Threshold Resistance (10 page)

In a very real sense, with every personal exchange we were overcoming threshold resistance—their resistance to us. Throughout life, everyone faces similar challenges. Maybe it's an acquaintance you would like to know better, a banker you want to impress, or an investor you'd like to buy shares in your company. In each of these scenarios, the most important things are to listen and be yourself. Because Jeffrey and I were just as interested in the quality and concerns of Sotheby's management as they were in our vision for their business, we listened carefully to their concerns and ideas. We also didn't pretend to be auctioneers or authorities on Chinese porcelain. We were businessmen, marketers, and lovers of art.

Despite its unorthodox choreography, the dinner was a success. You could sense that these executives loved what they did and had the greatest respect for their company. We seemed to have a
common view of the business and where it could go. Encouraged by Brunton and Westmorland to make an offer, I bought out the interests of Cogan and Swid and assembled an investor group. Joining me were several of my Irvine Ranch partners: Max Fisher, Henry Ford II, and Milton Petrie, along with Les Wexner, Connecticut residential real estate executive Bill Pitt, art publisher Alexis Gregory, Italian businessman Emilio Gioia, and Ambassador Earl E. T. Smith, the former mayor of Palm Beach who had served as our nation's last, pre-Castro ambassador to Cuba. Each of my friends brought valuable perspective and relationships to the table. I put up $38.5 million for 60 percent of the stock, while my fellow investors contributed around $30 million, and we borrowed $70 million from Chase Manhattan Bank. Members of the art press, especially Rita Reif of the
New York Times,
were apoplectic over the $139 million purchase price, which they considered far too high. Their analysis of the deal reminded me of the early reviews of my Irvine Ranch acquisition. For the record, as I write this book (October 2006), I sold a portion of my Sotheby's stock in 1992 for about $100 million, received dividends over the years the company has been public of $100 million, received $168 million in September 2005 for half my remaining stock, in April 2006 sold 3.98 million shares for $110 million, and still own a 4.9 percent stake valued at more than $100 million (based on the company's share price as of January 16, 2007). Even when you factor in inflation, that's not a bad performance for an initial investment of $38.5 million. I respect Rita and her art journalist colleagues very much, but rarely consult with them for stock tips.

Our offer was enough to close the deal with Sotheby's public shareholders and place the matter before the UK's Monopolies and Mergers Commission, which must approve any investment in a public company by a foreign investor of more than a certain percent.

The situation was complicated by the fact that Sotheby's wasn't just another British company. It was considered a British national
treasure. For centuries it had honorably administered the transfer of precious property—first books and then the entire spectrum of fine and decorative art—from one generation to another. The distinguished members of the Monopolies and Mergers Commission wanted to make sure that an American owner would respect the institution's traditions and assure the company's survival.

My hearing before this august body should have been intimidating, but I actually enjoyed answering the commissioners' questions. I also apparently raised some eyebrows when I personally greeted each member after they took their seats in the chamber, introducing myself with a handshake over the dais. Apparently, that had never been done before. But we got along famously. The transaction was blessed and completed in September 1983.

Sotheby's was now a privately owned company incorporated in Michigan with dual headquarters in London and New York. Just a few days after taking control, I turned my attention to the firm's most important asset—its people. It was time for some straight talk and tough love. I had the deepest respect for the expertise and talent of our associates, but I was far less satisfied with the level of service we provided to our clients at every level. “Being knowledgeable,” I explained, “does not give us the right to be rude.”

From now on, Sotheby's was going to embrace a service mentality and treat everyone with respect. We were going to introduce the auction experience to a broader audience of consumers around the world and encourage the development of new collectors and connoisseurs. Together we were going to open up and make more transparent what had been traditionally a closed and unnecessarily intimidating business.

In short, we were going to break down the threshold resistance that had been holding us back and stifling the art market for as long as I could remember.

