NETAPP: THE DAY-TO-DAY OF A DM

As a rep, your time is your own. As a DM, your time is your reps. Jim Wilson, District Manager

INTRODUCING NETAPP

Network Appliance (NetApp) was cofounded by David Hitz and James Lau, in April of 1992. Hitz had earned a double engineering degree from Princeton University and worked at MIPS Computer, before meeting Lau at Silicon Valley-based Auspex Systems. Lau had obtained his
Patrick Arippol, MBA 2004, prepared this case under the supervision of Mark Leslie, Lecturer in Management, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Certain names and details in this case study have been changed. This case was made possible by the generous support of Mr. Jeffrey T. Chambers. Copyright 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business.

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On a cloudy Tuesday morning, July 26, 2002, Jim Wilson arrived for work at 6:43 a.m. on his, one hundred and eightieth day as district sales manager at Silicon Valley-based Network Appliance (NetApp). He had completed his second full quarter as district manager (DM) at the technology company and, according to his custom, arrived early to try to handle important matters that required his concentration, before the bustle of the day began. The critical question ahead of him that day was deciding whether or not to terminate Todd DeSchutes, his sales representative managing e-Market.com, the companys largest Internet account. Although DeSchutes had received praise for being one of the best customer advocates in the companys sales team, Wilson felt that he had lacked judgment in giving the customer discounts that were beyond what was acceptable (and profitable) to NetApp. The company was on a hiring freeze after having executed its first large-scale layoff three months earlier, and one of his five reps was already on his way out. As Wilson reconsidered DeSchutes termination, the prospect of meeting his numbers for that quarterlet alone that yearseemed even more distant. Wilsons thought was interrupted by the unexpected arrival of his star sales representative, Patty Thompson, who approached his desk. Without saying a word, she handed him a bright orangecolored envelope. It was her resignation letter, giving the company a 30-minute notice. Wilson could hardly believe his eyes.

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CASE: E-263 DATE: 08/06/07

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dual B.S. degree at University of California, Berkeley, and his M.S. degree in computer engineering from Stanford University, before working at Bridge Communications (3Com) and then joining Auspex Systems as director of software development.

Leveraging from their combined experience in data management and network storage, the two engineers started NetApp with the goal of simplifying the data storage industry. They developed a product that separated the typical computer server into its storage and management components, into appliances that they called filers. Unlike other products in the market at the time, NetApps appliances performed one single taskthat of storing network data, without the additional file and operating system overheads. It enabled companies with data-intensive networks to use industry standards and avoid being trapped into proprietary hardware systems, while being able to store and retrieve data at substantially faster rates.

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By that time, the storage market had turned very dynamic and competitive. NetApps products faced competition from EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company, IBM Corporation and Sun Microsystems. Furthermore, it also faced occasional competition from smaller players, such as Auspex Systems, LSI Logic, MTI Corporation, and Procom Technology. NetApp served customers in the energy, federal government, financial services, life sciences, manufacturing, telecommunications, high technology and Internet industries. High technology start-ups grew at a frenetic pace, which also propelled NetApp to become a 2,200employee-strong organization and generate over $1.1 billion in revenues by the fiscal year ending in April 30, 2001. Ninety-two percent of its revenues came from the sale of its appliance products; the rest was split between professional services and software sales.

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NetApp closed its 1995 fiscal year in April of that year, generating $15 million in revenues and expecting to break even and triple in size in another year. Later that year, Warmenhoven took NetApp public in the NASDAQ. Driven by the founders product expertise and by the senior teams strategic and execution acumen, NetApp continued growing. By year 2000, it had reached over 1,500 employees and $579 million in revenues and had consolidated its position as a leading global provider of data storage and content delivery products. NetApp offered over 14 different products, which interfaced with standard industry components and helped global companies face their major IT challengesof consolidating rapidly growing storage solutions, reducing costs, guaranteeing business continuance, and making data available throughout their various branches and geographies. The organization matured as Mendoza was promoted to Presidentto work alongside CEO Warmenhoven.

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NetApp finished developing the first version of its product in 1993, at which time start-up veteran Michael Malcolm joined the company. By 1994, he had helped secure over $10 million in venture funding from firms such as Vanguard, Sequoia Capital, TA Associates, and Sutter Hill Ventures. Thomas Mendoza then joined the company as VP of sales, further driving the companys outbound activities. Princeton graduate Daniel Warmenhoven became the companys CEO soon thereafter, contributing his experience from managing telecommunications companies such as Network Equipment Technologies.

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CHALLENGING MARKET ENVIRONMENT

The late 1990s market euphoria was followed by a period of significant economic slowdown, particularly among Internet and technology companies. By January of 2002, the effects of the dot-com bust reverberated throughout the U.S., causing companies in most sectors to slow, or even stall IT spending. NetApps revenues for calendar year 2001 fell by nearly 20 percent from the previous year, to $819 million. NetApps stock had already dropped from a $70-$120 price range in 2000 to a low of $6.54 in October of 2001. NetApps most direct competitor, EMC Corporation, also saw its revenues dwindle by 20 percent at the close of 2001. Its net income fell from 20.1 percent to a negative 7.5 percent of revenues. Larger companies that benefited from having broader product portfolios also suffered from the market collapse. In 2001, Hewlett-Packards and IBMs revenues dropped by 7.5 and 2.9 percent, respectively, while their net income eclipsed to zero from their historic 8-10 percent.1 Recently hired President Mendoza and CEO Warmenhoven decided to implement an aggressive restructuring plan to cope with decreased IT spending rates, and to adjust the company to its new level of revenues. In late 2001, NetApp executed the first ever layoff, terminating 200 employees and consolidating facilities to its Sunnyvale headquarters. The companys restructuring led to a total charge of $8 million, 60 percent of which were severance payments. Significant changes also took place in the sales and marketing departments, which together employed more than half of the companys people. NetApps sales force sold into more than 90 countries, and 58 percent of its 2002 revenues were generated through direct versus indirect sales. NetApp determined that its sales and marketing operating expense was to stay below its 2001 level of $289 million throughout 2002.2 Although sales headcount increased to 915 in January of 2002 (as compared to 870 one year earlier), changes were implemented to improve sales force efficiency, such as cost control measures (e.g., health insurance) and commission reduction policies. After the changes, sales and marketing expenses decreased 1.5 percent to $209.3 million for the nine-month period ended January 25, 2002 (from $212.6 million for the nine-month period ended January 26, 2001). The company was noticeably leaner. The challenge now was increasing employee productivity and the companys profit margins, once again. NEW DM FOR NORTH SILICON VALLEY

