In the volatile world of telecom, traditional planning techniques and a set-in-stone budget just don't cut it. Mark Peters, executive vice president and CFO of tw telecom, tells how a rolling forecast and a robust communication strategy help his company to thrive in a landscape littered with casualties.

Steve Player: Mark, will you please give us a little background about tw telecom?
Mark Peters: We are a national provider of telecom and data and Internet networking services for medium to large enterprise customers. Primarily, we focus on our local relationships with enterprises and large organizations in our 75 markets across the country. We provide our customers with services that leverage our fiber networks across the entire country. So, for instance, if they're in Tampa, we can connect them to their locations in Portland, New York, or San Diego, to name just a few of our markets. Our objective, for medium to large enterprises, is to be their total solution for their metro area network, their wide area network, their telephone services, and their Internet access services, by tying those all together.

SP: So as businesses move more to software-as-a-service and creating cloud computing through the Internet, you are running the information highways that people are starting to drive more frequently?
Peters: Yes. When you talk about software-as-a-service, cloud computing, managed services, and other buzzwords you hear in our industry, many times we are the enabler. For instance, we are not the videoconferencing experts like Cisco, but what we do is that we bring the connectivity, which requires huge bandwidth, to the locations that utilize that videoconferencing infrastructure. We enable their equipment to work the way it was intended to work.

SP: What have been the challenges for your finance staff in executing this business model?
Peters: Our finance group is embedded in many areas of the business. We have employees in Denver and we have our regional finance directors who are deployed throughout the country. The finance department gets embedded early on in evaluating how we are going to work with the customer; the rules of engagement are established upfront so that we're not reacting our way through each deal. We don't want to be in a position where suddenly a product has been sold and we have to play catch-up to figure out the pricing or return rules or how we make money. It's focused on where we want to drive our business.

That's a big component of why we've been successful. Our finance team truly understands the business. We have people with technical backgrounds who understand the technology and how it factors into the decision. But it's an upfront process, evaluating the products and services that we offer.

We frequently connect fiber-optic networks to our customers' locations with a variety of services. It's a complex business that's capital-intensive, and because of the investment required, it's important for our finance people to be well versed in the products, technology, and pricing rationale to ensure that we're going make money on our capital deployment. We've established an internal rate of return (IRR) model that's the benchmark for committing to a sale. Our salespeople know what an IRR is, which is pretty unique for a sales organization. We must hit that return threshold before we will commit to deploy capital to connect up our customers' buildings.

SP: Your installations require cutting up streets, which can be costly ...
Peters: It can be. Our long-held investment model emphasizes the concept of return; if we're going to sell something, we must generate a return. This well-communicated objective creates focus within the company to go after the right deals and eliminates a lot of wasted energy in going after those sales where we can't generate a return.

We're close to the point today, as we set our goals, where we almost don't have to discuss IRR as much, because it has become part of our corporate DNA. We have to get the return when we invest, or else why do it? Ultimately we're here to return shareholder value, and the way you do that is to get a return on the investment, whether it's in infrastructure, or in product, or in people. That's a given in our organization.

SP: How did this company get started?
Peters: The company began in 1993 as a joint venture between Time Warner Cable and US West, though neither of those companies is an owner today. The original concept was, because of the cable involvement, to find a way to efficiently deliver residential and business telephony.

In that initial joint build, we installed our fiber network in those overlap cable markets. At the time, I think the company was a little bit ahead of the game for delivering residential telephony over a cable network for a variety of reasons, not least of which was the cost of the technology required to compete with the incumbents. Once we determined that the cost made the original residential telephony approach unviable, we turned the company into what's called a competitive access provider. We were selling network services to other carriers -- pretty plain-vanilla services -- but doing it well and at the highest standards of carrier class service.

We then started moving more into the enterprise space. Around 1997, we began deploying circuit switches to support voice services. So, while we were providing services to carriers, we were also providing telecom services to enterprise customers. Beginning in 2003, we then became a pioneer in offering Ethernet services.

SP: I remember back in the 1990s, during the Internet boom, when everybody was putting capital into laying fiber-optic cables, and then we had the Internet bust in 2001. How did that impact the company?
Peters: Fundamentally, our strategy was different from those of other emerging carriers. We were focused on being a competitive provider leveraging our own infrastructure, our own network. Where most of the other carriers failed -- and they were littered all over the place -- was that they didn't have their own infrastructure. They were buying network capacity from others, including us. They would come to us and say, "We want to buy services from point A to point B," and they would buy a big pipe with the intention to sell into that pipe. But they would never fill it, and in the end, they failed. Plus, the model of selling somebody else's services as your primary business is a pretty hard one to execute.

A big piece of our revenue was from carriers -- all the companies that were buying from us and others and building out all this capacity -- and they failed. We lost a significant amount of revenue back then as a result. Our largest customer during that time was WorldCom, and we all know what happened to them.

SP: What role were you in at that time?
Peters: I was vice president and treasurer.