To deliver this frank but energizing message face-to-face, I started
the day with an all-staff meeting in London, jumped on the Concorde, flew into Kennedy International Airport, and addressed the troops in New York as they arrived for work. The Concorde, rest its soul, made the trans-Atlantic trip in three and a half hours. So with the five-hour time difference and the absence of e-mail, I was able to limit the preemption of my message between offices.

In both London and New York I could sense sincere enthusiasm and a great deal of relief. It's stressful to come to work wondering if your company and job will survive the day. It's equally frustrating to see little growth or improvement in your industry. That's what it had been like for the employees of Sotheby's. If nothing else, I offered resources, stability, and a much clearer vision of where we wanted to go. Even though change was a significant part of my message, the vast majority of my new colleagues in London and New York welcomed the challenge and expressed their support.

Over the next few years we had great fun breaking down barriers, winning new customers, and selling some of the most interesting art, antiques, and collectibles ever offered at auction.

We also made a few enemies.

M
anagement consultants and business school professors have developed all sorts of methods and approaches to positioning or repositioning a company for growth. The
Harvard Business Review
introduces new acronyms and fancy names with every issue. Developing things like missions, visions, and values is certainly helpful in getting everybody on the same page. But there is one other thing I like to do to stimulate management's creative juices.

Identify the forces and factors keeping your customers from coming over your threshold. Be honest. Brutally honest. If you're operating a restaurant, consider the quality of the food as well as its price and presentation. Does your menu appeal to your clientele? Analyze the comfort and character of your premises. Does the music playing in the background set the proper mood? Is your location convenient for your target customers? What about your waitstaff? Are they dressed appropriately, and focused on service and responsiveness? What restaurant options are in your immediate trade area, and what makes them popular?

If you're a trustee of a private high school struggling with declining enrollment, be honest, brutally honest. Is the faculty top-notch; are the facilities competitive? Are your graduates getting into the
colleges they and their parents respect most? Do you offer the right sports and extracurricular activities? Is your reputation what it should be? Are there any major problems with the student body—drugs, discipline, attitude?

Analyzing threshold resistance is difficult because it's always easier to talk with the existing customers, the ones who have already crossed over your threshold. Of course, their opinions are critically important, and you don't want to lose their business or weaken their loyalty. But to grow, you have to bring new people into the store. Most companies—especially new businesses—don't have the money to bring in Yankelovich as we did at A&W. But even firms with very small budgets can take the crucial first step of being brutally honest with themselves. Challenge your management team with this assignment: “Let's pretend that we leave our company and create the toughest competitor we've ever faced. What would we do to beat us? How would we do things differently and better? What would we keep the same? Remember; we want to win, and the opponent is us!”

Shortly after we took Sotheby's private and I had recruited a new chief executive officer, I posed similar questions to the auction house's senior managers. “Let's walk across the street and start a new art auction company to beat our brains in,” I said. “Don't hang on to the things we've been doing for two hundred years unless they're worth saving. You know our weaknesses, you know our strengths. You know the improvements you've always wanted to implement but were told you couldn't. Now's your chance. Sotheby's is the best auction company in the world, but we can beat us!”

We had a creative team in place, and this fun but very serious exercise got their creative juices flowing.

Michael Ainslie, our new CEO, stepped right out of central casting. Just forty-one years old, the tall, preppy southern gentleman exuded confidence and trust. Educated at Vanderbilt and Harvard, he
had joined us from his role as president of the National Trust for Historic Preservation in Washington, D.C.

John Marion, our vice-chairman, was a legend in the auction world. His skills as an auctioneer and salesman were exceeded only by his Irish wit and charm. John, whose father was Louis Marion, an early partner and later the president of Parke-Bernet, an auction house in New York (which Sotheby's purchased in 1964 to establish a presence in the U.S.), had literally grown up in the business and had commanded the gavel at some of the most high-profile auctions in history. It was not unusual for customers to consign their property to Sotheby's with the condition that John be the auctioneer on the evening their treasure was offered for sale.

