all this on their own inside the walls of their building. That’s the way we’re structured.

It’s a structural advantage.

We have a strong balance sheet, so they know that as soon as they see something interesting, they can come to us, and funding has never been a problem. The question is, can you make the business model work and the economics work? And if we pass on something, they know that they can come back the next week with another deal.

They have to convince themselves they can make the numbers work, because one thing we are is very tough on the deal model.

Whatever deal model they put together, it doesn’t go on a shelf, it goes into their bonus plan for the next two years. And if they’re missing their numbers, they feel the pain. We’re very tough on holding them accountable to the metrics of the model. It’s very entrepreneurial that way.

Does everybody see themselves as a bit of a deal maker?

Absolutely. It’s an expectation. If you’re gonna be put in as division president, you better be spending a good percentage of your time looking at deals.

Do you have a matrix in place where you say, “Okay, that many billion and this percentage must come from new products?”

That’s something that Stryker used to track.

We called it the Freshness Index. I killed the metric because it’s a useless metric for some of our businesses. I’ll give you an example. Our knee business, we have the oldest knee on the market. It’s 13 years old. Two of our competitors launched new knees three or four years ago, and we’re taking market share from them with an older knee. Why? Because instead of investing in a new knee, we chose to invest in robotics to help put the knee in perfect balance, and we chose to invest in one component of the knee that’s 3D printed so that you don’t need to use bone cement when you do the procedure.

For that business, the Freshness Index would have encouraged the wrong behavior, which is “We better launch a new knee so that we score high on the Freshness Index.” It really varies by business, how we choose to measure the level of innovativeness. So, the orthopedics groups decided not to invest in that. It ended up being a very good bet. We’re the fastest-growing implant company in the market, have been for the last four or five years. It was counterintuitive. It’s the first time in the history of orthopedics that the oldest knee is the fastest-growing knee.

That particular decision—acquiring Mako Surgical with the goal of bringing robotassisted surgery to knee replacement procedures—did that come out of being very close to the customer?

Yeah. Of all the deals we’ve done, that was the most controversial. It was my first big deal as CEO. Even my customers were very upset, it was a disruptive idea. Most of the deals we do are simple tuck-in products, they’re obvious. It’s a need that we have, we

Masters of M& A A sampling of the 50-plus deals done on Lobo’s watch.

Core business Adjacency

Synergetics USA’s Neruro Portfolio

Pending

Vertebral Compression Fracture Portfolio from BD

Patient Safety Technologies Berchtold Holding

Concentric Orthovita

2011 Memometal Neurovascular

CoAlign Innovations, Inc.

Trauson

2012 Surpass

2013

Invuity, Inc.

NOVADAQ Technologies, Inc.

K2M Group Holdings, Inc.

SafeWire Restore Surgical LLC, DBA Instratek

Muka Metal

2014

Mako

Ivy Sports Medicine, LLC

2015 CHG Hospital Beds

Pivot Medical Small Bone Innovations

2016 Sage Products

Stanmore Implants Worldwide Physio-Control International

Hygia Health Services

2017 Vexim

2018 SafeAir AG Entellus Medical

Wright Medical

2019 Arrinex, Inc. Mobius Imaging & Cardan Robotics

HyperBranch Medical Technology, Inc.

MARCH/APRIL 2020 / CHIEFEXECUTIVE.NET

/ 25

fill the gap. This was very disruptive.

The idea of robotics in orthopedics, most customers told me, “We don’t need it.” The consultants that we work with, the orthopedic surgeons that use our products, said, “We’re not asking for it.” But that’s one of the areas where there were a few surgeons who really believed in it. As a new person coming into orthopedics, I said, “These implants are all good now. But it’s not about the implant now, it’s about how well the knee is balanced and how much soft tissue we’re disrupting.” If we can do a less invasive procedure, the surgeon can have better information with a 3D plan, so they can make it more personalized. It’s gonna be a better outcome. But that was more of a bet that we made.

Our stock went down 5 percent the day we announced the deal. We were loudly criticized and even our own customers didn’t support us initially, but now we’re coming up on 800 robots in the market.

And almost one out of every three knees is going in with a robot. So it’s been wildly successful, but it wasn’t that obvious.

“I’ve learned you need to rip the Band-Aid off quickly. We used to be way too nice to these companies.”

But it is obvious that if you can have a machine—our saw blade—that’s cutting your bone in your knee that will only let you cut where you’re supposed to cut—even if the surgeon tries to cut the PCL ligament, they can’t do it—why wouldn’t you want some robot that absolutely 100 percent guarantees you’re not gonna cut or even nick the PCL? The culture question in M&A is usually the difference-maker. How do you handle integrating acquisitions?

It’s changed over time. We were not great at it early. When I became CEO, Stryker was a very sporadic acquirer. It would do one or two deals a year, maybe. And we had this balance sheet that was very strong. Frankly, investors thought it was inefficient. Having a great

26 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

balance sheet 10 years ago or 20 years ago— AA or AAA—was a badge of honor. Now, investors are like, “Why are you wasting your money? Give it to us. Give us the dividends or buy back stock or spend it.”

I felt that the company’s decentralized structure lent itself to being able to get into new spaces. I thought we were being overly conservative as a company with our cash.

So I said, “We need to get more aggressive on M&A. I wanna use the money for acquisitions.” Shareholders were screaming at me, they wanted me to buy back stock.

This was seven years ago, buybacks were in vogue. I refused. I took a lot of heat from that. Now, those same investors, by the way, are like, “Hey, what’s the next deal you’re gonna do?”

You have to listen with one ear to the investors. You can’t listen with both ears.

I refused to buy back the stock because it’s not a long-term value creator. We started getting busy on deals. We started doing acquisitions. The more you do, you get better at it, you build muscle, you build know-how.

Initially, we were buying products.

When you buy technology without all the people, it’s easy to integrate. You buy the technology, and you stick it into your own R&D team. They usually have distributors, so you get rid of the distributors. It’s actually very easy.

The hard ones are when you buy a company that brings across a lot of people and have to figure out, okay, now what? What I’ve learned is you need to rip the Band-Aid off quickly. We used to be way too nice to these companies. “Hey, you wanna keep the same name? Fine, you can keep your name.

You guys wanna dress this way or whatever do this, that’s fine.”

We used to just feed them with money and investment and leave them alone. We don’t do that anymore. Basically, within a year, we want all the signage to be Stryker.

We want the mission values on your wall.

We always had a habit of putting in a Stryker finance people and a Stryker HR person, typically. But now we’re starting to see in certain organizations, let’s put in a Stryker sales leader. Let’s sprinkle in a

Born to Run Since Lobo started at Stryker in October 2012, the company’s share price has more than quadrupled.

$240/Share $200 $160 $120 $80 $40 2012 2013

2014

2015

little bit more Stryker. We don’t want to completely change the culture because each division is unique and we’re buying them for a reason. If they’re a really good innovative company, the last thing I want to do is kill their innovation.

But one of the tricks I do, a very subtle way of forcing change, is to take the board of directors to visit within a year. Two things happen: When the board goes to the visit, I don’t have to ask them to put the Stryker signage up. They know the board of directors is coming so they do it themselves.

It gives them a lot of motivation.

We also learned that with the [number of] deals we do, we need some people who spend all their time on integrations in HR, in operations and in certain functions in legal and finance. We have to carve out a few resources that are virtually full-time on deals because there’s so many of them. There’s always the next deal coming. That wasn’t the case six years ago. We’ve had to tweak our model. We have a common playbook. Now, people get their computers right away on day one. These things matter for people. When they show up on the first day the deal’s closed, we show up, they sign up for their Stryker benefits. Little things like that really helped.

Does that give you a strategic advantage?

That people want to do a deal with you

2016

2017

2018

2019

versus somebody else because they’ll have a better outcome?

Definitely. Our brand is very strong at treating people we acquire well and growing the businesses that we acquire. We’re not good at cutting costs. We’re good at growing.

So, someone selling to Stryker knows their employees will be taken care of and that we’re gonna grow the business, invest in the business. So, if someone outbids us, we’ll lose the deal if they outbid us by a lot.

But if we get the price close, they prefer to sell to us—especially if it’s like a lot of the companies we buy, which are private, and sometimes family-run businesses. They care about the legacy.

You seem to hire a lot of veterans at Stryker. Why? We’ve had great success with men and women coming out of the military. It’s the sense of purpose. What works at Stryker are people with high drive and low ego.

And that is hard to find.

High drive, low ego is rare. We screen for humility. It’s a trait that we look for. Some of the companies we buy, the owners of those companies don’t have humility. And they’re out the door. For R&D engineers who aren’t leading large teams to have a bit of an ego is okay. We find a way to massage them. But to lead teams, you can’t have big

MARCH/APRIL 2020 / CHIEFEXECUTIVE.NET

/ 27

ego. You have to have high humility. But high drive, high humility is hard to find. In the military, it’s about the mission. It’s team first, me second. They’re organized. They’re disciplined. They have the drive for results, that is what we look for in Stryker.

In our mission statement, it said, “Together with our customers, we are driven to make healthcare better.” “We are driven,” those words were very, very thoughtfully chosen. People who don’t have high drive don’t do well at Stryker. But people that who don’t have that high humility, low ego, they get chewed up and spit out really fast.

If I give an order to a division president and they don’t think it’s good for the customer, they are free to disagree with it and disobey it—no problem. Everyone in the center at Stryker is at the surface of

“In the military, it’s about the mission.

It’s team first, me second. They’re organized.

They’re disciplined. They have the drive for results, that is what we look for in Stryker.” the divisions, they’re the center of gravity of our company. The hardest part is hiring people in the corporate staff. Those people need the lowest ego, because nobody cares what your title is at Stryker.

That’s got to be a blow for someone who comes in as CFO or whatever and suddenly they’re in service of everybody around them.

What I say is that people in the corporate centers of Stryker or shared services, including me, are in the sell business, not the tell business. I have to sell the divisions on why they should do anything. If I tell them what to do, and I’m not selling them on why to do it, they’re not gonna embrace it. It won’t work. If you don’t have the patience and the fortitude to sell something, go work somewhere else. Go work for a centralized company. I’m not saying they’re bad, it’s just not us.

Our process is not efficient. It’s painful, being in the center and having to go to each division president and get them to buy into

28 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

something, it takes longer. But that’s how it works. Every company has their own magic, and that’s ours.

How is your marketing and sales model changing?

Let me start with what’s not changing. The first thing that’s not changing is we are continuing to specialize our sales forces more and more at a time when many of our competitors are actually increasing the size of the product bag. I believe focus drives growth.

But what’s changing is we’re building tremendous marketing capabilities. We were not a great marketing company seven or eight years ago. We created a marketing council, which was voluntary, every division could send whoever they wanted. We created a common curriculum, a common language around what we call big-picture marketing training. We’ve become a much more sophisticated marketing company, better price discipline, better price management, better segmentation of customers.

What difference does that make, the idea of marketing, with all of the different things you make? Stretchers have nothing to do with knees.

No, they don’t.

So how does the brand work with that?

It’s an umbrella. Mako is the brand for robotic in orthopedics. We have a knee called Triathlon, we have the Big Wheel bed. The products have their own name. But underneath that, we have this umbrella called Stryker, which has a common look and feel.

Frankly, it’s just as powerful inside the company as it is with our customers. It creates a lot more power. And it’s very unifying for the organization.

And the sales specialization, is it by product type or by customer type?

By call point. If the call point is a nurse, we wrap the products around that OR nurse.

If the call point is a neurosurgeon, how do we bring everything we can to the neurosurgeon?

I say the term “call point” very inten-

tionally because it’s different than what you’ll hear other CEOs or companies say.

We use that term very intentionally. The example I’ll give you is when we bought Physio-Control, which is the defibrillator company, which Medtronic used to own and sold because it was not a good performing business. They sold to private equity, and we bought it from private equity. When we did that deal, investors said, “Medtronic said this wasn’t a good business.” I said, “Well, it’s not good for them because it’s not a cardiovascular product. It’s an emergency medical technology.”

If you open the back of an ambulance, the two most expensive items in the back of that ambulance are the powered cot—the Stryker—and the defibrillator. It’s an EMT product, not a heart product.

And guess what? We have a division that’s laser-focused on that call point. Now I just put another product in their bag, focused on the call point. We know how to innovate and create new cycles of this innovation. That thing’s been growing double digits for us since we bought it. When Medtronic had it, it was growing 2 percent, 3 percent—that’s why they sold it.

So we think of things in terms of call point. And as soon as the bag starts to get too big, or we have some division or a sales rep that selling to two or three call points, as soon as we can fill it in with extra products, then we split.

So instead of operating like Jim Collins’s flywheel, you’re running hundreds of little flywheels all over the place?

That’s exactly right. Call-point driven. How do we become really excellent in that call point and solve their problems in the call point? How do we become indispensable to them? It gives us new ideas. We try all kinds of crazy things inside the call points.

Obviously, the Amazon effect is impacting everybody. So maybe can you address that point?

Sure. Most of the products we sell are acute intervention products. If you have a car accident and your leg has to be repaired, consumerism isn’t going to help. No one’s

“[Physio-Control]’s been growing double digits for us since we bought it. When Medtronic had it, it was growing 2 percent, 3 percent. That’s why they sold it.” gonna say, “[Make] sure that rod is a Stryker rod,” because they’re under anesthetic. They’re asleep.

So it is irrelevant for certain portions of our business. But not for anything elective. Knee replacement is a great example.

Patients care a lot now. They want to know, “Hey, is it being done with robotic surgery, and what’s the implant?”

I would say we’re in the very early stages of consumerism. It is an undeniable trend in the future. People are going to care much more. They’re going to want to know more.

We’re in its infancy right now.

