KCB Central Biz Blog

Interviewed by R. Scott Macintosh on July 3, 2008

Just months into his new job as CEO of Sprint Nextel, Dan Hesse talks about the reasons for joining the beleaguered telecom, the importance of simplicity, customer service and other lessons learned about…

APPEARING IN A NATIONAL TV AD
There’s a risk involved with putting the CEO in the ad, because most CEO ads don’t work that well. They don’t run for a long period of time. But some do—Lee Iacocca; Dave Thomas from Wendy’s. The [Sprint] ads have scored extremely well. They work. I don’t think it’s because of me. I think it’s because of the message. The message is a very clear one that people can understand—the simplicity of Simply Everything. That’s really the key. People like the idea of Simply Everything. It’s very distinctive and the only offer like it. So it does break through.

DAN@SPRINT.COM
It was a good idea. It was our ad agency’s idea of putting me out there and also having a way to communicate. It’s been very helpful. We’re learning a lot, not only from customers but from non-customers with respect to what they think about Sprint. I don’t see every email. But I get a daily report. There are categories, subjects that explain what they’re about. So I can see a sampling of the emails.

LISTENING IN AT CALL CENTERS
Generally, the tone of the conversations is pretty nice. Most importantly to the customers who call in, whatever their issue, is that they get an answer to their question or they get their issue resolved. The care rep has to know so much. There are so many different screens they have to go to, numbers of rate plans and combinations that customers could buy—our business was far too complex. We eliminated 85 percent of the combinations customers could buy from us. We really needed to simplify the business. It was too complicated for our customers and too complicated for our reps and people who dealt with customers.

CUSTOMER SERVICE
Every single week, in every meeting of our management team, we count the number of calls coming into our call centers. It’s a huge metric. We measure all the reasons they call. The big objective around here is improving the customer experience in a way where we can measure it. There are really two major metrics on which all the employees of the company are paid. One is churn—that is, customers leaving us; the straw that broke the camel’s back. The other is the number of calls coming into care. We want to reduce the reasons they call.

TAKING THE JOB
If what you want to do is make a difference in the lives of others, there are a variety of vocations. You can teach. You can be involved in public service. You can enter the clergy. But few things today give you the opportunity to impact as many lives in a positive way as running a major company.

HIS PREDECESSOR
I learned a lot from Gary [Foresee]. With respect to Kansas City, there’s probably no one that I’ve ever seen lead a company who’s taken his role in the community more seriously.

PREPARING FOR THE UNEXPECTED
The best way to prepare for the unexpected is to create the unexpected for your competitors. Innovate and drive and go on the offensive instead of being on the defensive. Try to create something unexpected for them. You change the game so they’re reacting to you rather than vice versa. You’re fist mover. I’ve always believed in that. The biggest advantage of being an innovator is that you’re not dealing with the unexpected, they are.

WiMAX
We’ll be the first in the market with 4-G services, super-high data speed services. We’ll be out there first. We’ll also create a new business model around it. WiMax is working in 100 countries around the world. It’s a very tested technology, but we wanted to test our latest version of WiMax, with higher data speeds and higher mobile data speed that had been deployed in earlier versions. We’re getting ready to do our very first commercial launch in September. It works. We’re ready for practice. We need to build out. You need to build-out more coverage before you launch commercially. You need to build out enough coverage so you have a decent footprint so you have a good customer experience. That’s what takes the time.

MERGING WITH NEXTEL
Mergers of equals really rarely work. And I think what they tried to do when they put Sprint and Nextel together was to do a merger of equals. The cultures never came clearly together. You had two headquarters—the corporate headquarters in Reston, Virginia, and the operating headquarters here. The board of directors was split roughly 50/50. The senior team and management was split roughly 50/50. The major thing, if you could go back in time, it should have been one or the other. Choose which one, but go with one. One headquarters. One culture.

SELLING OFF NEXTEL
Nothing is off the table. This is a rapidly changing business. We don’t have blinders on. Opportunities always present themselves. There was an opportunity to create this new Clearwater company. We took it. That was a situation or opportunity we didn’t even contemplate only a few months ago. Who knows what business structure we may end up with over time, but we’re taking a very open approach to what that could be.

iPHONE
It really reinforces the importance of strong brand. There’s no question that the big element of success of the iPhone has been the strength of the Apple brand. The second thing is that customers will pay for something that they want. The iPhone is an indication that customers really do want to use the phone for a lot more than just making voice calls. Proof point of that.

COMPETING WITH THE iPHONE
It’s difficult in some respects, but easier as well because it creates more attention for the space. iPhone kind of blazed a trail there. The Instinct is by far the most successful phone the company has ever had, based on its first two weeks in the market. My gut would be, that if we had launched the Instinct and the iPhone hadn’t existed, we wouldn’t have sold as many Instincts. I will give Apple it’s due. They have set a high bar. But it has also opened the market in terms of what consumers are looking for in these devices.