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On Monday, January 28, 2002, the first day of NetApps fourth fiscal quarter, Jim Wilson was hired and started working as new district manager (DM), to lead the sales representatives of one of NetApps highest-potential districts in the San Francisco Bay Area. Called North Silicon Valley, Wilsons district covered most companies located between North Palo Alto and the city of Belmont, as well as additional named accounts that fell outside of that perimeter (see Exhibit 1 for a further description of the district). It was one of three districts in the San
Sources: SEC Filings; Network Appliance Form 10-K, for the year ended April 26, 2002. Note: In 2000-01, NetApps sales and marketing operating expense had increased by 88 percent.

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Francisco Bay Area region, which also included the South Silicon Valley and Downtown San Francisco Districtsall densely populated with start-up high technology companies.

After obtaining his B.S. degree in Business Administration from California State University at Chico, Wilson began working as a stock trader, then decided to change careers after Black Monday, the 1987 market crash. He worked for two to four years at each of five technology start-up companies, mostly in the Silicon Valley. Over 13 years, as he developed an expertise of successfully selling IT infrastructure products, his role evolved from sales representative to director (see Exhibit 2 for his professional profile). Wilsons first experience with NetApp was in 1995, when he worked as a value-added reseller of its product. He was a keen believer in (and seller of) NetApps product, and became an investor in the company after the Sunnyvale-based start-up offered its partner companies the opportunity to participate in one of its private investment rounds. Wilson was hired by Regional Sales Director (RD) Alice Minnelli, who in turn reported to VP of Sales Whitney Tomlin. Minnelli was a friend of NetApps CEO before she joined the company. By 2001, she had accumulated six years of work in sales, and had rapidly moved up NetApps ranks to become a second-line manager. Tomlin, on the other hand, had just joined NetApp in October of 2001. Besides selling mainframes for IBM and Wang Laboratories for nearly a decade, he had also spent five years as VP of Sales for Ciscos western region.

Wilson decided to set the tone for his team by instilling an informal work environment. He did not demand attendance to many regular meetings, except for a monthly update meeting with all reps. Wilson tried to be accessible to his team, by often stopping by his team members desks to learn of progress and make everyone feel included. He explained: I didnt feel like I had to micro-manage my people. I only got more involved when reps asked for help, or when strategizing was needed. I was upfront with

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Interviews with District Manager Jim Wilson (June 6, June 13, July 23, and July 26, 2007), Sales Representative Garett Okano (June 27, 2007), VP of Sales for the West Coast Whitney Tomlin (June 29, 2007), Sales Representative Victoria Knapp (July 3, 2007), and Sales Representative David Engel (July 5, 2007). Subsequent quotations are from the authors interviews unless otherwise noted.

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Positions in sales are very visible to the companys senior management, particularly in difficult environments like that of 2001. In any organization, sales representatives have some downtime due to their irregular work schedules, which inevitably fuels a gossip ring that Ive seen create irreversible damage to incoming DMs. The only way for me to make a positive impression on my managers is to deliverwhich would allow me to build credibility with my team members.3

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Wilsons district had six representatives: Todd DeSchutes, Victoria Knapp, Patty Thompson, William Frank, Brian Smith and Bing Chasen. Like NetApps other DMs, Wilson faced two key challenges for Q4/FY02: to successfully restructure his sales team, and to validate his effort by reaching the companys aggressive sales target of 30 percent increase for FY2003. He also faced the typical challenges of learning the ropes of his new job. Wilson explained:

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my team in that I expected them to send me updated weekly forecasts, called flash reports, and to always give me the straight scoopespecially when the news was not good.

In Wilsons second week at the job, NetApp announced negative results for the third quarter of FY2002 with revenues of $198 million, as compared to $288 million for the same period the year before. He knew that the situation was critical. Customers within his district were still reticent about making new capital expenditures in technology, and the overall economic environment remained unfavorable. NetApps products, which sold for prices ranging from $4,000 to more than $1,000,000, saw declining unit volumes. Its older products, such as F700 Filers, also suffered from a falling selling price. Wilson refocused his activities, in his DM capacity, to face the situation: Reps can only see and influence events in the next 60 days. As a DM, I need to see and maximize results 120 days ahead, and leave it up to the RD and VPs to see and change things for the longer-term. On the morning of Monday, February 11, Wilson translated NetApps revised strategy for FY2003, which was distributed internally, into concrete goals for his reps. He wrote down the three main points he was going to cover with his team during the meeting he had scheduled for that afternoon: Sell new products: Try to sell NearStore and NetCache more aggressively. Introduced in mid-2002, the products sought to take advantage of the new market demands for data backup/recovery, and fast Internet content delivery. Software sales: Focus on selling software subscription upgrades, given the large number of new features that were introduced to those products. Total cost of ownership (TCO): Position NetApp products by using their TCO analyses, since the company had recently revised its pricing strategy, improved product performance (to decrease system downtime and minimize service costs), and increased ease of use (to lower the administrative overhead of products). Wilson intuitively believed that NetApps larger competitors were still reshuffling from the impact of the dot-com crash on their businesses, which could create a substantial opportunity for his team.

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Wilson felt that his approach was adequate, given NetApps culture, the offices open-door layout, and the fact that his entire team was located in the same physical office space. Aware of the fact that he would likely have to change members of his sales team, Wilson sought to understand NetApps sales management tools and policies, during his first week at the job. He discovered two key processes at NetApp that would help him monitor and manage his team. One was the Focal Review, an appraisal of reps that was conducted every year at the end of Q4 (see Exhibit 3). The other one, called the Improvement Plan, was used for employees with mediocre or failing performance (see Exhibit 4). Managed jointly by the reps DM and by the companys Human Resources (HR) department, this program extended over 90 days, and consisted of classes and a close monitoring of the reps performance metricswhich included numbers of sales calls, numbers of visits, and booked revenues. Wilson learned that Improvement Plans led to one of two outcomes: The rep either improved in performance, or was terminated. NetApps HR folks were jokingly called angels of death, for that reason.