SP: You had to deal with all of the cash flow implications ...
Peters: Yes, cash flow, but my role was more expansive than the typical treasurer functions. I also was responsible for investor relations -- really, anything to do with the capital markets. I was dealing with our investors during a pretty rough time in our history. As I think back on that period, the investors were not that rough on us. I believe that part of the reason was that everything was collapsing around us, and on a relative basis we were outperforming most others in our space -- kind of like today. Plus, we were upfront and honest.

We were the first to disclose when we saw issues starting to develop in the marketplace. We were the first among our peers to say, "You know, there could be a tough time here." That's always been our approach with investors. In this latest recession, we were one of the first to come out and say, "We're feeling some initial pressure from this recession, and this is how we believe it might impact us." We disclosed things sooner than most on the downside, for better or worse. And I think that this builds a lot of credibility on the Street.

SP: Do you give earnings guidance?
Peters: We do not. We've never given earnings guidance, revenue guidance, EPS guidance, or cash flow guidance. We do provide Capex guidance, because it's a large number and something that's useful for us to provide, at least within a range of expected spending. But giving guidance is something we have always considered a trap, and that was highlighted with the telecom implosion. To say, "This is what the number is going to be next year or next quarter" is not as relevant as talking about the trends that we're seeing in our business. We don't know with certainty what our results are going to be in any given period. But we can explain what we see as the trends: our enterprise and carrier business, overall revenue, pricing and demand trends, what we're feeling from the economy in this environment, etc.

SP: It's really bold to say that you're going to hit a prediction that's this specific number, when there are so many factors that go into it that are totally outside your control.
Peters: There are, and I think we've been pretty good at predicting longer-term trends in our business. Where it becomes a trap -- and we've seen this in many companies -- is when they put out a prediction on revenue and EPS and then do artificial things to try to hit their guidance because they're afraid they're going to get crucified by Wall Street.

We don't believe in managing to the short term. If you manage for the short term, you're not going to have a long term. Obviously you have to look tactically at the short term, but we're always looking at where we need to be 1 year, 3 years, 5 years from now, and that's why we're in such a good position today.

For example, we made a conscious decision going into this recession that, if at all possible, we were going to avoid employee layoffs. We would take it as a bit of a failure if we had to lay people off, because this would mean that we aren't planning properly. Never say "never," but being able to avoid large layoffs is a real advantage because it means that we've avoided the disruption in productivity and morale they cause, plus we've retained the capacity to ramp up quickly once we return to higher growth with a stronger economy.

SP: It seems that tw telecom has changed the way in which its planning works, moving away from a detailed annual budget with spreadsheets and evolving into, as I understand it, a 6-month rolling forecast. What led to this change and how did it impact your ability to execute?
Peters: Well, it wasn't an easy decision because it was such a different approach. Everybody was used to preparing and approving an annual budget. We went down this new path because the annual budget was just so frustrating. You spend 3 months doing it -- you probably start in August or September to prepare the budget for the next year -- and inevitably by the time you're done it's old news. It doesn't provide a foundation for an agile company.

That's one of our key successes: We've been agile. In an environment that's so competitive and with recessions that can be pretty severe, things change so rapidly that if you're looking at a budget that was created 2 to 3 months ago, much less 9 months ago, it's useless. Investments are higher or lower, something has changed, and your view has changed. The economy and the marketplace have inevitably changed as well.

Then you have to manage to that stale budget throughout the whole year. And so it becomes worse than useless. The budget becomes destructive. We knew that we needed to do something different.

SP: Is that when you adopted the Beyond Budgeting approach?
Peters: Yes. When the Beyond Budgeting concept was first brought to us, we thought, "It makes sense, but is it too loose?" Everybody, in their mind, is accustomed to putting a stake in the ground and holding their salespeople to this number, holding the operations people to a certain number, and holding hiring to a certain number. So if any one of those varies, somebody will be held accountable for missing a number, even though there might be a very good reason.

SP: And even though the assumptions that the budget is based on might be wrong. How did you overcome that perception? Sounds like a pretty big hurdle.
Peters: It was, but we got over it because everybody conceptually liked the idea except for that accountability piece. But we were so frustrated that the budget was just so dated by the time it was printed that we got management buy-in pretty rapidly.

SP: Adaptability won out over accountability? You really need to be adaptable in order to survive. Of course, you were coming out of some very volatile years.
Peters: You're right, there was huge volatility, especially in those years. Who knew that WorldCom was going to go bankrupt? They represented almost 14 percent of our revenue then, and it went very rapidly to about 4 percent. We just thought this change to Beyond Budgeting was so compelling because it was dynamic and responsive to our business needs.

We now complete a rolling forecast four times a year, which takes less time than when we did the budget just once a year. We don't go through every single line item, like we used to; we've aggregated the data, based on trends. Why do you need hundreds and hundreds of lines when each item doesn't move the needle enough to matter?

SP: So you've got people focusing a lot more time on fewer things ...
Peters: They can spend more time running the business rather than worrying about insignificant budget variances. And for those who are responsible for updating the forecast, it's very much routine. We've followed this rolling forecast method since the end of 2004, so we have a rhythm going. The accuracy improves every single time; you get much more precise. And the pain level is so much lower.