PROFITABILITY
They [Instinct phones] detract from our profitability, quite frankly, because we subsidize the hell out of them. Those phones are a lot more expensive—they all are, really—than what a customer buys it for. Where we will make our money is if customers want to use a lot of additional applications and will buy something like Simply Everything, which is $100 a month, and we will see a lot more sales of these plans where you can use all of these features if you have devices that make it fun and easy to use all of those features. We’re seeing a lot of customers buy-up to Simply Everything because there are devices that make Simply Everything worth having.

###

As a weakened U.S. economy roils the stock market and housing sector, it also hurts municipal spending. When consumers cut back on spending, there’s generally less tax revenue for cities. In Kansas City, the concern is compounded by a $550 million in variable-rate debt, which accounts for about 37 percent of the city’s total debt portfolio.

Last week, the ongoing economic concerns and the city’s debt load caused Moody’s Investors Services to change the city’s credit outlook from stable to negative.

“The negative outlook reflects the city’s significant insured variable rate demand obligation exposure and resultant increased interest costs and potential liquidity drain posed by the possibility of continued adverse market conditions,” Moody’s wrote in its analysis.

As a result of Moody’s assessment, staff with the City Council Business Session last Thursday suggested delaying the sale of $25 million in general obligation bonds for capital improvements.

In a statement, Mayor Mark Funkhouser suggested that the city take steps to improve financial stability by:

• Reducing expenses to less that projected revenue.
• Adopting fund balance, revenue and other financial policies to supplement the debt and economic incentive policies.
• Building the fund balance to at least 8 percent.

“We can do a lot with the budget we are working on right now,” Mayor Funkhouser said. “If we can stabilize our financial situation, we can reduce the possibility of delays to important projects in the future.”

The city has maintained an Aa3 general obligation rating on $310.66 million of outstanding general obligation debt.

—R. Scott Macintosh

Other than courtroom victory, nothing is more coveted in the legal world than partnership with a name. And when two giants merge, the name game begins.

Last week, two of the Midwest’s largest law firms officially merged to create a new legal entity. Husch Blackwell Sanders was born with the merger of St. Louis-based Husch & Eppenberger and KC-based Blackwell Sanders. The new firm will have 630 attorneys with anticipated revenues topping $275 million for 2008. But just how was the new name decided?

“The firm name was decided by the flip of a coin, because we felt that in a true merger of equals this was the most fair way to determine the new name,” said Joseph P. Conran, co-chairman of the new firm, in an announcement of the name change.

David A. Fenley, co-chair, added: “It was important to both of us that we go into this as equals; Husch won the toss.”

Mergers are nothing new to 92-year-old Blackwell Sanders. Ten years ago, what was originally Blackwell Sanders Matheny Weary & Lombardi became Blackwell Sanders Peper Martin after merging with St. Louis-based Peper Martin Jensen Maichel & Hetlage.

Last year, the firm struck Peper Martin from its title, claiming it was rarely referred to by its full name and those extras weren’t needed. Given the history of name changes at law firms, the last thing anyone needs is the confusion caused by a few extras. KCB takes a look back at some other notable mergers:

2004: Niewald & Brown merged with Dunn Keller Gillespie & Latz to become Brown & Dunn. The merger was the second change for Niewald & Brown within a year. The firm, previously known as Niewald Waldeck & Brown, had a breakup with founding partner Michael Waldeck.

Polsinelli Shalton Welte merged with the Clayton-based law firm Suelthaus, formerly known as Suelthaus & Walsh, to become Polsinelli Shalton Welte Suelthaus. The firm became Polsinelli Shalton Flanigan Suelthaus in 2007 when shareholder David Welte left the firm and Daniel Flanigan became partner.

2002: Stinson, Mag & Fizzell and Morrison & Hecker inked a deal to form Stinson Morrison Hecker. “The names may change, but the practice of law and the quality of the people never will,” said managing partner Mark Foster at the time.

—R. Scott Macintosh

The GEICO gecko may be able to swoon audiences with his British accent and quick-witted humor, and the Cavemen may wear designer clothes and have a TV show, but those characters have nothing on the latest promotional animal. Kenzie the chimpanzee may not be able to speak, but he can do things like book flights online, pack a suitcase, drive to the airport, get on a shuttle, find his gate and board an airplane.

In a new KCI commercial (which can be viewed on televisions in the airport and on the airport Web site), the chimp shows viewers just how easy it is to use KCI’s new Web site (flykci.com), and its improved parking and shuttle systems. Kuhn & Wittenborn Advertising, a Kansas City-based agency, came up with the ad, and T2, a local production company, produced it. The spot has even drawn the attention of USA Today. Those wanting to see more performances from Kenzie should check him out in the Speed Racer movie, which should hit theaters in May.