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EVALUATING REPS

At the request of his RD, Minnelli, Wilson reported his progress to her on a weekly basis. They had arranged a 3 p.m.to 4 p.m. meeting every Monday to review Wilsons detailed opportunity forecast and district activities and issues during that time. Like the two other DMs in his region, Wilson was also scheduled to meet with Minnelli and VP of Sales Whitney Tomlin once every month, to present account reviews for the quarter. Wilsons first meeting with Tomlin was on Monday, February 25, 2002one month into his tenure. He shared his preliminary impressions of his district and accounts, and explained how he did not feel comfortable about evaluating any of his representatives yet, except for Bing Chasen and Brian Smith. Chasen was already on an improvement plan when Wilson joined, and they agreed that he was probably not going to make it. In addition, Wilson had just put Brian Smith on an improvement plan, since by then he had only reached an average of 60 percent of his quota during the nine previous months (see Exhibit 5 for quotas versus actuals, for FY2002). He thought that NetApps improvement plan would likely help Smith, who appeared to have the proven skills but was temporarily struggling to cope with caring for his first baby, then six months old. Tomlin often used his first meetings with incoming DMs to field potential questions, and to provide them with additional context, as he did with Wilson: I know that youve inherited a mixed bag of talent. Hyper-growth companiesor ones that grow at 30 percent or more for successive yearsare known to face difficulties in growing [their] sales organizations. NetApp grew at more than 70 percent for seven successive years, and we nearly doubled our sales team last year alone. Now we have no choice but to scale back our sales organization, and to filter the keepers from the reps we have to let go.

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Tomlin then provided Wilson with further detail about what had happened with NetApps sales area in recent years. Their hiring philosophy had always been to over hire, which they described as the practice of hiring professionals with more proven experience than what was demanded by their new jobs. He explained: Over hiring empowers our people. It allows them to grow from within the company. That would not occur if we hired top-guns from the outside, directly into senior positions. It also gave us good management depth that counterbalances the capable yet green managers who rapidly rose up our ranks. Altogether, this practice has kept our team both dynamic and solid. The scarcity of good professionals during the dot-com period, however, forced us to become more liberal in our hiring practices, and to hire professionals that were less experienced onesor who had generic high-tech backgrounds instead of specific domain expertise in storage technologies.

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In 2000, almost anyone could sell. Only the best ones can sell in todays environment, though. The new paradigm requires reps to draw from all of their sales skills, and to help customers see how they can save money by investing in our technologies.

Wilson thanked Tomlin for sharing his insights, and affirmed that changes in his team would probably be needed: After getting to know my crew, I will certainly be able to maintain our airplane in mid-flight. He went on: We certainly do not want our best people to leave, and fortunately our good sales people do not want to leave NetApp either. The job market is rougher than ever, and our competitors continue in turmoiland with high turnover rates. FOCAL REVIEWS

By mid March of 2002, as Wilson evolved his relationship with each sales rep, he kept a mental log of how each one fared against the criteria he felt were most crucial for the role: understanding of sales cycles; ability to prioritize leads; skill of navigating within the right levels of the customers organizations; understanding of customers needs; and ability to adapt to the industrys changing dynamics. Wilson also tried to determine which reps performed best as farmers (who built on existing relationships to grow accounts), and which ones were better hunters (who efficiently converted a mixed bag of prospects into first-time customers). Wilson also made a concerted effort to support his reps emotionally. Although he liked the reps who could deal with adversity, he knew that people living through difficulties were less likely to perform well. Wilson discovered that, like all DMs at NetApp, he had to conduct focal reviews with reps in the last 30 days of the fourth quarter. He used much of the rep evaluations that he had already begun conducting before having one-on-one conversations with them. Only one of his sales people, Todd DeSchutes, disagreed and decided to discuss Wilsons assessment of his performance that year.4 The situation was ultimately resolved after conducting a meeting that included one representative from the HR department, and resulted in DeSchutes being assessed an intermediate score. Those scores did not affect sales representatives commissions, but helped guide DMs so they defined who they promoted. (See Exhibit 6 for a description of reps compensation models.) SETTING FY2003 QUOTAS One month before the close of NetApps fiscal year, on Monday, March 26, Wilson reviewed his progress with Minnelli and Tomlin. He learned from Tomlin that so far NetApp was finishing the quarter at slightly over $200 million in sales, closing product revenues for FY2002 more than 20 percent below FY2001 levels. Wilsons district was expected to reach 85 percent of its $8 million target, even though two of his repsVictoria Knapp and Patty Thompsonwere
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Note: That year, for the first time, NetApps DMs had to score reps on a normal distribution curve (in which only 5 percent of reps ever made the highest score of 1). In prior years, DMs were allowed to score reps as they pleased. Todd DeSchutes complained that he received a score of 3, instead of 2, which had been the score given to him for the prior two years (by DM Jim Wilsons predecessor).

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performing well and would probably make it to club (receive NetApps top salesperson recognition). Before breaking from the meeting, Tomlin reminded Wilson that his quotas for NetApps Annual Operating Plan (AOP) were due the following week.

NetApps AOP detailed the companys sales goals for the upcoming fiscal year. AOP was typically defined during the entire fourth quarter, and sought to align all levels of the organization to the companys plan. On average, sales organizations of publicly traded companies sought to reach 20 percent of their annual sales targets during first quarter, and 22, 26, and 32 percent in each of the successive quarters. Fourth quarter was also the time when most major changes to districts and teams were executed. In early March, Minnelli handed Wilson his target, which was to generate a 30 percent annual growth in sales, from the same region, accounts, and team. That translated to $32 million for the year, and $6.4 million for the first quarter of FY2003. Minnelli surprised Wilson by asking him to research public databases, in order to discover if any of the 1,000 companies in his district had an equipment lease agreement which was about to expire. After three days of fruitless pursuit, Wilson reported that he would instead spend his time becoming acquainted with his team and accounts, in order to verify the feasibility of his targets, before committing to a number. He continued informally meeting one-on-one with each of his reps.

