Jai Shekhawat is as passionate about mentoring entrepreneurs as he is about building his own great companies. He founded Fieldglass in 1999 and pioneered what would become the go-to model for VMS technology, ultimately growing the company into the industry leader and helming the firm through its acquisition by SAP in 2014. Today he is a pivotal advisor for both private equity firms and Chicago’s most promising startups.
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How do you go about determining fit from both sides – both as the one acquiring and as the one being acquired?
From the seller’s point of view, the main criteria for fit is the value that a potential buyer can derive from your asset. There’s no inherent, idealized valuation for a firm. It’s only what it’s worth to someone else. Once you have a few interested buyers, your company’s valuation range becomes clearer and will vary for each prospective buyer based on their realities. Essentially, each potential buyer arrives at a different value determined by what they can do with your company.
Your job as an executive is to place your firm in the hands of the buyer who can do the most with it – and in turn, do right by it. As a CEO you wear multiple hats: as a shareholder, you care about maximizing transactional value; as a custodian of the company you care about what’s best for employees; and you even consider what the sale means for your personal career. Evaluating a potential sale while wearing all of those hats is critical to figuring out what’s best for your company.
Now, on the buyer side, it’s the same general calculation. They must ask themselves what they can do with your company; how quickly they can monetize your offerings; whether your customers are asking for that product or service; or even if you have overlapping customers already. An important element for a buyer is whether they’ve identified an internal group that really wants to make this deal happen, who will lobby for it. Without that internal champion, it likely won’t happen. Externally, a buyer must consider where your asset fits in their product portfolio, what alternative acquisitions to consider or whether they can just build this capability internally. The build vs. buy scenario creates some challenges for the seller in the diligence process, so it is helpful if the buyer signals that intent before they get too far.
What events or company deals do you consider to be the biggest turning points for the staffing industry?
Two come to mind. The first was when job boards came along, particularly Monster, which went on to become quite dominant in its time. The staffing industry was by far the largest customer of job boards and there was much discussion on how to try to keep that value within the industry – perhaps by jointly supporting a rival offering. That never worked out due to the difficulty in getting a large group of competitors to collaborate effectively. The second was the emergence of VMS/MSP. This sector was created by the staffing industry and the first and best-known example was Chimes, which was owned by the staffing firm Computer Horizons. Chimes was quite successful until its sale and subsequent mishandling at the hands of the payroll firm that bought it. When Chimes went under, the idea of combining the MSP and VMS fell out of favor and helped the pure-play VMS providers like Fieldglass. This led to the staffing industry largely abandoning their internal VMS efforts and partnering with various VMS players. I see this as a good thing for the industry as it allows them to focus on what they do better than anyone else – recruiting and managing a large complex global contingent workforce.
How important is it to educate the worker audience about the benefits of M&A?
Very important. No matter what is driving the deal, you are inflicting change upon a large number of people who depend on their particular staffing firm for their livelihoods. It’s important to communicate the benefits and be honest about the near-term disruptions, such as new timekeeping or payroll systems as just one example. For the workers, there are good reasons why they would be in favor of a merger. For instance, if their staffing company is being acquired by a larger firm for geographic expansion, they may see a greater variety of job opportunities. Don’t count workers out of the communication plan. They have other options for staffing firms, and they’ll need to be reassured that you still have opportunities for them to grow their careers.
Moving on to your particular experience with Fieldglass. You sold the firm first to a private equity firm, then to SAP… What drove those decisions?
When we brought in Madison Dearborn Partners in 2010, our intent was to give our original investors a good return and bring in fresh capital for the rest of our journey. In terms of a buyer, there were two choices: a financial buyer or a corporate buyer. We felt there was a lot of runway ahead of us so a financial buyer made sense. The recession had revealed to large companies that they had never really optimized how they bought services. This fed right into our value proposition and we saw the greatest uptick in customer interest during this time. When times are good, companies look to their revenue line for value creation; when times are bad they look to their costs. Our sector was the perfect play to get costs under control for a very large spend category.
In 2014 the reasoning for selling was very different. The sale to SAP was really driven by external forces – the financial markets were valuing SaaS businesses very highly and the customers were signaling that being part of a large global ERP firm would offer long-term stability. By this point, we had become a global firm with users in over one hundred countries and a few dozen languages to support. Moreover, the large ERP and other technology firms were now looking closely at our space and it just felt like the right move for our company. In the end, it is more art than science and I am happy to say that being part of SAP has worked out very well. Our employee retention after nearly three years stands close to 85%.
What did you learn along the way that other founders should take into consideration when scaling then selling?
It is much better to be bought than to be sold. This is the pull vs. push distinction. If someone wants to own the firm, they will work hard to make the internal case and will pay a premium for the asset. Your only objective should be to keep your head down and build a successful, profitable, market-leading business. Period. If you do that well, the buyers will be there at the right time.
The second piece of advice is to make sure you are solving a big problem for your customers. If it isn’t a top two or three problem for your particular buyer (say the head of Procurement or HR), then you are not going to get their mindshare and it is hard to build a firm that creates real value.
Fieldglass succeeded because we addressed a massive global problem – that of the contingent workforce, which has grown steadily in complexity and scale over the last decade or more. Now it did take several years for it to be viewed as a top issue by our particular buyer (largely Procurement) which explains why this sector grew slowly in its early years. It often takes an externality like a recession or something specific like the infamous Microsoft ‘permatemp’ case, where lines had been blurred between the regular and contract workforce and Microsoft had to settle for a large sum. These things can help a problem move up the ranks quickly as it did with our sector. Today, no one even questions the need for a platform to manage this category of spend which gives our new parent, SAP, a great deal of runway as we continue to expand around the globe.
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