No CFO can, on his or her own, spur a company to massive growth. But Red Hat’s Charlie Peters is comfortable with how the numbers have trended during his eight-year tenure as finance chief for the leading open-source software company.
Upon his arrival in 2004, the company had 700 employees and annual revenue of less than $200 million. Presently there are more than 5,000 workers who are helping publicly held Red Hat to an expected $1.3 billion intake this fiscal year — a solid gain from $1.1 billion in its most recent fiscal year, which ended February 29.
Investors are clearly expecting the growth to continue, and in a big way. Red Hat’s market capitalization (value of outstanding shares) is nearing $11 billion, an almost 10-times multiple over revenue. The company’s growth is a beacon to the other, mostly small players in the field of open-source software.
Like other open-source firms, Red Hat makes its products’ source codes available under license agreements that permit users to study and alter the software for their own purposes. Red Hat then can choose to adopt such changes itself, which both improves the product and greatly reduces the software company’s product-development costs. Red Hat’s biggest business is providing software for the Linux computer operating system.
Unlike many technology-company CFOs, Peters has not been a specialist in that field but rather has led finance teams in four distinct industries. He landed his first CFO post all the way back in 1985, at the just-ripe age of 31, at electronic-equipment maker GenRad (owned since 2001 by Teradyne). Next came four years as finance vice president at utility company Boston Edison (now called NStar), followed by nine years heading finance for textile giant Burlington Industries. “I’m walking proof that CFO skills are very transferable across industries,” he says.
Peters recently spoke with CFO about his career, the open-source software industry, and challenges facing Red Hat. An edited version of the interview follows.
Is the collaborative interaction between Red Hat and its customers mirrored within the organization?
We have all sorts of cross-functional projects. But since the early days we’ve had something called Memo List, which is an open e-mail list exchange where anybody in the company can express virtually any idea about anything. For example, if our CEO, Jim Whitehurst, does something that others think is a bad idea or not the right direction, people are very vocal in saying so. If it is a bad idea, eventually a better idea will surface. If it’s a good idea to begin with, the forum can help get everybody on the same page.
What has switching time and again to very different industries been like?
I started out at Price Waterhouse. I was there nine years and had clients in probably 30 different industries. That really helped prepare me for the jobs I’ve had. When you start in a new industry, first identify and admit what you don’t know and put some really good people around you to fill in those gaps. Generally, though, there are one or two significant aspects of an industry that the CFO must get familiar with.
In the high-tech equipment business, you’ve got to focus on inventory obsolescence. At Boston Edison we had a nuclear power plant. Accounting for that plant’s cost is a very important accounting issue, especially its nuclear decommissioning: at some point you’re going to take the plant out of service and mothball it, which is very expensive. So each year when it’s in operation you set aside a nuclear-decommissioning reserve.
At the time I was in the textile industry, it frankly was about restructuring and understanding how to cut costs. And in the software business the critical element is revenue recognition.
Is there pressure to get up to speed on the new industry pretty quickly?
Yes. You find out that people don’t suffer fools lightly. But each of those industries offered training. I learned at the Edison Electric Institute, North Carolina State University’s Textile College, and Price Waterhouse’s Revenue Recognition Bootcamp, which is mostly for the firm’s staff but clients can also attend.
How have you leveraged your cumulative work experience at Red Hat?
I think I brought to the table a level of maturity, big-company experience, multinational experience, and the ability to build teams, and not only in finance. IT has reported to me in all my CFO jobs. Operations also reports to me now.
How far get down in the weeds do you get with IT details?
I think everyone in IT who has worked for me would certainly say that I’m no technology geek. I’m better at management than sorting out an IT problem, that’s for sure. It’s a strategic asset and needs to be used that way. In my early days at GenRad and when I first arrived at Burlington Industries, it was buried way down in the organization, reporting to a controller or even below that. It was a function that just chunked out reports. That was the wrong reporting line.
I even suggested a couple times that IT was strategic enough that it should report to the CEO — but the CEO was happy to have it report to me.
Does the nature of open-source technology influence what you do day to day?
Our way of thinking is influenced by that; we’re far more collaborative than other businesses I’ve seen. But “open source” is more of a development model than anything else. The subscription business model generally has more impact on what the CFO does than the fact that it’s open-source development.
What is your approach to managing your finance team?
At the start of the year we work together to set broad goals for each function. Then I give the guys [who] report to me a lot of leeway in how they execute and achieve those goals. I may have one-on-one meetings with them each week to talk about where they are relative to goals, but I’m typically not going to continually pester them about all the details.
Like any publicly held company, Red Hat has a long list of risk factors in its public filings. What is your biggest concern?
Definitely, the most difficult thing is managing the growth. That’s a good problem to have, but when this year started we told our employees and the outside world that we were going to add 800 to 1,000 employees. Think about the difficulty of recruiting that many people, on-boarding them, training them, making sure we have space for them, that they understand where we’re going. That takes up a lot of my time.
Then there is the question of where the next facility is going to go. What’s this new country about?
What would poor management of growth look like?
One indicator is that you are so restrictive on hiring that you don’t take advantage of the growth opportunity. There’s a constant tug: should we grow faster or have higher profits? We could be a lot more profitable if we simply didn’t hire, but that’s a short-term view and not the right view.
But the other side is that if you don’t set expectations properly among the various organizational functions about what the critical hires are and how to get them, you can end up hiring too many people too fast and get into an expense problem.
How can you ensure the company will remain relevant amid the type of seismic changes we’ve seen many times in the technology industry?
It’s true that every technology company runs the risk that new technology will leave the old guys in the dust. The nice thing about open-source software is that we don’t always drive the development road map. You can get a sense of what future consumer interest and demand are going to be by looking at what projects customers are involved in. We have market intelligence coming in from all over the world.