Conversations: Doreen Lorenzo, Who Was the CEO of frog design When It Was Acquired by Aricent in 2006

Conversations The last story you’ll read about is from my conversation with Doreen Lorenzo. Under Doreen’s leadership, frog drove an industry revolution in strategic design, a rise of design-as-innovation, and the acceptance of design as a broad creative power for social change. During her tenure as CEO, she helped the company survive economic downturns, established frog as a global brand, drove massive growth in revenue and staff size, and saw the company change ownership twice. And she also hired me!

Tell me a little about your experience at frog design.

I started at frog in 1997. Before that, I was the Head of Marketing at Power Computing, and I hired Virtual Studio—Mark Rolston and Collin Cole’s company—to do our e-Commerce website.

At about the same time, Virtual Studio was acquired by frog. frog’s founder Hartmut Esslinger had started to see that the digital future wasn’t just about websites; he saw that products were starting to have digital interfaces and he needed people who understood digital. There weren’t a lot of software digital interface people at the time. Hartmut found these guys in Austin, and they began to work with him on a couple of projects, and then he decided he wanted to buy them.

And also at the same time, Steve Jobs came back from NeXT to Apple. He said, “Licensing is dead,” and he told us at Power Computing, “I’m going to buy your company or I’m going to put you out of business; I’m putting everybody else out of business.” So he bought Power Computing.

Hartmut had been advising Steve about design, I was at Power Computing, frog bought Virtual Studio, and it also sort of came together. We caught the digital wave. I became the Chief Operating Officer of frog. And the company went gangbusters. We opened offices all over.

Then 2001 hit. It was dark. Hartmut and his wife and co-founder Patricia had invested a great deal of their own money into frog at that point, and when it went south, it went really south. They did a lot to keep frog alive, but we had to do tons of layoffs. And it was awful.

At the end, Patricia said, “I don’t ever want to do this again.” So in 2004, when they were approached by Flextronics about an acquisition, they took it. They sold 80% of frog to Flextronics and they basically backed away; they kind of handed me the reins to go run the company.

The whole point of the acquisition was that we were supposed to work with Flextronics doing hardware and software integration with their factories. It never happened. They never talked to us, and nothing happened. Fast forward to 2006; the CEO of Flextronics went to join the investment company KKR as a partner. He wanted to take all of these software companies that Flextronics had bought, including frog, and roll them into a business. KKR bought Patricia and Hartmut out entirely, and that new company became Aricent. I became president of frog, and from then until about 2012, they left us alone.

In about 2012, a new CEO came into Aricent, and they decided to try to integrate everything. They felt that’s where the value was. But every time they would bring the subject up, I would fight them, and so they booted me out.

After I left, Aricent sold to Altran, and Altran sold to Capgemini, and that’s where they are today.

It sounds like it all worked pretty well when the parent company—be it Flextronics or Aricent—left frog alone, but it started to fall apart when one company tried to integrate the other company. Why do you think that is?

One reason is the finances.

In managed services or IT services, you could have two years of visibility into a contract value. But in a creative services company, there’s no visibility in growth. Innovation is not a line item in anybody’s P&L. The work that you do requires almost constant delight, constantly proving to people that you can provide something that no one else can. They have to go and dig up money every quarter. This is how our industry worked, and it still works that way. That was really hard for financial people. Aricent was owned by a private equity company, and that’s all they knew. They liked our output, they liked what they saw, and they liked the notoriety that the company got, but they couldn’t understand the business model because it goes against everything that most financial people understand as good business practice. The sales cycles are long but short: it takes you a long time to get the sales opportunity, then it’s a short sale, and then you’ve got to do it all over again. And that’s really hard to understand.

They started to try to “fix it.” Our overhead costs were higher and the margins didn’t operate at the same margins that a lot of these integrators operate at. The margins that we had at frog were exceptional, but they still tried to improve them. Creative is so labor-intensive and people-intensive, and that’s hard for financial people to swallow. So they tried to figure out how to operationalize creativity.

They told me, “We’ll get rid of your finance team.” But if you get rid of the finance team, you can’t get things done fast. And in our industry, you’ve got to get things done fast. For example, sometimes we need to get on a plane and go to Cuba today to do that interview for a client. Well, in a large corporation, that takes a long time to do. We were at odds with each other, and so it became clear that they didn’t understand what we did. That’s where the mismatch happened. And it was incredibly frustrating, because I couldn’t operate the way I always operated.

Another example was pricing.

In creative services, your pricing model is never really fixed; it’s a very fluid pricing model. And it’s really dependent on how much business you have at that moment or how much you can charge a client. It’s about the value you are going to bring to the company through the project. And that model is just insane to some people. They would ask, “What do you mean you don’t have a fixed pricing model?”

We say we have an hourly rate, but we don’t really have an hourly rate. We kind of know what we have to make, and by managing the project, we can make a profit. That’s why program management is so important. But it’s not based on saying, “I’m going to bill you for 50 man-hours a month for the next 10 months.” It just doesn’t work like that.

