Engineering is a better starting point for corporate management than business training

1. Engineering
Mindset for
Corporate
Management
with Dr. Alan
Harbitter

2. XBOSoft Info
Founded in 2006
Dedicated to software quality
Software QA Consulting
Software Testing
Offices in San Francisco, Beijing, Oslo, and Amsterdam

3. Housekeeping
● Everyone except the speakers are muted
● Questions via the gotowebinar control on the right side of
your screen or through Twitter @XBOSoft
● Questions can be asked throughout the webinar, we’ll try
to fit them in when appropriate
● General Q & A at the end of the webinar
● You will receive info on recording after the webinar

4. Speakers
Alan Harbitter
Board Member of XBOSoft
Jan Princen
Director at XBOsoft
Founder of GripQA
Sabrina Gasson
XBOSoft Marketing

5. Engineering Mindset for Corporate
Management
Dr. Alan Harbitter
alan@harbitterconsulting.com
October 30, 2014

6. What I’ll Talk About
• My hypothesis: Engineering is a better starting
point for corporate management than
business training
• The story of the company I co-founded (in
1985) and how an engineer came to be a COO
• A couple of examples of how analytical skills
adapt to business problems

7. The Secret to Business is Technical Analysis
• B-school is too easy after technology training
• 90% of all important business decisions can be
made by understanding terminology (e.g.,
EBITDA, …) and a spreadsheet
• Examples
– Balance sheet and income statement tell all
– Revenue/earnings forecasts (following example
will be somewhat tongue-in-cheek)
– Intentionally leaving out personnel management

8. Timeline - Millennium 1
• 1978: BSEE, Cornell
• 1978-85: Met partners at CSC (NoVA)
• 1982: MSCS at UMD (research in computer
performance)
• 1985: Co-founded Performance Engineering
Corporation (3 guys, $50K)
• 1997: PEC CTO

9. Timeline - Millennium 2
• 2001: Took PEC public (NASDAQ/NM: PECS)
• 2002: PhD CS at GMU (research in computer
security)
• 2004: PEC COO
• 2005: 1,700 employees,
$250M annual revenue,
sold for $472M

10. A Little More Detail
• 1985 (go-go Reagan economy): founded as
Performance Engineering Corporation—high-end IT
services for Government
• 1999: $50MM in revenue; entering 15th year of solid
bottom line (north of 10% net) and top line growth
(30 to 35%)
• 2000: Public as PEC Solutions, 3M shares at $9.50
• 2001: Follow-on offering, 5M shares at $17.00
(~$85M)
• 2001 through 2004: Buying spree

11. Acquisitions
• 2000: Viking Technology, <$3M, state & local
focus
• 2001: Troy Systems, $18M, 300 employees,
Navy focus
• 2003: IITC, $33M, 270 employees, Air
Force/satellite focus
• 2004: AC Technologies, $46.7M, 360
employees, USPS, CMMI rating

12. Example 1: How Might the Engineer
Evaluate an Acquisition Target?
• There’s the qualitative stuff
– Alignment of goals and culture
– The addition of value that can’t be grown in-house
– Are the two cultures merge-able?
• Then there’s the quantitative stuff
– Will the purchase be “accretive”?
– Income statement & balance sheet

13. What if we wanted to buy Facebook?
Significant
increase in sales
and R&D costs in
CY12 (they IPOed
May 2012)
CY13 profit is
19% of revenue,
up from 1% in
CY12, up from
18% in CY11
Low interest
expense…
probably not
much debt
37% revenue
growth in CY12,
55% in CY13…
excellent

14. Balance Sheet Reveals More!
With $1.875B in
annual costs,
plenty of cash on
hand to fund
operations
There’s our low
debt

15. Some Other Important Quantitative
Info on Our Acquisition Target
Conclusion: Performance is excellent; P/E doesn’t seem bad compared
to other market comparables such as Linked-In and Twitter. Deal
breaker: coming up with > $200B (AOL-Time Warner was $186B)

16. Example 2: Revenue and Income
Forecasting
(Wall Street expects crazy predictive accuracy)
February 2, 2010. MicroStrategy (MSTR) shares are down sharply this
morning on investor disappointment with the company’s fourth quarter results.
This morning, the business intelligence software provider reported Q4 revenue
of $105.8 million, short of the Street consensus at $107.3 million. EPS, though,
came in at $1.66 a share, a nickel ahead of the Street.
On Feb 2: 79.03 17.61 (18.22%)
1.3% miss
(but up 11%
YOY)
3% miss (up
42% YOY)

