THE PROPHET OF PROFITS
For the hundreds of thousands of Excel representatives, Ken Troutt is more than a CEO-he’s a symbol of success and possibility. Now, he plans to go global, and his followers are eager to join the ride.
IT’S A HOT SUMMER SATURDAY morning and about 1.000 people have decided to spend it in Oklahoma City’s Civic Center Music Hall. The event: a "Power Ral ly"-a sort of pep rally for independent representatives who sell long distance and other communications services for Dallas-based Excel Communications.
The reps have sat through three grueling hours of speeches and pep talks. The high point of the morning approaches: the appearance of their guru. As Kenny Troutt steps out from behind the stage curtains and approaches the podium, the audience gives him a standing ovation even before he opens his mouth, More than 6 feet tall, wearing an elegant black business suit and wire-rimmed glasses. Troutt cuts an imposing figure. When he begins to speak, his enthusiasm borders on the giddy, as if the man lives inside an infomercial for positive thinking. One unfamiliar with the world that is Excel may wonder, "Is this man some kind of an evangelist?" The answer, to some degree, is yes.
"We’re going to explode!" Troutt proclaims to whoops and cheers. To the hard-core independent representatives, Troutt isn’t just the chief executive officer and chairman of Excel, he’s the visionary who’s transforming their lives. Though he’s originally from up North, he speaks with a strong rural accent, a contrast with the expensive suit. It evokes his humbler origins and Subconsciously tells his followers that, yes, he once was where they are. and he hasn’t forgotten those roots.
The audience pays close attention to his words; they always do. Troutt describes to his followers his vision. It’s a world where other countries are deregulating their communications and public utilities-opportunities for Excel’s representatives to broaden their international reach. At the same time, thanks to Excel’s recent merger with another company, other products for them to sell are just beyond the horizon: local and cellular phone service. cable and digital satellite TV, and--as Troutt can’t help flirt with-public utilities. He tells about an informal chat he had with an unnamed congressman in Washington, D.C., who asked if Excel’s independent reps could sell local electric service if the opportunity were presented to them. You bet! The crowd roars. Troutt’s message to them is: today, long distance service- tomorrow, the rest of the planet.
When the rally ends in the afternoon, Troutt meets with his audience in the lobby to hobnob. Up close, he looks thinner than when he’s on stage. People crowd around him, lining up to shake his hand. They tell him how, thanks to him and Excel, their lives are going to turn around. Troutt listens to each one of them and obliges every request for an autograph or a photograph with him: children even ask for his signature. This is the CEO of the fourth-largest long distance phone company in the United States? With the smiles, handshakes, and chitchatting, he’s the epitome of the glad-handing, grass-roots politician.
But Ken Troutt isn’t running for elective office. He doesn’t want their votes. He wants their commitment-body and soul- to the dream.
WHAT HAS BROUGHT KENNY TROUTT SUCCESS-AND millions of dollars-is his merger of two ideas: long distance telephone service and multilevel marketing. Excel borrowed the idea of MCI’s original "Friends & Family" calling plan and broadened it, taking it to a more personal level.
You remember the ploy. MCI marketers convinced you to switch over to its longdistance service and asked you to list your circle of friends and relatives. Then they solicited those friends to switch in order to maximize your and their savings in long distance calls. Now it seems that every long distance company calls and tries to get you to switch to its service (during the most inconvenient times, like when you’re sitting down to dinner).
Now imagine Cousin Bob, who works as an independent rep for Excel, asking you to switch to Excel while he’s eating with you at the dinner table. In Excelspeak, he’s trying to make a "relationship sale" with you. What’s more. Bobby’s also goading you to sell Excel, too.
Depending on whether you’re the one doing the selling or the eating, Excel’s business model may sound either ingenious or insidious. While other direct-marketing companies such as Amway dabble in selling long distance service, none has done so as exclusively and extensively as Excel.
At the Oklahoma City Power Rally (and others held throughout the country), higher-level independent reps tout what Excel has done tor them. They claim to earn monthly commission checks from the company for amounts slatting at $5,000 to more than $ 15,000. They tell their success stories. Most of the Power Rally consists of stories, stories, stories-ad nauseam. It’s one long series of testimonials.
