On Feb. 27, 2000, Robert Toomey and a number of other stock analysts listened to Nike executives explain via conference call that the company had missed its third-quarter earnings estimate partly because of a botched i2 Technologies supply chain software installation. A day later, on the recommendation of those analysts, Nike shares lost nearly 20 percent of their value. “Their manufacturing and deliveries got all screwed up,” recalls Toomey, a Seattle-based stock analyst for brokerage company RBC Dain Rauscher. “They probably had to take back inventory, and that affected gross margins.” And while the strength of the dollar and slower than expected domestic sales were also factors in Toomey’s lower valuation of the company, the technology implementation figured prominently in his assessment. “It was like ’Wow. You screwed up i2?’ [i2 is] supposed to be the leader in this,” he says.
Toomey might have thought differently had Nike Vice President of IT Robert Tabb been available to explain the supply chain project’s long-term impact. A technology expert like Tabb might have convinced analysts that the problem with i2 wasn’t a threat to Nike’s long-term stability and softened the stock market’s blow, Toomey says. But Tabb wasn’t part of the team making the company’s case to investors. In fact, stock analysts almost never hear from CIOs about what IT is?or isn’t?doing for a company’s bottom line. And more of them, such as Toomey, are starting to think that’s a mistake.
When CIOs do talk to analysts, their interactions take different forms. They speak at breakout sessions during company-sponsored analyst conferences, answer questions during conference calls brokered by their investor relations departments or chat one-on-one with analysts about general technology questions. In every case, the interactions help establish the company as a technology leader and the CIO as a leader within the business. The same opportunity is available for other CIOs who want to be seen as strategic leaders and help their companies to build a better reputation on Wall Street.
Here’s what CIOs need to know.
1.have a message.
Every company has a story to tell Wall Street, and that story is determined largely by the CEO and CFO. Before talking with analysts, CIOs need to consult with their fellow senior executives to understand the message the company wants to deliver, and how information about the company’s IT projects supports that message. By the time Victor Hawley, senior vice president and principal for Reed, Conner and Birdwell, an investment management company in Los Angeles, gets a CIO on the phone, he’s talked to as many as 10 other executives. “I have a good idea of what the company strategy is by then,” he says, “but I ask [about it] anyway to see if there is a disconnect.” He wants the CIO to deliver the company message and say what the IS department can do to further the company’s primary objectives.
James Metzger, former CTO with White Plains, N.Y.-based Texaco, who retired in October after the company merged with Chevron, says it was his responsibility to shape the message Texaco sent to the Street by ensuring that former CEO Glen F. Tilton (now vice chairman of the new company, ChevronTexaco) accurately described Texaco’s IT initiatives and their impact on the bottom line. Texaco’s investor relations department would set up phone calls with analysts so that Metzger could answer their questions about technical details, such as how the 3-D visualization technology the company is using to find new sources of oil leads to faster decisions about where to drill next. These conversations occurred on a case-by-case basis, when Texaco executives thought analysts needed more information, or when an analyst had a specific question, says Metzger.
Alex Alexander, CIO of the Computer Task Group (CTG), a Buffalo, N.Y.-based company that provides temporary staff and IT consulting services to commercial and government clients, says he contributes by being a general resource about technology companies for analysts that cover those organizations. The questions have nothing to do with CTG. Instead, he might be asked to compare IBM’s software to Oracle’s, or to explain why a new Microsoft product is slow to catch on. Analysts spread the word to their colleagues that Alexander is knowledgeable, which helps brand CTG as a leader in its field. Alexander believes that reputation builds confidence among investors.
In a time when the stock market is increasingly dominated by short-term speculative investing, conversations like those held by Metzger and Alexander can point analysts past the current quarter, says Pascal Levensohn, president of San Francisco-based investment company Levensohn Capital Management. And when analysts take a longer view, that helps to stabilize a company’s stock price. Y2K taught Wall Street that companies’ operations depend on the strength of their IT systems, a lesson reiterated by the current economic downturn and the Sept. 11 attacks.
What analysts learn from talking with CIOs and other corporate executives heavily influences their buy or sell recommendations. “If you have a [choice] to invest between a company that only has investor relations people talking and one that has an investor relations person, the CEO, CFO and the CIO, you will invest in the company where you hear from more people,” says Hampton Adams, a San Francisco-based analyst with CIBC World Markets.
2.know your audience.
Analysts don’t care about technology for its own sake. “They care about technology in the context of the business strategy,” says Metzger. “I don’t think they are remotely interested in Texaco’s IT. They care about the results.” Explaining how technology helps your company make more money than your competitors will lead analysts to recommend investing in your company.
With that in mind, one retired CIO from the beverage industry who met regularly with analysts at his company’s investor conferences, offers this piece of advice: Keep your explanations simple. Don’t use technical acronyms such as ERP, CRM and SCM. Not only is it too easy to get the acronyms mixed up, but analysts could be so busy tracking the three-letter storm that they miss the actual point of the presentation. Charts and graphs that may distract from the message are also off-limits.
Hawley remembers one meeting in which senior executives from a major national retailer, which he declined to name, couldn’t explain why its inventory system was taking so long to install. “The guy talked about the data centers and all the things in IT,” he says. “We sold the stock after the meeting.” He looks for details about the return the company will get on its IT investments. The CIO can’t say that he is doing CRM because other companies are. Hawley wants to hear that if a company is investing in CRM it will “grow by Y and have X return on the investment.” That CIO, he says, understands that CRM is really about making customers shop more.
So if analysts ask, for example, about a major SAP investment, say the project will help your company make its production processes more efficient, and explain the ROI, says CTG’s Alexander. Don’t bother explaining why, technically, the latest package works better than what you installed before. And don’t assume, just because they don’t ask follow-up questions, that the analysts understand what they’ve been told. To make sure analysts get the point, Alexander usually asks them to recap the conversation.
3.think before you speak.
Once a CIO talks to an analyst, word gets around. “You will be bombarded with calls,” says Michael Newman, president of Seattle-based investor relations firm Street Connect. That’s because analysts want information from as many sources as possible. But corporate executives can get in serious legal trouble for telling them too much. An October 2000 Securities and Exchange Commission rule called Regulation FD (Fair Disclosure) requires that any information about a company that could affect its valuation must be announced publicly, not just to one or two analysts. Failing to comply could, in extreme cases, lead to fines or shareholder lawsuits. News reports note that several companies, including Raytheon and Motorola, have been investigated by the SEC for Regulation FD violations, although none have been fined or taken to court.
Responsibility for adhering to the regulation rests with the company because “we don’t know what is material and what isn’t,” says CIBC’s Adams. Even an off-the-cuff remark can be considered a violation. The most immediate remedy is a press release making the statement a public matter. Any time a company issues a press release titled, “Executive Says Business Is Great,” it’s a good bet someone slipped up.
But if CIOs stick to the legal rules and the company message, the risks of talking to financial analysts are vastly outweighed by the opportunity to help shape the company’s image among investors. A CIO is a credible and authoritative voice on technology issues, and, as these issues become more and more important to Wall Street, the CIO’s views will be increasingly in demand. And, says the former beverage industry CIO, the role fits naturally with the CIO job. “You need to have a long-term vision,” he says, “but you have to deliver value quarter to quarter.”