17. How Might An Engineer Look at
Earnings Forecast
• Accurately predicting revenue and earnings is
a big deal
• If you throw in enough independent variables,
and/or pick a high enough order fit, you don’t
even need a CFO

18. Quarterly Revenue & Price
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jul-02
Oct-02
Jan-02
Apr-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Reporting Quarter
Mdollars
normalized
share price
quarterly
revenue
guidance
revision
the “terror stock”

19. Quarterly Earnings & Price
0.28
0.26
0.24
0.22
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
-
Jul-00
Oct-00
Jan-01
Apr-00
Jul-01
Oct-01
Jan-02
Apr-01
Jul-02
Oct-02
Jan-03
Apr-02
Jul-03
Oct-03
Jan-04
Apr-03
Jul-04
Oct-04
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Apr-04
Apr-05
Reporting Quarter
Dollars
normalized
share price
eps
guidance

20. 70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Revenue & Earnings & Price
Apr-00
Oct-00
Jul-00
Jan-01
Apr-01
Oct-01
Jul-01
Jan-02
Apr-02
Oct-02
Jul-02
Jan-03
Apr-03
Oct-03
Jul-03
Jan-04
Apr-04
Oct-04
Jul-04
Jan-05
Apr-05
Reporting Quarter
Mdollars
normalized
share price
quarterly
revenue
guidance
revision
0.28
0.26
0.24
0.22
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
-
Jul-00
Oct-00
Jan-01
Apr-00
Jul-01
Oct-01
Jan-02
Apr-01
Jul-02
Oct-02
Jan-03
Apr-02
Jul-03
Oct-03
Jan-04
Apr-03
Jul-04
Oct-04
Jan-05
Apr-04
Apr-05
Reporting Quarter
Dollars
normalized
share price
eps
guidance
Revenue
Earnings

21. Other Areas Where Engineering Analysis
Can Answer Business Questions
• How can we grow?
• How do we control costs?
• Should we invest in infrastructure?
• How efficient are our new business
development processes?
• Are our clients satisfied?
• Are our goals realistic?

22. PEC Solutions,
Inc.
The Final
Chapter
(June 2005)

23. PEC Redux
• June 2005: Nortel Networks buys all shares of PEC at $15 per
(all cash, $472M)
• Nortel Government Systems (NGS) is formed as a wholly
owned subsidiary
• The 3 PEC founders had a 2 year employment agreement
• Jan 2009: Nortel files for Chapter 11
• Dec 2009: Avaya ($5B revenue, spun off from Lucent, bought
private) acquires Nortel’s “enterprise” business ($2.4B
revenue in 2008) and NGS for $900M
• Feb 2014: Camber Corporation purchases Avaya Government
Solutions for $100M

24. What My Engineering Education Did
For Me
• Taught me broadly applicable analytical skills
• Got me past a lot of conceptual hurtles I never
would have figured out on my own
• Taught me how to research a topic I didn’t
know anything about
• Taught me how to deal with people from
diverse backgrounds
• Made me an expert in selected technological
fields and gave me something to sell

25. What My Education Didn’t Do
• It didn’t teach me how to write &
communicate
• It didn’t teach me anything about business
• It didn’t teach me anything about management
• It didn’t teach me to be ambitious, aggressive,
and continually unsatisfied

26. See, see?
Undergrad Degree
Percent of S&P 500 CEOs
2008 2007 2006 2005
Engineering 22% 21% 23% 20%
Economics 16% 15% 13% 11%
Business Administration 13% 13% 12% 15%
Accounting 9% 8% 8% 7%
Liberal Arts 6% 6% 8% 9%
http://content.spencerstuart.com/sswebsite/pdf/lib/2008_RTTT_Final_summary.pdf

27. How Can an Engineer be Successful in
Business?
• The subject matter has to intrigue you
• It will be one of your easiest research
projects
• Use analytical thought processes and tools
to evaluate options and make decisions
• Know your weaknesses, surround yourself
with people with compensating strengths
• Pick options that give you more options

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