Wilson estimated, though he was not sure, that Minnelli had applied the same growth target to all three districts in her region. He felt that his districts $32 million annual target sounded feasible though, and told his RD so. Before calculating targets for individual sales reps, however, he decided to first inflate his total growth target from 30 to 35 percent, so as to overgoal, in order to hedge against rep attrition, openings, and the entry of rookieswho typically took nine months to ramp up and become productive. Although his superiors did not appear to use this technique, Wilson felt that this extra buffer would allow him to manage changes that could occur to his team throughout the year. Before discussing quotas with reps he first studied how he could reallocate quotas to maximize resultsrather than just applying the growth target uniformly across all reps and accounts. He
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The term sandbagging was used colloquially at NetApp, to describe a sales persons effort to close all potential sales transactions that s/he possibly could during a particular quarter, without consideration for quotas of future sales periods. This practice often led to unrealistically high goals for customers in which this occurred.

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Wilson felt that setting quotas was both a bit of an artand a bit of a gamble. RDs based their initial quotas on actual sales figures and on Total Addressable Market (TAM) calculations for each prospective customer. The method was somewhat arbitrary, however, and needed to be reiterated, balanced against operational expenses (bottom-up analysis), and filtered for reps who might have sandbagged some sales the previous quarter.5 For that reason, Wilson sought to really get to know the district, to avoid just rolling the dice. Besides analyzing the TAM, he also analyzed each customers growth over time, type of business growth (organic vs. by acquisition), and projected level of storage product saturation within the account. Wilson also re-prioritized his industries of focus. Consumer technology companies such as Scan Disk continued growing in spite of the economic slowdown, while core technology companies, like Intel, appeared to maintain their IT budgets dry.

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decided to follow a method he called best on best, in which he allocated his best reps, or those that had exceeded quota for two to three consecutive quarters, on his best accounts. After identifying the top customers (that would represent 60 percent of the districts revenues for FY2003) and allocating best on best for farming those accounts, Wilson distributed new accounts across the remaining hunter reps. On Monday, April 8, 2002, Wilson called for a meeting with all of his reps and allocated individual quotas ranging from $4 to $9 million for the year (see Exhibit 7). He had discussed targets with each team member separately. NetApp used goal-based compensation plans for sales reps, meaning that people in similar positions made the same salary for on-target actuals. That appeared to make reps more willing to swap accounts and territories, as long as they found their numbers to be achievable. Although he felt he was gambling on some of his reps, Wilson hoped that the process of discussing quotas with team members would help to keep his team intact, motivated, and productive.

On April 29, 2002, NetApp entered its 2003 fiscal year. After preparing its preliminary numbers and releases (see Exhibit 8, Exhibit 9, and Exhibit 10), the companys sales team began to operate under the new quotas. TEAM CHANGES

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The next day, Tuesday, May 11, Wilson managed an uneventful monthly meeting with his reps. One hour after their monthly meeting, Brian Smith surprised Wilson by submitting his resignation letter to him, 75 days into his 90-day improvement plan. Wilson knew that Smith was slightly below his $910,000 target for the quarter, but still expected him to have a chance at recovering. They discussed Smiths decision, and Wilson learned that his rep had decided to leave because he could not bear the pressure of being an underperformer, when all of his peers appeared to be well above targetas had just surfaced in their monthly update meeting. Wilson suspected that his reps decision had also been driven by the fact that their RD, Minnelli, had pressured Smith to sell into the Synopsis account, where she was micro-managing his activities. Wilson felt uncomfortable and disempowered by his RDs attitude himself, but Smith preferred not to discuss the incident. After bidding farewell to Smith, Wilson refocused on the challenge of suddenly having to cope with the loss of two, not just one, of the members of his already small sales team. Wilson and Minnelli had their traditional 3 p.m. meeting that day, which started with the RDs emotional outburst: We should have given Brian Smith another chance! Putting him on an improvement plan was a mistake. What are we going to do now? We already have too many things taking place at NetApp to be able to manage yet another change in your district. After discussing next steps, Wilson ultimately agreed to run major changes in his team by her in

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Wilson executed multiple changes in his team during the first two months of FY2003. The environment in NetApps sales area was already tense since a total of four sales reps in the San Francisco Bay Area region had been let go. One of those terminations was within Wilsons district. Bing Chasen, who finished his improvement plan on May 10, 2002, was fired later that day.

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advance. That discussion had convinced him, however, that Minnelli did not like some of their reps (who happened to be the top performers). Furthermore, she expected him to make fewer changes in his team than he thought were needed. Wilson decided to temporarily assign the major accounts vacated by the departure of Smith and Chasen, to try to avoid losing some key customers. As he considered how to reallocate these accounts across his team, Wilson decided to allocate best on best, and gave the accounts with highest growth potential to Knapp.

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Wilson arranged to meet Engel that afternoon, to discuss his transfer and specifically the Synopsis account. Engel was also going to oversee the Verisign, Broadcom, and GE Nuclear accounts, yet Synopsis represented 90 percent of his new accounts revenues. Engel was unseasoned and did not have the kind of strong track record that would give Wilson the sense of security that Knapp did, for example. The DM thought that his new rep was bright and a fast learner, however, and set him the aggressive quota of $6.5 million. Since the Synopsis account appeared to demand much strategizing (as compared to other accounts) Wilson expected to continue to be involved with it. In spite of the uncertainty that accompanied his new rep, Wilson was satisfied with the change.

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NetApp was under a hiring freeze at that point, yet Wilson felt that he needed at least one additional rep. He called for a meeting with both Minnelli and Tomlin, in which he raised the problem and suggested that they hire David Engel, a junior representative who had just applied for an internal transfer into his district. Engel had joined NetApp in April of 2001, and until then had managed 15 accounts in the Pleasanton/Livermore District. Previously, he had built his career as a stock broker and as a sales representativehaving worked at Oracle and at Telera (acquired by Alcatel). After weighing the prospects profile and Wilsons budget, Tomlin agreed with the transfer, and Minnelli concurred.

