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The Art of ProfitabilityPrologue September 21. Steve Gardner sat quietly in a forty-sixth-floor office in downtown Manhattan. It was 8:15 on a Saturday morning, and the offices of Storm and Fellows were nearly deserted. Steve would normally have been asleep at this hour, or perhaps sipping a first cup of coffee while skimming the Times in his cramped Soho apartment. Despite four and a half years of working at the midtown headquarters of a multinational conglomerate, he'd never fully shaken the nightowl lifestyle of his undergraduate days, to which he happily reverted on weekends. But today was different. Early Saturday morning, he'd been told, would be his only opportunity to meet David Zhao—"the man who understood how profit happens." Through determined effort and a lucky connection or two, Steve had worked his way to the fringe of one of the circles in which Zhao was known. So he had some inkling of the unique knowledge that Zhao possessed. Suddenly the office door opened, and Steve rose. "Good morning, Steve. I'm David Zhao. Thanks for accommodating me by coming here at this hour. It's quiet, and I find the view conducive to doing a little bit of thinking. I see you like it, too." He gestured toward Steve's chair, which had been turned from its place alongside the ornate oak desk to face the harbor view. Steve smiled. He quickly decided he liked this man. Zhao was a small, slender, slightly rumpled figure in a brown check jacket, khaki trousers, and battered loafers, resembling more a history professor at some little New England college than an astute businessman. His round face, topped by an unruly longish mop of coarse hair more gray than black, seemed almost unlined until he smiled, when a network of fine creases suddenly radiated from his deep brown eyes. "It's a great view," Steve agreed. "But I'm surprised you have an office here at Storm and Fellows. I didn't know you were a lawyer." Zhao laughed. He took his seat behind the desk, and Steve pulled up his own chair. "Not exactly," Zhao remarked. "It so happens I have a law degree from a previous life, but I don't practice law anymore. I consult to Storm and Fellows on industry structure and other business issues related to antitrust law. They let me have this spectacular office, they pay me handsomely, and they basically leave me alone most of the time. But when they call on me—even if it's only once or twice a month—I have to be very, very good. Tens of millions—sometimes hundreds of millions—are at stake." Steve was intrigued by Zhao's apparent openness and complete ease with himself. Maybe I would be, too, thought Steve, if I worked only a couple of times a month. What a deal! "You look impressed," Zhao commented. "You shouldn't be. I'm fortunate in being able to spend most of my time focusing on what interests me most." "What interests you most?" asked Steve. "Oh, a few things. For example, investing. When I left my economic research firm, they handed me a nice nest egg. I realized I'd better figure out what to do with it—for the benefit of my wife and kids, if nothing else. So I made myself a student of the discipline of investing, and only recently have I graduated to some reasonable level of proficiency. It was both harder and more rewarding than I anticipated—and, oddly enough, I'm not talking about money." "How long did you feel clueless?" asked Steve. "Out of ten years that I've been studying investing, I was lost for the first nine." "Why did it take so long? Doesn't investing use the same set of skills as business analysis?" "That's a good question," Zhao responded. He was warming to Steve. "Look at it this way. Imagine a great lab scientist—a research cardiologist, let's say. Suppose that one day you learn you need a triple coronary bypass. Are you going to let the lab guy perform the operation?" "Never. I'd want a great surgeon—the more experienced the better." "Naturally. Now, say the lab guy, who knows cardiology inside-out, decides to become a surgeon, because the compensation is ten times greater. How long do you think it would take him to learn?" Steve pondered. How long does a doctor's internship and residency usually last? He couldn't remember. "Five or six years?" "Maybe. More like ten for my taste. I'm completely risk-averse, you know." "I get it," Steve replied. He didn't really. He wondered where all this was leading. "So what's the key to really mastering some new skill—like investing?" "A ridiculous degree of persistence," Zhao answered. He paused, as if to mark a transition, and then leaned forward across the desk. "So tell me," he said, "what brings you to see me today?" Where to begin? "At a cocktail party, someone introduced me to a man named Otto Kerner. I told him I had to learn about profitability. And Mr. Kerner told me that if I wanted to learn about profit, I ought to meet you." Zhao smiled. Kerner was Zhao's closest friend. A senior partner at Storm and Fellows, he was the person responsible for connecting Zhao to the firm. At age eighty-five, he still came into the office every day, even if only to spend half the afternoon chatting with Zhao. "An introduction from Otto Kerner is like gold in my book," Zhao remarked. "But tell me—why do you have to learn about profitability?" Steve paused. Why, indeed? Because profit is the lifeblood of any organization. . . . Because the ultimate purpose of