Wednesday, October 25, 2006

How to make Wall Street Analysts Relevant



They are a highly sought after group of commentators on CNBC and the business press: Wall Street Analysts. Often, they have impeccable educational pedigrees and years of experience at bulge bracket investment banks. A major business story in BusinessWeek, Barron's, and the WSJ almost always has a couple of quotations reserved for an analyst who covers one of the companies under the microscope.

Back in the halcyon days of the late '90s, these curious creatures even broke into the ranks of business celebrities -- almost as famous as the entrepreneurs and managers they covered. Mary Meeker of Morgan Stanley was trumpeted as the "Queen of the Net" for her coverage of the Internet space. Henry Blodget (pictured above) made the audacious prediction that Amazon would hit $400 (and it did shortly thereafter), allowing him to ditch the house of Oppenheimer for the more luxurious digs of Merrill Lynch. And Jack Grubman of Citi was the telco czar -- for a time.

Of course, we all know what happened next. Only Mary Meeker came out of that mess with her dignity in tact. The telco and internet analysts saw their importance dim, as the industries they covered waned. Yet, for some inexplicable reason, analysts remain "go to" people for the business media.

Turn on CNBC during the trading day and you're bound to see an analyst (or two on a split screen) helping us digest the numbers for Company A's most recent quarter. Presumably, the media goes to these people because: who better to comment on a company than someone who is paid to study it? Their employers (the investment banks) are only too happy to put them out there to chat, as a little publicity never hurt anyone.

Yet, here's a basic question: who among us has ever garnered an insight from one of these talking heads? They are prone to regurgitating back the most recent numbers for the given company. If the numbers hit or surpassed, they shower praise; if they missed, they identify that some problems exist. But, too often, the commentary is reporting facts, rather than strategic insight.

For example, in the Spring of 2005, Google had a blow-out quarter. Jordan Rohan, an RBC analyst, who gets attention because he covers Google and never shies away from a media interview, grudingly acknowledged their success this way: "Google's defying the logic of growth companies." About a year later, Google's stock took a hit, after it mistakenly posted financial projections on its website. The company has resisted giving Wall Street analysts guidance. Jordan disapproved, saying: "We believe Google management is creating unnecessary volatility by refusing to issue financial targets." Additionally, he complained that management's capital spending was "unfathomably high." After Google's most recent blow-out quarter, Rohan struck a congratulatory tone: "This is an eye-opening and refreshing quarter for Google investors."

What's wrong with this synopsis?


  1. Analysts, unlike the companies they cover, rarely are accountable for what they previously write. No one ever goes back and studies whether their ability to predict the future actually panned out.
  2. Analysts are chronic rear-view mirror drivers. These are bright Harvard MBAs. Yet, I am less interested in what has happened to a company compared to what will happen. I can read the press release or listen to the conference call. Where is the insight into what will happen down the road?
  3. How many original ideas do you recall hearing from analysts? The kinds of thoughts that made you stop and rethink how a space was developing? I frankly can't think of any. I can think of outlandish price targets -- but few singular thoughts.
  4. Analysts' insights are free to all who watch CNBC and, therefore, worthless. Free information is a commodity. For these analysts and their companies, the name of the game is publicity for the investment banking team. Have you ever noticed you never see analysts from hedge funds on CNBC? Why? Their intelligence is valuable and their firms will not easily part with this.

So, what are some solutions for the problem of more talking head analysts on CNBC? Here are a few modest suggestions for how to make Wall Street Analysts more relevant to market observers:

  1. Hire McKinsey/Bain/BCG strategy consultants (or others with a similar Strategy bent) as Analysts. A big problem with analysts is that they are too analytical. It would be much more interesting to hear comments or read reports from those with a background on saying what the latest results mean for the future and how well the company is strategically positioned.
  2. Track Analyst Performance and report it. While Institutional Investor magazine and others do analyst ranking, what's missing is analyst accountability. Big business periodicals should track analyst predictions and then show how they actually did. If someone is perenially a poor performer, there's probably a better profession for him/her. As Dr. Demming, the grandfather of Quality, said, 'you can't improve something, if you don't measure it.'
  3. Reward Analyst Creativity. There should be the equivalent of a Pulitzer Prize for Wall Street research. In the meantime, compensation should also follow original ideas that help banking clients make money. If you don't pay for it, you won't see it. The creativity should also drive more publicity for the firm.

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Friday, October 20, 2006

Top Ten Ways to Turnaround a Dysfunctional Team



  1. You’ve just been hired or promoted to lead a company, division, function or team. However, your quick analysis of the players in the group suggests you’ve got some major problems. What do you do?

    Here are the top ten ways to turnaround a dysfunctional team:

