Made in Detroit

Peter Karmanos Jr. has tapped his blue-collar work ethic and a knack for discovering the next big thing to build Compuware Corp. into a global information-technology power-house — but his latest move could be an industry game-changer.
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Peter Karmanos Jr., the impatient, foot-tapping chairman and CEO of Compuware Corp., wasn’t about to sit around waiting for an economic recovery. The IT company he co-founded had pulled off a 52-percent increase in net income, despite a miserable economy that sent Compuware’s revenue tumbling from $269 million in the year-earlier second quarter to $217 million by the end of September.

In October, he’d snagged Gomez Inc. — a leading company in troubleshooting and fixing Web-based applications — in an all-cash deal for $295 million, filling in a big hole in the company that’s been known for fixing mainframe computing problems for more than 30 years. Analysts such as Jean-Pierre Garbani, from computer-research firm Forrester, called the acquisition “potentially game-changing” for Compuware.

The gain in income — $28 million versus $21 million the year earlier — and the Gomez acquisition showed that Karmanos’ plans were coming together for putting the company back on a sustainable course for growth after several difficult years. That meant Karmanos, 66, could think about retiring or at least stepping back from day-to-day operations in the next year or two to spend more time with his twin sons and his wife, Danialle, and to manage his hockey teams (he owns three, including the Carolina Hurricanes) so “they don’t keep losing nine games in a row,” he says.

Successfully managing the cycles of business, and life, are perhaps what best defines Karmanos. Before he ever laid the foundation in 1973 for a professional services company serving the burgeoning computer industry, he showed a knack for confronting problems and devising solutions.

American Motors,” he recalls. “The plan was for me to finish school and then start a family. The family came long before we thought. American Motors fired her when she got pregnant. Her health insurance ended, as well. Flat in Dearborn, baby on the way, neither of us had a job.”

Continuing with a full load at Wayne State — he was pursuing a mathematics degree, with the end goal of teaching — Karmanos quickly found that by servicing and installing mainframes, he could make three times what a math instructor could. So he dropped out of school and went to work full-time.

Karmanos’ deep ties to Detroit — the hometown he alternately loves and is frustrated by — have never left him. “I’m angry alright, but resolved. I think Detroit will end up being just fine. There are a bunch of things, decisions made years ago, that created the situation we’re in,” he says, seated in a leather armchair looking over downtown toward the Detroit River. “It’s still a remarkable place,” he says.

In fact, it’s hard to disconnect Karmanos from Detroit.

He is one of its business icons — a hometown boy who made it big but stayed and thrived in Michigan. Karmanos believes the blue-collar, roll-up-your-sleeves Midwestern work ethic at Compuware comes directly from its local roots. He says he learned his business skills working the counter at his parents’ diner on Detroit’s west side, and that the company has benefited from serving the technology needs of the city’s biggest companies: the American automakers that made Detroit into the world’s center for manufacturing.

Moreover, in the almost four decades since he founded Compuware with two friends in 1973, Karmanos has invested his time, money, and energy in the various turnarounds the city has tried. One of the biggest investments came when Compuware moved into a $400-million, 15-story glass tower in the center of Detroit at Campus Martius Plaza in 2003. The plans for the move started under Mayor Dennis Archer and came to fruition under Mayor Kwame Kilpatrick, which brought the young, vibrant politico in contact with Karmanos, one of the city’s leading businessmen.

Karmanos remains a supporter of the former mayor, whose scandalous second term was cut short in September of 2008. Following Kilpatrick’s incarceration last February, Karmanos offered him a job at a Dallas subsidiary, as well as a $60,000 loan.

Karmanos’ generosity also extends to the world of philanthropy. In addition to donating money to numerous causes, he has provided gifts totaling more than $50 million to establish the Barbara Ann Karmanos Cancer Institute in Detroit, one of the nation’s finest.

To many, it seemed that Karmanos was being charitable when he moved Compuware from the northern suburbs to downtown Detroit. But Karmanos balks at that perception. “We moved here because this is the best business location,” he says. “I didn’t do it out of any feeling of giving back to Detroit. It’s in the center of where everybody lives, and some of our biggest customers are right next door. I wasn’t being altruistic; I’m rarely altruistic about anything.”

That statement speaks volumes about Karmanos. Others have cast him as a city booster, a philanthropist, or a lucky entrepreneur who started a tech company in 1973 with Tom Thewes and Al Cutting (both now deceased) — with $9,000 pooled from their collective income-tax refunds.

But Karmanos tells a different story, harking to the 1960s when, as a young computer technician, he came upon the idea for a business. He was in his early 20s and working for the architectural engineering firm Giffels & Rossetti. The architectural firm had survived a major financial scandal in which its bookkeeper had embezzled hundreds of thousands of dollars from the firm.

“They were late in putting together any computer usage because they were careful with their accounting,” Karmanos says. He had the job of installing a computer system and remembers a day when two executives were arguing over who was going to use the computer. “The head of engineering turned to me and said, ‘Do you know how much we’ll have to design to pay for this computer room for just one year?’” Karmanos re-members. The number was in the tens of millions, Karmanos says, and it was then that he decided that if he was ever going to start a business, it would be in computers — a full decade before he conceived the name “Compuware” with co-founder Thewes at a Northland Shopping Center restaurant.

“Tom and I sat there throwing around names,” he recalls. “Computers and software … Compuware. … Being two technical geeks, that was about the best we could do.”