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Originally from Washington, D.C., Victoria Knapp had started her career in accounting/finance, before finding her aptitude for sales almost by accident while working as executive administrator for the VPs of sales at Tektronix. She then worked for 11 years as sales account manager at Silicon Graphics, and in April of 1999 joined NetApp as a sales representative for the Downtown San Francisco District. Knapp developed a positive sales track record in the following two years, in spite of the epidemic of shut-downs among young Internet companies at the time. Realizing that her district was bound to be downsized, she requested to move to the North Silicon Valley District. In July of 2001, she was effectively transferred, named account manager, and given 20 mid-range enterprise accounts. Soon after Wilson joined in January of 2002, he added eBay to her accounts, and was most impressed by Knapps skill and results. He explained: Knapp did a wonderful job at eBay. She was an amazingly good listener, which was critical to be successful within the companys homogeneous group of ambitious, male, inexperienced, mid-level managers. Wilson assessed that even though Bing Chasens accounts were generating almost zero revenues, they had significant potential. He therefore decided to allocate those accounts, which included Marvell and Toshiba, to Knapp.

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MARGINAL REP

By June 11, 2002, Wilson felt that he had been spending too much of his time supporting small enterprise accounts based in the cities of Menlo Park and Palo Alto in the North Silicon Valley District. He was accompanying sales rep William Frank, at his request, to more than five sales visits every week. Frank was one of the best-liked people in NetApps sales team, and had been working for that district the longestsince early 1998, when he was hired by Minnelli. With an annual target of $4 million, he managed 150 third-tier accounts. The more that Wilson chaperoned Frank in sales calls, the more unconvinced he became about his reps ability. Frank understood sales cycles and customers needs but lacked some key skills that Wilson thought were key to handling the downturn environment:

He explained: Frank was very much liked by customers, but simply could not bring much value to them. He only sold when the customer wanted to buy a specific product. Furthermore, he often fell apart when he was introduced to new people. He sought to build a degree of interpersonal relationship with customers that was simply too costly. Frank appeared to be en route to reach 60 percent of his target that quarteras some of his accounts began going under and he failed to realize new ones. He was losing about 30 accounts that month alone. Looking back, Wilson described his concern: Even if William Frank actually made 120 percent of his goalwhich was highly unlikelythat would not really change results for our region significantly. He had not shown any promise of becoming a star salesperson or of delivering on key customer accounts. Wilson had spent much of his bandwidth with Frank: Perhaps I should be spending more of my time with my best reps, instead, he thought. The decision was not a simple one, though. Wilson had become more involved with Frank personally, which made the decision difficult. Furthermore, he had previously managed reps who were slow to start performing or who eventually turned around to become star performers after being moved across regions. If Frank were terminated, his RD Minnelli was likely to have another emotional tantrumor use her political capital in the company to try to reverse the decision. Wilson considered: Franks termination will likely take a personal toll on some of our other team members, as well as a financial toll on our aggregate results. In all likelihood, I will probably remain understaffed for the rest of FY2003. Even if I hired a new rep, my experience is that each rep costs the company a $1-2 million investment, since each candidate is subject to 12 to 18 interviews before being hired, and takes around 90 days to ramp up. Also, overseeing a new hire will be an

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o He could not prioritize or qualify leads effectively. o He was unable to adapt as decisions moved upstream in start-ups (sometimes as far as the CTO). o He did not develop any creative customer solutions (e.g., product refreshes, leasing, sale of used equipment, etc.). o He was not conveying to customers how NetApps products could ultimately lead to cost reductions.

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additional energy drain, since they typically take 25 percent of my bandwidth for monthsbefore reaching their full potential.

Most concerned about the fact that Franks irregular performance would likely make his team fall short of its goals, however, Wilson put him on an improvement plan. CUSTOMER ADVOCACY OR LACK OF ETHICS ?

DeSchutes had been managing the account for three years, and before NetApps reorganization he reported directly to the VP of Sales Rob Salmon and to President Thomas Mendoza. In Q4/2002, after DeSchutes fell under the authority of the North Silicon Valley District, he clearly lost some of his latitude in making customer decisions. DeSchutes reaction to his questioning gave Wilson pause. The sales representative ultimately admitted that he refused to apply the new pricing table, announced at the start of FY2003, to eMarket.com. NetApp had increased all hardware prices to adjust for an increase in COGS (which was beyond the companys control), while preserving its 65 percent gross margins. DeSchutes had ignored the price increase, and continued giving e-Market.com the best possible discountby artificially classifying new product sales as upgrades to have the sale fall under more favorable pricing terms. DeSchutes appeared to be abusing the dynamic pricing scheme that was extended specifically to e-Market.com. After running the numbers, Wilson found that DeSchutes recent sales to e-Market.com would generate a gross margin of 7 percent to NetApp, which amounted to a total loss of $1.3 million that year. As Wilson asked his sales rep for an explanation, DeSchutes resisted, became emotional, and even called VP of Sales Rob Salmon to contest the matter. He finally conceded that he would apply the price increase to future sales. Although the incident seemed to raise sufficient grounds for a termination, Wilson felt that managing DeSchutes situation was not that straightforward: Sales reps are expected to represent customers interests. Did Todd DeSchutes go overboard and put e-Market.coms interests ahead of NetApps? Would terminating DeSchutes emanate the dangerous signal that sales reps should not be customer advocates? Some executives at NetApp appeared to be applauding DeSchutes for his concerted dedication to serving e-Market.com.

Do

Wilson also asked HR to verify his sales teams recent communications with e-Market.com and discovered that, soon after their one-on-one meeting, DeSchutes even wrote an unofficial letter

No

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op yo

The following Monday, June 27, 2002, Wilson held his monthly meeting with reps. As Todd DeSchutes presented results for the companys largest Internet account, e-Market.com, the DM noticed how revenue volumes from the customer had grown significantly less than unit volumes. He approached DeSchutes after the meeting, to understand what was happening with one of NetApps most valued customers. e-Market.com generated approximately $8 million per year, and NetApp had three of its support people working on-site. After discussing the account with DeSchutes, Wilson began suspecting that his top rep had extended an excessively preferential pricing condition to the customer, and could be acting in bad faith.