  1. Get rid of non-performers immediately. You will save yourself a lot of time and goodwill with other team members if you get rid of the cancerous members of the team right away. You’ll notice a lightness and energy in the air immediately afterwards.
  2. Fill vacant roles with capable people with amazing attitudes, skills for that particular area, and zealous attention to detail and follow-through. Top talent loves other top talent. They hate being on a team with others that are slowing them down. Most companies we see do a decent job hiring for attitude and skills but a terrible job judging someone’s attention to detail and follow-through.
  3. Set the vision for the group and establish milestones to achieving the vision. You’re the group leader. That means, it’s part of your job description to set the goal for the group. It doesn’t have to be a vision with a capital “V.” Just paint a picture of what you want to accomplish over the next few weeks/months/years. You don’t want you’re team saying, “what the heck are we doing? Where is this leading us?” The vision also needs milestones. People want to know how they’re doing in relation to their goal. Milestones let you tell them.
  4. Follow-up and remind the team how they’re doing against the milestones. This sounds simple, but a lot of team leaders forget to update their members on how they’re progressing against plan. If too much time passes between updates, people’s attention drifts to other topics.
  5. Agree on meeting ‘rules of the road.’ Start and end meetings on time. Also, it’s unacceptable for team members to be late for meetings. This can’t be enforced differently across the group. Even if it’s your star sales person who’s late, he/she should be held accountable just as if it was anyone else. If we’re a team, we all need to follow the same rules.
  6. Schedule regular face time with each of your team members at least monthly and ideally bi-weekly. I meet lots of busy managers who say, “my people know they can always come to me… I have an ‘open-door’ policy.” Yet, probably most don’t bother. It doesn’t happen. The best bosses who have the best teams know the importance of ‘checking in’ and keeping a finger on the pulse with every team member. When it doesn’t happen, you can see the team start to gradually drift apart.
  7. Hold fewer team-wide meetings but smaller ones with the right people attending. Top talent hate it when their valuable time is chewed up by endless meetings that they really shouldn’t even be at anyway. This is especially a problem in companies which have a more participative/democratic culture. Yet, you’ll have a happier team with fewer meetings with only the most necessary people invited.
  8. Do annual performance reviews and discuss the team member’s developmental needs. This one is a big differentiator between the high- and low-performing teams. Everyone’s busy. (Don’t you get sick of people telling you how busy they are? Aren't we all?) Yet, a lot of people will use their busy-ness as an excuse for not doing performance reviews in a timely manner. They see it as less important that “getting real business done.” Yet, when we’ve studied multiple industries and multiple companies, whether or not you do timely performance reviews is a huge predictor of team performance. The best team leaders make time for this – and their people appreciate it and get better in the areas they need to.
  9. Hold people accountable. If someone’s not pulling their weight, you’ve got to call them on that. Other team members who are pulling their weight will resent you more than they resent the loafer if you don’t.
  10. Measure the team’s progress at least annually. There are lots of tools available to measure where your team is at today and where it needs to be tweaked. It’s a good idea to get in the habit of benchmarking the team’s performance relative to others on an annual basis. By reviewing the strengths and weaknesses from their own ratings and seeing them in black-and-white, you’ll find it easier to gain consensus on the areas that need improvement. My firm’s tool of choice is called the Breakout Performance Index. More information on it is here.

As the team leader, you’ve got to take responsibility for when things go well and when they don’t for the team. If you fulfill these 10 requirements, you’ll have the team humming within 6 weeks. Good luck.

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Thursday, October 19, 2006

The Best Advice I've Ever Received About Hiring Talent


About 8 years ago, I met Glenn Fuhrman of MSD Capital in New York. At the time, I was in the midst of writing my dissertation at Columbia on what drives pre-IPO and post-IPO success in venture-backed firms (the tome is here if you are interested). I was getting a little glazy-eyed from reading all the academic papers on the topic in the Columbia stacks, so I set out to sit down and chat with as many NY VCs and managers from VC-backed firms as I could. I find the best research and writing on business combines facts with relevant color commentary from subject matter experts.

Glenn has a unique background for a hedge fund manager. He’s got the requisite Wharton and Goldman pedigree. What makes him unusual is that he was an Art History minor at Wharton and remains an active patron and supporter of the arts in New York. (He serves on the board of MOMA’s Junior Associates.) Now, he runs MSD Capital with his partners and they have one very important client: Michael Dell.

Every VC you meet will tell you the importance of management in the success of a start-up. I heard lots of comments during my interviews like “In real estate, it’s ‘location, location, location,’ here it’s ‘management, management, management’” or “We’ll only do the deal if we like management; all our failed deals were when the market and product was great but the management sucked.” These days, it’s become almost cliché in business circles to utter a variation of Jim Collins’ aphorism: “Get the right people on the bus.” However, these comments fail to provide much guidance on exactly how to do this.

Glenn gave me what I think is the best advice I’ve ever heard about hiring new people into an organization. It’s about as good as a few sentences can get. Here it is:

“I only ever hire ‘A’ players for me and my companies. If I hire ‘A’ players, they will hire ‘A+’ people below them. If I hire ‘B’ players, they will hire ‘C’ players below them. ‘A’ players don’t get threatened by better people below them; ‘B’ players do.”

Whether you’re building a VC-backed firm or filling one of the 1000 daily open jobs at Yahoo! (as Libby Sartain talks about here with Guy Kawasaki), you would do well to heed this advice. A bad hire today can lead to a legacy of bad hires for that particular company, function or group. Something not easy to undo down the line.

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Tuesday, October 17, 2006

What Drives Success in the Seniors Housing Industry?



This Breakout Performance blog is dedicated to understanding the factors which drive "breakout" (i.e., exceptional) sales and profit growth over time. Although there are some general aspects of leadership, strategy, and organizational process that cut across industries, the truth is that there are often significant differences between industries. Recent postings have discussed what drives success for venture capital-backed firms.

We recently had the opportunity to study the American Seniors Housing industry with our "Breakout Performance Index" (or BPI) tool. Over 2 million seniors today are served by this industry and -- like it or not -- it's a service we'll all likely use in the next 10 years for ourselves or our parents/family. About 10 large seniors housing organizations from Seattle to California and across to Boston and Maryland participated in our research.

Here are the major findings of what accelerated sales, sales growth, profitability and market share in our research group (ranked in order of statistical importance):

  1. Facing Reality: When problems arose with a new location or product launch, the better performing companies quickly jumped on them.
  2. Preventing Groupthink on the management team: The President and CEO of the best-performing companies in our dataset didn't require that eveyone on his/her team think like him/her. Diversity of opinion was welcomed, not shunned.
  3. Ensuring senior managers were sufficiently challenged in their current roles: We found lower performing companies had more senior managers who felt insufficiently challenged in their current positions.
  4. Putting a clear Succession/Talent Management Plan in place: The better performing seniors housing companies had taken the time to chart out their future talent needs and start preparing for them.
  5. Using conflict on the management team about an issue to result in a better decision: Lower performing companies let conflict shut down a discussion.
  6. Mentoring key staff to pass on knowledge and industry contacts: Lower performing organizations said they didn't have time to do this. However, the better-performing ones did.
  7. Providing clear and objective performance reviews to management: This was an area that many organizations felt they could improve in.
  8. Ensuring there was a sufficient degree of "proactive paranoia" on the management team: Lower performing organizations often felt that were the dominant player in their geographic territory.

If you would like to learn more about the BPI and where your organization ranks relative to others in our dataset or what aspects of leadership, strategy, and process you need to improve in, let me know. We can also provide comparisons to a number of other industries.

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Monday, October 16, 2006

What Have We Learned from Friendster?



Kudos to Gary Rivlin at the New York Times for his great piece yesterday on Friendster. If you didn't see it, the original article is here, and the follow-on coverage from Michael Arrington is here.