But it will accelerate, and we’re already talking to our teams about how we start telling our story. We’re even doing patient stories on our website, so people [can] go on the website and say, “Hey, if I have a need for this procedure, let me see a patient describing what they went through.” It has to be real and authentic.

And so those are things we’re starting to do even getting, you know, more patient advocacy. But it’s a great question. It’s coming. CE

MARCH/APRIL 2020 / CHIEFEXECUTIVE.NET

/ 29

Help your high potential new and middle managers develop their leadership abilities Chief Executive Network is proud to introduce the Next Level Leaders Seminar. Join us for a 3-day intensive leadership training where Next Level Leaders immerse themselves in a leadership curriculum to learn about themselves as leaders and develop their own personal leadership philosophy.

• Develop your own leadership philosophy • Develop your communication skills • Improve your decision-making ability • Be ready to apply what you have learned

NEXT LEVEL

LEADERS CHIEF EXECUTIVE NET WORK

For more information, go to: NextLevelLeadersSeminar.com

Next Level Leaders Seminar May 13-15, 2020 | Chicago, IL A three-day intensive program that guides and empowers rising leaders to find and hone their leadership style and abilities for the betterment of their companies and their personal lives.

And it is only the beginning...

B E ST PR ACTI C E S

MOVING THE CHAINS Trade, tech and disease have CEOs rethinking their supply networks. Some strategies.

BY DALE BUSS

W

32 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

ATERLOGIC AMERICAS HAS BEEN MANUFACTURING workplace drinking-water machines in China for 25 years and shipping them to the United States, but the company is moving output of its products for the domestic market to a 110,000-square-foot plant it just built in Dallas. Manufacturing costs will be as much as 15 percent higher there, but lower transportation outlays will offset much of that.

The imposition of a 25 percent U.S. tariff on Waterlogic’s imports from China played a big role in the decision, which came way before the coronavirus epidemic began jangling global supply chains in January. “We’d been considering building another plant for most of a decade, and 18 months ago we began researching whether it was feasible,” says Casey Taylor, CEO of the U.S. arm of United Kingdom-based Waterlogic. “Then the tariffs kind of pushed it over the edge.”

Waterlogic’s move is an apt illustration of the new dynamics of the supply chain. President Donald Trump’s tariff war with China, overhaul of the long-standing trade pact with Mexico and Canada

and saber-rattling against other countries shook up CEOs’ global decision-making, as the president tried to skew every aspect of U.S. trade relations to favor domestic companies—and American manufacturing.

“Whatever your view of the president, he wanted to ingather manufacturing by creating greater investment in the United States,” says Clifford Sosnow, co-chair of the trade and investment group at Canadian law firm Fasken. “And he’s achieved that.”

But Trump’s geopolitical gambits—and now Brexit in Europe—only added to factors that already were prompting chiefs to examine and refine corporate supply chains at every point from the farm field to the ocean freighter, from the factory floor to the front stoop of an e-commerce customer. These dynamics include rising labor costs abroad, pressures to shorten transportation lines, disruption by digital transformation and demands to incorporate “sustainability” in every link of the chain. China’s coronavirus added yet another factor.

“The more CEOs get into it, the more they realize that the key challenges they need to solve are more driven by consumer trends and industrial revolution than by tariffs per se,” says Arun Kochar, a partner in A.T. Kearney’s strategic operations practice.

Chief Executive reached out to CEOs and industry experts across the country to get a read on where all this is going and how they’re handling issues impacting supply chains.

TRADE TURMOIL

The $250 billion in new tariffs on Chinese imports that Trump began phasing in during late 2018 prompted Tom Shorma simply to tack them onto invoices for the industrial belts made by WCCO Belting.

Sales flattened out, and long-time customers hesitated to place new orders. “They don’t want to be on the wrong side of a change if the surcharge goes away next month,” says Shorma. “This makes things much more difficult to manage, and lead times are shorter.”

After 26 years manufacturing in China, Waterlogic moved its output to Dallas, where higher overhead will be offset by lower transportation costs.

Shorma has been searching for new sources of quality belt materials, “but when you have custom-engineered fabrics that also are patented,” he says, “you’re very careful about sharing all of the proprietary designs.” At least Wahpeton, North Dakota-based WCCO has cut in half the five years it used to take to verify a new supplier—if any can be found.

The dilemma illustrates a truism. “Some small and mid-size companies are feeling pain to a greater extent than large companies because they have fewer resources to quickly source products in another location,” says Lisa Walker, managing partner of the global industrial practice for executive recruiters DHR International.

Despite the reduction in tensions embodied in Phase One of the U.S.-China trade deal signed in January, more CEOs are resigned to tariffs as a prominent policy feature, at least as long as Trump is president. “Many believed that the trade war was going to be temporary, maybe six months or so, to send a message,” says Rosemary Coates, a supply-chain consultant and executive director of the Reshoring Institute. “But now they have to plan for it being semi-permanent.”

In fact, she fears that popular new manufacturing sources such as Vietnam also “may be subject to tariffs in the future. The Trump administration may go after these other countries one by one to try to force companies to evaluate bringing manufacturing back to the U.S.”

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

/

33

“Traditional tooling is cheaper in China, but it takes longer. Now with 3D printing we can do the tooling in the United States.”

—James Tu, CEO, Energy Focus

of intellectual-property protections.

Overall, China is just less welcoming to foreign companies than a decade ago, “when they were hungry and poor,” says Harry Moser, founder of the Reshoring Initiative. “Now, they’ve gotten more or less what they wanted, and they’re trying very hard to have their domestic Chinese companies become dominant world players, which means they can’t help Americans.”

Thus, more companies are scouring other Asian countries looking for new low-cost sources of supply. But they can be hard to come by. Vietnam’s industrial capacity is only a fraction of that of China’s, for instance, while India remains a land of manufacturing opportunity but still woefully underdeveloped.

Many CEOs instead are “nearshoring” output to Mexico if possible. About 40 percent of the content of products assembled in Mexico now originates in the U.S. and is then shipped south of the border for assembly into finished goods, while there is only 5 percent of such content in Chinese-made imports to this country, according to Moser. “Either U.S. manufacture or the Mexico solution works well for American companies,” he says.

AFTER CHINA

Tariffs, of course, aren’t the only reason American companies are rejiggering their supply chains. Energy Focus, a Solon, Ohio-based supplier of LED lighting, imports from China as well as Taiwan but hasn’t faced additional tariffs. But CEO James Tu is still steering production of an important new wireless lighting-controls line to the company’s plant in Cleveland.

“Traditional tooling is cheaper in China, but it takes longer,” explains Tu. “Now with 3D printing we can do the tooling in the United States. It’s more expensive, but we shave two to three months off time-tolaunch. And that will be important because we’ll have rapid iteration in these products.”

Rising labor costs in China relative to the U.S. and to other low-cost countries are another reason CEOs are shifting. And many CEOs want to bring crucial technologies closer to the vest through U.S. production, given continued Chinese flouting

34 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

ADAPTING TO TECH

As technological advances revolutionize supply chains, companies must keep up.

Warehouse staffing firm Atlanta-based ProLogistix, for instance, came up with a program to train operators of new standup forklifts that can save up to 30 percent of the aisle space in a large warehouse, compared with traditional sit-down forklifts that have a relatively huge turning radius.

Then there’s big data and digitization, which can greatly enhance efficiencies and drive down costs. Applications include using the IoT and machine learning for predictive asset maintenance to avoid unscheduled down times, optimizing delivery routes, minimizing delays and providing more precision in inventory management.

Amazon’s tightening grip on e-commerce and the supply chain necessary to support it is one of the ultimate applications of big data and, of course, is trans-

Disruptive Tech Summit May 7-8, 2020 I Cambridge, Massachusetts

A.I. Platforms. Big Data. The Gig Economy. Quantum.

Disruption isn’t just about technology.

It’s about new business models turning every industry upside down. Are you prepared?

MIT’s top minds will help you understand the real-world business applications and new business opportunities.

ANDREW MCAFEE Co-Founder, MIT Initiative on the Digital Economy; Author, Machine, Platform, Crowd: Harnessing our Digital Future

MICHAEL CUSUMANO Author, The Business of Platforms; SMR Distinguished Professor of Management, MIT Sloan School of Management

JONATHAN BYRNES Board Member, MSC Industrial Direct​; Senior Lecturer, MIT​; Author, Islands of Profit in a Sea of Red Ink​

MARK WEBER Strategy and Operations Lead,​ MIT-IBM Watson A.I. Lab

Save $500 off the current rate with code CEO500MA ChiefExecutive.net/DisruptiveTech

FUTURE-PROOFING YOUR SUPPLY CHAIN Spotting potential problems on the horizon? Here’s how to prepare.

Get flexible: “It used to be a fairly simple game, but you’ve got to build in flexibility for the long term now,” says Geoff Pollak, managing director for Alvarez & Marsal Corporate Performance. Andi Owen, CEO of office-furniture maker Herman Miller, finds himself doing just that.

“We watch every tariff announcement closely, and it’s made us more proactive,” he says. “We’ve been contingency planning for Brexit for years now, for instance.”

Be patient: Signs suggest the tariff merry-goround between the U.S. and China may be winding down. A CEO’s strategy still could be, “Pay the tariffs and ultimately see what happens because your business growth is still offsetting the risk of rising costs,” says Larry Harding, Head of North America, TMF Group.

Make new calculations: CEOs should consider changing their “total cost of ownership” calculus from “point solutions to a scenario-value-planning analysis,” Pollak says. “Before, you could say, ‘This widget is going to cost me $4.50, maybe $4.58 if tariffs inch up. Now, something could happen in the political or economic environment that could make the cost $7.50.

And that could hurt not only you but others in your supply chain and your competitive set. You’ve got to look at it much more from a 360-degree point of view.”

Appeal for exemptions: Allegheny Technologies CEO Robert Wetherbee got so desperate for a Section 301 U.S. tariff exemption on materials his company imports from Indonesia that he wrote a Wall Street Journal op-ed to plead with President Trump.

The exemption process can be a slog and, ultimately, fruitless, but small and mid-market companies can have an edge. “What often is a successful argument is the financial impact on companies of increased tariffs,” says Laura Siegel Rabinowitz, a supply-chain expert at the Greenberg Traurig law firm.

ISlides CEO Justin Kittredge recently switched sourcing footwear production from China to Vietnam.

says Justin Kittredge, CEO of ISlides, who recently moved his company’s output to Vietnam from China.

Beware issues elsewhere: However, CEOs can run into thickets of complications in new countries, such as whether China remains the ultimate country of origin in cases where only component manufacture is moved out of it. And there are proper labor standards.

“U.S. Customs is taking those issues very seriously and making spot checks in places such as Bangladesh and Cambodia,” Siegel Rabinowitz says. “Labor is cheap, but companies have to be very careful.”

Use any downturn: While capital investment in supply chains may look less inviting at a time when the threat of an economic slowdown looms, any deceleration in business could present an opportune time for it.

“Most CEOs want to use their supply chain for competitive advantage and want to innovate during a downturn so they come out of it in a more powerful position,” says Jonathan Eaton, lead of the supply-chain practice for Grant Thornton consultants.

Sniff out incentives: Waterlogic got big incen-

Get help: Supply-chain challenges such as cyber-

tives from Texas to consolidate its U.S. operations there, for instance, while Canadian auto supplier Axiom received financial help from Ohio to build a plant in Toledo.

Other countries offer sourcing incentives, too. “With a bigger national initiative to get manufacturing, there can be lesser taxes and help with the work environment,”

security and international e-commerce usually mean mid-market and small-company CEOs should seek outside help. Do they understand, for example, how value-added taxes apply to their online sales in EU countries? “Many CEOs know how to spell ‘VAT,’ but that’s the extent of their expertise,” Harding quips.

36 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

FAST TRACK YOUR SUCCESS THIS YEAR

Get advice from peers in your industry

Imagine the value a CEO adviser who has built a company in your industry. Now imagine the power of a network of 8-10 of these peers helping you—and each other—succeed.

Chief Executive Network (CEN) is the CEO network that delivers answers to the critical challenges you face. By meeting face to face with non-competing peers who are in the same industry and run comparably-sized firms, members leave each meeting with proven ideas.

√ Improve performance √ Avoid costly mistakes √ Make informed decisions

ChiefExecutiveNetwork.com

Peer ahead with Chief Executive Network

“We took an existing facility and, instead of tearing it down and putting all the rubble into landfill, we decided to repurpose and rebuild it using the framework we had.”

—Michael Watt, CEO, Daiya forming business for manufacturers and retailers alike. Its Prime subscription service is just Amazon’s latest—but perhaps most effective—lever. “For many customers, if it’s not Prime and free delivery in two days, you’re not buying it,” says Nicole Reich, director of Retail Bloom, a Rochester Hills, Michigan-based e-commerce consulting firm. “That’s forcing all other dot-com sites and all marketplaces to play

by Amazon’s rules.”

Integrity of data also is increasingly crucial across the supply chain, sometimes in surprising ways. Banks, for example, have grown concerned about cyberattacks on ATM machines as they’re manufactured and shipped. “Malicious actors can build

back doors into the technology, collecting and analyzing the data for fraudulent purposes or even prompting the machine to dispense cash in an unauthorized manner,” says Kelly White, CEO of the risk-monitoring company RiskRecon.

GETTING GREENER

Up and down the supply chain, environmental sustainability has become a sine qua non. “Customers are wanting to understand what part of supply-chain sustainability is part of your argument for business now,” says Larry Harding, head of North America for professional-services firm TMF Group.

Much of what’s required is new sourcing of commodities—and the need to provide the “traceability” and transparency customers are now demanding. Mars recently committed to a “100 percent sustainable supply chain” via projects such as collaboration with advocacy organizations to develop new cacao varieties with higher yields, increased disease resistance and higher quality—so the chocolate giant can cut back on deforestation and environmental degradation.