Diana “Dede” Brooks, who had joined the company several years earlier essentially as a volunteer, was a decisive, fast-rising financial executive. She had been a member of the first female graduating class at Yale, and her background as a senior loan officer at Citibank made her stand out from the typical Sotheby's associate. Frankly, so did her energy, self-assurance, and aggressiveness (traits that would later metastasize into recklessness and dishonesty).

James Lally, an accomplished Chinese porcelain expert with an MBA, was the president of our North American operations. Jim, who today runs his own very successful art dealership, never appeared comfortable in our early strategy meetings. I'm not sure he bought into my exercise, and I know he must have felt the heat of Dede's ambition.

Michael, John, Dede, Jim, and I went to work inventing the auction house that could beat Sotheby's at its own game. The ideas that emerged from these brainstorming sessions directed the business strategy that would dramatically increase Sotheby's sales. Looking at the decade of the 1980s, Sotheby's auction sales increased five-fold from $573 million in the 1979–80 season to $3.2 billion in the 1989–90 season. I believe we propelled the entire art market—auction houses and dealers—to extraordinary new heights. When it came to developing
centers, the Taubman Company had always taken into account external and interior design, image, branding, and an understanding of retailing psychology. The same would hold true at Sotheby's. And just as our malls had challenged the insular department stores that crushed competition and controlled the distribution of brands, we aimed to bring new retail customers into a closed industry in which a relatively few individuals had been distributing the spoils.

Initially, there were small, subtle changes. We dropped the Parke-Bernet identity (the company had been called Sotheby Parke Bernet since the acquisition), and simplified the name to “Sotheby's.” The subtext “Established 1744” was added to the logo to underscore our venerable history. We redesigned the auction catalogs printed for each sale, establishing a single worldwide graphic standard with much larger type. The 9-point type we had been using was too small to read for anyone old enough to afford fine art!

I immediately saw there were opportunities to dramatically improve the physical space at several Sotheby's office and auction facilities. Apparently, I made quite an impression on the Sotheby's staff in London when I took a practical but admittedly unorthodox approach to space planning. Author Robert Lacey in
Sotheby's: Bidding for Class
writes:

On one of my less acrobatic space-planning tours of the New Bond Street facilities I noticed that there was a little-used storage
room off the lobby. Although it had a very low ceiling, the space was perfect for a café to enliven the lobby and create a more welcoming feel to Sotheby's historic front door. We raised the ceiling, added a kitchen on the level below the lobby, and installed a motorized dumbwaiter to deliver orders to the café. A simple video system allowed the kitchen and waitstaff to communicate effectively.

Shortly before we opened for business, I received a call from a senior Sotheby's executive in London. He was nearly hysterical and was concerned that our café looked too much like—perish the thought—a
French
café, one you might see on the streets of Paris! That was exactly the look we were after, and I assured him that our café would fit right in and be attractive to people from all over the world. And that's precisely what happened. The Café (which is what we unimaginatively named it) was an instant hit. Clients stayed longer, staff held small meetings over lunch, visitors stopped in for tea and discovered Sotheby's for the first time. We introduced a lobster sandwich on brioche bread (a London first) that put our simple but distinctive cuisine on the map.

To further improve the customer experience in our London facilities we doubled the size of the main auction room and created a corridor that connected through the building from New Bond Street to Conduit Street. This helped rationalize the pedestrian flow and brought all departments together.

In New York we added skyboxes in the main auction room to add capacity and offer privacy for consignors and bidders preferring a lower profile. More importantly, we broke down the barriers between our people and our merchandise. In New York, most of the goods were stored away, out of sight in a warehouse uptown, which was hardly the ideal venue for looking at fine art. So we added six floors to our converted Kodak warehouse on York Avenue to create a ten-story, 400,000-square-foot complex where our experts could work in close proximity to the artwork, and where clients could easily view whatever was coming up for sale. Building a new headquarters
also helped create synergies. Once the renovation was completed, in spring 2000, a client visiting to meet with the jewelry expert might pass by the furniture department and see the perfect side table for her living room. We opened up the interior space to put essentially everything on view. The new facility also features fantastic exhibition and sales space.