It is a great tale of how Jonathan Abrams (pictured left) started the site as a way to get a few dates, turned down a $30M buyout offer from Google (which would be worth around $1B in GOOG stock today), and opted to raise VC money from John Doerr of Kleiner Perkins and Bob Kagle of Benchmark -- trying to create the next big thing. However, the bigger buyout offer never came, Jonathan Abrams is gone, and Friendster did a recap in the Spring with DAG Ventures.

There are several lessons to be learned from the Friendster fiasco. They seem to connect well with recent research I've published on the Breakout Performance blog on the drivers of VC-Backed firms' sales growth, as well as comments we've made here on the topic of "Why Smart Executives Fail" and the 'Seven Habits of Spectacularly Unsuccessful Executives.'

Here's the abridged version of lessons learned from Friendster:

  1. Never forget basic blocking and tackling. In our research, we called this "basic attention to detail" -- something Jeff Bussgang has discussed. If the Friendster site doesn't load, who cares what Yahoo and Google might do next according to the SWOT analysis?
  2. Even with bluest of "blue-chip" VCs, success can never be taken for granted. None of us has the Midas-touch -- even John Doerr and Bob Kagle. Managers and directors alike need keep a spirit of "proactive paranoia" alive in all discussions. Succes is taken and kept; it's never handed over easily.
  3. Even if you're the smartest CEO in the world, arrogance can be a company-killer. It's not intellect which gets companies into trouble; it's arrogance. Listen to a comment to Arrington's post on Techcrunch in response to his covering this article: "I remember shortly after Friendster launched, and Jonathan Abrams was responding to comments — I made a few suggestions about how it might be a good idea to integrate blogs and rss feeds. My suggestion was laughed off by Abrams as being ‘too geeky’ for their audience — and his arrogance was clearly apparent. I stopped using Friendster from then on."

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Friday, October 13, 2006

Terry Semel: Cause of Yahoo's Success or Along for the Ride?





It's an age-old question in the study of leadership: Do leaders really matter? In America (at least, outside of business academia), uttering these words is almost sacreligious. We crave heroes and scapegoats. Leaders help make sense of the world around us. Yet, there are some -- they call themselves "organizational ecologists" and, I have to say, they weren't too popular with the MBAs in B-School) who say: no leader in today's large corporations make that much difference. Take anyone else of a minimum ability level and they would do just as good a job. The die is already cast for them, given the company's size, resources, capabilities, and market position. I can hear all the management consultants and recruiters out there shuddering at this notion. And I also believe it's ridiculous. More than belief, there's empirical evidence that the right leaders do matter and can confer significant financial and morale-improving benefits to their companies. By the same token, the wrong leaders can be a drag.

Yet, the ecologists raise an interesting question: If you put leader A in the CEO's chair at time 1, and if you put leader B in that same chair at time 1, what would be the difference in company strategy and performance at time 2? The question is really unanswerable -- yet, it makes for great conversation.

Which brings us to Terry Semel at Yahoo! There's a bit of a pile-on going on now in the wake of GoogTube. Google = fast-moving/innovative/smart; Yahoo! = slow-moving/pedestrian/dumb. Google pounces on an incredible strategic opportunity in buying YouTube. Yahoo can't get a deal done with Facebook and lets it drag on for months. The truth is rarely black and white; there's always more context than what gets printed. Yet, Terry Semel hasn't really helped himself with the Street or in the Valley. After Barron's touted them as ready to break-out of a holding pattern, they've proceeded to whiff on earnings, delay a major ad product, not do a deal with Facebook, MySpace, AOL, or YouTube, and forced their employees to take unpaid sick/vacation time this Christmas.

Who is Terry Semel?

Terry, 66 years old, was born in Brooklyn, NY. He joined Yahoo over 5 years ago, after 24 years as a studio hot-shot heading up Warner Brothers. His hiring was met with surprise and skepticism. Of course, when you hire an outsider, you want something different. The board wanted an anti-Koogle (as in Tim Koogle, Semel's predecessor -- a more Techie Valley guy who had overseen Yahoo's enormous bubble growth -- remember Broadcast.com and GeoCities -- and its post-bubble deflation). And the board got Hollywood: Semel keeps his main residence in LA, got lost the first time driving around the Valley, brought in Lloyd Braun from ABC, and sits on the boards of Revlon and Polo Ralph Lauren. In the early days of Semel's tenure, YHOO's stock dropped. The critics pounced and Semel's hiring was questioned. Then, the stock went up. The critics cheered and said Semel was quite adept in his adopted industry. Now, the critics are out again, as YHOO has remained depressed and they haven't pulled the trigger on some deals. Unfair? Sure. Intelligence does not directly correlate with stock price. But the bottom-line is that there are some things Terry can do differently which would greatly help the overall success of Yahoo.

So, has Terry Semel caused the turnaround of Yahoo in the last 5 years? Or would it have happened anyway, if you'd put any other competent insider (say Jeff Mallett) or outsider in the position? What is he responsible for versus what would any CEO have overseen given the company's resources/positioning/market dynamics which occurred over the last 5 years?

We'll never know what Jeff or anyone else would have done. But here are some practical suggestions on what Terry Semel should change Monday morning:

  1. Sell your house in Bel Air and move full-time to Atherton or some otherwise acceptable zip code near Yahoo HQ. I know you have a family and friends in LA, but it sends the wrong message.
  2. Mingle with the "rank-and-file". You don't have to play hacky-sack in parking lot, but a little "management by walking around" and lunching in the cafeteria would be welcomed.
  3. Tone down the Tom Cruise appearances at the Yahoo campus. Yahoo shouldn't be about the bling, but be about the "!" -- what made Yahoo unique in the first place. Now, to be fair, there are a lot of celeb drop-ins/drive-bys at the Googleplex. But, the point is (and it goes for Google or any other company) that this is not the red carpet. It's a business and it's about destroying the competiton.
  4. Suck up the sick days. It sends the wrong message to the team. I've never seen a company force use of vacation/sick days and see it work for them in the long-run.
  5. Expand the brand. Semel's not getting any credit these days for 2 phenomenal deals Yahoo made: Flickr and Del.icio.us. Keep it going. Is Facebook going to revolutionize the world or Yahoo? No. Will it be better than Yahoo 360? Yes. Should you be quick to move on others in the future. Unquestionably.
  6. State the vision and why Yahoo is unique. Is Yahoo the next multi-channel web platform? Sure looks like it. Why don't you sell it now to Wall Street and others before the Skype guys launch the Venice Project.
  7. Keep the "talent firewall" in place. GigaOM discussed Yahoo's attempts to keep its top talent ensconced at Yahoo. As mentioned earlier, the best way to do this is not by re-pricing options or giving more, but getting talent jazzed to stay (see here how to do so).
  8. Keep up the individual goals for the Yahoos. In a 2002 CNET article, David Mandelbrot, a Yahoo VP, said: "To have accountability, you have to have individual goals.... We didn't have that before." Keep it up.