business is to create profits for share-holders. . . . Somehow, he sensed, the cliches he'd repeated in the workplace, and even in business classes he was now taking at night, wouldn't work so well with David Zhao. "It has to do with my job," he finally responded. "I work in strategic planning at Delmore. It's a big company with a great history. And being in the planning department is a good opportunity for me. I get to look closely at all the various industries we're in, which is almost like getting a business-school education on the job. But as you probably know, the company hasn't been doing very well lately. Profits are flat, and the stock price has been stagnant for about eighteen months." "For two years, actually," Zhao remarked. "I guess you're right," Steve said. "You must follow the stock." "I find Delmore—interesting is the right word, I suppose," said Zhao. "And you're in strategic planning there. Tell me, Steve, what sort of strategy do you plan?" Was that an amused glint in Zhao's eye? "What I do is more like research—studying potential mergers, acquisitions, spinoffs," he responded, immediately feeling that his answer sounded lame. "But I want to contribute more. I want to learn how I can help the company get out of the doldrums. Does that make sense?" "Why not?" Zhao answered. "But Delmore has been in business since 1904. It has revenues of $18 billion a year from forty different businesses. Surely the wise men and women who run the firm must know all about how to make profits. Or do you suppose they need Steve Gardner to teach them that?" Steve reddened and sat for a moment in silence. He was thinking about some of the disturbing things he'd heard and seen around the offices at Delmore in the last six months. About the company-wide strategy conference that was rescheduled twice, then postponed indefinitely, with no explanation as to why, causing rumors to swirl in the corridors . . .about the resignations of three members of the executive committee, all within four weeks of one another . . . about the disparaging tone of recent comments by Wall Street analysts about Delmore and the defensive tone of the company's public responses. And just this past week, people were whispering that the long-expected layoffs in three divisions would be a lot bigger than anticipated. Life at Delmore was feeling very different than it had when Steve joined the company. Steve took a deep breath. "I guess I'm not necessarily convinced that the wise men and women at Delmore do know what profitability is all about," he finally admitted. He looked Zhao in the eye, wondering how he would react. Zhao merely turned his head slightly to stare more closely at Steve. A long moment passed. "Honesty," Zhao commented. "I don't run into it very often." Another pause, as Zhao stared out the window. Finally, he turned to Steve. "If you really want to learn about profitability, I'm willing to teach you," he said. "But there are several conditions. First, we'll meet most Saturday mornings between now and next May. Second, every lesson will last exactly one hour. And I'll expect you to spend time between lessons reading and otherwise preparing, which will take about four hours per week. Is that acceptable?" Steve bowed his head slightly. "Yes, it is." "Good. There's just one more thing. Did Otto tell you that I charge a fee?" "No. How much is it?" "A thousand dollars per lesson." Steve sucked in his breath. Then his shoulders dropped. He looked away, frustrated and angry. He was tempted to speak his mind—or to simply storm out of the office. But instead, he simply said quietly, "I can't afford that." Zhao laughed, cutting the tension. "Of course you can't," he replied. "I'm not asking for the money now. You can pay the fee when you're able to—if you ever are." Steve didn't know whether to feel relieved, embarrassed, or guilty. He thought about the usual three-digit balance in his bank account. "I might not be able to pay you for five or six years. Maybe longer." "I know that," Zhao answered, a playful grin now spreading across his face. "Luckily for you, I've decided you're good for it." Steve's mood turned to puzzlement and mild annoyance. Zhao, he felt, was being condescending, perhaps toying with him. What makes Zhao think I'll ever pay him a penny? he thought. Maybe I'll take all his lessons, absorb all his ideas, then walk away and never see him again. "Do we have a deal?" Zhao asked. Steve paused. "Yes, it's a deal." Zhao reached across the desk, and the two men shook hands. And suddenly Steve sensed that he would never simply walk away from Zhao ...that one day he would pay Zhao his total fee ...and that Zhao had known all this before Steve himself did. Zhao smiled as if he understood. "Very well then," he said. "Let's get started." Copyright © 2002 by Mercer Management Consulting, Inc. Order The Art of Profitability: ADRIAN SLYWOTZKY is the bestselling coauthor of The Profit Zone and Profit Patterns, and How Digital Is Your Business?, as well as the author of Value Migration. A graduate of Harvard College, Harvard Business School, and Harvard Law School, he is a vice president of Mercer Management Consulting, Inc., a global management consulting firm that focuses on profit growth in changing markets. All rights reserved. Posted with permission of AOL Time Warner Book Group and
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The
Art of Profitability