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to e-Market.com shortly after their one-on-one meeting, saying that he still expected to be able to maintain the original discount. Although NetApp had deep and wide relationship mapping with e-Market.com, and was likely to keep its relationship in the event of DeSchutes termination, DeSchutes possessed some of the companys most sensitive information that could be very damaging if it reached NetApps competitors. After analyzing the situation further, Wilson concluded that NetApp was partially at fault, for allowing DeSchutes to operate autonomously for such a long time. Furthermore, the company compensated its sales people based on the total revenues they generated, and not on the profitability of each account. Rather then terminating DeSchutes immediately Wilson put him on an improvement program that required him to conform to company policies. They arranged to meet again and follow up on his progress in the first week of Q2/2003. ROUGH START TO THE NEW QUARTER

Do

Wilson wondered if there was any way to keep her in the District. Maybe he could offer to put her on a leave of absence until the return from her honeymoon some 60 days later. But then again, what about the geographic issues? What does it say about Thompson that she could make a decision as important as marriage so impulsively? Given all of the other personnel issues, however, getting Thompson back even for a while sounded like an appealing option. Wilson congratulated Thompson and turned his attention back to the burning question of how he was going to meet quota that quarter.

No

It was on the very next morning, at 7:30 a.m., that Wilson received a visit from his star representative, Patty Thompson. It was her resignation letter. Wilson could not foresee a worse moment for this to happen. He had actively tried to keep in close contact with his reps in order to support them through difficult personal situations that they might be facing. He asked Thompson if she could share her reasons for leaving the company, and learned that her decision was completely personal. She had met a man on her trip to Atlanta that weekend and accepted his invitation to marry him. The following seven days were barely going to be enough for her to prepare for the wedding celebration that was to take place in two weeks, and for the 40-day honeymoon they were planning thereafter.

tC

On Monday, July 25, 2007, Alice Minnelli met with the DMs and reps in her region to discuss the results for the first quarter of fiscal year 2003. The company had reached $207 million in revenues, or 3.5 percent more than the same quarter in FY2002. Although the number had turned positive, it was shy of the companys targets. The North Silicon Valley District was the only one that had exceeded quota. Perceptibly anguished, Minnelli pressured all of her other DMs to reach quota the following quarterat the risk of losing their jobs. Uncomfortable and unsure about how to respond to the meetings rough start, Wilson exchanged glances with the manager of the struggling Downtown San Francisco District. Wilson had already met with his fellow DM twice, trying to exchange insights and help him improve his sales teams performance. The question that remained at the back of Wilsons mind, however, was what he should do about Todd DeSchutes and William Frank.

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Exhibit 1 Description of the North Silicon Valley District

Region Covered by District San Francisco Bay Area, California, U.S. North Palo Alto to Belmont

Do

Sources: Google Maps; Management interviews with District Manager Jim Wilson.

No

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Named Accounts in North Silicon Valley District

36 chip design/manufacturing companies 26 Internet companies 22 software companies 15 biotech companies 13 banks / financial services firms 12 telecommunication equipment manufacturers 11 government entities and contractors 8 retailers

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Exhibit 2 Jim Wilsons Professional Experience

NetGenesis, Cupertino CA Director Hi-Tech Sales Vertical, 1999 - 2002 Responsible for the sale of web analytic solutions and the management of the Hi-Tech sales vertical. Providing enterprise-level solutions for Fortune 500 clients in the B to B and, B to C web environment. 202 percent of 2000 Quota, and 160 percent of 1999 quota Closed site licenses with Sun Microsystems , Adobe and Seagate Technology First million-dollar sale in companys history

Do

Harris/3M San Francisco, CA National Account Representative, 1988 - 1990 Sales of high-end network and stand-alone facsimile equipment. Negotiate and coordinate the implementation of national contracts. Key accounts Pacific Bell , PG&E and Hills Brothers. Best of the West 1989, 1990 Top Sales person in San Francisco 1989 Vice Presidents Council 1988

Source: NetApp internal documents, July 2007.

No

Highland Digital, Palo Alto, CA District Sales Manager, 1990 - 1994 Responsible for sales of UNIX applications software, Ethernet networking products, Sun workstations and servers to the commercial, technical and software development markets. Achieved 100 to 150 percent of quota 1991 - 1994 Highest Gross margin percent in sales 1992 -1994

tC

Parity Systems Inc., Los Gatos, CA Regional Sales Manager, 1994 - 1996 Served as a top sales person and manager for an industry leading system integrator, focused on the delivery and sale of mission-critical solutions. Sales of enterprise Client/Server software solutions, high performance networking equipment, and related UNIX computing systems Increased sales by 176 percent and gross profit from 18-26 percent 1995 Vs 1994

op yo

Vangard Technology, Denver CO Western Regional Sales Manager, 1996 - 1999 Reporting to EVP of Sales for the strategic planning, staffing, training and achievement of Western Region sales objectives in the following business elements (Colorado West). Sales of Enterprise Client/Server storage software, RAID systems, and UNIX computing systems Planning, scheduling, and implementation of all enterprise solutions Increased sales 610 percent from 1996 to 1998

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Exhibit 3 Focal Review Report

Employee Name: Position Title: Performance Summary
Past Years Highlights and Results Compared to Objectives:

Manager: Review Period:

High Performance Culture Behaviors

Capabilities Summary Strengths

Development Actions and Timing Action

Future Goals and Individual Objectives (use the optional development planning tool on last page for a more detailed plan )

General Summary/Comments (note: employees will have an opportunity to leave comments once they acknowledge receipt of their review in the Focal HQ website)

Employee Date

No

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Do

Please upload your completed review forms to the Focal HQ website. For tips on writing a review for a Sales Rep, click here. For tips on writing a review for an SE, click here.

Source: NetApp internal documents, July 2007. Note: After the first 90 days at their jobs, employees were assessed a rating of 1 for overall performance that consistently exceeded all expectations for the job, 2 for performance that consistently met all and exceeded many of the position requirements, 3 for performance that met all and exceeded some of the position requirements, and 4 for performance that met some but missed many of the position requirements.

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Growth Opportunities Target Date Manager Date

Customer scorecard/ Total Cust. Experience Drives for Results Planning and Forecasting Communication Skills NetApp Product/Functional Knowledge Builds Cross-Functional Collaboration Team Player (For Management Positions) Owns, Develops and Executes Business Plan Effectively Leads and Develops Team

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High Medium Low

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Exhibit 4 NetApps Template Performance Improvement Plan Summary Letter

Per our discussion on (date) , this letter outlines performance plan criteria you need to achieve in the next four weeks to meet objectives that have not been previously achieved in (quarter) . This is a performance plan for the period of (date range) and I am prepared and willing to assist you in any way I can to help you achieve this goal. The performance issue outlined is your inability to meet your monthly as well as quarterly booking objectives over the last 9 months. To date your bookings are (actuals, YTD) million on a quota of (annual quota) million booking. This represents (percentage) percent of YTD quota.