While both the tales and the tellers are varied, the things said can be generalized this way: One, "I was poor; money was tight; I was looking to start my own business/earn extra income"; two. "I didn’t think Excel would work until I saw how much extra income my wife/brother/sister/friend was bringing in selling it"; and three. "Excel works! You don’t need any special talents or training to sell Excel! If you work hard and keep at it. despite the early rejection, you can achieve your dreams!"
Not surprisingly, the story of 49-year-old Kenneth Troutt reads like one of those testimonials you hear successful Excel representatives tell about themselves.
"I’m a big believer in being an entrepreneur," Troutt says. "That’s something I’ve been all my life, since 1 was a young kid. And 1 believe in multilevel marketing because it gives everybody an opportunity to go out and change their life."
He grew up in an Illinois housing project, the son of a single mother, who raised him after divorcing his father-an alcoholic bartender-when Troutt was in the seventh grade. Before he became a teenager, he started a neighborhood lawn-mowing service and employed his brothers and cousins. In high school, he played quarterback and earned a partial scholarship to Southern Illinois University.
While in college, Troutt sold insurance part time and discovered his forte was selling. He was so good at it he became the company’s top salesman. It was also his first experience with the selling method that would eventually become the basis for Excel.
"Seven people got commissions off of what 1 did," says Troutt of his insurance selling. "I was always intrigued by. and very excited about, that-that you could move up and get commissions off of other people’s work. That always stuck in my mind."
The entrepreneurial spirit ignited again within him. so much so that he lost interest in pursuing law school and decided, instead, to start his own business.
After graduating from SIU, he moved to Nebraska and started a construction firm. But he shut it down when interest rates went up to 20 percent during the 1970s. Inspired by the image of the Dallas oil tycoon, Troutt moved here in the 1980s to deal in crude-only to drop out of the game in 1988 like so many others did when oil prices fell to $8 a barrel. Though he says he managed to make money in both endeavors, the up-and-down nature of these two industries and the inherent financial risks involved rattled him.
Closing in on his 40th birthday, he came to a decision. "I realized I needed to find something that I can spend the rest of my life working [on]," he says, remembering that period after his second venture failed to meet his expectations. "What I was looking for was something that was more or less recession-proof."
Based on his two previous businesses and his entrepreneurial success during his youth, Troutt came to a formula for the perfect business: It would have to sell a product almost everybody uses, and the price of the product wouldn’t fluctuate wildly to the whims of the market. And, like insurance, it should bring in a steady stream of revenue after its initial sale. With the investors who had worked with him in his last businesses willing to fund a new enterprise, he searched for that perfect company.
Troutt’s accountant brother, Steve, suggested telecommunications, a field that historically has been relatively stable. Additionally, at the time in 1988, the breakup of AT&T’s monopoly offered ample opportunity for others to start offering long distance service. (Most of the smaller companies dealing in long distance-like Excel during its early years-don’t actually own their own telecommunications networks. What they do is lease out time from the networks of other companies, which own and maintain such networks, and resell it to customers.)
And telecommunications seemed to be recession-proof. The number of telephones-and pagers and cell phones-per American household has exploded.
There was one problem. Acquiring as many customers as quickly as possible was necessary in order to establish a significant foothold in this new market, but doing so would neither be easy nor cheap, Troutt figured that he would need to hire marketing executives and salespeople and spend millions on advertising. After two failed businesses, that task seemed daunting.
WHEN STEVE SMITH GOES UP TO THE PODIUM AT THE Oklahoma City Power Rally, he doesn’t come across as much of a salesman even though he’s (he mastermind behind Excel’s marketing setup. He wears a nondescript gray suit. His speaking voice is soft, good-natured, but hardly dynamic. At 52. Smith has a modest, self-deprecating demeanor. His story of the financial hardships he and his family endured before he joined forces with Kenny Troutt feels almost out of place in the "can do" atmosphere of the Power Rally.
At times he actually sounds sad. You almost forget the fact that he’s a rich man. and you want to feel sorry for him.
For three years during the mid-’80s. Smith had tried to convince a regional long distance carrier in Houston named Coastal Telephone to implement his multilevel marketing system idea. Then he met Kenny Troutt-ironically, over the phone.
