The Daily Blog

Good day. We've got a special treat for you. Our own Dave Joachim sat down recently with Life Time Fitness CEO, Bahram Akradi to talk turkey on how upper management funds and supports strategic IT projects. Here is the complete, unabridged version of the interview.

Name:	Bahram Akradi
At Work:	Leads corporate strategy and runs day-to-day operations.
At Home:	At Home: 41 years old. Single, one daughter. Hobbies include running, biking and piloting jets. Alma Mater: University of Colorado, BS in electrical engineering.
How He Got Here:	1990 to 1992: Started his first fitness club in Brooklyn Park, Minn. 1989 to 1990: Executive vice president, U.S. Swim and Fitness 1982 to 1989: Salesman for and later part owner of Nautilus Fitness Center, which would become U.S. Swim and Fitness and be sold to Bally Fitness Group

NWC: Your growth plans are pretty aggressive. You're talking about 50 percent per year. How much of a role does information technology play in that plan?

Bahram Akradi: Well, we looked years ago at how we were going to allow members from one part of the country to go to another part of the country and use their membership. The flexibility that our new platform offers us is amazing. We can, tomorrow, choose to buy a club in New York with 10,000 memberships, put a computer in there, get the browser set and bring that club into our network in literally a matter of two or three days. If a member from that club then comes to any of the other markets where we have a club and passes his card through--boom, he's up there [on the screen].

From the standpoint of simplicity of operations and convenience to the member, we can be safe that people aren't creating false, fraudulent membership cards. The alternative is we would be kind of making it inconvenient for our customers because we have to check to make sure they are not [misleading] us. Really, it was one or the other. Now we can have the security and control that we need, and at the same time we can have the convenience for the member.

At Life Time, we constantly think from the member point of view. Our campaigns, our drives, it's about the member point of view, and the ability to go online and schedule a massage or a personal training program or something. The only way that would have been possible is on the platform we have today. So that is how the technology, I think, is going to enable us to create a robust customer-oriented operation.

Bahram Akradi: We have gone through phases where I am involved and I am not involved. And I can tell you I should be involved all the time. I think because this is such a new area for most corporate executives, they just want to stand away from it and hire some guy who is the guru of IT in their minds and say, "OK, now we want this, you get it done.[per thou] But really the stakeholder in each process needs to be out of operations or marketing or accounting, and the IT group has to be working in tandem with that person to implement his needs.

Like everything else, the job of the CEO or a COO for the company is to make sure that there is a homogeneous approach to the objectives of the company, and I think without it, any company would be lost. It's not isolated to IT; it goes for any department. It's important to make sure that IT totally runs parallel with the strategic needs of the entire company.

That is correct. I have tried to change our company philosophy to what we call an inclusive decision-making process. We've gone from being a $60-million company to a $100-million company to a $135-million and, this year, to a $200-plus-million company. We are growing rapidly enough that if we don't change our mindset about how we are going to run the business, some of the ways that have worked in the past could very quickly become obsolete.

You're asking a tough question. If we were going to run 25 clubs for the rest of our lives, we would never get the rate of return on this member management system. Never. However, if we are going to be a 100-club operation, then this infrastructure can replace the things we do by hand and eliminate opportunities for fraud by salespeople and the night guy who could give a membership card to somebody who puts $50 in his pocket. It's unfortunate that you have to spend that money probably four or five years before you actually get the opportunity to reap the rewards from it, but it's a tough call. I think it's a strategic call.

I think, first of all, the competitive advantage that we have at Life Time Fitness is really not the MMS. That is one of 300 things, 400 things. If you were to ask what makes the Ritz Carlton the Ritz Carlton and the answer was only three things, well then every other hotel would take those three things and implement them. It's not any one thing that makes a great company a great company. The competitive advantage for any company is a combination of hundreds of little things that you do better.

What makes Life Time Fitness better than other companies is hundreds of little things from the marketing to the member point of view and the way we sell memberships to the way we do the color selection to the way we move the air in the building so you don't smell diapers if you are in day care or you don't smell chlorine when you are in the pool. We are thinking of things that you don't think about when you are in our facilities. You just benefit from them, and you enjoy the space. You don't know why you like it, but you like it. MMS is one of those hundreds of things that we do.

In the event that we share MMS with other top-10 health club companies, before you know it, they might be able to create some addition to what we gave them that is better than what we do, and then we can use that. What would happen to Windows if it was kept as a secret and nobody else could build on it? If you think about technology, it builds on itself, and if you build it and make it widespread in usage, then somebody else will innovate something new on that and it keeps getting better.

I want to balance this for you. We are not going out there and trying to market and be a software sales company. If somebody came to us and wanted our software and it was a logical deal, great, we do something with them. But, in the event that you think we are going to build an infrastructure to go out and pound on doors and say, "Oh please come buy our software,[per thou] I have no interest in that.