—Dayne Logan

It may not be the “Motor City,” but Kansas City has definitely been turning itself into a stronger player in the automobile manufacturing industry of late. Both the General Motors plant in Fairfax, Kansas, and Ford in Claycomo, Missouri, have added new models to their production lines in the past year.

In January, Ford’s new F-150 was revealed at the North American International Auto Show in Detroit with a KC manufacturer, Richard Pleacher, on hand to help with the showcase. The ‘09 model comes standard with a V-6 engine that can be upgraded to a V-8, an option for a supercab, which can fit five to six passengers, and front and rear vented disc brakes.

Ford has invested $100 million in its Kansas City Assembly Plant, which opened in 1953, for new training, equipment and tooling. So far, it has been spared the massive job cuts and closings made in the wake of Ford’s Way Forward Plan, a 2006 strategy to return profitability to the struggling company. The KC plant also produces the redesigned ‘08 Mercury Mariner and Ford Escape, along with the hybrid versions of those models.

For GM, Fall 2007 marked the launch of the ‘08 Chevy Malibu and Saturn Aura. A 4-cylinder, 169-horsepower engine comes standard on both vehicles, with an optional 252-horsepower V-6 upgrade. A hybrid option is made as well.

Earlier this year, the ’08 Malibu was named the North American International Auto Show Car of the Year. The opportunity to produce an award-winning vehicle has many at the Fairfax plant excited, but more good times could be on the way. There has been talk of adding an unnamed Buick vehicle to the mix. However, no official announcement has been made.

—Dayne Logan

While things may seem rosy at Wyandotte County’s pride and joy, The Legends at Village West, some restaurant owners there are claiming that the area is more of a landmine than a goldmine. “There’s a lot of displeasure at The Legends,” says Kerry Duffin, co-owner of former Legends tenant Caliente Cuban Restaurant, which is currently involved in a lawsuit with the complex regarding a payment dispute.

The lawsuit stems from what Duffin claims was a nearly year-long delay in the construction of his restaurant, but he also says that a meager weekday customer base was a major factor that forced him to leave The Legends. Business boomed on Fridays and Saturdays. Unfortunately, the rest of the week was just that, weak.

“It’s two-day-per-week traffic,” Duffin says. “When we signed on, we were told to look for 10 to 15 million people per year.” By his estimation, the area brought in less than half that number in 2007. According to an “educated guess” by the general manager of The Legends, Dennis McGovern, the shopping center attracted between eight and 10 million people last year. McGovern would not comment on the lawsuit with Duffin.

Still, other restaurateurs that KCB interviewed also expressed chagrin. Vic Allred, owner of Jazz, A Louisiana Kitchen, says regardless of the actual number of visitors, the real problem is the spread-out design of the shopping center, which isolates shops and restaurants and virtually eliminates foot traffic. “Everything out there is its own separate entity,” he says. “If you’re going to Cabela’s and you want to eat at Jazz, you have to park twice.”

Allred says the sprawling layout, combined with the sheer number of restaurants at The Legends, makes it a very competitive market. “There’s no doubt about it,” he says, “it’s fierce out there.”

John Head, culinary instructor at Johnson County Community College, says the problem goes deeper. The foodservice industry is oversaturated across the entire metro. With new developments springing up in the Northland and the resurgence of downtown, Head says the KC food market is more crowded than ever. And the problem of over-saturation is magnified at The Legends because there are so many restaurants vying for the same customers. “It’s not that the market grows,” Head says. “It’s just that the pie gets re-divided.”

A second byproduct of a congested market is an employee shortage. Head, who knows many students who have worked at The Legends, says the issue has created a revolving door at many of the area’s restaurants. “I know that all those restaurants out there struggle to get employees,” he says.

Head says the key to success is finding the right customer base and location. At The Legends, high-concept theme restaurants like Dave & Buster’s and T-Rex thrive, while the area has been the death knell for some traditional eateries.

—Dayne Logan

In September, analysts wrote off the rumor that Deutsche Post, parent of DHL transportation, would buy YRC Worldwide for $41 a share as “extremely unlikely.” Yet it seems that everything the Overland Park logistics company is doing indicates it might be preparing for a sale.

Over the past year or two, YRC has worked hard to pare down its debt load. The third quarter report shows management’s ongoing effort to keep debt in check. YRC said it would scale back plans to expand in China through acquisitions. While the YRC remains in negotiations with Shanghai Jiayu Logistics Limited, one of the largest heavy freight transportation services in China, it has scrapped other potential deals in the country for ‘08. It had intended to pursue acquisitions there not to “exceed $115 million,” but now only expects to spend less than $50 million on a Shanghai Jiayu deal. YRC’s Chinese partner might also join in the deal, further reducing spending.

