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How Symbol Got Its Mojo Back


Symbol Technologies was a nifty little high-tech company. It created the very first bar code scanner in 1980 and kept pace with the rapid growth of its customers—FedEx (FDX), Wal-Mart (WMT), Home Depot (HD), and the U.S. Postal Service. At each step of the way, the Holtsville (N.Y.) company was there with a steady series of original products to track its customers' growing flow of goods around the world: portable scanners, handheld computers, voice technology, and radio frequency identification (RFID). For two decades, Symbol was a paragon of innovation. Its creative engineers consistently developed new tools for an important client base.

Then it all came to an end. The Symbol story is a complex tale of corruption and mismanagement, rescue and recovery. It involves an ex-CEO who is on the lam in Europe, a former Cisco Systems (CSCO) executive brought in to patch the company back together with Six Sigma glue, and a Wall Street guy who tried to inject risk back into a culture that had leached it out.

Most of all, the Symbol story is about the fragility of innovation and how easily it can be lost, even with the best of intentions. And it shows how herculean efforts to revive a company can pay off. On Jan. 9, Motorola (MOT) completed a $3.9 billion purchase of Symbol, its second-largest acquisition ever. Last September when the deal was announced, Motorola Chairman and Chief Executive Ed Zander extolled Symbol's strong product, patent base, and creative engineers. He said he plans to leave the research and development department mostly intact as a Motorola division. And he insisted that Symbol's top 15 executives, including CEO Salvatore Iannuzzi, stay on for at least two years. The electronics giant will likely pour resources into Symbol innovations. Combining the smaller company's RFID technology with Motorola's wireless capabilities holds promise. As Motorola Chief Technology Officer Padmasree Warrior put it, Symbol has a culture that encourages "intrapreneurial innovation and early-stage business development."

This is how Symbol lost its mojo—and how it's trying to get it back.

SCANDAL

In May, 2001, the Securities & Exchange Commission began investigating Symbol after receiving an anonymous letter alleging that some insiders were inflating sales. Top executives at the Long Island company eventually admitted to overstating revenue by $234 million and net income by $325 million from 1998 to 2004. By the investigation's close in 2004, most of Symbol's top managers were ousted, eight were indicted on various charges, and the company had to pay a $138 million settlement. The face of former CEO Tomo Razmilovic still adorns wanted posters; according to Newsday, he lives in exile in a seaside chalet in Bussevik, Sweden, having fled the country in 2002.

The scandal devastated Symbol. But in its efforts to restrain the freewheeling culture that led to creative accounting, the company severely tamped down the inventive spirit that drove creative ideas. To return order, its directors hired William Nuti away from Cisco, where he was a senior vice-president. Nuti was named CEO in December, 2003, the fourth in four years to occupy the top job at Symbol's sprawling, three-story headquarters. Nuti moved fast to bring order, discipline, and profitability to the workforce of 5,600 and to restore investor confidence. He replaced 15 of Symbol's top 16 executives—many of the recruits were trained in Six Sigma management methods and came from Cisco. He reined in headquarters and the four other corporate offices around the globe with stringent reporting requirements, constant meetings, and rigorous personal oversight. And he layered onto the once-entrepreneurial organization a powerful management system that emphasized predictability, reliability, and measurement.

Under Nuti, innovation became a much more controlled process. The R&D team lived by the Three On's—on spec, on time, and on budget. He built a best-in-class product lifecycle management (plm) system to make product development as efficient as possible. He pushed scientists, engineers, and designers to focus on the product tweaks that had a good chance for success and an immediate impact on quarterly financial results. "We needed incremental innovation" to drive higher margins, said Nuti, who describes the system he inherited as wasteful and unfocused. "We needed a more disciplined approach in deciding how we were going to spend our money on true r&d vs. product improvements."

