Net App The Day to Day of a District Manager PDF

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For the exclusive use of R. Mathlouthi, 2020.

CASE: E-263 DATE: 08/06/07

NETAPP: THE DAY-TO-DAY OF A DM As a rep, your time is your own. As a DM, your time is your rep’s. —Jim Wilson, District Manager

On a cloudy Tuesday morning, July 26, 2002, arrived for work at 6:43 a.m. on his, one hundred and eightieth day as d . He had completed his second full quarter as district manager (DM) at the technology company and, according to his custom, arrived early to try to handle important matters that required his concentration, before the bustle of the day began. . Although DeSchutes had received praise for being one of the best customer advocates in the company’s sales team, Wilson felt that he had lacked judgment in giving the customer discounts that were beyond what was acceptable (and profitable) to NetApp. The company was on a hiring freeze after having executed its first large-scale layoff three months earlier, and one of his five reps was already on his way out. As Wilson reconsidered DeSchutes’ termination, the prospect of meeting his numbers for that quarter—let alone that year—seemed even more distant. Wilson’s thought was interrupted by the unexpected arrival of his star sales representative, Patty Thompson, who approached his desk. Without saying a word, she handed him a bright orangecolored envelope. It was her resignation letter, giving the company a “30-minute notice.” Wilson could hardly believe his eyes. INTRODUCING NETAPP Network Appliance (NetApp) was cofounded by David Hitz and James Lau, Hitz had earned a double engineering degree from Princeton University and worked at MIPS Computer, before meeting Lau at Silicon Valley-based Auspex Systems. Lau had obtained his Patrick Arippol, MBA 2004, prepared this case under the supervision of Mark Leslie, Lecturer in Management, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Certain names and details in this case study have been changed. This case was made possible by the generous support of Mr. Jeffrey T. Chambers. Copyright © 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. This document is authorized for use only by Riadh Mathlouthi in Managing Customer Relationships and the Professional Sales Function-2020 taught by RICHARD CLAYMAN, University Ottawa from Apr 2020 to Jul 2020.

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dual B.S. degree at University of California, Berkeley, and his M.S. degree in computer engineering from Stanford University, before working at Bridge Communications (3Com) and then joining Auspex Systems as director of software development. Leveraging from their combined experience in data management and network storage, the two engineers started They developed a product that separated the typical computer server into its storage and management components, into appliances that they called “filers.” Unlike other products in the market at the time, NetApp’s appliances performed one single task—that of storing network data, without the additional file and operating system overheads. It enabled companies with data-intensive networks to use industry standards and avoid being trapped into proprietary hardware systems, while being able to store and retrieve data at substantially faster rates. NetApp finished developing the first version of its product in 1993, at which time start-up veteran Michael Malcolm joined the company. By 1994, he had helped secure over $10 million in venture funding from firms such as Vanguard, Sequoia Capital, TA Associates, and Sutter Hill Ventures. Thomas Mendoza then joined the company as VP of sales, further driving the company’s outbound activities. Princeton graduate Daniel Warmenhoven became the company’s CEO soon thereafter, contributing his experience from managing telecommunications companies such as Network Equipment Technologies. NetApp closed its 1995 fiscal year in April of that year, generating $15 million in revenues and expecting to break even and triple in size in another year. Later that year, Warmenhoven took NetApp public in the NASDAQ. Driven by the founders’ product expertise and by the senior team’s strategic and execution acumen, NetApp continued growing. By year 2000, it had reached over 1,500 employees and $579 million in revenues and had consolidated its position as a leading global provider of data storage and content delivery products.

By that time, the storage market had turned very dynamic and competitive. NetApp’s products faced competition from EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company, IBM Corporation and Sun Microsystems. Furthermore, it also faced occasional competition from smaller players, such as Auspex Systems, LSI Logic, MTI Corporation, and Procom Technology. High technology start-ups grew at a frenetic pace, which also propelled NetApp to become a 2,200employee-strong organization and generate over $1.1 billion in revenues by the fiscal year ending in April 30, 2001. the rest was split between professional services and software sales.

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CHALLENGING MARKET ENVIRONMENT The late 1990s market euphoria was followed by a period of significant economic slowdown, particularly among Internet and technology companies. By January of 2002, the effects of the “dot-com bust” reverberated throughout the U.S., causing companies in most sectors to slow, or even stall IT spending.

