Bloomberg's money machine (cont.)

By Carol J. Loomis, Fortune editor-at-large

Bloombergers

There are close to 9,400 employees at Bloomberg, and all would cheer that analyst's fidelity to the product. That's because the company has a highly unusual compensation system that ties employee pay directly to the sale of terminals - or more precisely, to net installations, or "net installs."

The concept behind this system is that everyone at the company should be driving toward only one goal: selling more Bloombergs. To underscore that point, large electronic signs hanging from the ceilings in the Bloomberg offices report progress on both sales and installations. Bells ring to mark a sale - multiple times if the news justifies it.

Every year, virtually all Bloomberg employees get compensation - in effect, bonuses - based on how many net installs Bloomberg put on the books in the twelve months just past. This reward comes from certificates, nicknamed "certs," that are given annually to an employee in the month following his hiring (so he could have, for example, a May-to-May year) and cash out in two years, though only if that person is still a Bloomberger. In other words, if an employee quits Bloomberg, he or she is always leaving money on the table.

Turnover at the company is in fact quite low - it ran just above 12 percent in 2006 - and certs may be one of the reasons. (There are two top people who don't participate in the cert system: chairman Grauer, because he and Mike Bloomberg worked out a different, undisclosed compensation scheme, and Secunda, because he's an owner of the company. Fenwick and Winkler, on the other hand, are awarded certs, and because they're so high up, get a large percentage of their pay that way.)

The Bloomberg system is all about revenues, not profits. The company has no profit centers; every initiative - the magazine, television, radio - is valued not for the dollars it brings in but for its contribution to making the Bloomberg product more indispensable.

One manager who was at the company in its early days remembers that Mike Bloomberg dressed him down once for spending his brainpower on trying to cut costs rather than selling. "You worry about sales," said Mike, "and I'll worry about profits."

Of course, there are occasional situations in which some customer goes out of business and Bloombergs are a casualty. In a case like that, the immediate financial hit to Bloomberg LP is mild, given that it has been paid quarterly in advance. But Bloomberg is stung nevertheless, because the customer won't be finishing out whatever remains of its two-year contract, probably won't be paying the "breakage fee" that is supposed to apply to contract terminations, and won't be signing up for a new contract.

All of that, for example, describes Amaranth Advisors, a $9.5 billion hedge fund that went calamitously out of business last fall, losing $6.4 billion for its investors. At death, it had 221 Bloombergs worldwide. Those were in effect returned to Bloomberg LP, except that the company has a policy of letting any user who loses his job have a Bloomberg at home for four months - free of charge - while he tries to get hired somewhere else.

By January, most of the Amaranth employees had indeed taken new jobs and were once again re-equipped with Bloombergs. So Grauer was then measuring his Amaranth loss as amounting to only 41 terminals, which struck him as bearable. Besides that, the electronic sign hanging near his desk and keeping tabs on net installs was proclaiming that the company was having a fine start to the year.

That sales picture could change quickly. Despite Bloomberg's ever-blooming drive to broaden its customer base - to become a staple at law firms, for example - the company is cyclically tied to the financial world.

Mapping the future

The company made its biggest gallops upward in the last years of the stock market bubble, when its revenues grew annually by rates averaging better than 25 percent. Then reality set in, and growth slowed to a crawl - 3 percent in 2003. It was a scary period, says Fenwick, made especially so because Mike Bloomberg had left the building. "You lost your best salesman," says Fenwick, "and someone you were used to testing your opinion against, this person with a remarkable brain."

It is indeed testimony to Mike's thinking power that the management team he put in place was able to both successfully grind through that period and cope with one strange twist in the cast of characters. The twist concerned Fenwick, who after Mike's election had a four-month period in which he was CEO in both name and authority. Then Grauer moved in as boss, the clear choice of Mike to watchdog his valuable property. Fenwick, demoted - though he says he never saw it that way - stepped back to running sales and other operations, as he had under Mike.

That management flip may have been unorthodox, but it produced a set of top executives - strong personalities, speed talkers and hard workers all - who have obviously functioned well. Grauer, widely liked and respected, is precise in conversation and visibly organized, a classic clean-desk man. Fenwick is shorn of hair, tieless almost always, and "cool," naturally loaded with charm but regarded by a former, uncharmed employee as sometimes aggressively rude.