I'd like us to build a comprehensive software program with bells and whistles. Today, what we have actually deployed is a very capable chassis, if you will, for a car that could have just about any feature you want on it. But we still haven't developed all the features. The CEOs of the health club companies are going to be interested in those features. Their IT staff may be interested in the chassis, but the CEO isn't going to spend $20 million to buy the chassis. They are going to get excited when they can do online scheduling for their members and customer service, and it's all integrated. They can walk into their office and see their membership sales per hour and contacts per hour in all their different clubs or any one they choose.

Well, again, you can't put the cart in front of the horse. We are not a company that said, "OK, we want to bring in 30 of the best minds in software and build a software company and then go sell our software.[per thou] We are not Hewlett-Packard; [we are not] trying to be an electronic innovation company. We are a health club company, and we feel like this software is a necessity for large, multi-operation health and fitness companies in the future. In the same way that American Airlines built software [the Sabre reservation system] and other airlines said, "This is what we want to utilize for reservation systems,[per thou] we might be the company that finally ends up with a product that other health club companies of mass size would need to use in their offices for their member management.

I can't tell you that one benefit is more important than the other. They are both critically important. It's not so much that I'm worried about 50 people in a club getting a false ID card and using the club. It's the fact that at some point you start saying, "Oh, you know what, we have all these people using the club, we better make sure when people show up we ask them not only for their membership cards but also for their driver's licenses to make sure it's the right person.[per thou] Well now, all of a sudden, it's becoming annoying and inconvenient to the customer.

Then comes the idea of cross-selling. We never wanted to be just a health club company. We want to be a complete health and fitness answer, providing nutritional products and educational information. For us to be able to do that, we need to have a more robust way of communicating with our members. So again, if you look at all these pieces, they are ridiculously expensive for 25 club operations and 400,000 members. It's hard to say it's worth paying to do it, but we are going to be a 100-club operation. We are going to have $1.5-billion in assets deployed in bricks and mortar. At that point, the $25 million and $30 million in software infrastructure is not a big number at all. I can't recommend this for the small operations in our industry, but I can say it's an absolute necessity for anybody our size exploring ways to grow bigger.

Since the day the company started, we didn't want to be a health club company. I read an article 15 years ago about the railroad industry. [It said] that if they had thought of themselves as the transportation industry, who knows how big of a giant they would have been. But they decided to stay focused on railroads, and they became obsolete. I think the next example of that would be a newspaper company. Are you going to be a newspaper company or are you going to be an information organization? If you think of yourself as an information gathering and delivery company, there will be different ways of doing that. But if you think of yourself as a newspaper company, you will probably become just as obsolete as railroads.

So from the inception of Life Time Fitness in 1992, we have wanted to be a truly comprehensive health and fitness company. The area of health and fitness education is tremendous because people are hugely misinformed and they are more hanging on to myths than they are to reality. The area of nutritional products is very fragmented. So those are areas that I think are huge opportunities to build a true health and fitness company and athletic events and adventure travel and just a healthy way of life company. If you look at it from that perspective, I think we are focused appropriately.

What I'd like to do is look aggressively for a chief operating officer who is really a "been there, done that[per thou] kind of guy. I don't want somebody to come here to learn on the job. I want to find someone who has taken a business that parallels our standards of quality, like a Ritz Carlton or something like that, who has been around and taken a business to multi-millions or -billions of dollars, and who is schooled and disciplined and charismatic to come in to take over coordination of all the different disciplines of the business. I don't have to do that overnight. If it takes six months to assign the right person, that's OK.

Well, the direct mandate is not one more dollar per year. The actual [amount] that we spend on that area [is not to grow] in any shape or form in the next three years. We have a headcount in IT of 48 people, and we are going to keep that number constant. If anything is to be added, it will be a cost-of-living increase for those people working in that area. I think we need to take our revenues from $200 million to $400 million and keep IT relatively in the same place that it is today. I do believe that it's possible; I think it's responsible; and I think it will then bring the IT cost to a reasonable percentage of our corporate office expense.

We raised probably around $95 million from the inception of the company, which seems like a fairly good number. We really had no intention of raising additional capital last year, but the debt market really changed our tune. As a result, I think many businesses needed to restructure their finances and maybe have more equity if they want to maintain growth. We did not want to slow down our growth, and the way to maintain the growth of the company was by just bringing in additional capital. Most of that capital came from existing partners just to have the ability to build our six clubs a year.

Last year we raised $20 million. The year before we raised $45 million. And, frankly, right now, with the success of the company -- and we have been able to hit our numbers last year despite the economy and everything, and this year we are significantly ahead of plan on our membership sales and our supplements, etc. -- we don't need to raise capital. We can actually add additional facilities into our expansion plan and pay for them.

The money spent on MMS over the last three to four years has come from the overall pool of our capital, which is retained earnings and VCs and also additional debt structure. We have a comprehensive pool of money, and we use it for whatever we need.

It was absolutely not technology. It was 100-percent club expansion.

I really see us as a bigger player in the overall health and fitness category. I think we have the opportunity to expand our brand of Life Time Fitness to potentially one in which you would be buying our vitamins even if we don't have clubs in your market. You will be buying our protein bars and other products because you will know, again, that it is the highest possible quality at a great value. And that is where we are going to continue to march forward.