NetApp’s most direct competitor, . Its net income fell from 20.1 percent to a negative 7.5 percent of revenues. Larger companies that benefited from having broader product portfolios also suffered from the market collapse. In 2001, Hewlett-Packard’s and IBM’s revenues dropped by 7.5 and 2.9 percent, respectively, while their net income eclipsed to zero from their historic 8-10 percent.1 Recently hired President Mendoza and CEO Warmenhoven decided to and to adjust the company to its new level of revenues. In late 2001, NetApp executed the first ever layoff, . The company’s restructuring led to a total charge of $8 million, 60 percent of which were severance payments. Significant changes also took place in the sales and marketing departments, which together employed more than half of the company’s people. NetApp determined that its sales and marketing operating expense was to stay below its 2001 level of $289 million throughout 2002.2 Although sales headcount increased to 915 in January of 2002 (as compared to 870 one year earlier), changes were implemented to improve sales force efficiency, such as cost control measures (e.g., health insurance) and commission reduction policies. After the changes, sales and marketing expenses decreased 1.5 percent to $209.3 million for the nine-month period ended January 25, 2002 (from $212.6 million for the nine-month period ended January 26, 2001).

NEW DM FOR NORTH SILICON VALLEY On Monday, January 28, 2002, the first day of NetApp’s fourth fiscal quarter, Jim Wilson was hired and started working as new district manager (DM), to lead the sales representatives of one of NetApp’s highest-potential districts in the San Francisco Bay Area. Called “North Silicon Valley,” Wilson’s district covered most companies located between North Palo Alto and the city of Belmont, as well as additional “named accounts” that fell outside of that perimeter (see Exhibit 1 for a further description of the district). It was one of three districts in the San 1 2

Sources: SEC Filings; Network Appliance Form 10-K, for the year ended April 26, 2002. Note: In 2000-01, NetApp’s sales and marketing operating expense had increased by 88 percent.

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NetApp: The Day-to-Day of a DM E-263

Francisco Bay Area region, which also included the South Silicon Valley and Downtown San Francisco Districts—all densely populated with start-up high technology companies. After obtaining his B.S. degree in Business Administration from California State University at Chico, Wilson began working as a stock trader, then decided to change careers after “Black Monday,” the 1987 market crash. He worked for two to four years at each of five technology start-up companies, mostly in the Silicon Valley. Over 13 years, as he developed an expertise of successfully selling IT infrastructure products, . He was a keen believer in (and seller of) NetApp’s product, and became an investor in the company after the Sunnyvale-based start-up offered its partner companies the opportunity to participate in one of its private investment rounds. Wilson was hired by Regional Sales Director (RD) Alice Minnelli, who in turn reported to VP of Sales Whitney Tomlin. Minnelli was a friend of NetApp’s CEO before she joined the company. By 2001, she had accumulated six years of work in sales, and had rapidly moved up NetApp’s ranks to become a second-line manager. Tomlin, on the other hand, had just joined NetApp in October of 2001. Besides selling mainframes for IBM and Wang Laboratories for nearly a decade, he had also spent five years as VP of Sales for Cisco’s western region.

He also faced the typical challenges of “learning the ropes” of his new job. Wilson explained: Positions in sales are very visible to the company’s senior management, particularly in difficult environments like that of 2001. In any organization, sales representatives have some downtime due to their irregular work schedules, which inevitably fuels a gossip ring that I’ve seen create irreversible damage to incoming DMs.

He explained: I didn’t feel like I had to micro-manage my people. I only got more involved when reps asked for help, or when strategizing was needed. I was upfront with 3

Interviews with District Manager Jim Wilson (June 6, June 13, July 23, and July 26, 2007), Sales Representative Garett Okano (June 27, 2007), VP of Sales for the West Coast Whitney Tomlin (June 29, 2007), Sales Representative Victoria Knapp (July 3, 2007), and Sales Representative David Engel (July 5, 2007). Subsequent quotations are from the author’s interviews unless otherwise noted.

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Wilson felt that his approach was adequate, given NetApp’s culture, the office’s open-door layout, and the fact that his entire team was located in the same physical office space. Aware of the fact that he would likely have to change members of his sales team, Wilson sought to understand NetApp’s sales management tools and policies, during his first week at the job. He discovered two key processes at NetApp that would help him monitor and manage his team. One was the “Focal Review,” an appraisal of reps that was conducted every year at the end of Q4 (see Exhibit 3). The other one, called the “Improvement Plan,” was used for employees with mediocre or failing performance (see Exhibit 4). Managed jointly by the rep’s DM and by the company’s Human Resources (HR) department, this program extended over 90 days, and consisted of classes and a close monitoring of the rep’s performance metrics—which included numbers of sales calls, numbers of visits, and booked revenues. Wilson learned that Improvement Plans led to one of two outcomes: “The rep either improved in performance, or was terminated. NetApp’s HR folks were jokingly called ‘angels of death,’ for that reason.” In Wilson’s second week at the job, NetApp announced negative results for the third quarter of FY2002 with revenues of $198 million, as compared to $288 million for the same period the year before. He knew that the situation was critical. Customers within his district were still reticent about making new capital expenditures in technology, and the overall economic environment remained unfavorable. NetApp’s products, which sold for prices ranging from $4,000 to more than $1,000,000, saw declining unit volumes. Its older products, such as F700 Filers, also suffered from a falling selling price. Wilson refocused his activities, in his DM capacity, to face the situation: “Reps can only see and influence events in the next 60 days. As a DM, I need to see and maximize results 120 days ahead, and leave it up to the RD and VPs to see and change things for the longer-term.”

