Running a successful business requires you to navigate rough waters. If there were only sunny skies and gentle winds throughout the journey, there would be no need for an experienced CEO to captain the business, along with an exceptional crew! Over the course of my career, I have lived through some of the toughest tech and financial jolts of recent times – times that tested my leadership and my management style. What follows is a story of one such time, and the strategies I used to turn crisis into opportunity.
I received a phone call on a Saturday morning from a prospect’s CFO. We’d been working on a deal for 8 months. Signatures were expected within days on what promised to be a game changing deal for my company, Cogency. The deal involved a large regional bank, a large Alternative Investment asset manager, and an international consulting company. “Unfortunately”, the CFO said, “We need to exit this deal. In fact, given yesterday’s news, we will be closing our firm within the next few months.”
The day before, the news was ablaze with the story of billions of $$$ lost by investors in a pyramid scheme run by Bernie Madoff. For most New Yorkers, it was just another run-of-the-mill scandal playing out across the financial pages. But for me, the CEO of a company that sold portfolio management and accounting software to funds of hedge funds, it was an intimate story about my clients.
As the scandal unfolded over the next six months we lost clients and prospects, and many of our remaining clients had to confront their financial exposure and damaged reputations. No one would have questioned the move if I had shut down Cogency at that point. The situation was untenable. But rather than throwing in the towel, I implemented these five “survive and thrive” strategies that resulted in a growing business through difficult times:
- Identify the weak links that enabled the crisis. Name the behaviors and characteristics that separated the victims from the survivors. Risks, controls, trust, visibility, accountability — how did each organization address these issues?
- Due diligence. What does each organization track about the funds they research and invest into? What does each fund expose to its investors?
- Counterparties. Who are the 3rd party accountants, administrators, custodians, attorneys, auditors, that each fund uses, and are they reputable within the industry?
- Liquidity. How did each organization track their liquidity, did they have in-house cash management, lines of credit?
- Legal and Accounting. What structures are in place to handle defaulting investments, side-pockets, and custom redemption terms?
- Operations. What are the roles and responsibilities with an organization? Is that structure conducive to oversight and transparency?
- Map your product to the market needs. Identify how it helps mitigate the risks exposed by the crisis
- Does our product have features to let clients track and cross reference and quantify these components named above?
- Does it encourage and even force users to do the right thing, embedding industry best practices within the flow?
- What controls, reports, and alerts does the product have that point out exceptions and anomalies?
- Focus on what is working well. Our clients that weathered the storm must have been doing something right, so we were right there to help them grow.
- Be the expert. With our visibility into the market, and our analysis and product, we had a lot of IP that was valuable to our clients. We turned that into professional services revenue, content marketing material, and goodwill.
- Roadmap. We used our new-found bandwidth to focus on feature requests from existing clients – those items that were on the longer term roadmap became short term paid-development.
- Share ideas. We communicated regularly with our clients. I got them together on conference calls where appropriate. It was a time to dig in and recalibrate.
- Reassess the future. Look at how this event might change behavior in the industry over the medium and long term. For each possible change, identify new channels and direction for your company
- New Alliances – This event was the last straw in the FOHF and HF industry’s transition from in-house to outsourced accounting, making clear the need for third party fund administration. Admins and custodians would become the biggest clients for accounting systems.
- Adjacent Markets – Private Equity funds were just now getting to where hedge funds were 10 years ago, in terms of regulation and back office accounting. It was a market that was ripe for technology firms to enter.
- Diversification – Hedge funds might be seen as unsafe. New structures would emerge. There was a move toward hybrid PE/hedge funds and multi asset class portfolios. Silo’ed products would be pushed aside by multi-asset class products.
- Outsourcing — Asset allocators would get nervous about their ability to make decisions on managers, leading to the outsourcing of portfolio management to experts. This was the beginning of a new market of Outsourced Chief Investment Officer (OCIOs).
- Reassure your team. My team was worried as they saw clients and competitors going out of business, and an industry in disarray. It was imperative that I address their morale.
- Don’t hide behind closed doors. Involve everyone in the process, so that they all see this event as an opportunity rather than a crisis.
At Cogency, we used the Madoff crisis to create and rally around a new story. Our motto became “Extraordinary Times Require Extraordinary Accounting”. We used this internally as a rallying chant and externally as our story for clients and the industry. We put all our efforts into updating the product and the marketing to speak to the fallout from the crisis. Within a few days we had new materials out on all channels. It worked both to gel the team and to secure our future within the market.
If you have the stomach for it, every crisis is an opportunity to refine your organization. Survival brings great rewards!