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DPI Client Interview
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Even Horatio Alger would be impressed.
Two men set out with $10,000 and in less than twenty years parlayed that investment into a world-class company with a market cap of nearly $5.5 billion.
To make the accomplishment even more stunning, they didn't do it in the usual places -- Silicon Valley, Wall Street or some Internet meteor. It happened in South Africa, a relatively small country beset for years by internal strife and external economic pressures.
They did it, the CEO says, by consistently looking for ways to change the rules in their markets and exercising a combination of fiscal savvy and an entrepreneurial management style.
The two original partners were Laurie (pronounced Lowry) Dippenaar and G.T. Ferreira. A third partner, Paul Harris, joined them a year later. All are in senior management with what is now known as FirstRand Limited, with Laurie Dippenaar as CEO. FirstRand is reported to be the largest financial services organization on the African Continent. But these men have never forgotten their small company roots.
"We started out offering finance to public utilities for their capital equipment with $10,000 in the bank," Dippenaar remembers. "Now I promise you, you can't compete with that amount of money and those resources unless you've changed the rules of the game completely. And that's what we did over the years and we've stuck to that."
The idea that got them started was a unique opportunity in a tax break offered to public utilities by the South Africa Tax Act. Says Dippenaar, "There were tax incentives for capital investments in public utilities, but of course the utilities couldn't take advantage of them directly because they don't pay taxes. So commercial leasing companies could come into these deals as participants, and then be able to enjoy a part of the tax allowances. We weren't the only ones to get into this but we did it a little differently than anyone else. Normally, participants in these deals would be advisors who would go to a bank or another finance company, tell them how to structure the deal, and share the profits. But we were brave enough to quote as a principal, a very important difference. So we were able to control the distribution of the profits to the participants. We made the price instead of being a price taker.
"Obviously, to accumulate capital you either take capital from outside or you generate it yourself through earnings. We did that by simply using a structure that nobody else had used, and it took time for our competitors to cotton onto what we were doing."
Profits from this stratagem enabled the group to build their initial investment into a growing portfolio of financial service entities over the next few years. The company grew quite rapidly.
"We started with this idea of residualizing capital equipment for public utilities," Dippenaar relates. "And then seven years later, in 1984, we acquired control of a small merchant, or investment, bank called Rand Merchant Bank. We grew that to become one of the pre-eminent merchant banks in South Africa. Then our next milestone was in 1992, when we acquired control of Momentum, the fifth largest life insurance company in South Africa. It was ailing when we bought it, and it took us five years to turn it from an ailing situation into South Africa's most admired insurance company. And then in 1998 we acquired joint control of one of South Africa's biggest four banks called First National Bank, and also the fourth largest insurance company, Southern Life. In between these big takeovers, we grew our existing business really rapidly and started a number of new businesses, 'seedlings' as we call them. We believe we're quite good at starting new businesses from grass roots. In fact we make very few acquisitions, but when we do make them, they're extremely large. Our group now covers virtually every facet of financial services. In banking we do commercial banking, investment banking, private banking and finance. In insurance we have life insurance, health insurance, property and casualty insurance. We're also in fund management and mutual funds. Our market capitalization currently makes us the largest financial services group in South Africa. Just before the July/August meltdown in world financial markets last year, for a brief spell we were South Africa's largest listed company. Not large perhaps by American standards, but we are probably the largest financial services group in Africa today."
Dippenaar and his partners have become widely known for their decentralized management structure that encourages prudent innovation and outside-the-box thinking. At Momentum Insurance, for example, they changed its monolithic structure, breaking the company into profit centers so that profit could be measured in small units, not as massive net numbers. Creating an 'owner-manager culture', as they call it, produced very successful results at Momentum.
As Dippenaar explains the concept, "One of our core philosophies is that we try and break up big groups into smaller little units. We refer to it as 'chunking'. We are great believers in not having monolithic structures. Instead of having a battleship we prefer to have a hundred destroyers. Even if it's a large market, we believe in doing that. We like lots of captains commanding, with minimal input from the center. That's part of our philosophy. It's really born out of our history. Because we started as a very small company, we still have a lot of faith in the small company mentality. But at the same time we realized that you want to get the benefits of a large company balance sheet. So often our legal structure will be one balance sheet and a lot of entities operating with different brands within that legal structure."
Discussing the role of the central management group that binds these independent units together, Dippenaar refers to the top management team as the "foxhole at the top."
"We didn't use any other management style except the one where you place a great deal of trust in your own people, because that's the only one we knew," he says. "Those were our roots. So we, almost by accident if you will, applied that management style to Momentum, the first insurance company that we took over. And we just found the people responded very well to it. It unleashed creativity -- people being held accountable, being trusted.
"At the top we don't have a command and control mentality. We rather see ourselves as being strategic enablers and facilitators. That's the role. Because we feel that, if you really believe in an empowered, autonomous, owner-manager type of culture in your operating company, the only style that fits-in well with that at the center is if you style yourself as a strategic enabler and facilitator. We like to think of ourselves as, not a 'rule-driven' group, but a 'value-driven' group. I explain this to people as follows: Do you want to establish a rule for everything for your children, or do you just want to give them a set of values and then they conduct themselves according to that value system rather than by reference to the rule that father and mother have lain down? This filtered down to all levels and we found ordinary people doing exceptional things."
Bottling The Success FormulaIn early 1997, a year before Rand Merchant Bank and Momentum took over Southern Life and First National Bank, the company was brimming with organic growth. It was time, they said, to step back, arrive at a clear definition of strategy and to gain an understanding of that strategy across these many units -- in effect to extract their success formula and "bottle it."
