The star system is part of the recognition. We try to make sure it doesn t get out of hand. Leadership. Interview

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Leadership

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THE FOCUS VOL. XIII/1

PHOTOS : JÜ RG E N FRAN K

Daniel J. Warmenhoven

CEO and Chairman of

NetApp Inc. has grown a 45-man operation into a

leading global supplier of data storage solutions.

Talking to THE FOCUS, he describes how he gets

the best out of himself and his people day after day.

Interview

“The star system is

part of the recognition.

We try to make sure

it doesn’t get out of

hand.”

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LeadershipInterview

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DAN WARMENHOVEN believes in straight talking: “It’s fast paced,” he says about life at NetApp, the com-pany he’s been leading for the past 15 years. “This is not a country club. It’s not as though we earned our success through perks like on-site massages.” Instead of mas-sages, today 57 year-old Warmenhoven relies on the mo-tivational power of a blend of performance-based mone-tary incentives and maximum personal autonomy at work to drive the company to its goal of market leader-ship. Motivating himself is no problem, he says – he loves a challenge and right now he’s enjoying teaching a lesson to all those who think NetApp is about to be snapped up by an investor.

The Focus: NetApp recently won Fortune magazine’s “Best Company To Work For” award, putting you among the top 10 for the second year running and making it seven consecutive years in the top 50. What’s the secret?

Daniel J. Warmenhoven:That’s exactly the question I asked myself when I joined this company 15 years ago. The answer was, and still is: You start by trying to build a great company that has greatness in many different dimensions. You need to have a framework of greatness in order to be a great place to work. And you know what? It’s hard to find a great place to work that has a losing team.

The Focus:How is NetApp’s reward culture integrated into this “framework of greatness”?

Warmenhoven:The rewards fit in many different cate-gories: They are recognition and reinforcement of be-haviors around customer success, around innovation or around goal-achievement. These are very challenging goals. The rewards are not just monetary and not just stock compensation.

The Focus:Let’s stick to the monetary compensation for a moment. Do you have a special compensation scheme to motivate your employees?

Warmenhoven:The compensation of everybody working for this company has three components: There is a fixed base salary; there is a variable component, which is paid on annual goal basis; and there are equity incentives. Everybody here has stock options or some form of stock ownership. Sales representatives have a commission-based plan or some other kind of incentive-commission-based plan, and typically they have as much as 50 percent of their target earnings at risk. All non-sales employees participate in a company incentive plan, and the amount at risk increases as the level in the organization increases. More than 50

The son of a middle manager at US groceries group General Foods, Daniel J. Warmenhoven knew at the age of 17 that he wanted to be a CEO – so he could control his own destiny. After studying electri-cal engineering at Princeton University he started his professional career at IBM before switching to Hewlett Packard. The idea of networks enabling many computers to communicate with each other began to fascinate him. In 1989 Warmenhoven joined Network Equipment Technologies as President and COO. He was quickly promoted to CEO to turn around the struggling company. After a short stay he moved to Network Appliance, now NetApp, as CEO. At the time the supplier of data storage solutions for large computer networks had 45 employees. Just one year later, Warmenhoven led Network Appliance to an initial public offering. The company’s dramatic growth in the second half of the 1990s and since 2003 is widely credited to his influence. 57-year-old Warmenhoven, who has also been Chairman of the Board since 2008, is one of America’s most highly regarded CEOs. In 2004 he won the National Ernst & Young Entrepreneur of the Year Award.

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at an enormous rate, our HR Vice President told me we needed to be more concerned about work-life balance. I asked her: “What team are you on? Are you on my side?”

The Focus:Were you serious?

Warmenhoven:I did it in jest but there was a sense of seriousness there. I don’t think that any company can take responsibility for an employee’s work-life balance. That’s a very individual issue, and what you think is a good balance for you might be totally ridiculous for me. Let’s put it this way: I’m going to encourage you to work every hour, every second that you are awake. Then it’s up to you to go find your own work-life balance. One thing we do is to encourage people to get involved with the community. We have an optional volunteer time-off pro-gram covering five days a year. We tell our people: “You’re not here at work but you’re still paid, and the only thing you have to certify to us is that you are in-volved in a non-profit activity. You pick the area of inter-est.” The interesting thing is that although we don’t change their business objectives at all, my sense is we don’t lose anything. These are professionals working on long-term goals and so they find a way to get their job done, even if they’re into a non-profit activity.

The Focus:You often emphasize the importance of a corporate culture that is not merely written down on pa-per but put into daily practice. How did you develop NetApp’s set of corporate values?