We also trend our accuracy. We compare actual results to what the bottom-up forecast has been. We can see, for example, when the field has been more optimistic than the actual results, or when they've been more pessimistic. How does this lead or trail what actually happens? This allows us to modify the forecast at the corporate level; we might have to put in a governor if they are consistently too optimistic or pessimistic. We can say "If they told us x, we know that usually they're at x plus y percent or minus z percent."

SP: Let me go back to that question of accountability. How was that resolved?
Peters: I believe we have achieved much better accountability, even though we update the forecast every single quarter. We don't go to our managers and say, "Wait a minute, you had this number and you missed it, what's going on?" What we do is that we sit with them and say, "Here's the variation from the number that you expected -- let's talk about why that happened." We have a conversation about the trends in the business. Is there a talent issue in your city? Is there a competitive issue in your city? Is there an investment issue in your city?

If they continually miss, then maybe there is a problem with that manager, and we will say, "Apparently you don't have a handle on what's going on in your business" or "Your trends are going the wrong way, whereas all your peers' are going the right way," and we have to make a change.

SP: How hard was it, from a change point of view, talking to the board?
Peters: All of us in finance were convinced that it was the right way to go. Our board of directors was the one group we wanted to make sure clearly understood that this was a good move for the company. Initially, and we still do this today, we took that 6-month rolling forecast, the last one of the year, and then projected that out for the full year. That forecast becomes the basis for our long-range plans and our annual plan. We don't ask the field or managers to forecast the second half of the year; we do that for them based on historical trends, seasonality, expected sales, etc. This enables us to provide the board with something to review and approve in a form that looks like a full-year budget.

SP: You are still feeding a strategic planning process ...
Peters: Yes ... however, we also go back to the board and share with them our quarterly forecast and how are we doing against the plan. That's how they measure the trends as well.

They have something that shows where we expect to be. And we provide them with guideposts -- this is actually something new that we started in 2008. When the recession started, we said, "Here's one case under these certain assumptions, here's one under other assumptions."

SP: To help them see that there's some uncertainty in there ...
Peters: Right, but they also know that no one has a crystal ball to tell what the future will bring. In our business, with more robust top-line growth and sales we spend more on capital expenditures, so a range of results is a more realistic and useful approach.

SP: How does this roll into compensation planning?
Peters: It is a component, especially when you are in a volatile economy or the "Great Recession" that we've just been in. It's about measuring performance. We look at that relative to what the expectations were.

SP: You're looking at year-over-year growth ...
Peters: That's one piece; it's relative to historic performance, but it's also relative to peers' performances. We also look not just at the numbers but at where we are taking the business competitively, how we're differentiating ourselves and how we're setting the company up for the future.

It's not just, "How did you do on revenue and cash flow?" While these are very important factors, you don't want to ignore how you got the results. We could be driving much more top-line revenue growth and probably kill our margins. Or we could drive an enormous amount of additional cash flow by having a manager slash their markets' capital spending, but then we would lose the foundation for growth for future sales.

We are very good at communicating our overall strategy so that managers can keep everyone on track by remembering our 1-year and our long-term strategy, and what our focus is. This upfront and continuous flow of information reduces information disconnects down the road.

SP: Tell me a little more about communication ...
Peters: The finance organization is involved with the 1-year and multiyear strategic planning and development, and it's involved in creating the communication process, as well. What we do is communicate our goals and objectives for the coming year, and I think that every year we've gotten much better at it.

It starts at a level down from the senior executive level. Obviously, we have our hands on the steering wheel, but that's where we like to start it because this managerial level has a sense of what's getting pushed from the bottom up, and they also get direction from us, from the top down. They then help put it all together in the middle.

SP: The key is the middle managers ...
Peters: The level immediately below the executive level. They have to make sure that it all works. Ultimately, they pass it up to the executive level, and there's dialog along the way. Once everybody has gone through it and buys into this plan for the coming year, we can put that year to bed. We then communicate the plans through webcasts and face-to-face meetings with employees and walk them through it. We cascade it throughout the organization and everyone sees what the plan is and what the focus is for the next year.

SP: So they see it two or three times, in two or three different modes of communication?
Peters: Everything we do then focuses on the overriding goals for the year. Out front, at the beginning of the year, we communicate the plan broadly, and then we focus on a few topics and reinforce it every quarter.

Each quarter, following our regular earnings call with investors, we update our employees via a conference call. Our CEO leads the call. I do an update on the numbers and walk them through what the revenue growth was, what the margin was, what the cash flow was, and remind everybody -- always understanding that they don't look at numbers all day -- what that means and how we got to where we are. Then I'll pick a couple of topics on strategy and hit on those just to reinforce them so that they hear them again.

Recently, we did an internal survey of our employees. One of the highest marks we received was on their understanding of what the company's goals are and how they can contribute to those goals. You never know if you're communicating well until you hear it back, and the survey results confirmed the fact that the communication is working.