_________________________________ EMPLOYEE _________________________________ MANAGER

No

On (two weeks before the interim date) , I will review with you your progress towards meeting your bookings objective. If appropriate progress has not been made, we will discuss what must be accomplished by (interim date) . In the event that you have not accomplished your booking targets by that time, Network Appliance could start the process for terminating your employment. Appropriate progress will be considered as: Projected Forecasts greater than Quota and agreed to by your DM Continued 8 appointments per week Three calls per week with (your DM) or (HR contact) . _____________________________ DATE _____________________________ DATE

Do

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As you know, being successful in sales is more than just bringing in orders. These orders must be clean and clear of any contingencies. In addition to clean, payable bookings, you are expected to respond to the customer as well as to Network Appliance communication in a timely manner: Maintain an average of eight appointments per week Respond to requests for information from management or your admin in a timely manner Be on time with War Reports, Forecasts, and appointments. Be prepared prior to sales calls with management with a call plan and objectives for the call Provide feedback after sales call to sales team and management in regards to next steps, strategy, obstacles and pricing recommendations Be available by pager or cell phone during all business hours

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At the end of (following quarter) you and (name of DM) agreed on a level of sales for the . In analyzing that number as well as your current forecast you final quarter of (EOQ amount) appear to be well below that projected number. In putting this plan in place I hope that we can accelerate your ability to achieve your goal. The first target for the (interim date) will be (amount) with the remaining (remaining amount) being booked by EOY.

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Exhibit 4 (continued) NetApps Template Performance Improvement Plan Accompanying Development Plan

Development Plan Objectives: Create development needs and activities that will enhance productivity, performance, competence and professional growth.

Development Need

Development Activities

Timeline

op yo

What gaps or enhancements in competencies or performance need to be addressed?

What on-the-job experiences, projects, or stretch assignments will be pursued to address identified needs?

How many days, months or quarters will it take to implement your stated development activities?

Do

Source: NetApp internal company documents from March 19, 2002 (obtained in July 2007).

No

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Desired Results Support
What performance improvement in support of business results do you expect will be achieved through the learning gained in the development activities? Whose support is necessary for the development activities to ensure success?

Do
NetApp: The Day-to-Day of a DM E-263

Source: NetApp internal documents, July 2007.

No
May/01 $430,769 $551,000 28% $307,692 $300,556 -2% $307,692 $238,000 -23% $184,615 $120,000 -35% $184,615 $68,000 -63% $184,615 $200,000 8% Jun/01 $430,769 $512,350 19% $307,692 $398,332 29% $307,692 $427,897 39% $184,615 $0 -100% $184,615 $22,000 -88% $184,615 $243,343 32%

Goal Todd Actuals DeSchutes % off quota Goal Patty Actuals Thompson % off quota Goal Victoria Actuals Knapp % off quota Goal Brian Actuals Smith % off quota Goal Bing Actuals Chasen % off quota Goal William Actuals Frank % off quota

tC
Jul/01 $538,460 $488,000 -9% $384,615 $490,445 28% $384,615 $472,089 23% $230,769 $201,000 -13% $230,769 $106,000 -54% $230,769 $0 -100% Aug/01 $516,922 $360,770 -30% $369,230 $250,000 -32% $369,230 $323,456 -12% $221,538 $134,500 -39% $221,538 $331,000 49% $221,538 $50,000 -77% Sep/01 $516,922 $280,000 -46% $369,230 $369,000 0% $369,230 $324,000 -12% $221,538 $312,250 41% $221,538 $100,000 -55% $221,538 $123,990 -44%

Exhibit 5 Jim Wilsons District Quarterly Quotas and Actuals

op yo
Dec/01 $560,000 $123,000 -78% $400,000 $100,000 -75% $400,000 $475,000 19% $240,000 $245,000 2% $240,000 $7,500 -97% $240,000 $0 -100% Jan/02 $700,000 $550,500 -21% $500,000 $420,000 -16% $500,000 $373,451 -25% $300,000 $30,000 -90% $300,000 $73,456 -76% $300,000 $150,499 -50% Feb/02 $735,244 $742,000 1% $525,175 $835,050 59% $525,175 $545,768 4% $315,105 $208,954 -34% $315,105 $267,000 -15% $315,105 $100,000 -68%

FY2002 Oct/01 Nov/01 $646,153 $560,000 $344,250 $299,000 -47% -47% $461,538 $400,000 $363,050 $399,000 -21% 0% $461,538 $400,000 $432,000 $186,000 -6% -54% $276,923 $240,000 $120,000 $99,000 -57% -59% $276,923 $240,000 $86,000 $715 -69% -100% $276,923 $240,000 $280,000 $92,500 1% -61%

Mar/02 $646,153 $880,000 36% $461,538 $700,000 52% $461,538 $545,678 18% $276,923 $180,400 -35% $276,923 $0 -100% $276,923 $569,000 105%

Apr/02 $718,607 $560,122 -22% $513,291 $655,000 28% $513,291 $834,652 63% $307,975 $156,000 -49% $307,975 $0 -100% $307,975 $120,500 -61%

Total $7,000,000 $5,690,992 -19% $5,000,000 $5,280,433 6% $5,000,000 $5,177,991 4% $3,000,000 $1,807,104 -40% $3,000,000 $1,061,671 -65% $3,000,000 $1,929,832 -36%

p. 19

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Exhibit 6 Sales Representative Compensation

Do

Source: Management interviews with District Manager Jim Wilson.

No

Sales Force Motivation and Dynamics: Rep motivation: Given NetApps FY2002-2003 compensation model, sales reps were driven mostly by their sales commissions. Top performers in FY2002 had reached total annual compensations of more than 1 million dollars. Month-by-month focus: Sales force representatives were motivated to meet their numbers on a month-by-month, more so than on a quarter-by-quarter basis. Consisting of 13 weeks, each quarter was broken into months of 4, 4, and 5 weeks, respectively. End-of-year peak: The accelerated commission model used by NetApp typically made topperforming sales representatives receive nearly half of their annual compensation in the fourth quarter of the fiscal year, and the largest amount after the month of April. This model also motivated sales team changes to be executed during, or shortly after the close of every fiscal year (much like happened in many other Silicon Valley technology start-ups at the time).