Troutt was calling Coastal to get information about its direct marketing of long distance services. Smith answered the phone and pitched Troutt his idea. Smith became Excel’s first independent rep and, today, is executive vice president of marketing.
For Troutt, Smith’s plan was the answer to offsetting the marketing costs of his new business venture, and it recalled his youth as a successful insurance salesman. As Troutt sums it up, "When I sat down with Steve Smith, [Smith’s marketing idea] was just a perfect fit for me."
That "perfect fit" started out in a 750-square-foot office space in 1988 and grew dramatically. From 1992 to 1994, revenue for Excel Communications leaped from $24 million to $153 million. In 1995, Excel raked in revenues of $507 million. Last year, the company boiled over the billion dollar mark at S 1.4 billion. Excel’s stock went public on the New York Stock Exchange on May 10, 1996, at 15 and closed for the day at 29 3/8.
Today, Excel is the fourth-largest residential long distance provider in the United States, carries a customer base of 4.1 million, and employs a total of 2,600 people at its corporate headquarters on Central Expressway and at three customer service centers located in Addison, Houston, and Reno, Nev. Kenny Troutt, who retains control of about 60 percent of his company’s stock, is estimated to be worth more than a billion dollars.
"Multilevel marketing to me, to a guy like myself, is probably the greatest thing that has ever come along." Troutt says. That’s a spectacular understatement, of course, for a man worth as much as he is. But what excites and interests him more is describing how wonderful a system he feels that multilevel marketing is-not for himself but what he touts it can do for others.
"It’s the entrepreneurial spirit that you’re seeing." he explains. "You’re seeing it in multilevel marketing. You’re seeing it in more businesses opening up today than ever before. And what this is, is people saying, ’Hey, I want to take control of my life. ’ It’s that entrepreneurial spirit that is really driving Excel."
Thanks to multilevel marketing. Troutt claims that his company spends no money on advertising to acquire customers. He credits the profit surges and accelerated growth of Excel to the work of his company’s independent representatives. "Our [company] philosophy is that our independent reps are our key." as he likes to emphasize.
"Telecommunications is a marketing business," Eric Strumingher, a stock analyst with Paine Webber in New York City who covers Excel, puts simply. "There’s no advantage to any one company [when it conies to] technology. It really boils down to marketing: customer acquisition, customer retention. I think Excel has a terrific method of doing this."
Along with Excel’s revenue, the number of independent reps has leapfrogged just as enormously. In 1995, there were about 60,000 people actively selling Excel’s services. Last year, that number multiplied by 10-anywhere from 500,000 to 700,000 pitched Excel to friends, family, acquaintances, and anybody else these people could get a moment from. That number is now Hearing a million. Granted, perhaps only 10 percent of these people will actively keep selling Excel for the foreseeable future. But that’s still a national sales force of 100,000. That’s a lot of people pushing Excel’s product. (To put this number in further perspective, consider this: Sprint, the nation’s third-largest long distance phone company, employs 47,500, and most of these employees don’t handle sales for the company.)
As with any multilevel marketing company. Excel has had its share of disgruntled independent reps. Most notably, one such Exceler, Linden Wood of Oklahoma, filed suit against the company for $405 million. Wood, who reportedly once earned $500,000 a month in commissions, claimed that the company prevented him from selling or distributing his own training materials to recruits. Yet overall, the matter likely illustrates Excel’s commitment to stay within the state’s set compliances for multilevel marketing businesses. (State laws against paying commissions for just recruiting people to sell a product are not uncommon.) Regardless of whether or not it’s actually so, an independent rep for such a company is supposed to make money off of customers-not from selling materials to recruits. (Wood’s case was countered by Excel on May 23. 1996. in U.S. District Court for the Northern District of Texas. The case was closed on Nov. 22, 1996. with the court compelling both sides into arbitration. The arbitration hearing is scheduled for this month.)
’Texas was. when we started, on the downside,’" Troutt says. "The oil had crashed; the real estate had crashed. People were looking for an opportunity. That gave us the start. That probably really helped us an awful lot."
Why Dallas? Well, that’s where he and his brother Steve, now director of commission administration, lived. The timing could not have been more perfect. Like the Troutts, other Dallas entrepreneurs hurt by the real estate slump were looking for opportunities to replace their once-hefty incomes.