Meanwhile, Matthew Wadiak, co-founder of the Blue Apron home-delivery service, has launched Cooks Venture, a “next-generation food company rooted in regenerative

SMART MANUFACTURING SUMMIT June 2-4, 2020 / JW Marriott / Indianapolis, IN / SmartManufacturingSummit.com FEATURED SPEAKERS:

Tom Bell, Chairman & CEO, Rolls Royce North America

Nigel Thurlow, Chief of Agile, Toyota Connected

38 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

Exclusive Facility Tours will include:

Lou Rassey, CEO, Fast Radius

Kim Ryan, President of Coperion & SVP, Hillenbrand

2020 CEO TALENT SUMMIT

SEPTEMBER 24–25, 2020 | BOSTON, MA GAME-CHANGING SOLUTIONS TO YOUR GREATEST TALENT CHALLENGES Join your CEO peers and leading experts to make talent your organization’s strongest competitive advantage. We’ll explore relevant lessons from sports, the military and leading corporations to help you:  Lead Through Transformation  Apply Habits of Winning Teams  Drive Employee Engagement  Retain Your High-Performers  Win at Culture

Outstanding program. Very applicable. Speakers were tremendous and agenda was appropriately comprehensive.

—John Tyree, Morgan Stanley, and 2019 CEO Talent Summit attendee

Save $300 with code CEOMA300 CHIEFEXECUTIVE.NET / MAY/JUNE 2019 To learn more and register, visit: ChiefExecutive.net/CEOTalentSummit

/ 55

AUTOMAKERS GO AMERICA FIRST DONALD TRUMP HAS MADE a rhetorical punching bag out of the auto industry for supply-chain decisions during the five years of his first campaign and presidency, variously picking on GM, Ford and Toyota.

But make no mistake about it, the industry has been moving his way on the ultimate economic issue of his administration: American jobs.

Expect the next big example at June’s North American International Auto Show in Detroit. Toyota will be cutting way back on traditional activities that promote its fresh models and technologies, says Ed Laukes, group vice president of marketing for Toyota in the U.S. “Instead, we’ll focus on an Americanization message about our investment in the U.S., our plants, supply chain, our dealers. That continues to resonate with consumers.”

Consider also Ontario-based Axiom Industrial opting to build its first facility in the U.S.: a $20 million plant in Toledo, Ohio, specializing in thermoplastic injection molding that will create 250 jobs.

Japanese transmissions producer Aisin Seiki is reportedly sniffing out U.S. locations. “If they want to stay in the business, they have to invest in factory locations in the U.S. so manufacturers here can fulfill their content requirements,” says a top automaker executive.

Brembo North America is “trying at all costs to localize some major components that we import,” reports Dan Sandberg, CEO of the U.S. arm of the Italy-based brake maker, which employs about 800 people in Homer, Michigan. “It’s just easier at the end of the day,” he says. “If you’re close to suppliers and they’re reasonably compet-

itive, we think any difference in cost can be made up quickly by logistics and transportation advantages, and they’re front and center to you here in North America.”

Replacing decades-old NAFTA, which Trump said was unfair to the U.S., is the U.S., Mexico, Canada Agreement that was finally approved by Congress and signed in December, boosting U.S.-content requirements in cars sold in this country and guaranteeing more hours by highly paid American auto workers will go into the vehicles.

According to the Center for Automotive Research, U.S. auto production is expected to increase by more than 7 percent over the next four years, while Mexico output will be down by nearly 4 percent and Canadian output will decline by nearly 10 percent.

Thomas Doll, president of Subaru North America, identifies a potential speed bump. “Unemployment is so low, it is difficult for us to find good workers for the production line” in Lafayette, Indiana. “We’ve got to get more creative to bring in workers from other locales.”

agriculture and transparency” that sells poultry raised in a newfangled supply chain.

There’s also pressure to support sustainability via other links in the supply chain. And companies like Daiya—which quadrupled its capacity to make plantbased cheese-analog products in a 400,000-square-foot plant in Burnaby, British Columbia—are responding.

“We took an existing facility and, instead of tearing it down and putting all the rubble into landfills, we decided to repurpose and rebuild it using the framework we had,” says Daiya CEO Michael Watt. The company also made the plant LEED-cer-

40 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

tified, meaning that an international third-party organization verifies it was designed and built using a range of green tactics. “It was an expensive and complex choice to make, but it was the right thing for the environment.”

Doing the “right thing” for sustainability looms large indeed. For the past few years, for example, Procter & Gamble has been packaging shampoo and hair conditioner in bottles made from 25 percent plastic waste collected on beaches.

“From an economical standpoint, it doesn’t make any sense,” concedes Virginie Helias, P&G’s chief sustainability officer.

“But it’s such a big brand idea.” CE

PE-BACKED CEO SUMMIT December 8-9, 2020 Nasdaq Marketsite | Times Square, NYC Navigating The Unique Leadership Challenges Of Private Equity-Backed Companies CEOs of PE-backed companies have unique opportunities—and pressures. This intensive 1.5 day workshop is custom-built to help you tackle these specific challenges, with world-class experts and peer-learning from fellow CEOs and seasoned PE leaders with decades of hands-on experience.

You’ll come away with new ideas for:  Managing the PE Firm Relationship  Winning the Culture and Talent Equation  Growth Strategies that Work—Now  Nailing the Exit from the Very Beginning

Save $300 with code CEOMA300

To learn more and register, visit: ChiefExecutive.net/PEBackedSummit CHIEFEXECUTIVE.NET / MAY/JUNE 2019

/ 55

SMART MANUFACTURING SUMMIT JUNE 2-4, 2020 INDIANAPOLIS, IN

Anticipate trends and seize new opportunities with insights from manufacturing leaders: TOM BELL Chairman and CEO, Rolls-Royce North America

NIGEL THURLOW Chief of Agile, Toyota Connected

LOU RASSEY CEO, Fast Radius

KIM RYAN President, Coperion; SVP, Hillenbrand; Chairman of the Board, Kimball International

Save $300 with code CEO300MA 42 / CHIEFEXECUTIVE.NET / MAY/JUNE 2019

The Only Event for Mid-Market Manufacturers Get inspired by CEOs from across the nation who are applying automation and new technologies on the factory floor to reduce costs and improve speed Learn how A.I., IoT and other emerging technologies are reshaping the basic business models in manufacturing Discover proven recruiting solutions that other manufacturers are applying to attract leaders, hire the right talent, and retain valuable employees Leverage your ERP systems and data to improve operations and optimize your supply chain performance

GO BEHIND THE SCENES ON EXCLUSIVE FACTORY TOURS:

Unrivaled Quality You’ll visit a 1-million-square-foot Manufacturing, Assembly & Test (MA&T) campus in Indianapolis to explore how Rolls-Royce marries advanced manufacturing and zero-defect standards inside the world’s most sophisticated jet engines for military and civil customers.

Unequaled Scale Go inside the 3.2-million-squarefoot flagship production facility for the world’s largest manufacturer of mediumand heavy-duty automatic transmissions and electric hybrid systems to learn how it builds the key propulsion components for millions of vehicles that keep the global economy moving.

Unparalleled Precision Explore MTM’s 600,000-square-foot manufacturing facility, specializing in large, complex CNC milling and turning machining used in some of the most precise applications on earth, including America’s nuclear submarine fleet and the Orion spacecraft.

Uncompromising Accuracy Attendees looking for insights into scaling the manufacture of high-sensitivity components won’t want to miss this visit to one of the largest producers of precision instrumentation in the world. We’ll explore how it creates some of the most sophisticated sensors from inside its state-of-the-art manufacturing facilities.

Learn more and register at ChiefExecutive.net/SmartManufacturing CHIEFEXECUTIVE.NET / MAY/JUNE 2019 / 43

L E A D E R SHI P

WHAT’S YOUR MOTIVE?

44 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

INTERVIEW BY DAN BIGMAN

THE IDEA CAME TO HIM IN A ROOM FULL OF CEOS. Patrick Lencioni, the bestselling author known for business classics like The Five Dysfunctions of a Team, The Advantage and The Ideal Team Player, was sitting in on a roundtable conversation with a dozen or so chief executives from a variety of businesses—small, medium, large. He was talking about improving teamwork and organizational health by first creating a culture of trust among the CEO and their senior reports when he noticed something odd. At least to him.

“I was giving them advice, pretty standard, and many of them were writing it down,” he says. “But there were a number of them that were rejecting it out of hand. I asked myself, Why would these people reject it? Suddenly, it occurred to me: If they’re doing this job for their own entertainment or pleasure, they wouldn’t want to do any of the things I’m saying. Building a healthy organization is simple but difficult, and leaders who have the wrong motive are just not that interested.”

The result of that unsettling moment is The Motive (Wiley, 2020), Lencioni’s 12th—and perhaps his most incisive—book. At a pivotal time for leadership in America, with critics across the political spectrum targeting CEOs as prime suspects for society’s ills, Lencioni enters the fray with a more elemental, more uncomfortable question: Why do you want to be a leader in the first

PHOTOS BY JAMIE RAIN, LUNCH BREAK HEADSHOTS

At a pivotal time for leadership in America, bestselling author Patrick Lencioni digs into the most existential, uncomfortable question of all: Why do you want to be a CEO in the first place?

CHIEFEXECUTIVE.NET CHIEFEXECUTIVE.NET / MARCH/APRIL / MARCH/APRIL 20202020 / 45 / 45

‘IF YOU’RE DOING IT FOR THE WRONG REASONS, ADVICE ON HOW TO BECOME A BETTER LEADER ISN’T GOING TO MAKE ANY SENSE.’ place? Your answer, he says, has everything to do with your effectiveness as a CEO—and the success of whatever organization you’re running.

To Lencioni, who has counseled hundreds of CEOs and executive teams across virtually every industry over the past two decades, leaders operate on a spectrum from those who feel they have been put in charge as a reward for past performance and are seeking personal reward as a result, to those who feel the job as a near-crushing responsibility for the lives and performance of the people they are leading. The latter are willing to do the hard things they need to do to live up to that responsibility, even if it means suffering (his word) as a result.

That range in mindset—reward vs. responsibility—colors virtually every aspect of how those leaders do their jobs. How they manage or don’t manage their reports. How they run meetings. How they treat others.

How they spend the minutes of their day.

And, ultimately, whether or not they succeed at becoming the kind of person that other people want to follow.

“A person needs to check their motivation for becoming a leader before they can get into how to be a better leader,” he says.

“Because if you’re doing it for the wrong reasons, advice about how to become a better leader isn’t going to make any sense.” Chief Executive talked with Lencioni recently about what really drives many CEOs—and what should. What follows was edited for length and clarity.

What do you see as the right motives to lead, and what are the wrong motives?

And how do they play out in an organization? What happens with each?

The right motive to lead is because you’re accepting the responsibility of helping other people live a better life through their work,

46 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

through what they’re doing for customers and for the organization. That’s a burden. It’s a sacrifice. The economics of leadership are not great. When I say economics, I mean the personal economics. Any great leader knows that they put far more into it for others than they get out of it for themselves. And they’re okay with that because that’s why they became a leader in the first place.

The wrong motive for leadership is to benefit themselves, for the admiration of others, for money or, more often than not, they want just to do what’s fun and enjoyable. They go into the job thinking, “What am I going to get out of this?” And then, when the difficult parts come up, the really sacrificial parts that only the leader can do, they say, “Why would I do that? That won’t benefit me.”

How do people who don’t have what you term responsibility-centric leadership end up in positions of leadership if it backfires so badly?

Oftentimes, they’re pursuing that big job.

And they’re doing all the hard things because they know that’s what is going to get them the opportunity for the job. Then, when they get the big job, they say, “Oh, thank God, I’ve arrived. I’m reaping the rewards for a lifetime of hard work. I’m now the CEO.” Whereas, a responsibility-centered leader would say, “I’m doing it for the right reasons all along, and when I get the top job, now more than ever I have to be willing to take on the burden for the people I lead.”

Imagine a professional football player.

The day they get drafted, they say, “Oh, I’m gonna sign a big contract. I’ve finally arrived.

All the hard work in my life is finally paying off.” Versus somebody that says, “Now that I’ve been drafted, I have a huge responsibility to perform for this team and to work hard because now everything is on the line.” Is it a reward being promoted to this top job? Is

it a responsibility that you’re willing to be burdened for?

Some people can be a leader with the right motive, but they can get complacent and slide. They can say, “You know, I’ve been doing this for a long time, and I’m kinda tired.”

I’ve seen this so many times among CEOs. They start avoiding the hard things they have to do for the organization. I’ve done it myself. I’ve had periods where I balked at the really hard things because they were unpleasant. I was thinking about myself, not the organization and the people I led.

How does this differ from “only the paranoid survive?” How does doing the right thing for others differ from being paranoid about getting things done and being overtaken?

I love that Andy Grove quote. The question is, should you be paranoid because you’re afraid of looking bad? Or should you be paranoid because you’re afraid of letting down the organization and the people who work there, and your investors and your customers? If your ego is big enough, there are ego-centered leaders out there who lead for the wrong reason, who still find a way to succeed because they’re so concerned about their reputation or their wealth that they’ll do these things purely out of pragmatism and self-interest. But that’s a rarity.

What are some of the characteristics of the reward-driven leader versus the characteristics of the responsibility-driven leader? How would we know them apart in the wild?

There are certain things that reward-centered leaders don’t like to do and often delegate or abdicate even though they’re the only ones who can do them. That’s one way you can assess. A reward-centered leader is not always going to have the difficult conversations with people they need to, and if a leader won’t, nobody else will. I’ve seen so many leaders get to a point where they just will not confront people about behavioral things. They’ll say, “I don’t want to do that.