There was also the news that YRC would slash jobs as an effort to reduce costs by $100 million over the next six months. Profit margins have been razor thin due to a phlegmatic domestic shipping market, and the job cuts are a clear signal that management is serious about keeping fundamentals looking good.

The unlikeliness of a takeover might be about timing more than anything else. DHL needs a beefier heavy freight network to compete with FedEx and UPS in the U.S. market. YRC is the leader in this area. A takeover would make sense for DHL, however unlikely it seems. But with the sluggish market, and YRC’s negotiations with the Teamsters union that could stretch into March, it might not be the right time. Still, it’s interesting to speculate that a deal might already be done, and YRC is just getting things in line to meet that “unlikely” 40 percent premium offered by DHL. The next six months could be interesting.
—R. Scott Macintosh

We can’t let this one go by. So here are the details. As CEO of Sprint Nextel, Gary Forsee was Kansas City’s highest paid executive, pulling in some $21.3 million a year in compensation and benefits. Now that he’s parting ways with the telecom giant, his severance package could be worth roughly $54 million. Here’s the breakdown of Forsee’s severance package:

Compensation:
Base Salary—$2,900,000
Short Term Incentive, 2006—$414,120
Short Term Incentive, Target—$4,930,000
Long Term Incentive, Accelerated Vesting (1)—$43,240,921
Integration Overachievement Plan (2)—$1,250,000
Benefits:
Present Value of Additional Retirement Benefit—$2,702,699
Health and Welfare Benefits—$34,205
Outplacement Services—$45,000
Security Equipment and Services,
Communications Services and Insurance—$9,658
Excise Tax Reimbursement—$0
Grand total: $55,486,103

(1) The value of accelerated options is based on the intrinsic value of the options, and the value of accelerated RSUs is based on the market value of our stock, on December 29, 2006.

(2) Table gives effect to the Integration Overachievement Plan. This plan provides for a pro-rata payout only for involuntary terminations without cause, or in the case of death or disability, that occur on or after December 31, 2006.

—R. Scott Macintosh

Perhaps it was the jealousy of being scooped on the biggest news story of the year… or, at least, the past month or so. Last Thursday, The Wall Street Journal, citing shadowy unnamed sources while chastising Sprint customers who are unable to pay their bills, reported that KC’s biggest public company was going to replace CEO Gary Forsee. Turned out those sources were right. And at least one local publication didn’t want to face the facts. Indeed, every media organization in town was scooped by the Journal. And that might be the saddest thing about Forsee’s overthrow, other than Sprint’s flabby stock price. That’s because Forsee will be laughing as he sails on his golden parachute to the bank. As the KCB Biz Blog reported Friday, Forsee’s contract calls for a severance package worth as much as $55 million should he be deposed by an angry mob—aka Sprint’s board of directors—or killed. Nothing is so soothing as a giant paycheck.

According to a Sprint news release, “the decision to seek a new CEO was based on the Board’s belief that it is the right time to put in place new leadership to move the company forward in improving its performance and realizing corporate objectives.”

The company reported a jaw dropping loss of approximately 337,000 post-paid Sprint subscribers in the third quarter alone. It also expects operating revenue for 2007 to be slightly below its prior targeted range. Sprint’s churn rate—the pace by which the company has been losing customers—and the risk of building the company’s multi-billion WiMax network have failed to impress Wall Street. So sayonara Gary.

“On behalf of the entire board and the Sprint Nextel employees, we want to thank Gary for his dedication and leadership and all of the contributions he has made since becoming chief executive of Sprint in 2003,” said board member Irv Hockaday in the statement.

Sprint’s CFO Paul Saleh will serve as acting CEO until a replacement is named.

—R. Scott Macintosh

If a Wall Street Journal story is true about Sprint Nextel’s board members quietly trying to replace CEO Gary Forsee, the beleaguered executive will never have to work again. Forsee’s contract calls for as much as $54 million in compensation and benefits should he be forced from the company. Nevertheless, Forsee might be wishing for a buyout instead. Deposition by a change of control calls for a severance package worth as much as $90 million, and a means of preserving his pride.

According to the Journal’s story, citing unnamed sources and activist investor Ralph Whitworth, the board has been dissatisfied with Sprint’s churn rate—the steady clip by which the telecom company has been losing customers—and the risk involved with creating its multi-billion-dollar WiMax technology.

The authors of the story state, perhaps rather broadly and bluntly, that “many of Sprint’s troubles stem from its reliance on customers with poor credit, the cellphone industry’s version of the subprime market. The same kinds of people who have trouble paying their mortgages on time also have trouble paying cellphone bills.”

The story also states that the board hopes to announce a replacement by early December.

—R. Scott Macintosh