"The most important thing was that our product is so simple." says Ken Troutt. "It’s a product that everybody uses." Therefore, he says, the market is virtually unlimited.
There’s another aspect to Excel’s success. Unlike other companies that use multilevel marketing, selling long distance service has a far sexier appeal than peddling plastic food containers or financial services. With the availability of paging among Excel’s list of services, its reps also get to cash in on a trend. Pagers are no longer used solely by business professionals- they’re a sort of status symbol among teens. Never mind whether or not you would actually want to sell Excel. The question is: Which would you rather sell if you had to choose? Plastic containers or pagers? To say that you’re involved with the growing telecommunications industry tells others that you’re "with it." riding the wave of the future, and not some dunderhead trying to sell them junk they could probably buy for less at Wal-Mart.
SHARON HOLMAN, EXCEL’S VICE PRESIDENT OF PUBLIC RElations, wants to make a clarification about Troutt: He did not purchase his custom-built. 14.400-square-foot house with $845,000 cash, as it has been reported in the press, Her boss is quoted-misquoted, as she insists-for saying such in an article published two years ago in The Dallas Morning News. Yet what’s the big deal even if he did buy his house with cold hard cash? There are instances in which perfectly legitimate businesspersons must resort to handling transactions with a metal suitcase filled with Ben Franklins. Besides, such dealings fit with the legendary eccentricities of living the life of an extremely successful businessperson in Dallas. (His home is, after all, in the same neighborhood as Ross Perot’s own pricey estate and is now valued 011 tax rolls at $2.1 million.) And what does Troutt’s personal spending have to do with the company anyhow?
Holman’s job is less that of an information provider to the public and more a protector of her company’s image. After all, multilevel marketing tends to have a less-than-prestigious reputation. In the culture of direct marketing, actions of those above the marketing ladder reflect, and are also meant to inspire, those below. Which explains the whole issue concerning how Troutt’s house was purchased. Buying an expensive house with cash isn’t illegal, of course, but it isn’t perceived as a "legitimate" means of money transaction. Legitimacy is worth a lot to a company using multilevel marketing. It’s something that every such company struggles, usually in vain, to attain.
"I don’t believe multilevel marketing has a bad reputation, to be honest with you," Troutt says without any hint of irony. "You know, it’s like in any industry: You got good guys, bad guys, and different guys. It’s the bad guys that make everything look bad for you. It’s non-traditional. [But] it’s the thing of the future, it’s here to stay, and you’re probably going to see in five years everybody using it."
Companies like Excel that use multilevel marketing inevitably inspire cult-like fallowings. Instilling a sense of devotion to selling the product is also good business because, by estimates within the direct-marketing industry, the turnaround for independent representatives who drop out of any company’s system-those individuals who try to sell but then decide to quit-is over 90 percent.
Thus, the two keys to any business using direct marketing are recruitment and retention of its independent sales reps. Higher-level Excel reps do this by holding meetings. These vary in size-from a modest-sized crowd invited to a dinner party held at a rep’s home, to a rented meeting hall at a hotel.
At one such gathering at a hotel in Dallas, approximately 300 people attend. The basics of Excel’s multilevel marketing system are introduced and the benefits of selling Excel are extolled. The audience looks to be evenly split between men and women. (Excel reports that the gender ratio of its independent reps is 60 percent male and 40 percent female.) Their age is mid to late 30s. About half of those in the audience already sell Excel. These people have convinced the other half-friends, family members, and acquaintances-to check out this "exciting business opportunity" with them.
To inspire and encourage its independent representatives, Excel itself holds several weekend retreats ("Winners Weekends") and Power Rallies in cities near where many of its reps live and work. Annually, the company holds a megameeting, "Excelebration," here in Dallas. This grandiose, three-day event is like a political convention. (Excel staged 1997 ’s Excelebration in September at Reunion Arena, the first time the company booked the event at the venue.) Attending events tike these isn’t free, Fees range from S10 to $60 for the Winners Weekends and Power Rallies to $ 185 for Excelebration.