That’s unpleasant. I’ll ask HR to do it.” And it’s like, “No, no, no. That’s your job.”

A lot of them don’t want to manage their

direct reports anymore. I often hear, “I’ve been managing people my whole life. Now I’m just going to hire people that are adults and that don’t need management.” There’s no such thing. So they balk at managing their people. They say, “Well, fire them if they don’t do a good job. They shouldn’t need my management.” What they’re really saying is, “Management is kinda tedious. I’ve done it my whole career. I’m tired of it.”

Another characteristic is they don’t run good meetings, and they try to avoid as many meetings as they can. They’ll say, “I’ve been going to meetings my whole life. I’ve never had a choice. Now, I’m going to cut the number of meetings I go to. The ones I have, I’m just there to get what I need out of it.” I fell like yelling, “No, no, no. Your job is to make meetings intense and focused and productive. If you don’t, nobody else will.”

So, you can tell if a person is reward-centered by the things they avoid doing. And responsibility-centered by leaning into the things that are unpleasant, but necessary.

In the book, you talk about changing the CEO title from chief executive officer to chief executing officer. What’s the difference between the two, and what’s the point of pointing out that difference?

One is a noun, and one is a verb. Being the CEO implies that you do things, and that you’re accepting the verbs that go with the job. You’re not just occupying the position, but you’re actually doing things.

Now, the different activities I describe in the book are not the full range of activities that the CEO has to do. They’re the most common things that I find CEOs don’t do if they have the wrong motive. They’re the five verbs, if you will, that they abdicate or delegate inappropriately. Having difficult conversations regularly with people in the organization is one. Running focused meetings. Managing your direct reports.

Constantly reminding people of what matters. The fifth one is taking responsibility for building your team. It’s not HR’s job.

You are the primary team-building officer.

If the CEO isn’t driving the effort to build his or her team, it won’t happen.

What I say is, your job is a verb. If I ask

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 47

‘LEADING AN ORGANIZATION CAN BE AN EXTREMELY LONELY JOB. AND IT REQUIRES A SELFLESS LEADER TO DO THAT JOB WELL.’ you, “Do you love your wife?” And you say, “Yes.” My next question would be, “Do you take her on dates, show her affection, tell her you love her?” If you reply, “No. I don’t do any of those things, but I love her.” Well, you might feel like you love her, but you’re not actually demonstrating it through your actions. A person might say, “Well, I’m the CEO, and I like being the CEO.” That’s great, but you’re not doing the things that indicate you’re actually a responsible CEO.

For those of us who are nowhere near perfect in this, can you really change your motives?

Yes. You can change your motives. You can accidentally drift into reward-centered leadership because you get bored, complacent or tired. In which case, either fight that or you should get out of the job.

Switching your motive to the right one never happens accidentally. You have to ask yourself, “Am I willing to be burdened for the good of others even if it’s not exactly what I want to do?” I like to say that if you’re the CEO, you should have the hardest job in the company—by definition. A CEO should ask themselves, “Am I willing to do the hardest job here? Am I willing to do things that nobody else would want to, but that I have to because if I don’t, nobody else will?” It literally comes down to asking yourself every day as you go into the office, “Are you going there looking for enjoyment and pleasure, or are you going in there to—I’m going to use the word—suffer for others?” Not that it’s all unpleasant.

The point is, most people in society don’t become leaders to suffer. They become leaders to get. It’s something that our society has allowed to creep in, and I’m hoping that’s about to change.

Do you think that it has changed in society over the past, you know, 20-30 years?

48 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

Yes. I think that we live in a society that sees all forms of suffering as pointless.

I think our society is pretty soft. If you look at the lives we lead, things are pretty good. And leaders in general say, “Hey, you should maximize what you get out of life and minimize cost.” There used to be a feeling in society that said you’re a parent, you’re a leader, you’re a soldier, and you do hard things, and that’s its own reward.

When I talk about suffering, I mean sitting down with somebody and having a really hard conversation with them about what they need to do to change and what’s best for the organization. I once worked with a CEO who, instead of telling a guy that he was replacing that it was time for him to go, he just hired somebody for his position and avoided meeting with him for more than a month simply because he just didn’t want to have to say, “We’re letting you go. Here’s what I saw.”

I think we want quick fixes, we want easy fixes. I’m 54 years old. I was born in 1965. I think I’ve had pretty much a frontrow seat to this whole idea of we want things easy and we don’t want to suffer or sacrifice for others.

Because here’s the thing: Only the CEO of a company can do the things a CEO can do. You can’t delegate them. You can delegate marketing and strategy and finance.

Yet, so many CEOs are more comfortable in those areas because that’s where they’ve been trained, that’s what they enjoy. So, they deviate to those things, when in fact they need to be doing the things that only the CEO can do. And those things are, by definition, hard.

Leading an organization can be an extremely lonely job. And it requires a selfless leader to do that job well. There’s an element of selflessness that is true in any great leader.

And yet, I don’t think selflessness is very valued in our society anymore.

What practical advice would you give to someone about changing their motives?

I would say this: If you think you might be leading for the wrong reasons, know that your people see it. And they are disappointed. It causes them difficultly in their day-to-day jobs. Have the courage to first acknowledge that you do get sidetracked by doing things for yourself rather than for the people you lead. Admit it to them and let them know that you are going to be changing, that you are going to be adopting a more appropriate motive.

When reward-centered leaders abdicate critical responsibilities, the people on their team read between the lines. When leaders go to meetings and check out of things that aren’t interesting to them, the message they’re sending is loud and clear: “I’m only interested if it serves me.” When they see one of their direct reports exhibiting behavior that is detrimental to the team and fail to have a difficult conversation, the team’s conclusion is, “She doesn’t want to do that because that would be uncomfortable. It would make our lives easier. But she isn’t going to go there.” The truth is, our people see when this happens and are often left to face the consequences of our inaction.

So, I think the first thing is, know that your people see it. Admit to yourself that you’re doing it. Acknowledge to them that you’re going to change. And watch how glad they will be when they start to see a change. I think there are a lot of people doing this, who are humble enough to admit it and change. It’s not that they’re doing it intentionally. Some of them just think, “Well, this is how I thought it was supposed to be.”

And yet you talk about the end of servant leadership. Why? Why don’t you like that term?

Calling something servant leadership implies that there’s a different kind. All leadership is servant leadership. That’s what it should mean to lead. I am at the service of the people I lead. The reason I don’t like it is because it implies that the other kind is

acceptable. It’s like saying servant parenthood.

Oh, so, that means selfish parenthood is an option. Or “I’m an other-centered spouse.” Oh, you mean a self-centered spouse is okay?

In other words, saying “servant leadership” is redundant. If you’re not a servant leader, you’re not a leader at all.

The thing is, even the most wellintentioned leaders can slip into the wrong motive for leading. Any leader can become reward-centered at times in their career and believe it is about them more than the people they lead. The good news is, there’s hope for them if they can be honest and change their motive. Otherwise, perhaps they shouldn’t be leading. CE

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 49

WASHI NG TON

K STREET

CONFIDENTIAL These days, everyone needs eyes, ears and a voice in the nation’s capital.

Here’s how to find yours.

BY DAN FISHER

O

ONCE UPON A TIME, BILL GATES BUILT Microsoft into a software colossus from his home base in Seattle with only a single lobbyist to watch after his interests in Washington D.C. Then, Washington taught Gates a hard lesson.

As competitors like Netscape and Oracle complained to Congress about Microsoft’s hardball business tactics, the Justice Department opened an antitrust investigation and eventually sued to break the company

50 / CHIEFEXECUTIVE.NET / MARCH/ APRIL 2020

up in 1998. By 2000, Microsoft was spending millions of dollars a year on a small army of lobbyists to counter attacks by competitors and regulators and elect a more sympathetic president in George W. Bush.

The late-breaking offensive worked— Microsoft settled without being broken up—but the company’s ordeal taught the tech industry it was no different than the railroads, steel mills and automakers that came before it. In Washington, clout counts.

And the only sure way to acquire clout is to hire lobbyists who know how to convince, cajole and threaten lawmakers into seeing things their way.

Detroit has automobiles, Los Angeles has the movies, but in Washington the signature industry is lobbying. The public-interest reporting organization ProPublica lists 17,138 current “lobbying representations,” according to federal records, each one

representing a company, a nation or an individual who thinks it necessary to pay somebody else to plead their case before Congress or the regulators.

These days, Microsoft lists at least 20 different lobbying firms it pays as much as $110,000 a quarter to advise on everything from tech policy to immigration, while embattled former Nissan chief Carlos Ghosn reported paying BGR Group, a Republican-affiliated shop run by former Mississippi Gov.

Daniel Fisher, a former senior editor at Forbes, is Chief Executive’s legal affairs columnist.

CHIEFEXECUTIVE.NET / MARCH/ APRIL 2020 / 51

Haley Barbour, $300,000 last year for help in “resolving an international legal issue.”

“At some point, the game is on, and you can’t know and don’t know if that’s next month, next year or three years from now.

But you have to be on the field,” says Joel Johnson, a former Clinton administration senior adviser who now runs Glover Park Group, a 170-employee D.C. firm whose clients include Disney, Apple, Fox and Lyft.

“You can’t just come off the bench in overtime and hope to influence the outcome.”

Tech, once again, is the biggest game on K Street. With Congress turning its attention to Google, Facebook and Amazon, and whether they hold too much power over the Internet economy and how people receive the news, lobbyists, naturally, are raking in tens of millions of dollars to advise these new tech titans how not to become the next Microsoft.

Some of the money is going to traditional firms like international law firm Akin Gump, for years the highest-billing lobbying outfit in Washington, with five former members of Congress in its policy shop. But they’re also hiring newcomers like Fulcrum Public Affairs, a Democrat-oriented firm run by Obama administration alumnus Oscar Ramirez and Dana Thompson, a former chief of staff to Democratic Congresswomen Maxine Waters and Sheila Jackson Lee. In total, Google spent more than $3 million on outside lobbyists last year, according to government records, on top of more than $11 million it spent on its internal Washington operation.

As Microsoft demonstrated, the risk of going it alone in the nation’s capitol is too high. The classic example of a lobbying fail may be the 10 percent tanning-bed tax that appeared in the Obamacare bill sometime in 2009. The bill’s architects were looking for non-essential services they could tax to

Some describe the latest battle as “Google versus the world,” with Facebook and Amazon lumped in on the Google side.

52 / CHIEFEXECUTIVE.NET / MARCH/ APRIL 2020

help pay for the Affordable Care Act’s expansive benefits. At one point, they focused on Botox injections, but the dermatologist lobby killed that idea. So then they targeted the largely mom-and-pop business of tanning salons—and at the last minute exempted “qualified physical fitness facilities,” which in plain English are corporate health-club chains. This wasn’t an accident.

Capitol Counsel Partner Shannon Finley, a former senior staffer for Democratic Sen. Max Baucus, even brags about the tanning-bed coup on her website bio. Capitol Counsel’s longtime clients include the American Academy of Dermatology, Amgen and Bayer, and the firm cites more recent success, including helping to defeat changes in Medicare Part B drug reimbursement.

Pharmaceutical companies have traditionally been the biggest spenders in Washington, which is natural given their vulnerability to regulations and even tiny changes in government healthcare spending programs. They spent $295 million last year, according to OpenSecrets, multiples of the $75 million Internet companies spent.

The growing power of Google, Facebook and Amazon is forcing them to spend more to monitor and influence legislators and regulatory agencies, however, as disgruntled competitors and public-interest groups stoke the fires of grievance and suspicion.

Some describe the latest battle as “Google versus the world,” with Facebook and Amazon lumped in on the Google side, and a broad array of competitors, from Netflix to Internet startups, on the other. A recent hearing in Colorado demonstrates the challenges these new industry leaders face as their power and wealth draw the attention of Congress. At that hearing, lawmakers heard a number of smaller competitors, including Sonos, Tile and PopSockets, complain that Google, Facebook et al were trying to squelch them with anticompetitive tactics.

“I think it’s clear there’s abuse in the marketplace and a need for action,” said GOP Rep. Ken Buck of Colorado. That looks like a win for Erik Huey of Platinum Advisors, which charged Tile $10,000 in the fourth quarter of 2019 for advice on “issues related to the technology industry,” according to

WASHINGTON’S 10 TOP LOBBYISTS IT IS EASY TO CALCULATE THE TOP-GROSSING LOBBYING firms in Washington, thanks to detailed records they submit to Congress on a quarterly basis. But to construct our list of top lobbyists, we went behind the dollars to identify the firms and individuals who get the call when a company needs to buy the influence only years in the Capitol and a thick Rolodex can provide. Some firms have been around for decades and work both sides of the political aisle. Others, like Ballard Partners, have surged to prominence thanks to their Republican Party credentials and ties to Trump.

One thing is common to all of them: Count on spending a minimum of $10,000 a quarter for eyes and ears in Washington—and probably a lot more.

Akin Gump With $31.2 million in 2019 billings, international law firm Akin Gump also is the biggest lobbying firm, according to the Center for Responsible Politics’ OpenSecrets database.

Bipartisan staff includes Brian Pomper, former chief international trade counsel for the Senate Finance Committee; Hunter Bates, former counsel to Sen. Mitch McConnell, and Arshi Siddiqui, former policy advisor to Sen. Nancy Pelosi.

Top clients include Amazon, Altria, Indian tribes, Philip Morris International. Recent victory: representing AARP to help repeal a 2017 provision of the tax code that required non-profits to pay taxes on benefits like parking and transportation.