Warmenhoven:When we went public we had revenues of US$45 million, and we set down a goal to double that number every year for five years. Our idea was: Let’s go and identify a market segment, and then let’s dominate that segment. We’ll lead it, and as a result we’ll double our revenues, which at the time was seen as pretty ag-gressive. At the same time we asked ourselves what kind of company we wanted to be on the inside, and the con-clusion we came to was that we wanted to design a cul-ture that allowed this kind of growth rate to happen. We were convinced that the more you try to manage and control, the more you’ll restrict the opportunity to achieve your goals. So we installed a culture based on a minimum of control systems and a maximum of individ-ual autonomy to achieve specific business objectives.

The Focus:That calls for a special kind of person…

Warmenhoven:Yes, and at the time we talked about the profile of the type of personality we wanted. The people we were looking for had to be very collaborative,

anti-LeadershipInterview

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THE FOCUS VOL. XIII/1 percent of my earnings come from the annual incentive,

whereas for an engineer it may be only ten or 15 percent.

The Focus:Are there special incentives for teams or de-partments? Or is it individual performance that counts?

Warmenhoven:There is a real focus on individual con-tribution. It’s part of your target earnings at the beginning of the year. You may get a little more, you may get a little less, you may get nothing. We’ve steered away from team bonuses for things like engineering, where the tendency is to reward the people who are there at the end of a project.

The Focus:How do you avoid a star system developing?

Warmenhoven: I don’t think we want to avoid a star system.

The Focus:You don’t want to avoid it, or do you actively support it?

Warmenhoven:A star system, as you call it, is part of the recognition. We try to make sure it doesn’t get out of hand. We don’t want stars who are so individual that they don’t care about the rest of the organization. But in a sense, stars are those who represent the values of the or-ganization. They are the leaders, and so we look for them, we try to promote them and publicize them.

The Focus:When selecting the “Best Company To Work For” the jury focused mainly on non-monetary rewards. What’s special about NetApp’s approach in this respect?

Warmenhoven:Let me give you an example: Tom Men-doza, our vice chairman, has a program called “Catch somebody doing something right.” If you want somebody to be recognized by Tom, you just send him a short e-mail that describes what the person did. Tom sends out a hun-dred or more individual “thank you” notes a week. It’s just an informal program, but it’s still staggering when you pick up your blackberry or your phone and on the other end there’s Tom Mendoza saying: “I just want to say thank you, I heard about the good things that you did.” We also have something called the “living our values award.” The idea is that employees nominate other employees who have really demonstrated the essence of our corporate values.

The Focus: In recent years work-life balance has be-come a prominent subject. Has NetApp done anything to make working hours more flexible, for example?

Warmenhoven:I have never seen this as a real issue. I remember that in 1998 or 1999, when we were growing

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NetApp Inc., based in Sunnyvale, California, is one of the world’s leading suppliers of data storage solutions for large computer networks. The company has nearly 8,000 employees with distribution in 138 countries. In the last financial year (ending April 2008) NetApp achieved rev-enue growth of nearly 18 percent, to a total of US$3.3 billion, in an extremely difficult econom-ic environment. The net profit margin was given as 9.38 percent. Analysts are forecasting that despite the recession NetApp is set to increase its revenues to over US$3.5 billion in the current financial year. From 1992, the year of its founda-tion, to 2001, the crisis year for the high-tech sector, NetApp grew by an average of 100 per-cent per year. After a brief downturn in 2001/ 2002 the company quickly returned to growth. In March last year NetApp launched its new corpo-rate identity, with a new name (NetApp instead of Network Appliance), a new logo and a new style of presentation. CEO Warmenhoven want-ed to modernize and improve the way the com-pany was perceived externally. In January this year Fortunemagazine ranked NetApp No.1 in its list of the “100 Best Companies To Work For”. This was the seventh consecutive year that NetApp had been ranked among the top 50. CEO Dan Warmenhoven constantly emphasizes the importance of living out the company’s values: “Our interactions are based upon candor, hon-esty, and respect for individuals and their contri-butions,” he says. “We are committed to always acting for the absolute good of the whole.”

NetApp Inc.

“Best Company To Work For”

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political, and very goal focused. NetApp is very much a meritocracy, not a traditional hierarchal kind of organi-zation. So we literally put that in as a recruiting criterion for our people. As a result, we’ve hired some very talent-ed people, and they are very bright, very energetic, and very creative in their thinking processes.

The Focus:Before you took over NetApp you worked for three other companies. What lessons did you learn there with regard to corporate culture?