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Summary of Benefits: Base salary: Sales representatives were paid annual salaries in fixed monthly amounts, depending on their levels of experience. In FY2002, reps base salaries ranged from $60,000 to $80,000. Sales commissions: Reps were paid variable compensation, which in FY2002 ranged from $60,000 to $90,000 for representatives achieving 100 percent of their respective annual goals, which in that year ranged from $3 to $8 million. Commissions were paid on a monthly basis, one month after the products sold were shipped to customers (which could be delayed in the event of backlogs). Commissions were paid in proportion to the percentage of the reps annual goal that was reached that month. A rep with $60,000 commission and $3 million annual goal, for example, would get paid $6,000 in commissions for a month in which s/he sold $300,000. After reaching 110 percent of his or her goal, commission multiples would be doubled. Commissions were accelerated, for reps that exceeded quota. After 130 percent of quota, commission multiples would be tripled; after 150 percent, they would be quadrupled. Stock options: Upon joining the company, representatives were offered standard employee stock option plans, which vested over 5 years. The number of stock options offered depended upon the reps experience level, and varied between $30,000 and $60,000 in current value. Health benefits: NetApp paid approximately half of the premiums of one of two selected health plans. The company offered to pay 30 percent of the health plans of the employees families and significant others. (Note: Before Q3/FY2002, NetApp covered 100 percent of health plan premiums for employees and their families, and offered a selection of all-inclusive health plans that required $5 co-pays for most healthcare services rendered.)

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Exhibit 7 North Silicon Valley District Team Members & Targets

Salaries and Annual Quotas
Representative Todd DeSchutes Patty Thompson Victoria Knapp Brian Smith Bing Chasen William Frank Total Salary (US $) 70,000 65,000 65,000 60,000 60,000 60,000 380,000 Commission (US $) 90,000 80,000 80,000 FY2002 Quota (US $ million) 7 5 5

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60,000 60,000 60,000 3 3 3 430,000 26

Do

Note: (*) Total targets account for the additional 3-5 percent buffer that Jim Wilson built into his district representatives targets. Source: Internal company documents, June 2007.

No

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FY2003 Quota (US $ million) 9 6.5 6.5 4 4 4 34

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Exhibit 8 NetApp Financials

Income Statement (US $ Million; Fiscal Year Ends April/30) Revenues Total Revenues Costs Cost Of Goods Sold Selling General & Admin Exp. R & D Exp. Amortization of Goodwill Total Costs Operating Income (Expense) Other Income (Expense) Net Interest and Investment Income (Exp.) Other Non-Operating Income (Exp.) Total Non-Operating Income (Exp.) Unusual Items Net Income (Loss) 1994 2 1 2 1 4 (2) 0 0 (2) 1995 15 8 9 3 20 (5) 0 0 (5) 1996 47 21 15 5 41 6 1 1 7

Do

Source: NetApp SEC Filings, 10-K forms, Capital IQ, July 2007.

No

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Balance Sheet (US $ Million; Fiscal Year Ends April/30) Total Cash & Short-term Investments Accounts Receivable Net Property, Plant & Equipment Other Assets Total Assets Total Current Liabilities Total Liabilities Total Shareholder Equity

op yo
1994 1995 1996 1997 2 3 2 4 11 5 5 5 28 5 5 8 45 6 6 39 28 14 9 17 69 15 15 54

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1997 1998 1999 2000 2001 2002 93 166 289 579 1,006 798 38 28 9 76 18 68 49 17 133 33 118 86 31 0 234 55 236 176 62 0 474 105 404 333 124 9 870 136 324 326 122 15 787 11 1 (0) 1 (15) 4 1 (0) 1 34 3 (1) 2 57 9 9 114 22 1 23 (27) 133 19 (2) 17 (25) 3 1998 48 34 12 21 116 29 30 86 1999 227 57 19 43 346 51 51 296 2000 354 109 48 82 592 113 114 479 2001 364 187 103 382 1,036 219 232 804 2002 454 147 345 163 1,109 216 250 859

NetApp: The Day-to-Day of a DM E-263

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Exhibit 9 NetApps Financial Metrics

Basic Metrics (as a percent of revenues)

60%

40%

20%

0% 1996 1997

300 250 200 150 100 50 0

Q2/96

Average TEV/Revenue (LTM )

Average TEV/EBITDA (LTM )

No

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Q1/97 Q4/97 Q3/98 Q2/99 Q1/00 Q4/00 Q3/01 Q2/02 Fiscal Year (ends April/30)

Do

Source: NetApp SEC Filings, 10-K forms, Capital IQ, July 2007.

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1998 1999 2000 2001
Fiscal Year (ends in April/30)

Historical Valuation Multiples

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Gross Profit EBITDA Net Income

2002

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Exhibit 10 NetApp Quarterly Results

Financial Results for 2001 Total revenues Gross margin Net income Financial Results for 2002 Total revenues Gross margin Net income (loss) Comparative Results, 2001-2002 Increase (drop) in Revenues 2001-02 Net Income in 2001 (percent of revenues) Net Income in 2002 (percent of revenues) Increase (drop) in Net Income 2001-02 Q1/01 231.2 141.7 5.0 Q1/02 200.4 112.3 (0.5) Q1 -13.3% 2.2% -0.3% -2.4% Q2/01 260.8 161.5 35.4

Q2/02 194.7 113.7 (11.2)

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Q2 -25.3% 13.6% -5.8% -19.3%

Do

Source: NetApp SEC Filings, 10-K forms, Capital IQ, July 2007.

No

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Q3/01 288.4 174.6 34.1 Q4/01 225.8 126.7 0.5 Q4/02 204.9 131.1 7.8 Year 1,006.2 604.5 74.9 Q3/02 198.3 123.3 7.0 Year 798.4 480.5 3.0 Q3 -31.2% 11.8% 3.5% -8.3% Q4 -9.3% 0.2% 3.8% 3.6% Year -20.7% 7.4% 0.4% -7.1%