He met Thewes — who would come to share his passion for hockey as co-owner of the Hurricanes — when he was installing a computer for a company called Visual Services, housed in the iconic Penobscot Building. The two worked through the day and into the late evening, finally finishing their work around 2 a.m. “As we walked out,” Karmanos says, “Tom looked at me and said, ‘I like the way you work,’ and I said, ‘I like the way you work.’” The two ended up working together at a professional services company called Technalysis Corp. By the early 1970s, Karmanos had become manager of the company’s Detroit office and was ready to branch out on his own. “I asked Tom if he wanted to join me, and he didn’t hesitate,” Karmanos says. They then approached Honeywell salesman Al Cutting to join the team. The three decided to start the business April 1, 1973, so they could use their tax refund checks to support the business.

If Karmanos learned about the importance of computers in his early 20s, the rules by which he ran the business were learned working at his parents’ diner in his teens. “I learned the economics of a small business there at the diner,” he says. “My father used to say a diner has so much revenue every day. So the easiest way to think about it is you have a cigar box, and you put money in [it] when someone paid you, and then you took money out to pay for meat, etc. If you had money left at the end of the day, the business was OK. You always wanted to take in more money than you spent. I never forgot that.”

That simple concept has kept Compuware from falling into traps, such as taking on too much debt or dabbling in risky investments, says CFO Laura Fournier. “Analysts would say to us, ‘You should borrow money, you should buy back stock, you should buy companies,’” she says. “But Pete always reverted … to that cigar box. We’re debt-free during this recession, which means we could take the decline in revenue.”

But if the company is driven by financial conservatism, Fournier says what brought her to Compuware 20 years ago and what’s kept her there is

Karmanos’ dynamism and vision of what the company could achieve. As with several executives interviewed for this profile, she vividly remembers the conversation she had with Karmanos when she decided to join the company.

“I was pondering a job offer from Ford,” she says. “It was a very good job. The CFO of Compuware had heard I was going to leave [another company], and he wanted me to interview with Pete. I had a great respect for Pete, but the Ford job offered the whole nine yards; the benefits were great.”

Fournier describes herself as a conservative. “I’m an accountant,” she says, by way of explanation. So for her to consider joining Compuware — still an upstart, privately held technology firm — would take quite a bit of persuading. “Pete was very direct. He told me, ‘You’ll be a brick in the wall at Ford,’” she says. “I came out of the meeting with the sense that Compuware was never going to sit on the sidelines. You get caught up in Pete’s vision, and you believe in him.”

She says she’s never regretted her decision, even though she calls Compuware “challenging” and “rowdy” at times. “But each new position in this company was mine to take and mine to keep,” she says. “Here, humble is good; it’s a place where your work will speak for itself.”

Fournier arrived as Karmanos and his partners were considering taking the company public in the early 1990s. The next decade would be an incredible ride, one that Karmanos looks back on as the era of his biggest achievements — and one of his biggest mistakes. “We thought if we could build the company to about 20 to 25 people, it would be a nice practice,” Karmanos says. “But business either gets bigger or smaller; there was no such thing as status quo.”

Getting big is what Compuware did throughout the 1990s. When the company went public in 1992, it had 700 employees and $250 million in revenue. For the initial public stock offering, Morgan Stanley estimated its market capitalization at $500 million, Karmanos says. In just seven years, the company would grow exponentially to 14,000 employees and $2.2 billion in sales. Its market capitalization hit $16 billion. “That was really impressive,” Karmanos says. “[But] it was frightening; it was too fast — [it] wasn’t sustainable. We were the victims and the beneficiaries of Y2K.”

During those heady years, Compuware became the company other companies relied on to fix problems associated with Y2K, a problem created because many computer applications were written with dates that expired in 1999. Compuware’s employees wrote a vast amount of code to fix the problem, but when Y2K arrived — without the major meltdown people were expecting — much of Compuware’s work evaporated. For Karmanos, the past several years have been about shepherding the company back down to $1 billion in sales with 4,275 employees and a market capitalization of about $2 billion.

The retreat has been much harder than growing a business. “It’s a difficult process to choose what you need to get rid of or downsize — or [right-size],” Karmanos says. “It’s like walking through a mine-field.”

Amid the downsizing, Karmanos may have made one of his smartest moves: buying automotive network Covisint in 2004, on what seemed the spur of the moment.

Bob Paul, then president and CEO of Covisint, vividly remembers meeting Karmanos for the first time. One of Covisint’s board members, former General Motors chief information officer Ralph Szygenda, had asked Paul to lunch with Karmanos. The lunch was just days before Paul would have to make recommendations to his board on what company Covisint should sell to.

“I told Pete that, honestly, it couldn’t happen,” Paul recalls, “because I had a board meeting in just three days.” For the next 45 minutes, Karmanos showed Paul around the new Compuware headquarters, and the two talked about Detroit. As Paul was about to leave, Karmanos asked him again to explain why Compuware didn’t have a shot at the business.

“It’s Thursday,” Paul told him, “and I have to recommend a company by Tuesday.”

Karmanos didn’t flinch. “You’ll have our offer on Monday,” he said.

By Monday night, Paul was convinced that his board should accept Karmanos’ offer. A few months later, Compuware closed on the acquisition that would give the company access to a booming business — linking suppliers with each other and with the auto industry. Covisint has since branched out into creating supplier networks for the health-care industry.

But Compuware gained more than entree into a new business. In Paul, Karmanos found an executive who shares his views on how to reorganize the company for the 21st century. Paul has spearheaded major changes at Compuware that both men believe will keep the company from the cyclical ups and downs that have dogged it over the years. “One of the things we need to solve is consistency in quarterly performance,” Paul says. “Our share price is low because we have these dips.”

Paul says that instead of focusing on the quarter at hand — “and throwing everything we have at that quarter to make the numbers” — the company has to create sustainability. The way to do that, both Paul and Karmanos believe, is to not be the biggest, as it was in the late 1990s, but to be the best.

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