Warmenhoven: I spent thirteen years at IBM and five years at Hewlett Packard. Then I went to a company called Network Equipment Technologies, and it had a culture that was not very conducive to teamwork. It was very inefficient and ineffective. When I came here, we were 45 people, mostly engineers, and there was an op-portunity to craft a culture that was purpose built, and we set out to do just that. If you look at the value set that we defined back in March 1996, you will notice it’s the one that still applies today. The idea was that we wanted to be known as the best company on the planet by five very different constituents: customers, shareholders, employees, business partners, and the community. We set some objectives that we thought were distinctive rel-ative to the market leaders at that time. For instance, we didn’t commit to customer satisfaction, we committed to customer success. It makes a difference. People buy our products for a business purpose, and our job isn’t done until that purpose is fulfilled, which sets a different stan-dard for performance compared to our competitors.

The Focus:After the IPO your company showed rapid growth, five years in a row. That kind of growth is the ul-timate test of a well-thought-out corporate culture, be-cause in many cases, culture is sacrificed to growth.

Warmenhoven:When we went public in 1995, we had about 100 people on board, and the number one concern of our employees was: How are we going to sustain the culture as we grow? We got to 1,000 people and everone’s concern still was: How are we going to sustain the cul-ture? That’s always been the biggest concern for 15 years now. Today we are 8,000 people and I think our employ-ees have adopted the notion that if they like our culture they should help sustain it. It’s not something they want to leave to us as a management team. They help to propa-gate it; they help to integrate people into it.

The Focus:We are in the midst of one of the worst reces-sions on record. NetApp has a strong customer base in

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financial services – an area that has suffered enormous-ly. How much is this testing your culture?

Warmenhoven:This is not the first test we have faced. The dotcom bubble collapse in 2001 was actually more severe. The revenue level dropped by 20 percent; this time we’re going to go flat. We came through the recession in 2001/2002 with flying colors. It actually drew the team closer together. There are two things that can happen in a crisis: You can fracture and fly apart, or you can hunker down. Back then, everybody in the team hunkered down, and I sense that the same thing is going on right now. The team stayed together through thick and thin.

The Focus:How did it line up with your corporate val-ues when you had to announce layoffs?

Warmenhoven:We had a reduction a couple of months ago, and it’s still a bit of a shock to the system. It was handled thoughtfully: We put together a plan for several months based on various scenarios and then we made a decision. From the time that decision was made to the time when people were notified it took only a few hours. When the decision was announced on Monday morning, the people who were affected already knew. It would have been inappropriate if we had announced a decision without first telling the people affected. Everybody is affected anyway, but we didn’t want to create a problem for the over 90 percent of the population who didn’t have to go. It was unfortunate; it was unavoidable; but it was handled well. Even in a downturn, people are judging how the management behaves and whether they demon-strate the core values they proclaimed in boom times. They still think of our company as a great place to work with a great future, and they really are drawn into help-ing the company to be successful and go forward.

The Focus:Would you say your employees feel an obli-gation to give something back when times get tough?

Warmenhoven:In tough times we all pull together. You just have to look at our expense management: We have no control system on travel: You can book your own reservation, your own room, your own car. You just go and do it. And we noticed that in the past quarter our travel expenses have dropped like a rock – to the point where we said: “If you’ve got to go and see a customer, that’s OK. Find people with money; if they are still out there, go get them.” But the point is that it was a volun-tary response. Everybody got the message and behaved appropriately. People tightened their belts without having to be told to do so.

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“I encourage you to work

every hour, every second

that you are awake.”

The Focus: Are your corporate values implemented in the same way all over the world, wherever people work for NetApp, regardless of cultural traditions in specific regions?

Warmenhoven:There are challenges. The two biggest areas in terms of countries where we are challenged are Japan and India, in both cases for cultural reasons. Japan in particular is very sensitive to rank; just watch the seating dynamics when you have a meeting: The highest ranking person sits in the middle, and if someone of higher rank comes into the meeting, that person gets up and moves. So when you walk in and say: “Look, we don’t recognize rank here; this is a meritocracy,” that is a very tough concept.

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The Focus:Do such cultural issues mean you have prob-lems recruiting people who fit into the organization?