Now might be the perfect time to buy YHOO, when expectations are exceedingly low. Can Terry turn it around? Yes, with a few successes, these current nay-sayers will disappear. However, without following some of these 8 suggestions above, Yahoo will continue to hamstring itself.

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Picking 'Partner Managing Directors' at Goldman Sachs


Very interesting Page One article in today's WSJ here about the process followed by the venerated Goldman Sachs in picking the highest level of Partner in their firm: the "Partner Managing Director." In the Wall Street world where "stars" rule, Goldman has done a masterful job of keeping its tight-knit team culture.
The article drives home the point that the highest-potential talent are driven by counting themselves among the "best-of-the-best" rather than money alone.
Here is the full text of the article from Susanne Craig:
In June, top executives at Goldman Sachs Group Inc. began compiling lists of candidates for one of Wall Street's most exclusive clubs -- the 300 or so "partners" who take home a big chunk of the firm's profits.

Candidates were divided by letter grade into three categories -- A's, B's and C's. The C's were the long shots. "I can tell you that for anyone who is a B or a C in this process, it's the first time in their lives they've ever been ranked that," says Gary Cohn, Goldman's co-president, who oversees the process.
It's one of the business world's most lucrative and secret sweepstakes: Goldman's selection of its elite "partner managing directors," or PMDs. It dates back to Goldman's roots as a private partnership, in the days when that's how big Wall Street firms were run. Goldman went public in 1999. But every two years, in an effort to retain the clubby culture of old, Goldman anoints about 100 PMDs. Being inducted is considered a ticket to huge riches.
"On Wall Street, this club is the endgame and it is the best corporate motivation tool I have ever seen," says Glenn Schorr, an analyst who covers Goldman for UBS AG.
Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid to its more than 25,000 employees world-wide, according to people familiar with the matter. That averages out to about $7 million per partner.
Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative. Such offers aren't typically available to other Goldman executives. They can buy Goldman shares at a 25% discount. The firm prepares their taxes. Goldman will even book tables for them at hot New York restaurants such as Babbo and Spice Market.
Some receive bigger paychecks than their bosses. Mark McGoldrick, who became a partner in 2000 and heads a group that invests the firm's own money, earned about $40 million last year, according to people familiar with the matter, eclipsing his boss, Goldman Chairman and Chief Executive Lloyd Blankfein, a partner who earned $30.8 million in 2005.
NATURAL SELECTION