At the time one of the traditional management consulting firms was being considered for the job. But it just happened that one of Rand's executives was sick in bed and picked up Strategy Pure and Simple by DPI founding partner Mike Robert. He recognized the Strategic Thinking Process it described as a natural extension of the participative style of management Rand had cultivated. He took it to the CEO when he returned to work.
"I was quite pleased about it," Dippenaar recalls. "Normally you would think this kind of thing would come from the Chief Executive. I was delighted that it came from a guy in sort of second tier management. I thought it was quite telling for the group that we all had the openness of mind to say, 'Let's try this.'
"In our first exposure to DPI's process," Dippenaar explains, "we actually used it to get the captains of our different operating units, the CEO's, to arrive at a common understanding of our business philosophy. So, it wasn't really what the DPI process was primarily designed for. We weren't trying to necessarily find our Driving Force as DPI puts it. But we just thought if we go through this process we're going to get a common understanding and buy-in into our business philosophy. And it definitely achieved that objective. Obviously, what's affected us more than anything else is the fact that it systematically extracts the thinking and ideas from the executives' heads, rather than imposing the consultant's thinking. I think it almost forces it out of their heads. That obviously leads to the strategy being owned by the company, rather than by the consultant. I'm not just repeating what DPI says, it actually works that way."The Strategic Thinking Process with this group and subsequently with various FirstRand units was facilitated by an international team of DPI partners, South Africa's Rex Glanville and Mark Thompson of the U.S. Senior executives from the various operating units were able to come to a common understanding of the unique structure and management culture that the company had been practicing and cultivating for nearly twenty years. In such a decentralized structure, particularly one involving a number of acquisitions, there is always the danger of disconnects between the central management's philosophy and objectives with those of the operating units. One way to avoid that is living the values from the top, and certainly part of the CEO's job is to continuously reinforce the code of goals and beliefs across the many units. But, as Dippenaar found out, those efforts are far more effective if the people in charge of those units have arrived at those conclusions themselves, developing ownership in them and conviction about their importance.
"Remember, our objective here was to get an alignment of thinking from executives in the group. Of course we have this decentralized process or 'chunking,' because we'd rather have a hundred companies than one big one, but we need to be sure they're all heading in the same direction. Alignment of thinking is very, very important. And DPI's process is extremely useful for that. You can use it to align thinking within a business unit or you can use it to align thinking within a group of businesses. And it does it very quickly. You can get to the same alignment of thinking over years, but with this, in a matter of days you get there. At the time we used it, we had bought and started a number of new companies. It was extremely useful for them to acquaint themselves with each other, and get familiar with what the whole group was all about.
"Now we're not great users of consultants, I must tell you. Consulting firms have a great deal of talent and intellectual depth in them. Often, simply because of that inherent strength in consulting firms, any strategic plan or strategic thinking is often their thinking, and ownership of that plan or strategic thinking is never embraced by the company. And if there's no ownership, there will be no implementation. In fact, implementation of the strategic thinking is even more important than the thinking and planning itself. If it's not owned by the company, implementation has almost no chance at success, and you've wasted your money.
"Now we've started using DPI's process also, not just for getting a common understanding and buy-in on our business philosophy, but actually getting the individual companies to identify their Driving Force and develop plans of their own. We're now using it extensively for the purpose for which it was originally designed.
"As I said, we've never been great users of consultants. Can I just say that it's a credit to DPI that we've used them so extensively? It was partly because the style suits us. We don't want our business run by consultants."
Creating Advantage By Changing The RulesWith its key managers now firmly on the same wavelength, FirstRand continues to search out ways to innovate in all of its key markets by looking at them from its unique viewpoint.
Dippenaar and his team are convinced that the concept -- "changing the rules" -- that got them their start, has been the secret of its success for twenty years and will continue to be.
To illustrate the point Dippenaar gives an example from their insurance business. "In our life insurance company we saw a big swing away from traditional life insurance investment products to unit trusts, or mutual funds. Clearly, at that stage in the industry, mutual funds were regarded by life insurance companies as Enemy #1. We just identified that the market was moving that way. At the time, our life insurance company had a 5% market share. So we moved into what we call the mutual funds packaging industry. It's 10-packaging different mutual funds into groups of funds. We moved into that early, well ahead of our competitors. That's a new game in town as an alternative option to life insurance -- investment products at the upper end of the market, not the lower end.
"We're great believers that when there's a paradigm shift, when the rules of the game change, everybody goes back to zero. And if you go back to zero, the race starts again. It's the same as if you had 80% of the telex market, and faxes came along. You may have 80%, but its 80% of nothing; the race starts all over again. In our new game, we went to 25% market share in just a few years. Companies who collectively had the 60% share of the traditional life insurance market now only have 25% of the packaged unit trust market, which is a big swing. Originally they had 60%, and we had 5%.
"The shift, or the balance of power as it were, is just dramatic. We thrive on that. We thrive on these situations. And we are alert and watch for ways that the rules of the game are changing."
FirstRand has found that DPI's Strategic Thinking Process has helped them to differentiate between opportunities and identify those with the best strategic fit.
"One of the most valuable contributions to our thinking from the DPI process is that it provides a filter for the opportunities that you're swamped with," Dippenaar observes. "You can easily choose the ones that fit strategically so you don't go chasing hares across the plains.
"This last merger that we did is now just a year old. Part of the rationale was to take full advantage of this convergence that we see taking place between the products of banks, insurance companies, mutual funds, and fund managers. In recognition of that we've put together a group that has, as wholly owned subsidiaries, all these components. We'd like to think that in the next four to five years, we may rewrite the rules of financial services companies in South Africa. And maybe if we rewrite the rules here, there will be a few other countries that will sit up and take notice."