Symbol's new metric systems were designed to foster short-term profitability. That may have been what was required, but there was a price to pay. The metrics were excellent for collecting and analyzing data around existing markets, but emerging markets provide little guarantee of a potential return on investment. In its push to meet short-term financial targets, the company cut back investments in riskier, longer-term projects. By 2005, Symbol had few new ideas left in its pipeline. "It was nearly empty," said Alistair Hamilton, vice-president for innovation and design. In the name of efficiency, Nuti had cut investment in R&D as a percentage of total revenue from 10.4% in 2003 to 8.8% in 2005. At the same time, general and administrative expenses had risen to 30.5% from 28.4%.

At first, the new CEO's efforts paid off. By the end of the fourth quarter of 2004, quarterly earnings had jumped to $28.5 million from $16.2 million in 2003. But the Six Sigma effort to tighten efficiencies ran out of steam. Symbol's stock fell 40% between February and August, 2005, as investors lost patience. Jim Cramer shouted on TV: "I feel let down. Your stock is at 10. Tell me why I shouldn't jump out the window because of what's going on with Symbol Tech?" In August, 2005, after a dismal quarter in which the company lost $30.5 million, Nuti left to take the top position at NCR (NCR).

Symbol's eight directors replaced him with Iannuzzi, a fellow board member with 30 years of experience on Wall Street at KPMG, Bear Stearns (BSC), Bankers Trust, and CIBC (CM). With a background in auditing, regulation, and administration, Iannuzzi could help Symbol continue to bounce back from the legacy of its scandals, but he also had a high tolerance for risk. And he understood the company's DNA. "Our customers don't just look for products from us," he said. "They look for new ideas to make their business more profitable. If I don't encourage innovation, I'm cheating not only our customers but our investors."

Just days after Iannuzzi moved into the corner office, Motorola CEO Zander approached Symbol to begin conversations. The smaller company's wireless business offered the electronics giant a missing piece. But even as the two negotiated, Iannuzzi needed to shape up Symbol. He quickly moved to restore the R&D budget while slashing the overall budget, cutting 532 jobs, or 10% of the workforce, to wrestle costs under control (before he left, Nuti had begun the cutbacks). Iannuzzi then convened a council of a dozen Symbol "priests." These were people who understood the culture and the need for new ideas and opportunities—senior managers, longtime employees, prodigious producers of its most promising patents.

The 27-year-old high-tech company needed to restock its innovation pipeline. The priests divided the pipeline into three categories. The first is low-risk and focuses on incremental changes that make existing products better. Think ergonomically weighted handles for scanners. The second embraces risky ideas that have a decent chance of being realized. These new concepts don't have a market yet, but they could within two to five years. What if a new technology allowed scanners to play videos for customers? The riskiest category involves possible breakthroughs so radical they could disrupt existing Symbol businesses. These ideas are so off the map that internal divisions might not see them coming. Even if they did, chances are they would not invest in threats to their current work. Nuti had focused on low-risk changes that could translate into short-term profits. Symbol needed to manage a higher-risk pipeline.

In October, 2005, Iannuzzi appointed two innovation champions: Vice-President Hamilton and Chief Technology Officer Ray Martino. Both were seasoned Symbol managers. Hamilton had put in nine years, Martino more than 20. Hamilton looked the part of the classic designer, sporting black suede tennies, a sports jacket, and a mischievous smile. Martino had the monochrome shirt and pensive, focused stare of an engineer. Together, they embody innovation's most critical element, balance. "It's all about the yin and the yang," explained Martino with a slight chuckle, shifting his weight as he sat in a white Eames chair in Symbol's design lab.

The two are product design masters. But their challenge was to design a stronger innovation pipeline. They needed to develop a disciplined procedure for spurring big-impact ideas. This meant aligning their colleagues, managers, and those they managed behind a new push for innovation. As with any iterative process, they made some key findings.

COMMUNICATION IS CRITICAL

Martino and Hamilton spent weeks toting their PowerPoint display from conference room to office to the high-backed booths of nearby restaurants, sitting down with more than 100 vice-presidents and senior managers. They explained that Symbol had become well-run—perhaps too well-run. Under Nuti, the company was encouraged to develop products with the best potential return on investment, but how do you measure ROI for products your customers haven't even imagined? Symbol, they argued, needed to focus as much on developing future opportunities as on executing successes.