Warmenhoven:Yes, it’s still hard to get the right people. In Japan we hired a wonderful guy from Hitachi to lead the team. So what happened? All around the globe, NetApp employees are working in cubes. My office is a cube, and most everywhere – unless we have constraints in terms of the physical facility – most everybody has a cube. Our Tokyo office also has cubes. But what did this guy do? Not only did he build himself an office, but he put the office right against the window. I told him

“You’ve got to be right up front. Get away from the win-dow; get up where the action is.” He didn’t realize he’d done anything wrong. What he did was culturally unac-ceptable to us, but it was culturally expected in Japan. This kind of thing becomes a real challenge because so much of it is subconscious. This is behavior you’re taught for your entire life and it is not going to change overnight.

The Focus:You said you commit to your customers’ success. Do you ever ask your customers for feedback on the performance of the NetApp sales force?

Warmenhoven:Yes we do. For the top enterprise ac-counts, there is a very structured program to solicit feed-back and it generates some very interesting findings. For example we have found that the corporate culture, the energy, enthusiasm, and team spirit at NetApp make a difference for the customer. The best demonstration is when there is some kind of problem. That’s when the customer discovers how our company responds, and

“Being ranked number one

in the ‘Best Company To

Work For’ awards was the

crowning achievement of

my career.”

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The interview with Dan Warmenhoven in Sunnyvale, California was conducted by Reynold Lewke (left) and Pavan Vohra, both Egon Zehnder International, Palo Alto.

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THE FOCUS VOL. XIII/1 when they see the level of involvement rise across the

or-ganization in no time at all, it’s quite astonishing. It’s certainly different from anything they’ve seen before. We had a case in Australia, where one of our customers was having a technical problem. Our guys came in and veri-fied it was not our problem. What would most vendors do? They’d go back to the customer and say, “Look, I’m sure it’s not our problem; please call the company that’s responsible for this.” And what did we do? Remember, the objective is customer success, not customer satisfac-tion. That customer was not yet successful and he asked us to solve his problem. And so we did. I think that’s a big piece of our business success: We like to think we’ve got great products, but when it comes to customer buy-ing behavior, they actually care less about the differenti-ated product than about the differentidifferenti-ated relationship.

The Focus:You’ve been at the helm of NetApp for 15 years now – a long time compared to the average tenure in corporate America. How do you stay motivated?

Warmenhoven: I wake up with a pretty good attitude every day and I find myself wanting to go to work almost every day, so it’s not as though I need a lot more personal motivation. I find challenges very stimulating, and I’m probably viewed as a natural problem solver. I get moti-vated by challenges and that gives me energy, and there is always a set of challenges to be dealt with. There is a lot of speculation out there that NetApp cannot stay an inde-pendent company for long, and that’s a challenge all by it-self – to prove everybody wrong. So just proving that our concept can and does work has been a challenge every day for fifteen years now. In that time we’ve changed al-most everything: We’ve changed the nature of our prod-uct; the kind of customer we sell it to; the way we sell it; and the way we support it.

The Focus:You have a reputation for taking a tough stance on competition. Does an aggressive style help motivate yourself and your employees?

Warmenhoven:Our goal is to be the market leader. If you want to be the market leader you have to beat every-body who is ahead of you, and in our case there are three or four substantially sized vendors ahead of us in terms of market share. So our goal is very clear: We go out there and we beat them. We have great respect for our competitors: They deserved the success they have achieved, but they don’t deserve it any longer. I think everybody here is a very competitive person, although not in the sense that it would lead them to any unethical

behavior. It’s not win at all costs; it’s win with integrity. But it’s definitely win. We don’t celebrate a lot of losers.

The Focus:Looking back – what are you most proud of?

Warmenhoven:No question: Being ranked number one in the “Best Company To Work For” awards. When I learned of the award I was in Munich, making sales calls. I got up one morning, read my Blackberry, and said to myself, “We’re number one! Unbelievable!” That was the crowning achievement of my career. I always had the notion that I was going to be a CEO and run a substantial company, but I always assumed it would be one I was promoted into, like IBM. I never thought I’d be the one who builds it, in the sense of leading the evolu-tion from basically US$15 million in revenue in the first year to almost US$4 billion in revenue this year, and from 45 people to 8,000. So I am quite proud of what we have achieved here.

The Focus:What is there still left to do?

Warmenhoven:The job’s not done yet. But the point is that it’s a journey; it’s not just a set of milestones.

The Focus:You are at the peak of your career, but every personal journey comes to an end someday…

Warmenhoven:Yes, it will take many more years for NetApp to achieve the goal of market leadership, many more than I have remaining. So NetApp’s journey will continue after my time here comes to an end, and it would be disappointing if the company stumbled in the wake of my departure. NetApp has enormous potential, and I would like to see it continue to prosper.