To expose our sales to an international audience we expanded the use of traveling exhibitions, which allowed potential bidders in Japan and Germany to view items that would be coming up for sale in New York or London. By making better use of our sixty offices around the world, we built larger audiences of bidders and consignors. We also formed an international advisory board to strengthen global relationships and fine-tune our client services. Assisting us were such respected business and cultural leaders as Baron Hans Heinrich Thyssen-Bornemisza de Kászon from Switzerland, Seiji Tsutsumi from Japan, the Honourable Sir Angus Ogilvy from the UK, Ann Getty from the U.S.A., Giovanni Agnelli from Italy, and the Infanta Pilar de Borbón, Duchess of Badajoz, from Spain.

We reallocated our marketing dollars away from institutional advertising to public relations and our client services staff. Our press office, strengthened by the hiring of Diana Phillips in 1985, created excitement and buzz surrounding the sales, and the client services staff was the heart and soul of our point-of-purchase marketing efforts. We also developed promotional programs to increase the number of subscribers to our catalogs and publications. Sotheby's
Preview,
a glossy magazine highlighting upcoming sales, profiling experts and clients, and celebrating the joys of collecting was significantly upgraded and transformed into an advertiser-supported publication. The thinking behind these moves, and behind much of our efforts at Sotheby's, was relatively simple. Auctions can be elegant and highly efficient ways of selling goods, anything from Pez dispensers to Treasury bonds. But they work best—they get the largest possible price for the seller—only if there are a large number of bidders.

To make sure I could sleep at night, we discontinued the sale of shrunken human heads, elephant tusks, and Nazi memorabilia. We also created an international art registry with the participation of law enforcement agencies around the world to help recover stolen art and limit the market for fakes and forgeries.

To retain and reward our talented people we introduced a phantom stock option program, giving more employees a stake in the company for the first time. Sotheby's had never had a problem attracting bright people, but many experts came to Sotheby's for training and then went on to become art dealers. Offering stock to our key people dramatically improved our retention, but since we were a private company it was difficult to objectively value the stock. It was primarily for this reason that we took the company public in 1987. The stock initially traded on both the American and London stock exchanges, and Sotheby's shares began trading on the New York Stock Exchange in 1988. The success of Sotheby's shares and the generosity of our stock option program made a career in the art auction business more financially rewarding than it had ever been before.

No one inside or outside the organization challenged the validity of these important but subtle initiatives. The same couldn't be said of some of the more fundamental innovations, which aimed to shake some dust off a very sleepy and insular industry.

In our brainstorming sessions we discussed our three primary groups of customers: art dealers, museums, and individual collectors. We came to the conclusion that dealers were both customers—our most important customers—and competitors. Dealers accounted for more than two-thirds of our sales. This reality was one of the reasons, in my opinion, that our service mentality had been so lacking. Professional dealers required far less hand-holding, promotion, and follow-through than individual buyers. They came to exhibitions with their clipboards in hand and dispassionately inspected and assessed the goods. At auction they bid with the same discipline and detachment. Essentially, they were superconfident customers
looking for inventory to buy at wholesale and mark up in their own shops, where they played the role of salesman and adviser to less confident retail buyers. They were rewarded for this service by higher margins, just as Neiman Marcus is rewarded for displaying and selling Polo tennis shirts at full price.

In a more negative light, dealers were also known to manipulate the auction process, forming illegal dealer rings. In what came to be called “the Wednesday lunch,” a group of dealers would determine who would buy what at what price at an upcoming auction, and set a date for their own private auction after the sale. In this way the goods were divvied up among the ring at the expense of the consignor and the auction house. Certainly not all dealers were involved in this skullduggery, but it was pretty clear to us that this was a widespread practice. This collusion had the effect of making what should be the ultimate efficient market—an open auction—into an inefficient one.