Brownstein Hyatt Farber Schreck Denver real estate attorney Norman Brownstein built this regional law firm into a D.C. lobbying giant with $28.7 million in revenue last year. Brownstein’s edge comes from deep, bipartisan connections with legislators and bureaucrats (Norman Brownstein reportedly was feted at a 2016 party by Democratic Rep. Nancy Pelosi and GOP Sen. Mitch McConnell). Prominent partners include former Justice Dept. assistant attorney general William Moschella and former Senate staffer Al Mottur. Clients include Altria, the American Gaming Assoc., Anheuser- Busch, FedEx and PricewaterhouseCoopers.

BGR Group Bills itself as “bipartisan” but this firm brought in $21 million last year mostly thanks to its close ties to the Republican Party. Founded in 1991 by former Mississippi Gov. Haley Barbour and Edward Rogers, a Reagan White House official, BGR also employs former Reagan and Bush administration official Lanny Griffith and Loren Monroe, who served on the George H.W. Bush campaign. Blue-chip client list includes the nations of Azerbaijan and Bahrain, American Beverage Assoc., Physicians for Fair Coverage, the American Healthcare Association, Caesars, Airbus and Impossible Foods.

Squire Patton Boggs With former GOP Sen. Trent Lott and Democratic Sen. John Breaux on the masthead, this Washington law firm ranks among the most powerful lobbying outfits with special clout in the defense and energy industries. Squire Patton advises Airbus on military helicopter contracts, BAE Systems on defense and took in $150,000 a quarter last year from Americans for Carbon Dividends, an industry-backed group pushing for a carbon tax.

Ballard Partners Veteran Florida Republican operative Brian Ballard opened Ballard’s Washington office in 2017, just in time to ride the Trump wave to $14 million in lobbying revenue last year.

Important clients range from the American Kitchen Cabinet Conference, which pays $50,000 a quarter for advice on China trade regs, to General Motors, British American Tobacco and DISH Network.

CGCN Group Prominent partners include Matt Rhoades, who managed the Mitt Romney campaign, and Sam Geduldig, a former staffer for Speaker of the House John Boehner. Blue-chip client list includes Microsoft, Bloomberg, MasterCard and Grant Thornton.

American Continental Group The headliner here is David Urban, a former chief of staff to Sen. Arlen Specter who joined the Trump campaign and led the candidate to his crucial victory in Pennsylvania. Clients include 7-Eleven, Amgen, Bayer, News Corp. and Nike.

Glover Park Group Run by former Clinton communications official Joel Johnson, this once-unabashedly Democratic shop specializes in legislative strategy, advertising and crisis communications with strength in the tech industry. Clients include Apple, Cisco Systems, Coca-Cola, Keurig and Lyft.

Subject Matter Co-founder Steve Elmendorf was chief of staff to House Democratic Leader Dick Gephardt and a senior adviser to the Gephardt, Kerry and Clinton presidential campaigns before turning to lobbying. Clients include Nestle, Ford, Orbitz and MetLife.

Fierce Government Relations Kirk Blalock and Kirsten Chadwick, both former George W. Bush aides, are said to be very close to House and Senate Republicans. Clients include Delta Air Lines, eBay, Home Depot and Stanford University.

CHIEFEXECUTIVE.NET / MARCH/ APRIL 2020 / 53

HOW TO HIRE A VOICE IN WASHINGTON WASHINGTON IS AWASH IN LOBBYISTS. But hiring the right one requires more than a thick wallet. Some firms specialize in getting close to influential politicians, others with finessing the regulatory process. Here are some tips on pairing the right lobbyist with your company’s needs.

• Lobbying is relationships. There’s a reason so many firms are stocked with former members of Congress, legislative staff and regulators. They understand how the system works, and they know who they can get on the phone. A compelling argument isn’t worth much if nobody listens.

• Politics matter—but not as much as they used to. If your issue hinges on support from the executive branch, by all means seek out lobbyists aligned with the party in power. Not only do they have the right relationships (see above), but they were probably deeply involved in getting the president elected, either as campaign officials or by having close ties to the big contributors. For four years, at least, those connections can be essential.

• Both parties count. Most legislation is a long, slow crawl, and it helps to have a lobbying firm that can work with Republican and Democrat majorities in Congress. If your issue involves specific legislation or is perennial like tax or trade policy, better hire lobbyists from both sides of the aisle.

• Power is diffuse. Fifty years ago, lobbyists traded on their tight relationships with a few key figures in Washington: committee chairs, regulatory chiefs or the president’s staff. But power is far less concentrated today. A successful lobbying campaign might involve a crafting a compelling policy argument, followed by sophisticated social media messaging, grassroots activism and good old-fashioned arm-twisting in Congress. A firm that can’t do it all might not be able to deliver the result you need.

• Bring your checkbook. Ex-Congressmen aren’t cheap, and neither are the experienced corporate lawyers or campaign-finance chiefs who stock most lobbying firms.

The most influential outfits in Washington charge a minimum of $10,000 a month for important assignments, and big corporate clients frequently pay $500,000 a year or more.

54 / CHIEFEXECUTIVE.NET / MARCH/ APRIL 2020

federal lobbying records. Sonos is advised on competition policy by Mehlman Castagnetti Rosen & Thomas, which is stocked with former officials from Republican and Democratic administrations. Both firms declined comment.

Donald Trump’s surprise victory in 2016 shook up the political establishment and created opportunities for new entrants.

Just weeks after Trump’s inauguration in January 2017, longtime Florida Republican lobbyist and key Trump fundraiser Brian Ballard opened a Washington office and signed up clients from Amazon to Uber who were willing to pay tens of thousands of dollars a month to gain access to the new occupant in the White House.

From a Washington nonentity, Ballard vaulted to one of the biggest lobbying firms in the Capitol with more than $18 million in revenue last year, according to OpenSecrets. Ballard’s newly signed clients included MGM Resorts International and private prison operator GEO Group, which got a multimillion-dollar contract to operate an immigrant detention facility soon after signing a $100,000-a-quarter lobbying contract with the firm.

Ballard’s ascent was rapid, but he is already hiring Democrats to help position the firm for the future. A company that is new to Washington might do well by hiring a lobbying firm aligned with the current regime, but over time it’s important to have influence over every element of government—and constantly shifting public opinion. With Congress divided and power diffuse, lobbying for a piece of legislation or regulatory change has become similar to running a political campaign, says Johnson of Glover Park. Firms devise sophisticated policy, communications and social media programs to undergird any high-stakes Washington lobbying effort.

“There are very few single-party solutions or one-target solutions, where you say, ‘All we need to do is get somebody to get to Trump, or the majority leader of the Senate, or the Speaker of the House,’” says Johnson. “The days of hiring the former chief counsel of the chairman of a committee to fix your issue are gone.” CE

2020 LEADERSHIP CONFERENCE NOVEMBER 5-6, 2020 | Phoenix, AZ

Accelerate Growth and Profitability at the Nation’s Premier Senior Leadership Conference The 2020 agenda will tackle your top leadership priorities, including: • Attracting, training and retaining exceptional talent to create the next generation of leaders • Achieving long-term success with a high-functioning team • Building and motivating a world-class sales organization • Preparing for future economic and demographic shifts that will impact your business

FEATURED SPEAKERS DR. MARSHALL GOLDSMITH Author, What Got You Here Won’t Get You There and Triggers

PETER ZEIHAN Expert in Geopolitics Author, The Accidental Superpower

Save $300 with code CEOMA300

To learn more and register, visit: ChiefExecutive.net//LeadershipSummit CHIEFEXECUTIVE.NET / MAY/JUNE 2019

/ 55

BEST IDEAS 2020

TECHNOLOGY & CYBERSECURITY

One way or another, every leader today is in the tech trenches.

Lessons from the front lines.

FOR CEOs, TECHNOLOGY IMPLEMENTATION CAN BRING an exhilarating rush—or it can be their bête noire. But every business leader today recognizes the importance of getting their arms around technology and using it to take a major step forward for their companies, whether it be in the arena of artificial intelligence, ERP, cybersecurity, advanced manufacturing or something else.

To help you out, Chief Executive turned to eight fellow CEOs who have been dealing with or planning for significant technology implications for their own companies or who guide organizations that help others adopt the next new thing. Most of these folks didn’t start their careers having anything to do with—or maybe any interest in—the kind of big leaps in technology that they’re overseeing today. But as all forms of new technology have swept through business, they’ve stayed ahead of the surge.

And that’s what every CEO must do.

Several of our eight CEOs offer advice on dealing with the ubiquitous impact—and the infinite possibilities—of AI. Another chief explains how to win over employees and customers who may be skeptical about a company’s next big technological step. There’s also a head’s up that voice-recognition technology is the next big thing for all businesses, perhaps surprisingly starting with B2B companies.

We hope these ideas, excerpted from interviews, give you some insights for your own technology implementations—and maybe some extra enthusiasm. And we thank these CEOs for sharing their lessons, hard-earned or otherwise.

56 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

SOFTWARE

ARTIFICIAL INTELLEGENCE

OWN ERP YOURSELF

TRY AI IN 2020

JACK STACK, CEO SRC Holdings, Springfield, Missouri

DAVID OSBORNE, CEO Virgin Pulse, Providence, Rhode Island

We are the U.S. leader in remanufacturing—rebuilding previously sold or worn-out products—to OEMs in the agricultural, industrial, automotive and other markets.

We’ve got lots of locations. And we are in the middle of installing a new ERP [Enterprise Resource Planning] system companywide.

My biggest piece of advice about that is for CEOs to get as quickly as they can to the point where both sides of the coin—your IT department and your implementers—take the need for actually installing a new ERP system very seriously. And that’s up to you.

What happens over time is that under your old ERP system, people create their own spreadsheets because they’re so frustrated with a centralized IT department.

It doesn’t give you the service you need, or it costs you a tremendous amount of money. So, people at various locations start writing their own HR systems, their own CRM systems, and before you know it, you have a bag of worms. Moving someone from one department to another requires their understanding of a completely different system.

We’re writing a new song with our new ERP system and getting everyone singing from the same songbook. But like with every implementation, we had 12 months of backand-forth to get the software people and the users to fall in line with each other. You can just expect initial failure on implementation.

And CEOs aren’t that educated in terms of what ERP is going to do, just that it’s going to boost productivity. So, people have been after you for five years to do it, and you’re kind of flying by the seat of your pants.

That’s when you have to get the software people and the user people in the same room, and as CEO say, “Damn it, this is going to work, so don’t come back in here pointing fingers. I don’t even want to hear that it’s not going to work.” You can’t be understanding or sympathetic. And, at that point in time, it begins to work.

Because their attitude is different—they have no choice. The CEO told them to shape up and is no longer sympathetic to the difficulties of implementation.

We work with employers to help employees enforce their personal “wellness” efforts, ranging from kicking bad dietary habits to getting more sleep.

We keep adding capabilities, and one of the keys is using artificial intelligence to massage information that will help our platform become more predictive of individuals’ health risks. We can use data analytics and AI to match people to the right types of habits and programs for them and, in the future, to actually do coaching via bots.

Whatever business they’re in, CEOs should be ambitious about finding ways to implement AI. It can be intimidating because it’s so broad. But put the right investment in organization and structure in place and capitalize on the data you collect. AI can be contagious.

To go along with that big vision, though, you should start small. Get the initial piece under your belt, then you can advance from there. Having a big vision around AI is great, but roll it out, piece by piece. Then let it evolve. Change the culture and become an analytics-first company even if you’re able to roll out just the smallest component.

And along the way, market your early wins, both internally and externally. Every part of your organization could be interested in thinking about AI if you have a vision or a strategy, from sales to marketing to back-office functions. And if you celebrate wins externally as well, then they’ll flow back internally, too.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 57

LEADERSHIP

WIN OVER THE MUSHY MIDDLE CHRIS MAHER, CEO OceanFirst Bank, Toms River, New Jersey We think about technology as hardware, software and apps.

It’s important stuff, but even more important than that are the cultural implications of using technology and how it gets adopted by employees, partners and customers. And the most difficult part of that process is to win over the people in the middle, who aren’t sure about it but can be gained.

Our big gambit has been to embrace mobile banking technology that is at least on par with any national bank, taking a tremendous investment of time and money. We believe once people choose a financial company to work with on a digital basis, unseating it is difficult. The seamlessness of the technology provides such a great user experience that you’d hesitate to leave. So you have to be early in.

The business problem is getting our consumers and employees to embrace the technology we build. That requires a change in behavior patterns and overcoming discomfort with learning something new: to use our electronic wallet, to use video banking services instead of going to a branch.

We needed more than 500 customer-facing employees to work through a digital-retraining program. Many were happy to be part of it. Some aren’t with us anymore because they wanted to be back in a brick-and-mortar place where life was a little simpler.

But many were in the middle. They were not comfortable with the technology; it’s not why they came to the bank; it wasn’t the job they wanted to do. We used a few ways to win them over.

Each of them went through our seven-week retraining program, which combined an online classroom and interactive tests. Probably more important, we changed the way we measured performance and how we paid them.

Mobile activation of an account became a significant metric in front-line compensation. We’re also evaluating entire branches on the number of customers they move over to mobile.

We also got that middle tier of customers involved.

We gave them $5 checks that they could only deposit through mobile image capture. Once you take a picture of just one check with your phone, you’re never going back.

As CEO, this wasn’t something I could delegate. And I’ve had to live and breathe this because the organization would have resisted me otherwise. I’m using our mobile system and video all the time. They look to you, and the commitment of the organization is reflected in the commitment of the CEO.

58 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

CULTURE

MAKE CUSTOMER PRIVACY THE PRIORITY MARK SIMPSON, CEO Acoustic, New York, New York We run the largest independent marketing cloud since our separation from IBM in July. That has landed us in the middle of what I think will be one of the hottest technology topics of this year: how businesses treat the privacy of consumer and customer data.

