One Great Leap for frog design
The record rains that have been battering California this Spring have taken a day off, and a glorious sunshine bathes the green hills and horse pastures in the corner of Silicon Valley where frog design is headquartered. As Hartmut Esslinger arrives at his favorite sushi haunt in his lemon-yellow 2006 Porsche Carerra 4S, the 61-year-old co-CEO of frog design seems as relaxed as his unruly mane of hair.
And for good reason. It's another banner day in Esslinger's career -- one that many industry insiders figured was nearing its end when he and his wife, co-CEO Patricia Roller, sold the company to Flextronics in 2004 for roughly $25 million. But earlier in the day, news had broken that frog had been part of a $900 million sale of software companies, all acquired by Flextronics (FLEX) in recent years, to private equity giant Kohlberg Kravis Roberts & Co. Neither Esslinger nor Roller, who handles frog's business side, would comment on the purchase price, although sources say it was more than Flextronics paid for their company in the first place. "We're very excited," says Esslinger.
Indeed, both of frog's co-CEOs say the company has been growing in important new ways since becoming part of Flextronics, a $14.5 billion-a-year contract manufacturer. At the time of the deal, most industry insiders figured the pair was cashing out, and that Esslinger would ride his Porsche into the sunset after a career marked by highlights such as coming up with the design language for Apple's (AAPL) first Macintosh.
Others felt sure that frog, which had already lost some of its edge in product design, would lose many of its top designers once it had been subsumed into Flextronics. After all, huge contract manufacturers win by pinching pennies and focusing on brass-tacks operations.
But that isn't what happened. During frog's time with Flextronics, the company expanded its capabilities, its founders say. Previously, frog had focused on industrial design and on designing interfaces for Net-based offerings, such as Yahoo!'s (YHOO) Music Unlimited digital music service.
Now, frog better understands the linkages between industrial design and more back-end disciplines, such as supply-chain management and manufacturing. That has enabled it to be a more useful partner for companies that were seeking to find affordable ways to create stand-out products, à la Apple Computer.
"Apple does a phenomenal job designing what people want to buy, and then armwrestling suppliers to get the products made at acceptable margins," says Roller, 41. "It's that easy. But most companies can't do it. KKR has seen that this is the future, and that we can help them get there -- and that we have very little competition."
Not everyone agrees with that, of course. Bob Brunner, a partner with Pentagram Design in San Francisco, wonders if frog's broadening focus is due to its reduced stature as a pure product designer. "They don't have the cachet they used to have [as product designers], so they pitch themselves as this more strategic resource instead," he says.
But Roller insists frog has been performing well. "We exceeded our goals under Flextronics," she says. The company had hoped to hit $36 million in sales in 2005, but logged $37 million, while maintaining profit margins at around 15%. Also, the company has grown from 180 people in 2004 to around 300 now.
As such, KKR will be getting a frog with a larger sense of itself. In particular, the company aims to help clients in two new areas. The first is market research. Too often, companies rely on survey-style data purchased from market researchers such as Gartner Group. Rather than just learn the size or attributes of the market, frog's goal is to take a far more hands-on approach, interviewing prospective customers and then creating prototype models to further refine the offering.
Says Esslinger: "For the first time, we have the ability to move upstream and offer more consulting services" -- capabilities that will help frog compete against consultancies such as Ideo and Design Continuum. Esslinger says working with Flextronics enabled frog to sell not only to design chieftains but to CEOs and COOs.
"We now know how to have a much higher-level conversation with customers," says Esslinger. Insiders say this has helped it land broad-based arrangements with General Electric (GE) and Hewlett-Packard (HPQ), frog's largest current customers.
The second new focus is what Roller calls "execution." As a result of being part of Flextronics, frog knows the base of original design manufacturers (ODMs) and key parts suppliers. "We have learned how to negotiate with manufacturers, to find out when they're the right partner," she says.
Roller says frog, one of nine formerly independent businesses sold to KKR, will remain an independent entity within the yet to be named umbrella group. The duo will remain in charge and will report to Ash Bardwaj, the Flextronics executive to whom they've reported for the past two years, who's leaving to run the new entity. Roller says details of the frog founders' contract are still being worked out but that they have incentives tied to their ability to lift frog's profitability.
The move represents a dramatic turnaround from the reasoning behind the original sale to Flextronics. Back then, the contract manufacturer's CEO, Michael Marks, was intent on expanding the company's focus on manufacturing to better match the Asian ODM's skill at product design. That led him to buy not only frog, but nearly a dozen other software-focused entities.
But Marks stepped down as CEO in January when he joined KKR. When his replacement, Mike McNamara, decided to refocus on manufacturing, Marks championed the idea the KKR should buy the companies, say sources. But Roller says Marks wasn't involved in the transaction itself, given the danger for conflicts of interest.
"Michael is a visionary in terms of understanding where the industry needs to go, but he was very hands-off, for the obvious reasons," says Roller. Now that the deal is done, it just remains to be seen how well frog will adjust to its new pad.