Creativity doesn’t have a fixed script. When you’re coding for integration, there’s a script. You know what you have to do. You know exactly the directions. It has steps. Creativity doesn’t have steps. It’s pretty messy and ugly. And if you’re not really experienced at it, it can cost you your shirt. And if you don’t know how to work with your clients to get them to feel comfortable about what you’re delivering, you’ll just go through these iterations over and over again.

Aricent couldn’t understand that; it just didn’t make sense to them. They wanted us to just give them the man-hours. But there’s no such thing. You give the client a price and it’s based on a whole bunch of particulars. By the time you get into the project, the particulars have already changed. You make mistakes when you get in the project. It’s just a messy process. So what you try to do is bill enough to cover the mess. Nobody wants to talk about this; everyone wants to sound professional. But that’s really how the creative industry works. We make a mess out there, and you hope that you have enough experience to be aware of the mess before it gets to be too much.

If you’re a financial person, that’s really scary. There’s no visibility, and a lot of unknowns. They would ask, “How do you know the client is going to come back?” These integrators don’t understand that it’s the emotional things that bring clients back. If you do this right, your customer believes that nobody else can provide what you provide. That’s how you keep people for years and years and years. You’ve created something nobody else can. It’s that special.

These big tech integrators buy these design companies, and their EQ is really low. So the designers find themselves just painting pigs.

Why do you think these types of acquisitions don’t work?

Nobody has figured out the connector. There’s a connector between the shiny object of design and the backend drill work, but I have yet to see somebody make that connection work.

Part of it is culture. Software developers at these integrators don’t think like designers. Designers don’t mind the messy process. If the process isn’t working, they’ll tinker with it. But for software developers, they write code that has to be accurate.

This difference became a big problem for us. I would hear all the time that “We’re not getting what we want and the work isn’t good and the client’s not going to be happy because we’re not delivering.” And the designers would moan and groan every time they had to go work with Aricent, because it was so hard. They just couldn’t get what they thought they wanted.

And on the flip side, the IT people were like, “I don’t know what you’re talking about. You want something that doesn’t make any sense to me.”

All these design companies keep getting bought and bought and bought, but no one’s bothered to say, “How do we do this? What would be the best way to do this? And what’s the expectation once that happens?” I don’t think anybody ever does the visioning exercises to say, “What is this going to look like when the acquisition is done?”

Everybody says the same thing: “We’re going to leave you alone.” But that doesn’t make sense from a business perspective, and I understand that. If you’re running a business and you have your own finance team and your own sales team, and I’m running my business with another finance and sales team, you’re losing me money. Does that make sense? Why did I buy you?

When you started to see this happen at frog, what did you do?

I became a shield. The designers didn’t know half of it; the company just went on as business as usual. But I came out of board meetings or business meetings bloodied from the fights. It was exhausting.

I left, and I heard that the person who was put in charge said, “Let’s integrate.” And that was the rude awakening. That’s when Mark Rolston and a whole bunch of key people left. They said, “Well, we don’t want to do this.”

What could you have done differently up-front, before the Aricent acquisition happened, in order to ensure a better result and to retain more of your staff?

It’s really about expectations of the goals of the acquisition, and figuring out how to connect these two very disparate pieces. Can we bridge that, or is there no bridge? There’s always going to be change, and it isn’t going to work like a fairytale. They aren’t going to leave us alone or let us stay independent. That’s not realistic.

You’ve got to figure out the Human Resources, which becomes a big issue. Human Resources in a creative organization are very different from Human Resources in a software integrator. In a software integrator’s organization, you’re dealing with batches of thousands of students who come out of school each year. In a design organization, you’re hiring the “bespoke, pick the daisy beautiful flower.”

It’s about culture. What is really the culture of the parent company? And is that going to overpower the culture of the design firm? Culture is about how we do the work. What’s the ethos of how we work? How do we create an environment where we can create things? Those environments are hard. It’s very difficult to have an environment where everybody’s not afraid to create and come up with something. Oftentimes in these large organizations, you’ve got so many rules and regulations and other things that are influencing your success that you can’t create. How do you protect that essence? Your KPIs for design will be very different from what a software person is doing.

Aricent’s culture was revenue driven. Just totally revenue and EBITDA driven. It was all about profitability, growing the business, profitability. And these integrators, there’s so many of them, and so the competition is fierce. There’s no discernible way for them to stand out, so they’re looking for something to make them differentiated. They think that’s design, but when they try it, they get frustrated.

Do you think it’s actually possible to do an acquisition like frog and Aricent and be successful?

I actually don’t think it is. I don’t think anybody’s answered the hard question: what is that connector? And if you can’t figure that out, accept that you’re going to get paid a handsome sum for something you built, suck it up and then turn around and go build it again.