I think protecting that data is one of the new corporate social responsibilities alongside the environment and social issues. More regulators are seeing it this way too, including in Europe, where the EU coordinated itself into single guidance on consumer data. Next up are new regulations in California.

Companies are able to grab more data, and businesses have a responsibility to manage that data in a responsible manner. That happens in some instances, and in others— like the many big breaches of credit-card data—not so much. It’s even more important in a world where all that data is online and easier to access than ever before.

Every business has customers in some form or another, and CEOs need to make it a high priority and a corporate responsibility to protect those customers’ data. The harm they can do to both individuals and businesses by gaining that information is very significant.

To do this, you need to make it a priority within your business. Ensure that the right information-security protocols are put into place. Ensure that your company adheres to all the regulations and rules coming out and have the technology to be able to manage customer data within those rules and regulations. Make sure your IT team is a central and fundamental part of your business and that they’re ensuring the security of data within that business.

PROCESS IMPROVEMENT

FIELD TRIPS

NIBBLE AWAY AT IMPLEMENTATION

GO WHERE THE INNOVATORS GATHER

MIKE DENNISON, CEO Fox Factory, Scotts Valley, California

MARK MASSICOTTE, CEO L’Anse Manufacturing, L’Anse, Michigan

We have made parts at a handful of plants around California, including machining locations in Silicon Valley, for a long time. We’ve had a poorly built supply chain, which creates frictional costs and headwinds in the business.

We needed to establish ultra-efficient, automated manufacturing in a supply-chain environment where we could be successful.

So, we decided to build a 350,000-square-foot plant in Georgia, where we could put all of our functions in one place, housing all of the operations we had in California.

This move has involved an opportunity to revisit our Oracle [ERP] implementation and get it better structured for what we do, adding software tools to make warehouse management and shop-floor controls much better.

What we’re learning is that as eager as we are to deploy our new facility in its entirety, the thing we have to be conscious of is not moving too fast. The whole process of moving our production from West to East really takes the better part of a year. You don’t want to create bad habits, to bring them with you. That would create a long-term productivity headwind. So we’re going slower than we’d planned to make sure we can scale these new ideas and new ways of manufacturing into the business.

Take anodizing, for example—coating metal parts for protective and durability purposes. We are consolidating that in Georgia. We think that will create a huge opportunity for us to be more responsive and have less inventory stuck in external locations. But this process is fairly new to the organization and getting it right will depend on taking the time necessary to make it a big part of our manufacturing process.

We provide precision machining to the investment casting and specialty-products industries. I’ve seen a lot of technology change in the industry and have participated in a lot of it. This year, for instance, we’re adding a milling and turning machine with five-axis capability and six-station pallet change.

It’s a steppingstone for us to enter advanced manufacturing and 3D-printing technology. It’s $1 million worth of equipment that will give us a huge advantage technology-wise, providing tighter tolerances and more discipline. I expect it to take the whole organization into the advanced-manufacturing world.

But CEOs have got to understand this world before they can invest in it. That’s why I tell people to attend America Makes or some other big program and see what the big guys are doing, what they’re throwing a million dollars at, and be part of it. Go where the cutting edge is—and learn.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 59

DISRUPTIONS

HEAR VOICES JOSH SMITH, CEO Metova, Little Rock, Arkansas Voice is the prevailing wind in technology. It’s going to be as big as the touch screen, or maybe bigger. We’ve slowly evolved with how we interact with machines from punch cards to keyboards to a mouse to the fluidity of the touch screen.

How do humans interact? It’s the next evolution of the device, for convenience. Everything eventually will be voice, in the vehicle or anywhere else.

Alexa already has helped more people get familiar with voice capabilities.

And also for cybersecurity. Cybersecurity will help push that, tying voice and facial recognition together in two-factor authentication. So CEOs need to rethink how they’ve done business, maybe stepping outside what the company has done for years.

It’s not a superficial, five-minute conversation; it takes a lot of work.

For CEOs to chart the right course in voice, you need to truly know your existing customers. How do they interact with your products? What is it about voice that could alleviate pain points in your processes? Can you lead the customer by using voice in certain interactions? You can’t just apply it across the board.

And voice is probably going to be more important for business-to-business companies sooner than others because of how the human workforce is being replaced with machines. If you’re in manufacturing, you’re going to see it first. You’re going to need to interact with machines.

Adoption in B2B will happen first just because it drives down costs, whereas on the consumer side it’s a matter of user adoption. That’s a slower process and doesn’t necessarily affect the financials of the business.

60 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

CHANGE MANAGEMENT

WHAT’S THAT, WATSON? JAY WEINSTEIN, VICE CHAIRMAN, MARKETS AND INDUSTRIES EisnerAmper, New York, New York We’re making significant investments in what we call smart-auditing tools for our professional-services clients for financial statements, taxes and so on. Our value-add is advisory, but in delivery we’re using [IBM’s AI system] Watson to help us with routine, mundane accounting tasks to drive up efficiency and drive down costs.

We’re applying Watson to data collection, contract analysis, revenue recognition and other tasks that are less interesting and very time-consuming. This includes reading the backs of leases and customer contracts—tasks that take people a long time and don’t get them motivated.

AI is a great application for those kinds of things.

But one reason we’re doing it is because we had a relationship with IBM and a consulting company working with them. If not for that relationship, we probably would have been less motivated to enter this program, because AI is difficult to work with. It takes significant time in education and resources, though the payoff is significant.

We focus some of our strongest auditors on teaching Watson and making sure that the output Watson gives us is in a form that people can use and understand. Our first cut with it was technically beautiful but not in user-friendly form. We had to change it and revise it once we got user groups involved. So get them involved in the learning aspect early on, which will help you further down the road.

These were low-hanging fruit for AI because they were heavily manual tasks, and we could automate much of the work. But now it gets tougher as we move into higher-level things, such as having AI look at a tax return and pick out anomalies. But we’ll get there. CE

#1 WALL STREET JOURNAL BESTSELLER

The Amazon Management System RAM CHARAN and Julia Yang

The Ultimate Digital Business Engine That Creates Extraordinary Value for Both Customers and Shareholders “As a result of a highly successful advisory and consulting career, Ram Charan has studied innumerable companies and their management systems. The Amazon Management System challenges readers and their organizations to understand and then implement the management system that shortly will be demanded by their customers.”

—Larry Bossidy, former CEO of Honeywell and coauthor of Execution, which spent more than 150 weeks on the New York Times bestseller list.

“Amazon is secretive, but it is not a black box. The management secrets of this supremely successful company are here, revealed by Ram Charan and Julia Yang. You can’t afford not to read this fascinating book.”

—Geoff Colvin, bestselling author and Senior Editor-at-Large, Fortune “Ram does it again. He distills the maximum brilliance from a very complex company into the minimum number of pages, leaving the reader smarter and better prepared.”

—Johnny C. Taylor, Jr., President & CEO, Society for Human Resource Management (SHRM) “[Ram] has the rare ability to distill meaningful from meaningless and transfer it in a quiet, effective way without destroying confidences.”

—Jack Welch, former Chairman of GE “The most influential consultant alive.”

—Fortune Magazine

For more information on or to order The Amazon Management System, visit: ram-charan.com/books/the-amazon-management-system

EC O N O M IC D E VE LOPME NT

REGIONAL REPORT

THE NORTHEAST Things are looking up—slightly—for the nation’s Northeast, which was losing workers and flat on growth last year. BY CRAIG GUILLOT TECH, MANUFACTURING AND LIFE sciences continue to be prime economic drivers in the Northeast. The region remains a mixed bag of urban innovation and development with moderate growth and some signs of hope in states that have traditionally suffered population declines.

22* DELAWARE

62 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

26 NEW HAMPSHIRE GROWTH IN THE GRANITE STATE Life sciences and manufacturing are experiencing strong growth in New Hampshire.

BAE Systems announced in February 2019

CREDIT PORT OF WILMINGTON

*No. ranking in the 2019 Chief Executive Best & Worst States for Business (ChiefExecutive.net/2019Best-Worst-States)

INNOVATION IN THE FIRST STATE The Delaware Prosperity Partnership is driving new development initiatives that offer the private sector a bigger seat at the table, says DPP CEO Kurt Foreman. Efforts focusing on tech and science startups are paying off.

The Delaware Innovation Space, an incubator and accelerator for science startups, formally opened a $6 million lab in September 2019, and recently doubled its seed and pre-seed First Fund investment program to $150,000.

“The knowledge base, the talent pool and the concentration of Ph.D.’s in science, health and engineering have continued to attract startups and angel investors,” says Foreman.

Other big developments continue to sprout in The First State. GT USA, a subsidiary of Gulftainer, is undertaking a $600 million project to turn the Port of Wilmington into one of the largest facilities of its kind on the East Coast. And, in June 2019, Kansas City-based Northpoint Development announced a deal to create 2 million square feet of warehouse and logistics space at the Delaware City Logistics Park.

In July 2019, the Delaware Business Roundtable launched the Ready in 6 initiative to speed up the time it takes for the state to approve projects from an average of 24 months to only six. “It’s a plan to ensure we can commit to be ready in six months for companies who need and want us to move at the pace of business,” Foreman says.

DELAWARE GT USA aims to turn the port of Wilmington into one of the largest facilities of its kind on the East Coast. a 200,000-square-foot expansion of its operations in Manchester. The facility will employ up to 800 workers, adding to the 6,000 workers already at multiple facilities across the state. Hitchiner Manufacturing is also in the process of constructing a $50 million expansion in Manchester and adding another 85 jobs. Meanwhile, the Advanced Regenerative Manufacturing Institute, founded at the University of New Hampshire in 2016, continues to attract new members and spur development.

One challenge the state now faces is finding workforce to support the growth. Along with neighboring states, New Hampshire is grappling with a graying population and low population growth rates. The state is looking to address workforce and housing issues with a collaboration of government and private enterprise. “The problem with us right now is, like many places, we don’t have the workforce to allow these companies to expand at the rate they should,” says Will Arvelo, director at the New Hampshire Division of Economic Development.

35 MAINE NATURAL OPPORTUNITIES In November 2019, Maine released a new 10-year Economic Development Strategy.

One primary initiative is to tap the state’s wind, tides, sunlight, natural resources and expertise to develop solutions to the global climate crisis, said Heather Johnson, commissioner of the Maine Department of Economic and Community Development, in the report. “Our growth potential lies at the intersection of global trends and Maine’s assets,” Johnson said.

Many international leading scientists are looking to the state as a place to deploy new ideas related to food production and sustainability, says Peter DelGreco, CEO of Maine & Co. Big deals inked in 2018 and 2019 are now starting to take shape. Last year, three companies, including Whole

Oceans, Nordic Aquafarms and Kingfish Zeeland, announced plans to establish landbased fish operations on the state’s coast.

“These projects are north of $100 million… this will hopefully be the year when shovels go into the ground as they move through federal, state and local permitting projects,” DelGreco says.

In early 2019, the state ended its moratorium on land-based wind projects. Gov. Janet Mills called for a goal of 100 percent renewable energy by 2050, and the state legislature is considering proposals that would reduce gas emissions by 80 percent within 10 years. The American Wind Energy Association reports the state currently has 923 megawatts of installed capacity, an equivalent investment of nearly $2 billion. “I think we’re going to see those worlds marry each other,” DelGreco says. “If you look at something like land-based aquaculture, they use a lot of electricity. We’re going to start to see these companies deploying new ways of generating their own clean energy to power these operations.”

33 PENNSYLVANIA THE KEYS TO OPPORTUNITY Bloomberg’s inaugural “Economic Diversity Index” ranked Pennsylvania the most economically diverse state in the nation. More than just steel and chocolate, the state has seen big growth in real estate, manufacturing and healthcare. The state’s rich history, cutting-edge innovation and can-do spirit will help set the state apart and provide for future growth and prosperity, says Dennis Davin, secretary of the Department of Community and Economic Development.

Last year was a busy period for groundbreakings and expansions. Amazon announced in July 2019 it will construct a one-million-square-foot fulfillment center and create more than 800 full-time jobs in Allegheny County. In September 2019, Keurig Dr Pepper announced a $220 million manufacturing facility and up to 400 new jobs in Lehigh County. And near the end of last year, Stuffed Puffs opened a new facility in Bethlehem, and Astrobotic

MAINE Three companies plan to bring new landbased fish operations to Maine’s coastline.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 63

RHODE ISLAND The Naval Undersea Warfare Center’s Division Newport joined the 401 Tech Bridge innovation initiative in December of 2019.

Technology announced relocating to Pittsburgh.

Like many states, Pennsylvania is trying to address a growing workforce shortage. In 2019, Gov. Tom Wolf secured $40 million for education and workforce development through PAsmart, an initiative that connects state residents with resources to work, learn and train in new careers. In February 2019, the state founded the Keystone Economic Development and Workforce Command Center to bring state, labor and business leaders together on a weekly basis to address real-time workforce issues.

34 MARYLAND STACKING THE INCENTIVES Between August and October 2019, Maryland added more than 30,000 jobs, the biggest boost in a decade, says Kelly Schulz, secretary of the Maryland Department of Commerce. That growth is partly being driven by economic development efforts, one of which is to offer stackable incentives on top of the federal Opportunity Zone program. The More Opportunities for Marylanders Act offers additional tax credit for each new job created in an opportunity zone. These companies are also eligible for a $6 million in tax credit with an exemption of all state property taxes and a waiver for all business record, filing or special fees.

“Having those stackable incentives has been really important, and we’ve been letting the world know about it,” Schulz says.

New projects taking shape include building out the 3,250-acre Tradepoint Atlantic site, already home to such companies as Under Armour, Amazon, FedEx and Home Depot. Kite Pharma in Frederick County is also constructing an advanced pharmaceutical manufacturing facility and adding up to 700 jobs. And in March 2019, Northrop Grumman announced an expansion and 175 new jobs in Cecil County.