How Goldman Sachs is picking this year's class of "partners":
April 3: Division heads begin selecting people who may vet potential partner candidates.June: Division heads list their top choices for candidates; current partners from each division discuss candidates.
July 10: The partner nomination process starts.
Aug. 14: The vetting begins.
Oct. 2: Goldman senior management meets with vetting captains for status report.
Oct. 19: CEO Lloyd Blankfein is scheduled to meet with firm presidents Gary Cohn and Jon Winkelried to review the final list of candidates.
Oct. 23: Senior management meets to review the candidates.
Oct. 24: Mr. Blankfein finalizes the list.
Oct. 25: New partners are announced.
Goldman's partners have the best of two worlds. As a public company, Goldman can raise large amounts of cash easily. Yet in some ways, it still takes care of its top people as if it were a private firm.
Goldman's top money-makers, referred to within the firm as "commercial killers," have the best shot at making partner. In 2004, just four of those selected came from divisions that don't produce revenue, such as the legal department.
The firm won't discuss this year's candidates or comment on partner compensation. In 2004, 237 people were nominated, 174 were vetted by partners, and just 99 were selected, including only 14 women.
The seven-month selection process, which started this year on April 3, has long been the subject of Wall Street speculation -- about those in line to make the cut and about those who fall short. Eight of the 23 members of Goldman's management committee agreed to talk about what goes on behind the scenes, as did a number of current and former partners.
Top executives who vet candidates never interview the up-and-comers under consideration, opting instead to discuss them with other partners. When final decisions are made, Mr. Blankfein is likely to break the good news to the new partners. Those who don't make it get the bad news from division heads. Few candidates ever find out why they made or missed the cut.
"My entire goal when I was up for partner was to not step on any land mines, keep my head down and continue to perform," says Michael Daffey, co-head of Goldman's European stocks group, who made partner in 2002.
The also-rans are sometimes reconsidered two years later, but often their Goldman's careers are effectively over. The winners who don't subsequently perform up to expectations are sometimes quietly asked to leave.
Investment banker George Foussianes was turned down at least twice. He had worked in various departments at Goldman, leaving him with no single partner to champion him, which hurt his chances, people familiar with the process say. He left Goldman last year for a top post at HSBC Holdings PLC. Mr. Foussianes says he was disappointed by the outcome, but viewed the process as valuable.
Mark Slaughter, a Harvard-educated lawyer who worked in the investment-banking division, was passed over more than once before he left Goldman in 2005 for a senior post at Citigroup Inc. He declined to comment. Robert Hottensen, a highly ranked Goldman stock analyst, also twice missed the cut and left. Mr. Hottensen says he was "extremely disappointed" but that the possibility of making the club motivated him to work harder.
This week, Joseph Stevens, a top Goldman banker in China, caused a stir within the firm when he quit to join Standard Chartered PLC, taking himself out of the running for partner amid rumors he wouldn't make the cut. Mr. Stevens heard the rumors, he says, but was told he had a "strong shot" at making partner. He says he left because he wanted Goldman's top job in China, a position currently held by someone else. Goldman declined to comment on Mr. Stevens's decision.
For years since Goldman's founding in 1869, anyone who joined the firm and showed promise had a good shot of becoming partner. Until a couple of decades ago, the firm was much smaller and kept the number of partners to a minimum; in 1982 there were just 70.
The stakes for this year's class are high. In recent quarters, Goldman has been posting impressive quarterly profits -- $1.59 billion in the third quarter -- and its stock is up 40% so far this year, eclipsing the 17% gain for the Dow Jones Wilshire U.S. Financial Services Index. As some other large securities firms have pushed to become global financial supermarkets, Goldman, the world's No. 1 merger-advisory firm, has moved deeper into trading and investment banking. It has put more of its own money on the line both to trade and to invest in other companies, a move that has increased risk but beefed up profits.
Goldman's partners have always viewed their firm as a cut above the rest of Wall Street. Mr. Blankfein, a hard-driving former gold salesman who took the top job at Goldman in June, likes to refer to an intangible secret sauce that makes Goldman smarter and savvier than its competitors. Although Goldman is known for the fat pay partners receive, Mr. Blankfein bristles at the suggestion that money-making is all that drives his partners and the firm's selection process.
Successful partner candidates are expected to be "culture carriers," he says. The firm encourages public service by partners, he says, and many partners have pursued that path, including former Chief Executive Officer Henry Paulson Jr., who is now Treasury Secretary. "Sure, Goldman partners make a lot," Mr. Blankfein says. "But I can pay people a lot of money without going through this process."
At other Wall Street firms, executives typically aspire to become managing directors, a title that often comes with perks ranging from the right to buy firm stock at a discount to membership at the corporate gym. Goldman has 950 managing directors, who are referred to internally as "MD light," because that position is viewed as a stepping stone to becoming a partner, or PMD. Goldman Co-President Jon Winkelried, who oversees the selection process with Mr. Cohn, says making partner is viewed as the real beginning of a career at the firm.
The selection process is managed by a partnership committee chaired by senior partners Kevin Kennedy and Eric Schwartz. Messrs. Cohn and Winkelried oversee the process, and Mr. Blankfein gets the final say. Candidates often are sponsored by a partner. But lobbying is frowned upon, and can actually work against candidates.
In the mid-1990s, then senior partners Stephen Friedman and Robert Rubin, who have since joined other companies, developed a system to vet candidates. They dubbed the process "cross-ruffing," a reference to a complex bridge maneuver. At Goldman, it is the process by which partners review candidates from other departments. Investment-banking partners, for example, will review candidates from asset management.
This June, after grades were assigned to candidates on the preliminary list, partners in each division met to narrow the field. About 25% of the candidates are almost assured partnership, accords to Messrs. Cohn and Winkelried. Candidates who got C's were deemed unlikely to make it this time around, although some might have a shot down the road.
Goldman puts together teams of partners who cross-ruff the candidates. Team members are trained in what the firm is looking for and how to question their fellow partners about candidates in a consistent way. Among other things, they are told to ask about performance on specific assignments and about contributions outside of their departments.
Questioners are provided with a white binder containing the candidate's color photo, his or her performance review -- which includes feedback from peers, subordinates and bosses -- and a list of partners who know the candidate. Often, the questioner has never even met the prospective partner.
During the last selection process, in 2004, research strategist Abby Joseph Cohen led the cross-ruffing group for Goldman's asset-management division. One candidate, Tom Kenny, was a stranger to her. She interviewed more than a dozen partners before coming to a decision about him.
"He hasn't been here long, but his numbers are great and he is respected as a leader," Ms. Cohen says she said during a meeting with the firm's top brass just before they voted to make Mr. Kenny a partner.
Soon, Goldman's partnership committee and partners in each division will meet to hash out the names one last time. Messrs. Blankfein, Cohn and Winkelried plan to confer next week to review the final choices. Those selections will be voted on by the management committee on Oct. 23.
Turning hotshots into partners is no guarantee that they'll stick around. George H. Walker, a second cousin of President Bush and a rising star on Wall Street, became a partner in 1998 but left Goldman earlier this year to join rival Lehman Brothers Holdings Inc. He will run the firm's investment-management group and join the firm's executive committee. Mr. Walker, 37, might have had to wait years for this type of promotion at Goldman. Mr. Walker didn't return calls for comment.
Nevertheless, Goldman hopes the partnership process will help it retain talent in the face of competition from hedge funds, which have been paying top dollar for star traders. Increasingly, Goldman has tied partner compensation to individual performance rather than to the firm's performance. These days, about half of the partner compensation pool is discretionary, according to people familiar with the matter, allowing the firm to reward big producers.
"There are plenty of firms who would like to hire our people, but the pull of the partnership is still a very powerful incentive to stay," says Mr. Cohn.