For a company that doesn’t advertise to attract customers. Excel sure makes up for it at these events. Sitting in the audience at a Power Rally is a loi like watching a TV infomercial, complete with personable host. It’s a professionally executed affair on stage-lights, sound system with music soundtrack, and two video cameras that enlarge whoever is speaking at the podium onto a big projection screen. During intermissions between scheduled portions of the rally, the big screen plays ads reminding independent reps of the call services they should push onto their customers and selling them office products bearing the turquoise Excel logo (these are sold by other companies, not Excel). The color turquoise is as significant to Troutt’s Excelers as pink is to Mary Kay’s followers.
There’s an "Us vs. Them" theme-a common trait at any multilevel marketing company’s meetings--in some of the speeches. At the Oklahoma City Power Rally, it’s "Us vs. City Slickers" and "Us vs. People with College Degrees." At the recruiting session in Dallas, it’s "Us vs. Corporations That Downsize You." Following these spiels, at both meetings there’s also a mention about how Excel appeals to all types of people. No matter what your age, race, or gender. Excel can work for you.
Interestingly, the one "Us vs. Whomever" that’s missing is "Us vs. Any Other Long Distance Telephone Provider." You won’t hear rallying cries against AT&T or MCI. If you were to walk in right in the middle of these speakers’ testimonials, you might be compelled to ask, "So exactly what is it that these people sell?"
While Excel’s independent reps do describe the savings in long distance that those who switch over will see (and the rates are indeed competitive with other providers’), these selling points are practically breezed over at rep meetings. You soon get the impression that selling Excel is not about beating the other long distance phone companies at their own game. It’s about beating the system. Period.
JUNE 1997 MARKED ANOTHER STAGE IN EXCEL’S GROWTH. The company announced merger plans with Telco Communications Group Inc., which Excel purchased for $1.2 billion. Telco, based in Chantilly, Va., brought to the merged entity-which retained the Excel name-its fiber-optic network of 100,000 miles. The combined customer base of the two companies totals 6.3 million.
The move was seen as ideal by Wall Street. Because Telco specialized in long distance service for business accounts, its network could be used by Excel’s customers during weekends and nights, the times when most domestic calls are made. For Excel, this meant that the company would no longer have to deal with leasing and reselling long distance from other companies, and depending upon the reliability of these companies’ networks- one of which had problems keeping up with handling Excel’s increasing customer base. Essentially, the merger turned Excel into a "real" player in the telecommunications industry.
Excel’s ride through Wall Street hasn’t been without its stumbles, however. From the time the company went public on the New York Stock Exchange, doubts by investors have plagued the company. While its stock hit a high of 47 on May 21, 1996, the number steadily declined as the months went on (settling to alow of 19 1/2 in July).
There had been three concerns on investors’ minds. First, the "aggressive"manner in which Excel’s accounting was being handled. Analysts observed that Excel would immediately report revenue from new customers but defer portions of its marketing costs, such as the commissions it paid its independent reps, and spread it out over a 12-month period. This, in effect, inflated net income-a practice, while technically acceptable, is frowned upon by Wall Street. From an investor’s standpoint, this raised the troubling question: What is this company really worth? It was reported that this method may have accounted for as much as51 percent of Excel’s 1995 net income of $44.4 million.
Adding to the uncertainty was the fact that Excel at the time did not own its own phone network. The company was merely a leaser and reseller of time from networks owned by other companies. Technical problems arose when Frontier Corporation’s network was unable to handle the increased traffic load of Excel customers on its lines. Rectifying the problem by transferring Excel’s customers to a new network didn’t go seamlessly. Paine Webber analyst Strumingher estimates that Excel lost as many as 280,000 customers in one quarter-people frustrated that they were unable to get their calls through. Though the loss seems large, in comparison with their customer base of 4 million, it was a blip on the screen. Troutt says Excel quickly made up the loss.
The third concern centered on Excel’s use of multilevel marketing. "Excel’s business model is met with a high degree of skepticism among Wall Street. Also, [the company] had a very disappointing second half of 1996. and Wall Street isn’t satisfied at this point that they can regain a sustainable rate of growth," says Strumingher.
While there are other publicly traded companies that use multilevel marketing, growth in these companies is traditionally perceived as limited. Eventually, it is projected, the number of independent reps will plateau and maybe even drop.