Maryland has also experienced strong

64 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

growth in STEM occupations capitalizing on its university system, federal laboratories and incoming R&D dollars, Schulz says. “We really want to help commercialize them and move into a bigger, larger ecosystem filled with lots of growth,” Schulz says.

36 RHODE ISLAND INSPIRING INNOVATION CNBC named Providence metropolitan area as one of the top five places in the country to find a job, and, in November 2019, the Ocean State hit another all-time job high with more than a half million employed residents.

Close proximity to New York and Boston, coupled with a more favorable cost of living and quality of life, are attracting companies seeking to expand, says Brian Hodge, deputy director of communications at the Rhode Island Commerce Corporation.

Innovation is an area where Rhode Island is gaining momentum. In addition to the Wexford Innovation Center and Innovate Newport Center, there are five other new innovation campuses under development.

One of those is 401 Tech Bridge, a partnership with the U.S. Navy that will tap small businesses to engage in cooperative R&D to help solve Navy problems. Along with the infrastructure, initiatives such as the Qualified Jobs and Rebuild Rhode Island tax credit programs have proven valuable for innovation-oriented companies like Virgin Pulse, Amgen and Rubius Therapeutics.

“Our state has made unprecedented investments in innovation. Plus, our small size provides unparalleled access to key assets and institutions, all of which are taking an active approach to boosting innovation,” Hodge says.

41 VERMONT A NATURAL HAVEN FOR REMOTE WORK Vermont is working hard to address a dearth of workers with the Vermont Employment Growth Incentive, which offers payments of up to $5,000 per year for up to two years for remote workers who relocate to the state. “People typically think of Vermont as a great place to visit but not a great place to live,” says Joan Goldstein, Commissioner of the Vermont Department of Economic Development. “We really wanted

to change that narrative.”

The program went viral in 2019, generating the equivalent of more than $7 million in free advertising, and has brought hundreds of new residents to the state, Goldstein says. That might not seem like a big deal in many places, but it’s a decent win for a state desperately trying to attract new residents.

Meanwhile, Vermont’s bread-and-butter industries are growing. And two years after Blodgett Oven relocated its campus elsewhere within the state, entrepreneurs are hoping to renovate the waterfront campus as a space for big-tech businesses. “They’ve brought some subsidiaries from other areas of the country, and there’s new opportunity in the footprint,” Goldstein says.

46 CONNECTICUT DOUBLING DOWN ON CORE STRENGTHS Connecticut is focusing on its core strengths of advanced manufacturing, life sciences and financial services, says David Lehman, commissioner of Economic and Community Development for the State of Connecticut. “We’re focused on high-productivity industries with good-paying jobs and where we have a natural competitive advantage,” he says.

In April 2019, Yale New Haven Hospital announced plans to build a 505,000-square-

45 MASSACHUSETTS BIG OPPORTUNITIES IN THE BAY STATE More than a year after Gov. Charlie Baker signed a $1.15 billion economic development bond bill, Massachusetts is boosting funding for initiatives like infrastructure improvements, MassWorks, the Massachusetts Technology Development Corporation and the Massachusetts Cybersecurity Innovation Fund. “It’s really doubling down on a lot of different areas of economic development, from workforce training to grants for innovation and science and technology,” says Peter Abair, executive director at MassEcon.

The Bay State wasn’t selected for Amazon’s HQ2 project, but Amazon is constructing a 500,000-square-foot facility and adding 4,000 jobs in the Seaport area of Boston. It also acquired two additional facilities in Revere and Westborough, each of which will add close to 1,000 new jobs.

“While we didn’t win this big competition, we have been winning these incredible Amazon projects ever since,” Abair says.

The life sciences and biopharma industries also continue to grow. According to the 2019 Industry Snapshot by MassBio, the industry added 20,000 jobs in the past 10 years, a growth rate of more than 35 percent.

“The impact has been dramatic with the number of lab and manufacturing facilities going up in just the past year,” Abair says.

foot, $838 million neuroscience center to research diseases such as Alzheimer’s, Parkinson’s, epilepsy and multiple sclerosis. In October 2019, Polamer Precision announced intent to purchase 27 acres of undeveloped space in the Pinnacle Business Park in New Britain for a major expansion. In April, Stanley Black & Decker opened its Manufactory 4.0 advanced manufacturing center of excellence in Hartford. And in September, General Dynamics Electric Boat broke ground on an $850 million expansion.

Financial stability has also been a factor in this robust growth in key sectors,” says Lehman. “Connecticut had the best-performing bonds in 2019 of any state, as a function of the state’s finances being on the mend, and no taxes were increased in the past budget.”

MASSACHUSETTS Boston’s Seaport area will be the site of a new 500,000-square-foot Amazon facility.

47 NEW JERSEY NEW WORKSPACE The New Jersey Economic Development Authority released a report in 2018 about

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 65

NEW YORK Onondaga County will be home to a new mid-size manufacturing plant for Cyromech.

creating a stronger and fairer economy that would extend economic opportunities across all demographics and parts of the population. One initiative is NJ Ignite, an effort that supports entrepreneurs with rent grants and collaborative workspaces with a new tenant attraction tool. Gov. Phil Murphy said in a press release that a common concern from the entrepreneurial community is the difficulty that startups have finding affordable space in the state.

“Through NJ Ignite, we are striving to remove that obstacle, enabling Garden State innovators to preserve precious capital for product development, connecting with investors and everything else it takes to successfully grow and prosper here” Murphy said.

The program offers up to nine months of rent support for startups that move into collaborative workspaces. The first nine workspaces were approved by the New Jersey Economic Development Authority in December 2019, including the 108,000-square foot Enterprise Development Center at the New Jersey Institute of Technology and the Rutgers EcoComplex.

49 NEW YORK EXPANDING THE EMPIRE The Empire State has been striving to enhance economic development beyond New York City and to all corners of the state. In 2019, more than $761 million were awarded to 10 regional economic development councils to drive local economies forward and implement strategic plans for growth. “By bringing together local leaders and stakeholders who are invested in their communities, we have replaced the ‘one-size-fits-all’

66 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

approach to economic development with one that is unique to each community, creating opportunities for success all across The Empire State,” said Gov. Andrew Cuomo.

Notable announcements in 2019 included the state’s completion of the first-in-the-nation “drone corridor,” a 50-mile unmanned traffic management path for drone testing from Central New York to the Mohawk Valley.

Several mid-sized manufacturing plants have broken ground, from Cryomech in Onondaga County to Briggs & Stratton in Oneida County and Sullivan County Fabrication in the Woodridge. And in September 2019, the state announced a $1 billion public-private partnership with Cree to create the world’s largest silicon carbide device facility at SUNY Poly Campus. “This is a crucial step in cultivating the advanced manufacturing infrastructure of New York State, growing the upstate economy and transforming the future of the Mohawk Valley,” said Cuomo in a press release.

N/R WASHINGTON, D.C. RAISING CAPITAL IN THE CAPITAL The Washington D.C. Regional Report by Avison Young forecasts the metro area’s economy to grow by an average of 2 percent annually over the next five years. The positive sign is the District is diversifying and relying less on federal spending, with a quarter of the expansions anticipated to be in tech. Much of that is due to Amazon’s operations in the area. D.C. lost the bid for Amazon’s HQ2 project but indirectly won as the retailer sets up shop just south of the capital in Arlington, Virginia. The company plans to add up to 25,000 jobs in the region at an average salary of $150,000.

In addition to the gain in real estate prices and influx of new talent, a wave of ancillary service providers and startups can be expected to follow. A report released by the Virginia Chamber Foundation said the D.C. area can expect to see $15 billion in new economic activity and 62,000 new jobs by 2030. According to the Venture Monitor report by PitchBook and the National Venture Capital Association, D.C. area startups raised nearly $2 billion in 246 venture capital deals in 2019—slightly less than 2018 but still the second-highest year since 2006. CE

C EO SOLU TI ONS

TA B TE X T TA B We’ve got to have great employees to compete at the highest levels, but healthcare costs were taking their toll.”

—Marty Landon, CEO, BioBridge Global

HEALTHY CHOICES Healthcare costs are eating American business alive—with no end in sight. How three CEOs found a cure. BY RUSS BANHAM

Developed in Partnership with Validation Institute, a provider of independent thirdparty resources for healthcare purchasers, and Ascend Agency Growth and Leadership Summit.

LIKE MOST CEOS, Marty Landon was fed up with his employees’ rising healthcare expenses. Every year, the company’s insurance broker would sit down with Landon and inform him that despite the broker’s best efforts to contain costs, the annual premium for the health plan would rise another nine or 10 percent.

The conversation was merely the prelude, however. “A few months later, he’d return and say ‘Great news! We were able to get the increase down to 8 percent,’” says Landon, CEO of BioBridge Global, a nonprofit company with 750 employees that independently tests and supplies blood and tissue components to hospitals. “Like that was significant progress.”

Sharing his experience at a Chief Executive panel discussion held in partnership with

Validation Institute and the Ascend Agency Growth and Leadership Summit, Landon recounted that while he managed the company’s P&L across the rest of the business, with the health plan, he felt like he’d relinquished control to the broker. “It was frustrating for me and, by extension, for employees,” he says. “I’d be telling someone they were in line for a 3 percent merit-pay increase next year and then have to inform them their outof-pocket healthcare costs were going up 8 percent. It was a losing proposition.”

It was also eroding the nonprofit company’s ability to attract and retain high-quality employees. “We’ve got to have great employees to compete at the highest levels, but healthcare costs were taking their toll,” Landon says. “We just couldn’t figure out how to break the mold.”

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 67

Landon is far from alone in this experience, says RD Whitney, CEO of Validation Institute, whose company provides independent information to employers to help them make their healthcare plans more cost-effective. “CEOs feel powerless about their frustrating inability to alter the status quo of constantly rising healthcare costs,” Whitney says. “They control the cost of every line item, but when it comes to healthcare, they’re immobilized and don’t touch the subject, conditioned to believe they can do nothing about it.”

Those costs are substantial. In a survey of nearly 150 companies by the nonprofit National Business Group on Health, large U.S. employers expect their total healthcare costs, including premiums and out-of-pocket costs for employees and their dependents, to jump a median 6 percent in 2020.

These expenses weigh heavily on large employers, which absorb about 70 percent of annual workforce healthcare costs, running $15,375 per employee, on average. Employees also shoulder their share of the burden, paying nearly $4,500, on average, in deductibles and copayments.

For midsized and smaller businesses, the cost of healthcare is much worse, estimated to be 8 percent to 18 percent higher per employee than what larger companies fork over.

“It’s not that many CEOs are asleep at the switch when it comes to healthcare spend— they’re not even in the room with the switch.”

PENNY WISE AND POUND FOOLISH Politicians on both sides of the aisle blame a variety of factors for why the U.S. pays so much more for healthcare than the rest of the world, from the high cost of physician care, treatments and medications to expensive medical malpractice insurance coverage for doctors and high patient hospital admission rates. Nelson Griswold, president of healthcare advisory firm Bottom Line Solutions, doesn’t expect a fix from Washington anytime soon. Nor does he fault the insurance industry for making a buck when it can. Rather, he puts the blame squarely on CEOs for putting their companies in a no-win position. “It’s not that many CEOs

68 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

are asleep at the switch when it comes to healthcare spend,” he says, “they’re not even in the room with the switch. They’ve abdicated their fiduciary and management responsibilities.”

He provided the example of a CEO at a midsized business generating $20 million per year. “If you asked the CEO if a line manager ran any of the company’s million-dollar business units, he’d reply, ‘of course not.’

But isn’t there a line manager in HR who’s responsible for the health plan? Shouldn’t the spend for the benefit be considered a capital expenditure like any other, requiring oversight from an executive with P&L responsibility? When the CEO hears that, he says, ‘of course it should.’ But there is no high-level oversight.”

The same companies that negotiate the price of paper clips down to one-tenth of a cent allow their employees to get six-figure heart procedures and don’t question the quality or the cost, he says. “They pay the bill because they think they have no other choice.

But costs will always go up, and quality will go down when you don’t pay attention.”

CEOs like Marty Landon are paying attention—and learning that there are ways to lower their benefit-plan costs without decreasing the quality of care to employees.

BioBridge and other companies are jettisoning traditional health insurance and opting instead for a self-funded health plan. With such plans, the employer absorbs the financial risk of providing specific healthcare benefits to employees.

The idea of self-insuring healthcare costs may sound risky in a world in which a single heart transplant runs close to $1 million. To offset this possibility, midsize and smaller companies buy so-called stop loss insurance, a form of reinsurance absorbing medical expenses beyond the capital limits that are set aside in a special trust fund to pay claims.

“Because of stop-loss insurance, self-funding is no riskier than a fully insured health plan provided by an insurance company,” says Griswold. “With the proper stop-loss, the company’s risk exposure is no greater than the total of premiums paid previously to the insurance company.”

PARTNERING TO CONTAIN COSTS A self-funded plan is just one arrow in the quiver of CEOs battling rising benefit costs.

Companies also are retaining employee-benefits advisers to guide them in pursuing a range of other cost-effective strategies.

They include the use of independent third-party administrators (TPAs) to assess employee medical claims for appropriateness and accuracy; telehealth services providers offering health-related guidance to employees electronically or on the phone; and pharmacies outside the U.S. that ship brand-name and generic medicines at lower costs to an employee’s home. “The goal is for employees to get the best care from the right source at the best price,” says Griswold.

By redesigning their companies’ traditional health plans to become self-funded, the three CEOs profiled in this article are liberated from insurance brokers and carriers that call all the shots. This freedom opens the door to pursuing cost-containment strategies that eluded their control in the past.

