Better Communications for Better Investors: An Interview with the CFO of Gartner

In the 1990s, the market research firm Gartner was a Wall Street darling. Founded in 1979, the company had expanded during the 1980s, and by 1998 its top line was growing by close to 30 percent a year. Then from 2000 to 2004, top-line growth slowed, the core research business was down to 0 to 3 percent a year, and investors lost interest in Gartner's stock.

They returned after a new strategy was put in place in 2004 and a new CEO took over. With leading indicators returning to double-digit growth, the company attracted many investors, who quickly drove up its share price. But in the third quarter of 2007, the company announced that a single unit would report full-year results at the low end of the forecast range. Suddenly, many investors who claimed to have a long-term commitment to Gartner and who had taken up a good deal of its senior executives' time ditched the stock.

In a recent interview with McKinsey's Timothy Koller and Werner Rehm, Gartner CFO Christopher Lafond explained the company's current approach to investor relations: it now shapes its base of investors, carefully identifying those whom executives should meet, and does a better job of helping executives to prioritize their time and deliver their message.

The Quarterly: Gartner has changed its approach to communicating with investors in recent years. Describe for us what happened.

Christopher Lafond: When our new CEO, Gene Hall, joined, we established a long-term financial road map as a key element of our investor communications. We told our investors how we were running our businesses and where we thought we could drive performance over the long term—key measures, like revenue growth by business segment and margins.

And when we did that, we also identified the two or three metrics, for each segment, that would help investors understand whether we're on track. We wanted to be really thoughtful and clear with our investors about which metrics they should watch closely and why—and then we promised to disclose our performance, good or bad, on those metrics every quarter.

We haven't added a lot of new metrics. Instead, we've tried to remain consistent in our reporting, to explain why investors should only focus on these things, and to help them understand why these are the important ones. Like most companies, we have an enormous number of metrics we look at internally on a regular basis. But unless you're looking at the metrics every day, understanding the relationship of each metric to the final outcome can be really challenging. And our approach is that externally reported metrics need to be straightforward enough to attract investor attention and that the connection between the metrics and overall performance must be readily apparent.

The Quarterly: And how have investors responded?

Christopher Lafond: They have responded very favorably to the road map—I don't think many companies are as candid about where they think they're heading. The feedback on the nonfinancial metrics we report has also been generally positive, and investors think we provide plenty of insight. We're transparent about our results and why they are what they are, and most people haven't said they wanted much more.

Investors have wanted more data only on one of our key strategies—sales force effectiveness and expansion. Investors will always want more information, but ours have focused on this area in part because of its impact on our strategic direction.

The Quarterly: Do you also give guidance on these key operating metrics?

Christopher Lafond: Generally, we don't give guidance quarterly; we give it annually. At the beginning of every year, we'll say how we think we'll do for the year overall in revenue, EBITDA, and earnings per share. And since a number of our businesses are seasonal, we try to provide some color around the growth percentages that might be expected each quarter, because of the seasonality. So we may note, in our events business, that investors should expect, say, 10 percent of the annual revenue to be delivered in the first quarter and 30 percent in another. That gives investors some sense of how the seasonality impacts the business, without our giving a specific guidance number for every quarter.

Obviously, people can take the information we provide and create not only an annual number but their own next quarterly number as well. And, yes, we know what these numbers are. Yes, we pay attention to them. We try to do everything we can to help people understand our expectations for the quarterly skew of revenue and earnings. So if we think our analysts or investors have gotten it wrong, we'll often try, on the next call or Q&A session, to provide some more color to help them better understand it. At the end of the day, whether the analysts' consensus number is ours or not, it's viewed as our number.

The key to getting it right is transparency and consistency. When you put out a road map and a set of targets, you need to be prepared to disclose them—whether they're up or down. So we report on a set of consistent metrics every single quarter. We don't report on different metrics in different quarters because that one's bad and this one's better. We certainly listen to the questions investors ask and use them as one input into whether or not we decide to modify our disclosures.

The Quarterly: Have you changed metrics over time—perhaps because the business changed?

Christopher Lafond: We've tried to be consistent because our strategy has not changed. As our strategy evolves, we'll consider whether there are better metrics.

For example, we did improve our reporting around sales productivity. Sales force effectiveness and expansion is an important element of our strategy, so we were getting lots of questions from investors. Since we had been tracking an internal metric, we finally decided to put it out on the street. Now it's a regular part of our discussions with investors, both on the earnings calls and one-on-one calls. The rest of our metrics have stayed pretty stable, mainly because the strategy has been consistent and we think those are the right metrics to assess success.

The Quarterly: What would you say to a company that fears disclosing internal metrics because they might give competitors insights into its operations?

Christopher Lafond: My view on disclosure is that companies need to be really thoughtful about focusing on the right investors. It's not helpful to put out a bunch of metrics to placate investors focused on the short term, who are only looking for what will happen next quarter. All you're going to do then is help people make short-term decisions that don't support the value creation envisioned by the long-term road map. And, of course, we're not going to give away some internal secret that will help competitors jump on our coattails.

But we do want to attract investors focused on the long term, who can understand the investments we're making, why we're making them, and the impact they will have over the next three to five years. So we invest a lot of time in understanding what information those investors really need, what kinds of questions they are asking, and what we should give them to make sure they get our story. If a metric reflects something important for these investors to understand, then, yes, we'll disclose it. If not, we won't.

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