Wilson intuitively believed that NetApp’s larger competitors were still reshuffling from the impact of the “dot-com crash” on their businesses, which could create a substantial opportunity for his team.

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EVALUATING REPS At the request of his RD, Minnelli, Wilson reported his progress to her on a weekly basis. They had arranged a 3 p.m.to 4 p.m. meeting every Monday to review Wilson’s detailed opportunity forecast and district activities and issues during that time. Like the two other DMs in his region, Wilson was also scheduled to meet with Minnelli and VP of Sales Whitney Tomlin once every month, to present account reviews for the quarter. Wilson’s first meeting with Tomlin was on Monday, February 25, 2002—one month into his tenure. He shared his preliminary impressions of his district and accounts, and explained how he did not feel comfortable about evaluating any of his representatives yet, except for Bing Chasen and Brian Smith. Chasen was already on an improvement plan when Wilson joined, and they agreed that he was probably not going to make it. In addition, Wilson had just put Brian Smith on an improvement plan, since by then he had only reached an average of 60 percent of his quota during the nine previous months (see Exhibit 5 for quotas versus actuals, for FY2002). He thought that NetApp’s improvement plan would likely help Smith, who appeared to have the proven skills but was temporarily struggling to cope with caring for his first baby, then six months old. Tomlin often used his first meetings with incoming DMs to field potential questions, and to provide them with additional context, as he did with Wilson: I know that you’ve inherited a mixed bag of talent. Hyper-growth companies—or ones that grow at 30 percent or more for successive years—are known to face difficulties in growing [their] sales organizations. NetApp grew at more than 70 percent for seven successive years, and we nearly doubled our sales team last year alone. Now we have no choice but to scale back our sales organization, and to filter the keepers from the reps we have to let go. Tomlin then provided Wilson with further detail about what had happened with NetApp’s sales area in recent years. Their hiring philosophy had always been to “over hire,” which they described as the practice of hiring professionals with more proven experience than what was demanded by their new jobs. He explained: “Over hiring” empowers our people. It allows them to grow from within the company. That would not occur if we hired top-guns from the outside, directly into senior positions. It also gave us good management depth that counterbalances the capable yet green managers who rapidly rose up our ranks. Altogether, this practice has kept our team both dynamic and solid. The scarcity of good professionals during the dot-com period, however, forced us to become more liberal in our hiring practices, and to hire professionals that were less experienced ones—or who had generic high-tech backgrounds instead of specific domain expertise in storage technologies. Tomlin continued:

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Wilson thanked Tomlin for sharing his insights, and affirmed that changes in his team would probably be needed: “ He went on: “We certainly do not want our best people to leave, and fortunately our good sales people do not want to leave NetApp either. rates.” FOCAL REVIEWS By mid March of 2002, as Wilson evolved his relationship with each sales rep, he kept a mental log of how each one fared against the criteria he felt were most crucial for the role: understanding of sales cycles; ability to prioritize leads; skill of navigating within the right levels of the customer’s organizations; understanding of customer’s needs; and ability to adapt to the industry’s changing dynamics. Wilson also tried to determine which reps performed best as “farmers” (who built on existing relationships to grow accounts), and which ones were better “hunters” (who efficiently converted a mixed bag of prospects into first-time customers). Wilson also made a concerted effort to support his reps emotionally. Although he liked the reps who could deal with adversity, he knew that people living through difficulties were less likely to perform well. Wilson discovered that, like all DMs at NetApp, he had to conduct focal reviews with reps in the last 30 days of the fourth quarter. He used much of the rep evaluations that he had already begun conducting before having one-on-one conversations with them. Only one of his sales people, Todd DeSchutes, disagreed and decided to discuss Wilson’s assessment of his performance that year.4 The situation was ultimately resolved after conducting a meeting that included one representative from the HR department, and resulted in DeSchutes being assessed an intermediate score. Those scores did not affect sales representatives’ commissions, but helped guide DMs so they defined who they promoted. (See Exhibit 6 for a description of reps’ compensation models.) SETTING FY2003 QUOTAS One month before the close of NetApp’s fiscal year, on Monday, March 26, Wilson reviewed his progress with Minnelli and Tomlin. He learned from Tomlin that so far NetApp was finishing the quarter at slightly over $200 million in sales, closing product revenues for FY2002 more than 20 percent below FY2001 levels. Wilson’s district was expected to reach 85 percent of its $8 million target, even though two of his reps—Victoria Knapp and Patty Thompson—were 4

Note: That year, for the first time, NetApp’s DMs had to score reps on a “normal distribution curve” (in which only 5 percent of reps ever made the highest score of 1). In prior years, DMs were allowed to score reps as they pleased. Todd DeSchutes complained that he received a score of 3, instead of 2, which had been the score given to him for the prior two years (by DM Jim Wilson’s predecessor).

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