Winkler, who was a first-rate bond reporter in his old Wall Street Journal life, has a neckline distinction of his own: bow ties, always. A goof by one of his newspeople can rile him enormously; a former Bloomberger says the offender may then get "Winklerized," which means chewed out.

Secunda, a bearded mathematician, is described by Grauer as both "strong as horseradish" - a Texas expression, it seems - and "the most important guy in the company," a salute to his deep knowledge of the Bloomberg product, his obsession about constantly improving it and his standing as a founder.

When the leadership team was tested in hard times, caution prevailed. After 9/11, with the securities industry reeling from both tragedy and the bursting of the stock market bubble, Grauer and company made a conscious decision to stop building the company's headcount. From 2001 through 2005, the number of employees stayed constant at 7,800. But there was naturally turnover in the workforce, and the company exploited it by hiring a preponderance of tech experts (many jettisoned by Wall Street) and putting them to work in research and development and programming jobs.

As the world got sunnier in 2006, the company swung toward expansion, beginning to head toward a workforce of 10,000. This time around, the company is focusing on building its news staff. That's an astounding rarity in the news industry, of course. Many journalistic organizations, including Fortune's parent, Time Inc., have been cutting people.

Head newsman Winkler has different priorities, including a belief that new bureaus and more journalists will simply help the business. He said recently that he feels under almost no cost pressures in his department.

It sometimes seems, in fact, particularly when one looks around Bloomberg's glitzy offices, that costs are just about the last thing that anyone at the company thinks about. But Grauer says that is emphatically not the case: "I am riveted on our financial performance," he says. He often dwells as well - a few public companies could learn from this - on "the creation of shareholder value." Of course he mainly has just one shareholder in mind, that fellow who's located 6.2 miles south in Manhattan, in City Hall.

With unmistakable sincerity, Grauer sums up how he views his work: "I'm doing something for someone whom I care deeply about while he's doing a job that's extraordinarily important." Waving from a glass-walled conference room toward his bullpen desk, in front of which there is the usual heavy foot traffic, he says, "I get a lot of satisfaction out there."

Whether he continues to feel that way will naturally depend on the company's ability to thrive in the years ahead and to outdo the competition as it has in the past. That job appears to be getting harder. An energized Reuters has landed two big orders - from Citigroup and HSBC - that it loves to talk about.

Thomson Financial put 28,000 terminals on the desks of registered reps at Merrill Lynch (yes, Merrill Lynch, that 20 percent owner of Bloomberg LP). Thomson is also expanding its news operation.

No doubt some Bloomberg customers cheered those signs of competitive vigor. There is a belief around that Bloomberg is arrogant and that the world would be greatly improved if customers had more choice.

Grauer says they have plenty: "It's a highly, highly competitive market out there." But he is also persuaded that Bloomberg LP has nothing but a great future ahead of it. Much of the company's growth will come from abroad, particularly Asia, he predicts.

He also cites work done by the McKinsey Global Institute, an economic think tank that annually measures the value of the world's financial assets. The 2005 figure was $140 trillion, and MGI projects $214 trillion for 2010. "The markets," says Grauer, "are growing deeper and deeper, and that plays right into our strength."

But of course, the company has had another strength: the belief that it could do anything, beat any competitor, win any war. So much for the "Bloomberg killers" that were always said to be coming along - they just didn't make the grade.

That doesn't mean that today is free of threats. The men at the top of Bloomberg identify one dread: complacency. The company's biggest problem is "ourselves," says Fenwick - Bloomberg folks enjoying the comfortable life, getting paid well, spinning out terminals, working in a business grown so big that change comes hard. And yet, says Fenwick, "you've got to be prepared to go chuck it up in the air and do it differently."

No one there 25 years ago, like the mayor and Secunda, could then have imagined such a remark being made from a position of power. But starting off the second 25 with the understanding that the Bloomberg killer could be yourself is not a shabby way to think.

Reporter Associates Doris Burke, Patricia A. Neering and Christopher Tkaczyk contributed to this article.

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