"The multilevel marketing strategy may have played a part in the [perception] that it’s going to be hard to sustain the growth rate-or any," says Farley Shiner, a stock analyst with Scott & Stringfellow in Richmond, Va. "Because once you reach a certain level of independent reps, it’s hard to keep adding more and more because each person, at least in theory, has a little less earning power." Troutt is undaunted by that. He considers Excel’s market not just America, but the globe.
To halt the devaluing of its stock and reassure investors. Excel announced in April 1997 that it would cease deferring its marketing costs. It also bought back $2 million of its stock on May 1, 1997-and then, a month later, announced an additional $S million buyback. These actions, viewed favorably on the Street, steadied and then raised the value of Excel’s stock. The merger with Telco also went a long way in swaying Wall Street opinion.
"It wasn’t until I saw the reemergence of the [stock’s] growth through the acquisition of Telco that I started seriously considering them," says Shiner.
"Instead of adding more reps to add more earning power," he goes on, "Excel reps now are in a position, [with] Excel and Telco together adding more services for them to sell. |to| add to their earnings without necessarily having to continue building that independent rep base.
"Not to say that there won’t be new reps coming on, but I don’t think continuing to grow that independent rep network is going to be key to [Excel’s] continued growth as it was a year ago."
Now the problem seems to be a lack of awareness. As Strumingher. who has opined favorably for Excel through the company’s trying times on the Street, puts it. "Part of the reason why Excel has not received a higher valuation on the marketplace is because it’s not yet been discovered by investors."
"1 think you have to be a long-term investor with us," explains Troutt. "We’re a relatively young company on Wall Street. We were in a transition period from a switchless reseller to a facilities-based carrier. Products arc coming, which will fuel a lot of growth. And we got an international expansion. The potential is ahead of us, instead of behind us,"
"What we want to do is get into local telephone," Troutt says of the company’s long-term goals. "We’ve competed with AT&T and MCI now for eight years. One thing we are is lean, mean, and we know how to market. And that’s what we’ll do locally.
"What you’re going to see in the next few years is that Excel is just going to explode in growth," he enthuses. "Let me tell you why: We put a chart together and took it to Wall Street in one of our analyst reports. It’s a takeoff of something that the chairman of the board of NYNEX said. He said, take our customers that have long distance, local telephone, some type of cellular, and some type of paging. You put [these products sold] together and they average, I believe he said, $200 per customer. We average around S28 a customer. So if we add no more customers, none whatsoever, and just [sell them additional products at] the same percent that the rest of the industry is doing, we’ll grow six-and-a-half times bigger than we are today."
He lays out his plan for Excel’s future: "The game plan is to grow in three areas: in the long distance business, [selling] multiple products to our customers, doing the same thing that we’re doing here in the United States but [expanding into] Mexico. Canada, Europe. Asia, all over the world. The time in history is today because all these countries are now starting to deregulate and open up their markets."
FOR KENNY TROUTT, EXCEL HAS PROVEN ITSELF IN EVERY way to be the model of the perfect company that he dreamed about. "I have not seen any downside to this. I’m more excited today than I was eight years ago when I started this business." he says. "By every means possible, those fears I had of trying to get away from [recession-vulnerable enterprises] has gone to the wayside for me."
He says he’s been presented with offers to sell his company, but the catch has always been that any new owner would want him to stay on board as CEO. He’s turned down these buyouts, but it’s easy to see why. He’s the one who makes Excel, well. Excel-an obvious fact that every suitor sees. So why should he bother working for somebody else? Additionally, it would be antithetical to the mantra that the company keeps preaching to its independent reps: taking control of your life and working not for others but yourself.
After the Oklahoma City Power Rally, when the crowds flock around Troutt, I manage to work my way to him and ask: "What does Kenny Troutt personally come away with from these get-togethers?"
The crowd falls silent, waiting for their leader’s words.
"What I come away with." Troutts says, "is seeing how this has changed people’s lives for the better."
Just as Excel’s army of independent reps takes the company’s long distance services and sells it to others, Kenny Troutt, in turn. does similarly for them. He takes the faith that these people have-or should have-already within themselves and sells it back to them.
The relationship works, because like them,Troutt also believes in the power of Excel, in its vision of ever-increasing opportunities. After all, it’s worked for him.