With Landon, the turnaround began when another insurance broker, Hays Companies, made a call to BioBridge’s CFO and mentioned the idea of a self-funded plan backed by stop-loss insurance. The CFO passed on the particulars to the head of HR. Both executives then met with Landon to discuss their takeaways from the meeting.

In early 2019, the broker laid out the concept to Landon and board members, one of whom was Allison DePaoli, who runs a benefits advisory firm called Altiqe. “Allison was impressed by some of the broker’s ideas and asked if she could explore them further,” Landon says. “I said that was okay, but I didn’t want to foist too many changes on the employees at one time.”

In May 2019, the first phase of the company’s new healthcare plan, designed by Altiqe, was unveiled. Previously, BioBridge offered employees four separate health insurance options, each with a different set of deductibles, employee co-pay percentages and covered benefits. From an administrative standpoint, managing four plans was unwieldy. Over time, the number of plans was trimmed to two, with both self-funded and backed by stop-loss insurance.

One plan option is a traditional 80/20 coinsurance plan in which the insurer picks up 80 percent of medical costs, and the employee pays the rest, after satisfying the deductible. Most employees opted for this plan at a premium that saved them nearly 25 percent of what they previously paid, with no change in deductible. “When we introduced the plan at a meeting, employees applauded,” Frustrated with spiraling healthcare expenses, Akorbi Co-Founder Azam Mirza reduced costs Landon says. with a group captive insurance mechanism.

By having control over the management of claims, the company was able to introduce a variety of cost-containment features like Nurse Deb, a telehealth services provider.

Employees who need to make a doctor’s appointment contact a nurse advocate at the firm, a live person who listens to their medical issues and provides a list of physicians and their respective locations, prices and quality ratings. The employee decides which to visit, although the incentive to keep out-of-pocket medical costs down is a factor in the determination. Nurse Deb also helps employees understand the complex insurance jargon and provides guidance on the need for a second medical opinion.

Additional cost savings have been realized in the plan’s vision and dental coverages.

“We were able to play different providers like United Healthcare and Aetna off each other to get the best coverage and price, whereas in the past we were stuck with the vision and dental plan of the plan insurer,” Landon says.

The CEO also hoped to reduce prescription drug costs. A few days into 2020, a study tracking more than 3,500 drugs indicated that prices on 411 medications increased an average of 5 percent, with some drugs like Humira, used to treat autoimmune disease, up more than 7.4 percent

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 69

from 2019 prices. These costs are substantially higher than in other countries whose governments negotiate prices with drug manufacturers, whereas drug prices in the U.S. are set by three pharmacy benefit management firms that control an estimated 76 percent of the market.

BioBridge’s self-funded and managed health plan freed it to buy prescription medications through ScriptSourcing, an online provider of drugs shipped directly from pharmacies in Canada, the UK, Australia and New Zealand. Landon estimated the savings in the 5 percent range.

“By working with our partners and sharpening our pencils, we’ve been able to scrutinize what we were paying and what it got us,” he says. “And that’s just the first phase of our long-term strategy. We’ll introduce other cost-saving features in 2021 when we embark on the second phase.”

CAPTIVE AUDIENCE Since self-funding Akorbi’s healthcare plan five years ago, Azam Mirza, the company’s co-founder and president, has fine-tuned it to great effect, adding cost containment features. Mizra had initially reached out for advice to Dan LaBroad, an employee benefits strategist at Ovation Premier Health.

LaBroad put together a quasi-self-funded plan that gradually became a fully self-funded one backstopped by reinsurance.

Recently, LaBroad encouraged Mirza to self-insure the plan through a group captive insurance mechanism, an insurance company essentially owned by the organizations it insures. At present, Akorbi, a provider of multilingual business process outsourcing contact centers, shares its health plan risks with another two-dozen employers. The group buys reinsurance to spread their catastrophic medical exposures.

“A captive gives mid-size employers the benefits of being self-funded, with the added protection of working with other like-minded businesses,” LaBroad says. “The structure

“By working with our partners and sharpening our pencils, we’ve been able to scrutinize what we were paying and what it got us.”

70 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

also lowers the cost of stop-loss insurance and offers the possibility down the road of paying dividends to the group participants.”

Like other self-funded plan providers, Akorbi has contracted with a TPA, Employee Benefit Management Services (EBMS), that “controls all the pieces,” says Mirza. EBMS routes data between the group captive and a range of service providers like ScriptSourcing, the low-cost pharmaceuticals supplier, and a telehealth advocacy organization that ensures claims are being property charged and paid for, a process Ovation oversees.

The providers have chalked up substantial cost reductions. For instance, the use of expensive medications by employees has been nearly eliminated, resulting in a 40 percent decrease in prescription costs. The telehealth service provider contributed to an 18.5 percent reduction in doctor visits, increasing plan savings and member convenience.

“Ovation is always looking for ways we can save money and give better care, to be proactive rather than reactive,” Mirza says.

He provided a recent example involving the accuracy of a $125,000 medical bill charged by a healthcare provider. “Dan and his team did their due diligence, battled with the provider, and we ended up paying $2,000 for the claim,” he says. “They then found a doctor with higher quality ratings to provide care to the employee going forward, at less expense.”

Savings have added up over the years.

“Our premiums today are less than they were in 2014 when we completely insured the plan,” says Mirza. “We expect this to remain the same in 2020, with no cost increases and a reduction in claims.”

EYES ON THE PRIZE CEO Jim Eickhoff also reached a point where he could no longer tolerate the skyrocketing cost of healthcare for his 2,000 employees.

“Year after year after year, our expenses kicked upwards,” says Eickhoff, CEO of Creative Dining Services, a provider of cafeteria facilities to corporations, colleges, schools and senior living facilities. “Our broker would come in and say rates are going up 18 percent, followed by the usual song and dance explaining the reasons. He’d blame it on one person who needed this kind

of surgery and another who had a chronic condition. Two months later, he’d come back and say he was able to get the premium increase down to ‘only 14 percent,’ as if this was some sort of victory.”

The annual increases took a hammer to Creative Dining’s budget, but the impact was minor compared to the effect on morale.

“We’ve got team members here making $15 per hour who have a real passion for what they do,” Eickhoff says. “Having to tell them their out-of-pocket healthcare costs are going up 14 percent is a miserable task for a CEO, one that also affects our ability to retain quality people. The time had come for us to manage our health plan like like the rest of the P&L.” Eickhoff tasked the CFO and head of HR to co-lead an initiative to develop a new healthcare plan. The executives reached out to Mike Hill, an expert in self-funded medical plans at Coldbrook Insurance Group, who suggested developing a self-funded health insurance plan and retaining the services of a TPA to assess claims for accuracy, cost and medical need. “I explained that most companies hire an insurance company to manage their health plan, which puts the insurer in the driver’s seat in negotiating agreements with hospitals, doctors, pharmacies and so on,” Hill says.

“The problem is they’re negotiating the best deal for them and not the employer.”

Creative Dining took Hill’s advice, forming a self-funded plan and hiring a TPA (SisCo in Dubuque, Iowa) to evaluate the company’s medical claims “with a fine-tooth comb,” he says. “Unlike large health insurers that adjudicate more than 90 percent of their claims using a computer, SisCo handles more than 80 percent of claims manually, ensuring a self-funded plan isn’t paying for services that are not needed or overpriced.”

Eickhoff could now pursue such cost-containment concepts as the use of coupons provided by pharmaceutical manufacturers across the world for certain medications.

Telehealth services similar to Nurse Deb, provided by a team of doctors and nurses at AIMM in Columbus, Ohio, offer expert guidance on quality care at different cost points, leaving the decision up to the plan member.

“An employee with a particular medical condition might go online and read that ex-

pensive laser surgery is a recommended procedure,” says Eickhoff. “AIMM might point out that other procedures with equal or even better outcomes are available and covered by the plan in full, whereas laser surgery requires the payment of a deductible. Either way, the employee makes the decision.”

Our broker would come in and Launched in say rates are going up 18 percent, followed by the usual song and September 2019, the self-funded plan is on dance explaining the reasons.” track to save Creative —Jim Eickoff, CEO, Creative Dining Services Dining $500,000 this year, Eickhoff says. He pointed to a “partnership model” with Coldbrook Insurance designed to incentivize the firm when the plan achieves specified cost savings above a certain threshold, motivating quality care at lower cost.

“We share in the savings,” he says.

Finally, he says he can now see “where every penny goes in paying for employee healthcare, helping us forecast where best to allocate capital to grow the business and price our products and services.”

As these CEO experiences suggest, there are ways to tackle rising employee healthcare plan costs without affecting the quality of medical services. Griswold cautions, however, that self-funding the healthcare plan alone is just a part of the solution to wringing out high healthcare costs. “Self-funding allows the company to pay only for the healthcare the employees buy and use, but more importantly, it provides full control over the spend to manage the cost and quality of the healthcare,” he explains.

Instead of giving this power to large insurance companies that fail to provide transparency into their dealings with healthcare providers and grudgingly acRuss Banham is a cepting brokers’ annual “song and dance” Pulitzer-nominated rationales for the higher premiums, compafinancial journalist and nies run the show. CE best-selling author.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2020 / 71

L AST WOR D

FRED ENGELFRIED / DIRECTOR, NORTH COAST HOLDINGS

FAILURE IS AN OPTION

For we Type-A CEOs, rejection is a blip to overcome, or even a motivator—but others may need a hand coping with setbacks.

Fred Engelfried is director/chair of North Coast Holdings and its subsidiary Lewis Tree Service. He has been a member of the board of directors of Lewis for over 20 years and is president of Market Sense, a participative management firm that has served more than 100 regional clients over 35 years.

WE ALL EXPERIENCE IT GROWING UP: REJECTION! Page through your personal history: you didn’t make the team, you got turned down at your preferred college, you didn’t get a job offer from the “dream” employer that recruited you, you were passed over for a promotion.

For some of us it’s just a part of life, but for others it can be a source of anxiety that may lead to withdrawal. Not everyone has leather skin.

Early in my career, I was chasing a game-changer-size order with a national company. I had no formal sales training, just an unmerited big ego. I called the buyer almost daily to check if the order had been released as promised, always trying to have “openers” first—local sports talk, weather, weekend activities. Clearly, I brought no skills to this interaction, and one day the buyer said, “Fred, don’t call me no more, I’ll tell you when it’s ready.” I had been rejected…big time! Devastated, with my oversized ego deflated, I sulked in my office, hoping I hadn’t trashed the opportunity.

I once knew an executive who, when faced with peers who disagreed with his opinions/conclusions, would unrelentingly focus not on understanding the others’ positions but instead bore in on why they thought he was wrong. Even when his colleagues changed subjects, he was obsessive about reverting back to acceptance of his views. He could not stand the thought of being rejected and used combative mechanisms to deny peers the opportunity, provoking the same fear of rejection in some of them.

Most of us have a good understanding of how the experience of rejection has shaped us. Creating an environment where its negative impact can be minimized is the greater challenge. Here are a few approaches to consider:

72 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2020

RIGHT RESPONSE. Always be timely in your response to initiatives and respectful if deferring action. “Soft landings” tend to keep the door open; hard landings e.g., “no” or no response at all can eventually slam it shut.

PREP THEM. When you’re sending someone into a situation expected to be adversarial, prep him/her for the worse case. “They may throw our proposal in the basket,” “they’re upset with us and may use the meeting to take us behind the woodshed,” “I’ve been through that before, don’t take it personally,” or, “Here are some things I would do.”

BEHAVIOR MODS. Watch for the signs, especially with folks who were initially open and interactive. Some shut down, while others seem distracted. It’s important for them to verbalize their concerns and just as important for us to help them develop coping skills.

BE HONEST. Don’t rationalize the rejecter’s behavior—e.g., “that’s just him” or “he does that with everyone” doesn’t make anything right. Fix the behavior problem in the offender. Left unchecked, you may end up with more followers than leaders.

As seasoned CEOs, we know how it feels, that it comes with the territory, but not everyone in our orbit feels the same. Being confronted with rejection from time to time doesn’t make us failed executives, nor does it mean a team member is weak. It does, however, provide us the opportunity to help them understand its influence and to create a work environment that minimizes its negative impact. The personal experiences cited above have stayed with me to this day, and I use them as a teachable moment for others. CE

VariDesk is Now Vari ®

®

When we created VariDesk—the world’s leading standing desk solution—we improved the way people work. Today, Vari is so much more than desks. We have walls, workstations, and all the office furniture you need to create a flexible workspace for your growing business.

Learn more at Vari.com/CEO or call (877) 311-2414.

Patent and trademark information: vari.com/patents | ©2020 Varidesk, LLC All rights reserved.

high value homeowners automobile watercraft j e w e l r y, a r t & c o l l e c t i o n s personal excess liability flood fraud & cyber

Love your insurance.

Imagine an insurance company that’s owned by members and driven by a purpose of doing what’s right for them. One that makes its members smarter about risk, helps them reduce their chances of experiencing a claim, and makes them more resilient so that if a claim does happen, they can recover faster and with greater ease. That’s PURE. And it’s why our members love their insurance.

IF YOUR HOME IS INSURED FOR $1M OR MORE:

Contact a PURE-appointed independent broker, call 888.814.7873 or visit pureinsurance.com to learn more.

PURE® refers to Privilege Underwriters Reciprocal Exchange, a Florida-domiciled reciprocal insurer. PURE Risk Management, LLC, a for profit entity, (PRM) serves as PURE’s Attorney-In-Fact. PURE membership requires Subscriber’s Agreement. Coverage is subject to terms and conditions & may not be available in all jurisdictions. Copyright ©2020 PURE Risk Management, LLC. All Rights Reserved. PURE HNW Insurance Services, CA Lic. 0I78980.