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Thursday, October 12, 2006

CEOs Feeling the Heat


Louis Lavelle of BusinessWeek has covered the fact that 3 CEOs were deposed of in a single day yesterday. The original article is here. Syd Finkelstein is quoted heavily in the article.
Here's the entire text:
It was a brutal day for CEOs. On Oct. 11 three chief executives at public companies lost their jobs: George Samenuk of McAfee (MFE), Shelby Bonnie of CNET (CNET), and Jay Sidhu of Sovereign Bancorp (SOV).
Sidhu resigned after months of battling with large investors who said he hadn't done enough to lift Sovereign's stock price. Samenuk and Bonnie stepped down amid allegations of options backdating at their companies, making them instant poster boys for a scandal that has engulfed more than 100 public companies.
More than anything, however, the trio of downfalls underscore the end of the bulletproof CEO. These days, the once-fearless breed is fast becoming more like an endangered species.
INCREASED PRESSURE. Corporate governance experts generally applaud the increased accountability of executives, particularly where scandals have erupted. But some wonder whether the trend may end up going too far, pushing top execs to take on outsize risks or move with reckless speed. "The entire clock is accelerated," says Sydney Finkelstein, professor of strategy and leadership at Dartmouth's Tuck School of Business. "You end up feeling like you've got to act faster than you might otherwise."
The numbers are staggering. According to Liberum Research, at least 21 CEOs were fired outright in the first three quarters of 2006--one every 13 days on average--nearly double the 12 chief executives who walked the plank during the same period in 2005. Of the 21, at least six represent fallout from the backdating scandal. In addition to McAfee and CNET, the affected companies are Comverse Technology (CMVT), Vitesse Semiconductor (VTSS), and Monster.com (MNST).
The pressure on top execs has become so widespread that no company can escape scrutiny. Among the CEOs under the microscope these days are many at top-tier companies, including Robert Nardelli at Home Depot (HD), Kevin Rollins at Dell (DELL), and Richard Parsons at Time Warner (TWX) (see BusinessWeek.com, 9/6/06 "CEOs in the Hot Seat"). There's even speculation that Steve Jobs, celebrated for his success in restoring the luster to Apple Computer (AAPL), could become a victim of that company's stock option investigation (see BusinessWeek.com, 10/5/06, "Apple Comes Clean on Options")
POWERFUL BOARDS. Experts on governance and leadership say the reason so many corporate chieftains are meeting with ignominious ends is the changing nature of the board of directors. Boards are newly empowered to be more active in all manner of corporate affairs, at the same time that they're being held to a higher standard of accountability by shareholders than ever before. Since the Enron collapse in 2001, the governance revolution that swept through corporate boardrooms has resulted in boards willing to stand up to management, and reforms such as the Sarbanes-Oxley Act that create incentives for directors to do so. The result: a lot of itchy trigger fingers.
The Chicago-based placement firm Challenger, Gray & Christmas reports that the revolving door of the CEO suite is resulting in shorter tenures. In all, 28% of the CEOs who were shown the door so far this year were on the job fewer than three years, and 13% were in the top position for less than a year.
"Boards are much less tolerant than they were, more independent of management, and more likely to act in event of a problem," says Charles M. Elson, a corporate governance expert at the University of Delaware. Evidence of the newfound independence is everywhere, he says, including recent executive departures at Boeing (BA), RadioShack (RSH), and Hewlett-Packard (HPQ). "I think the board has changed fundamentally. It's much more of a monitoring institution than it was."
TOO MUCH TURNOVER? Advocates for better corporate governance generally support the willingness of boards to depose CEOs. But a short tenure, or the ever-present threat of one, creates problems, too. With just a year or two to show results, some CEOs may take big strategic gambles, or push the legal envelope to make their numbers. Others will simply push their people harder and harder. "When the pressure is ratcheted up that way, it cascades down to the next level," says Dartmouth's Finkelstein. "You get this cascading effect of pressure."
Rapid turnover in the c-suite may also affect executive pay. With the clock ticking from Day One, executives who can deliver the goods immediately will fetch an even higher premium than they do right now, while demand for those known for building long-term shareholder value may diminish.
Finkelstein believes the trend toward shorter tenures is not a short-term statistical fluctuation, but a real trend that may get worse. As boards decide to pull the plug on their CEOs over the backdating scandal, more boards will be under pressure to do the same. Says Finkelstein, "The backdating situation is a classic example of zero tolerance. Once this starts, the pressure is going to be ratcheted up even higher on other boards. Nobody wants to be the outlier when it comes to these kinds of things.
"Though CEO turnover for the first nine months of this year is up sharply from the same period last year, the numbers have ticked down in the past two quarters. After 750 personnel changes in the first quarter, there were 711 in the second, and 627 in the third. But that downward trend is unlikely to last, since planned transitions such as retirements, which make up the bulk of all CEO changes, are generally timed to the end of the fiscal year, most of which end in December. April may be the cruelest month, but for CEOs January is no walk in the park either.

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Monday, October 09, 2006

Google, YouTube, Shona Brown, and Galaxy


What does the Google acquisition of YouTube have to do with the Galaxy? If you thought it’s going to be a way that a new feature from Google Earth will be integrated into Google Video post-YouTube, you’re wrong. The YouTube acquisition is Google's Second Act; the first product that, although similar and adjacent to Search, will be a category-killer for Google within a second distinct realm from Search. It also is Google's and Shona Brown's answer to how the company can avoid becoming another 'Galaxy.'
Shona Brown is Google's SVP of Business Operations (and some call her GOOG’s ‘chief chaos officer'). I had intended to write this blog posting profiling Shona as one of the top unsung heroes in business today. Then, Adam Lashinsky of Fortune beat me to the punch with a fantastic profile last week. (Nice to see that one of the off-shoots of the recent GOOG – AOL advertising deal is that the Fortune reporters are able to get some great access to Google execs.)
When you think of Google, you think of the Brin-Page-Schmidt triumvirate. Then, you probably think of Omid Kordestani (head of sales); then, coming on strong – especially in the pages of Valleywag – Marissa Mayer. Left out of the discussion, until Adam’s piece, was Shona Brown.

Shona is someone who it’s easy to feel intellectually inferior to, once you understand her background: Rhodes Scholar, Ph.D. in Strategic Management from Stanford under one of the best management scholars in the world today (Kathy Eisenhardt – who has been studying fast-growth Silicon Valley firms for over 20 years), McKinsey partner, Business Best-Selling Co-Author, and pre-IPO member of Google’s management team. In other words, just another brilliant Google employee; they pride themselves on their intellect. However, she’s also someone who is very down-to-earth and helpful.

At Google, she’s responsible for optimizing Google’s internal structure. She decided to take her main findings of her dissertation, which led to the book “Competing on the Edge,” and apply them to Google. (Who says consultants can't practice what they preach.) She found that the optimal organizational design is not too much formality/structure and not too fast-and-loose. (There is new research my firm has done that has found further empirical proof for this assumption. Some details are contained here.) The process by which she does this is partly described in the Fortune article. However, there’s another aspect to Brown’s job described in the article. And, not to put too strong a point on it, it is to solve the greatest challenge facing Google today: how to avoid the fate of being a one-trick-pony.

Google does Search. And it does it better than anyone else on the planet. Remember all the talk around the IPO and even up until about a year ago about how Microsoft was going to come after them? You don’t hear that talk any longer. Google’s won Search. Their multi-billion dollar empire is paid for by search advertisements. Though this preeminent position has given them the ability to develop a cadre of new products (and some, even within Google, think they created too many products), none has been a category-killer in the way that Search has. Much has been written about Google using its Search position to decouple users from the desktop and MFST’s control; yet, this is all still talk today. They have been a very successful one-trick-pony.

