EMS executive management

In 2005, the top 50 EMS companies grew at an aggregate rate of 14.4%(1) over '04. Additionally, depending on whom you speak with today, current EMS and ODM saturation combined is estimated at 27% which means there are still a lot of electronics design and manufacturing programs to be outsourced and plenty of business opportunities for EMS companies.

EMS executives cannot rest once business is won, however. EMS corporate and strategic plans-of-action must constantly be developed then executed. To set direction and lead effectively, EMS company boards and executives must make assumptions and incorporate these assumptions into their plans-of-action. Assumptions must be updated frequently with company progress closely monitored, and re-evaluated, again, on a regular basis.

Aside from the fact electronics contract manufacturers share some common business traits and, while there appears on the surface to be little differentiation among many seemingly equally-positioned EMS providers serving similar end-markets, each provider does have his own unique set of company-specific EMS-industry strengths; challenges, competitive tactics, and value propositions. (2, 3)

Meanwhile, the make-up of EMS organization boardrooms and the ability for boards to set direction; anticipate market changes, identify industry challenges and respond to these challenges in an ever-changing business landscape can adversely impact chances of success for today's global, EMS providers.

Directives and execution

At the highest level, corporate strategy and mandates are typically developed and agreed on by the chairman of the board; board members, and the CEO. Company-wide execution of mandates is then put into action by the chief executive officer.

Executive business management consultants Robert Gandossy, Global Leader for Hewitt Associates, and Jeff Sonnenfeld, former Associate Dean for Executive Programs at the Yale School of Management, advocate clear and specific detailing of the role of the CEO and the board in their book, 'Corporate Governance from the Inside Out'. Gandossy and Sonnenfeld write that given human nature's tendency to fall into the trap of narcissism, the separation of the roles of chairman and CEO makes for good business sense. (On page 58, they actually advocate this separation as a 'no-brainer')

The authors propose combining these two roles, with the intention of unifying command and expediting decision making, is all too often an invitation to disaster. They emphasize this point with their belief there are very few Renaissance leaders among us whom can resist the seductive chant of the sirens of power and they follow this by citing Lord Acton's statement, "Power tends to corrupt, and absolute power corrupts absolutely."

So, what are EMS companies to do to help ensure a more effective executive reporting structure and diversity of opinions and ideas among board members? For starters, EMS companies and shareholders of publicly-traded EMS companies would be remiss in not looking closer for signs of compromised leadership integrity where the chairman of the board also holds the title of CEO. In an industry where reputation and execution are far more important than branding, how EMS companies address this responsibility can be a key differentiator.

Roundtable discussions

Looking around the table, EMS companies must be careful when evaluating need requirements of the board and identifying candidates to better manage expertise gaps.

One area of expertise we have found valuable for client partners with regards to the general workings of their executive suites is practical engineering experience. Engineers with good judgment can make some of the best financial controllers and operational and financial executives. (A circular argument and point of caution on this is good judgment is based on experience and, unfortunately, some experience is based on bad judgment)

Looking at it another way - accountants typically work with the past...something that has already occurred. Meanwhile, a good financial controller, or finance executive, with solid engineering expertise has experience with declining costs.

EMS-OEM contract relations often last for years. During which, costs inevitably come down on the curve. Having someone with key decision authority who also has technical experience making periodic audits to estimate costs-to-complete a contract is invaluable. (Rule of thumb: It's always better to get costs behind you and take profits late so any surprises are positive surprises)

Engineers are also more likely to be able to identify decreasing costs of an organization as it becomes more efficient. Cost-of-sales and cost-of-manufacturing are inherently different for any organization. To add to the complexity, manufacturing requirements and cost are also different for each manufacturing facility and company product program.

Scope and depth

Most company functions can be separated into five primary disciplines: sales, marketing, manufacturing/operations (hardware or software), engineering, and finance. While board member specialization is important, at the top it's beneficial for companies to also have individuals with scope and depth in as many of the core disciplines as possible while also building into the board a diverse set of skills and experiences.

"Companies are no longer just looking at board members with finance backgrounds. "We're mostly past the great rush to bring financial talent onto boards for SOX (Sarbanes-Oxley) purposes. This trend took about 18 months to complete" says Rick Gostyla, partner with board and executive search firm Spencer Stuart Associates.

Most boards are made up of eight to ten people and companies are looking for each person to add something different to the board perspective from an experiential viewpoint. "So many people are outsourcing manufacturing these days and having someone on your board that really understands outsourcing will benefit company business operations" says Gostyla. Companies also want someone who knows specific markets he adds. Gostyla notes one trend he sees is a push toward getting Asian representation on boards.

Another trend Gostya says his firm is witnessing is companies are realizing the benefit of bringing specific sector end-market expertise into the board room. One such increase in end-market sector demand for board candidates Gostyla sees is in consumer electronics as more technology industries realize more of their products are being sold in consumer markets.

In evaluating EMS board candidates more closely, venture capital partner with Sequoia Capital, and Flextronics board of directors member Michael Moritz says "EMS companies always need to be cautious of pontificators and gasbags, the growing cadre of 'professional' directors and people who are not prepared to devote adequate time to the company."

Just as with a management team, assembling a board that reflects a variety of experiences and backgrounds is important. "You do not want a monochromatic collection of directors. A company should build a board armed with all manner of opinions that are the offshoot of real and meaningful accomplishments" adds Moritz.

Footnotes:
1. Source: 'Manufacturing Market Insider', March issue (2005)
2. Source: 'OEM Outsourcing Customer Satisfaction Survey', Venture Outsource Group (2005)
3. Source: Webcast, 'Global EMS Providers - strengths, challenges, competitive tactics, & value propositions' Venture Outsource Group, http://www.ventureoutsource.com/docs/webinar/globalems.html, (2005)