Hamilton and Martino also set benchmarks for Symbol against other innovation-oriented companies such as Procter & Gamble (PG) and Apple (AAPL). They looked at how venture capital firms managed their risk portfolios. And the two studied IBM's (IBM) emerging-business opportunities strategy. That is an independent unit where Big Blue identifies and finances high-risk ideas with the potential to grow into billion-dollar business opportunities within five to seven years.

LEADERSHIP MATTERS

On a crisp morning in February, 2006, Iannuzzi addressed the Symbol directors from the center of the boardroom's C-shaped cedar table. He explained how critical innovation was to the company's future, as Hamilton remembers it, and then passed the microphone to Hamilton and Martino. They argued Symbol should invest significantly more in higher-risk undertakings. They wanted to begin with a commitment to spend no less than 6% of overall revenues. The board gave its approval.

MANAGEMENT MUST BE BALANCED

Hamilton and Martino focused on balancing risk-taking between centralized corporate and decentralized division management. "We wanted divisions in the company to control their own destiny," said Hamilton. "But left alone, they will silo themselves and solve their own problems." So in each division they named an advanced-development leader, or AD, who would push people to take more risk in incubating ideas and meet quarterly to monitor investment spending levels.

To finance the riskiest ideas that couldn't be developed within the business divisions, the two borrowed from IBM and set up a separate venture capital process. Symbol's Emerging Business Office (EBO) operates like the VCs on Sand Hill Road in Palo Alto, Calif. It is managed directly by Hamilton and Martino and has its own tracking system that will ruthlessly kill ideas that can't work. The EBO plans to spin off new businesses or integrate them into existing divisions. "We want to even encourage people to cannibalize the business," Martino said. "Because if we don't do it, our competition will."

IDEAS ARE THE EASY PART

Hamilton and Martino experimented with the new innovation process in the 100-person division that handles traditional scanners. There was no shortage of new ideas, they found right off, but most weren't usable. Some suggestions turned up in the form of paragraph-long sketches. Others had already become lengthy business plans. Most were still half-baked. "What we found out was that these new ideas required a lot of contact and advocacy from other people to work," said Hamilton.

AD leaders were told to connect people with fresh ideas to others across disciplines who could act on them. The pair also refined their electronic suggestion box to focus the information they were getting from colleagues to better evaluate an idea.

MAKE RULES, BREAK RULES

Last fall, the two began to test the program in other divisions. It proved much slower going than they had hoped. Originally, they organized their emerging pipeline according to a tight quarterly timeline in which ideas were submitted during month one, reviewed during month two, and evaluated during month three. "Halfway through our beta [test] we realized, no, it's not a quantified process," said Hamilton. They stopped.

A year and a half into their initiative, Symbol's once-empty pipeline is beginning to fill. Hamilton and Martino report hundreds of ideas are being generated. As many as 90% have been killed, but the remainder—several dozen in the medium-risk category and two considered the highest risk—have moved along to an exploration phase where designers and engineers are hammering out prototypes and business models. And on the first floor of a building in Symbol's office park, the white board in Hamilton's office is covered with the chicken-scratch sketches made by employees who've heard what he's up to and poked in their heads with a quick, "Hey, do you have a minute? Because I have an idea..."

It's too early to say whether Symbol will now begin to deliver the products that will maintain its lead in shaping the future of the industry. New proposals are at least three years away from reaching customers. But early indicators are hopeful. The company was back in the black by the second quarter of 2006, announcing $27.5 million in profits on $453.1 million in sales just before the Motorola acquisition was announced. And this January, as Hamilton and Martino ordered fresh business cards emblazoned with the twin-peaked "M" of their new corporate logo, they continued to expand their efforts to new divisions.

The current chapter of Symbol's saga is a bright one. In its drive for innovation, the company has struck a promising balance between rigor and risk. So far, the seasoned survivor and Motorola appear to be in cultural synch. "Symbol's sustained innovation history and breakthrough processes are strikingly aligned with Motorola's," says Chief Technology Officer Warrior. With Motorola's money and backing, Iannuzzi says he can now turn more of those drawing board projects into products.

By Jessi Hempel


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