That’s where Shona Brown comes in. In her qualitative, case-study approach dissertation, she studied – over 10 years ago – a curious Silicon Valley company that experienced explosive growth and lots of bright young college kids, but had difficulty moving beyond their initial hit product to a 2nd product of similar success. In the end, their core product faced competitive pressures and they were not able to continue. She doesn’t name the company, but calls it “Galaxy.” As Lashinsky points out in his article from Fortune, Google and Galaxy share several interesting common traits. The question you are left to ponder is will Google find a Second Act?

The other night, I was ironically on YouTube and watched the now somewhat dated 60 Minutes glowing segment on their success. Lesly Stahl gushes about how she can text-message Google on her mobile phone to find the nearest pharmacy on the Upper-West Side. Although this is a “nice to have,” along with other Google products like Froogle, Google Earth, and Google Talk, none is yet a “must have.”

There’s always going to be another competitor coming along to challenge Google in search (for the current darling of Silicon Valley in this category, read this TechCrunch posting), even though their lead seems insurmountable today. So, they do need a Second Act. What will it be? Shona Brown and others at Google have been working hard to solve that question and yesterday we got the answer: YouTube.
The YouTube acquisition will be the transformative for Google. They immediately vault to the lead of controlling the search for video on the web. However, more than search alone, they control content in the format that will be increasingly be the preferred way for viewing. But this deal gives Google the first global brand beyond Google. It also allows Google users to interact in a way that hasn't been possible to date.
It's breath-taking to see how quickly YouTube has grown to dominate a space that was not a space more than 5 months ago. It is a wonderful day for their founders and backers, but this is a landmark day for Google and Shona Brown. She wasn't part of the conference call announcing the deal. But her hands are all over this. The analysts can discuss the synergies and do their projections. Shona can simply turn to her colleagues and say that "Google will be no Galaxy; this is our Second Act."

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Welcome Back, Glen Grunwald


In case you missed it a couple of weeks ago, Glen Grunwald – the ex-GM of the Toronto Raptors – made his return to the NBA as Isiah Thomas’ right-hand man and SVP of Basketball Operations for the New York Knickerbockers.

We had the good fortune of getting to work with Glen and the Toronto Raptors organization a few years ago. We offered a third-party assessment of the short-listed coaches to succeed Lenny Wilkens. I wish we could have better helped Glen and Maple Leafs Sports and Entertainment (which owns the Raptors), as the eventual replacement coach – Kevin O’Neill – had a fiery and brief stay as Head Coach.

The misfortune of the O’Neill and the Raptors led to Glen leaving the organization, after having been with the franchise since its inception in the mid-90s. On the day of Glen’s leaving the Raptors, you couldn’t have found anyone within the organization or even in the press that would say one bad thing about him as a person. Indeed, it has been a pleasure for me to know him and to have had the chance to work with him, as he is a wonderful person who cared tremendously for those around him in the organization and in the community. I spoke to several former players with the Raptors in my work with them who commented how Glen had gone out of his way to offer them and their families financial support after major injuries, even though his actions never made it to the sports pages.

After leaving the Raptors, Glen had several opportunities to leave Toronto to take some very high-profile jobs in the sporting world outside the NBA. He decided to stay, as his wife and child, plus children from his first marriage were all in the city. He became President and CEO of the Toronto Board of Trade, serving admirably and being a strong voice that the organization had been previously missing.

Now, he’s back to the spotlight of the NBA – this time on Broadway. He’s back with longtime friend, colleague, and former Indiana teammate Isiah Thomas. Sometimes in business, nice guys finish last. This isn’t the case with Glen. I’m happy to see him back and know he’ll be a great addition to that organization.

Most of the national sports media seems to have already written off the Knicks and Isiah. They have focused on the problems between James Dolan, Isiah, and Larry Brown. I say don’t be so quick to write off the Knicks. Glen had some high points and low points as a GM – as any GM does. But, at the end of the day, he’s the guy that picked Tracy McGrady and Vince Carter – two of today’s top 10 NBA players – with lower first-round draft picks. He’s got a nose for talent, knows his job, and he’s a good person. Plus, I’m sure Glen loves coming into a situation with low expectations, where any upside will be embraced.
Put me down as a Knicks fan for this year and good luck, Glen.

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Thursday, October 05, 2006

Best Memories of the Internet Bubble




Maybe it's all the talk of Facebook being bought by Yahoo! for $900 Million and Web 2.0 on Techcrunch and other sites. Or the tales of its founder Mark Zuckerberg cavalierly refusing to meet Microsoft officials for an 8am meeting because he doesn't get into the office until 10:30am. However, it's got me pining for the heyday of the dot-com bubble.

Here are my "Best of" memories of before the bubble burst:

  1. Mike McCue delivers pizza to the Stanford computer lab at midnight to recruit engineers. Mike is a great guy. In some ways, he was a perfect dot com CEO: photogenic, young, well-spoken, and a little brash. Good for him and Angus for sticking it out.
  2. Carly! Brought in to turnaround HP. Carly Firoina declared in 1999 that "someday there will be books written about what we're doing." George Anders writes about current HP Chair, Dick Hackborn, recommending Carly to the Board in his book the Carly Chronicles: '"I could see he was dazzled by her," fellow director Patricia C. Dunn recalls. "He was really excited about her vision for the company. She had a feel for the company's strengths and weaknesses. It corresponded with his feel." Hackborn expressed mild concern about Fiorina's lack of a technical background, but that wasn't a top-priority worry for him. "We may be getting one of the top two or three CEOs of our generation," Hackborn declared. "She could be the next Jack Welch."'
  3. Amazon.com invests in Pets.com. At the time, Jeff Bezos said: "We invest only in companies that share our passion for customers. Pets.com has a leading market position, and its proven management team is dedicated to a great customer experience, whether it's making a product like a ferret hammock easy to find, or help in locating a pet-friendly hotel." Then-CEO, Julie Wainright, commented about the competitive online pet space at the time: "I've never seen so many companies in a category, and they may all get funded. I don't think there's room for two. It'll be a bloodbath with huge cash outlays and low margins. It's a tough business."
  4. George Sheehan leaves Andersen Consulting (Accenture) to lead Webvan. In 1999, George Sheehan bolted from Andersen Consulting to join Webvan. A copy of his employment agreement is here. Shaheen negotiated a personal insurance policy and a retirement package to pay him $375,000 a year from Webvan for the rest of his life. However, with Webvan's demise, this was worthless. Don't we miss the Webvan cup-holders at PacBell Park?
  5. Kozmo.com. If you lived in NY during the bubble, how could you not miss Kozmo? With their bicycle delivery folks bringing a stick of gum to your desk in the late afternoon, it was heaven. When they announced a partnership with Amazon.com, to help deliver Amazon customers' books, the analysts cheered. Ken Cassar, an analyst at New York research firm Jupiter Communications said: "Now, if you order from Amazon you live on the whim of UPS."
  6. TheGlobe.com goes public. Offer price $9. First trade $87. I remember being in a Columbia Business School class that morning when it happened. Someone ran into the class and announced it and the room broke into spontaneous applause.
  7. "It's About Capturing Eye-balls". The rationale for Microsoft's acquisition of Hotmail in late 1997. The CSFB analyst who coined this phrase didn't realize it would become a mantra for years to come.
  8. E*Trade Monkey. Best Superbowl commercial. La Cucaracha. A Chimp. Two Guys in checkered shirts. And $2 million.
  9. Henry Blodget's $400 price call on Amazon. It was the "call" heard round the world. Andy Kessler's book has great stories from it. Here's a link to a passage from Andy's blog. Good luck to Henry.
  10. Jeff Bezos is named Time's Person of the Year in 1999. Congrats. He left DE Shaw in 1994 and he's still going strong at AMZN.

Got other good memories of the Bubble? We'd like to hear them below....

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Sunday, October 01, 2006

The Predictors of Significant VC-Backed Firms' Sales Growth





What levers can be pulled to ensure that every start-up from founding is going to achieve significant and sustainable sales growth? If every Venture Capital firm General Partner knew the exact answer to that question, they likely wouldn't be reading this, but joining Sergey Brin and Larry Page (Google founders) in the hot tub (see photo to the left).

Of course, ask 10 different people that question, on the keys to start-up success, and you're likely to get 10 different answers. But empirical proof is always more convincing than speculation.

With this in mind, two years ago, my consulting company began a collaboration with Dartmouth Tuck School Professor Sydney Finkelstein to build a diagnostic that could help predict (1) warning signs that an organization was veering in a direction that might result in major -- and potentially dire -- problems and (2) positive signs that an organization had its leadership, strategy, and processes lined up in a direction that would likely generate consistent and significant sales growth for years to come.

The first of those two goals came out of research conducted over 6 years in the writing of Syd's best-seller 'Why Smart Executives Fail'; and the second came out of research done in the last 3 years contributing in part to Syd's upcoming 'Breakout Strategy.'

The diagnostic (which we call the Breakout Performance Index or BPI) has now been used with over 150 organizations in North America, Europe, Asia, and Australia ranging from multinationals to early-stage venture-backed firms. The three major categories of leadership, strategy, and process, which we measured, were all found to be major predictors of increased revenues and increased market share across the entire dataset.

However, not surprisingly, there were differences across industries (and sometimes countries) in terms of which aspects of our 3 main categories predicted performance. One of the contexts which we have had the opportunity to study in some level of detail is the world of venture-backed firms. Later on this week, Syd will present the results of a recent study we completed on what we found to drive success in venture-backed companies at the Financial Services and Venture Capital Alliance Annual Meeting in Boston.

In the VC context, we studied about 30 companies (asking VCs who serve as directors on companies in which they invest, as well as Management Team members -- mostly the CEOs -- from VC-backed firms to complete the 75 question diagnostic). On average, the companies were 6 years old, had raised about $15MM in VC funding, had 50 employees, were doing about $10MM in annual revenues, with a 15 - 20% annual growth rate, and were just about break-even. Two of the companies in the dataset have recently been acquired (by Cisco and Alcatel) and one has gone out of business.

For those of you who cannot attend Syd's talk in Boston: here are the main results of our study.

  1. How Much Venture Capital A Company Raises Does Not Predict How Much it Will Grow. This result is perhaps not surprising to VCs, who understand that likely only 30% of their investments will be significant 'winners.' But it is interesting that making bigger bets do not correlate with bigger outcomes.
  2. 17 out of our 75 Questions (or about 25%) in the Diagnostic were Highly Significant Predictors of Increased Sales Growth for VC-Backed Firms. The difference between scoring at the median level in a particular dimension versus the top quartile often meant a difference in annual sales growth of 20% versus 100%.
  3. The most important factors relating to Leadership found to predict faster sales growth were: Doing Annual Performance Reviews, Preventing Groupthink on the Management Team, Having a Spirit of Personal Accountability and a "Stakeholders' Mentality," and Key Management Team Structural and Process aspects (like attention to details).
  4. The most important factors relating to Strategy found to predict faster sales growth were: Focusing on the Right Metrics to Measure Implementation of the Company's Strategy and Having a Compensation Plan for Management Team members aligned with the Strategy.
  5. The most important factors relating to Process found to predict faster sales growth were: Having the Correct Organizational Structure in place, Ensuring that the Communication Channels within the organization allowed information to swiftly and correctly travel from the front-lines to the Management Team, and having a Strongly Motivated and Engaged group of Employees.

There are a number of take-aways from this study. The fact that such a high number of questions in the overall diagnostic predicted much faster sales growth is interesting -- and stands out compared to larger companies. VCs are fond of saying that the quality of management is the most important factor they weigh before making an investment, but this study sheds some light on what are the behaviors which management can exhibit to actually positively influence their company's performance.

If you are a GP, how would your investments do on the categories laid out above relative to their peers? If you are a CEO of a VC-backed firm, do these findings suggest you're encouraging the right behaviors on your Management Team and across the organization?

Ultimately, the most important performance metric for VC-backed firms is sales growth. This is usually what sets the value for the organization if it is later sold or goes public. This study suggests there are clearly some levers which you can influence to up your company's growth rate.

If you would like more details on the study or to find out if your firm would rank top quartile or bottom quartile on these dimensions relative to other VC-backed firms, drop me a line.

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