The Cogent Model
In 2001, Internet service providers were consolidating because of falling prices. Major carriers were filing for bankruptcy. Cogent Communications, however, bewildered the industry with an audacious model, offering rates to businesses at nearly 2 percent of what their competitors were charging.
Still, early business partner Jay Adelson of Equinix cautiously predicted their potential to Forbes in 2001: “If they get enough scale, they could make money. But that’s ‘could’ with a capital ‘C.’ ” And Cogent did exactly that.
In 2001, the organization entered their 500th building. In 2002, they went public, and by 2008, they carried 17 percent of all internet traffic. Today, they are in more than 190 major markets, growth sustained by caution with a capital C—actually, five capital Cs.
The Five C’s
The Five Cs are a set of guidelines that CFO Tad Weed credits for Cogent’s success in an inhospitable market: communication, consistency, centralization, cost reduction, and cash-flow positive. Necessity led Weed to formalize these principles; Cogent now services forty-one countries, and during that rise, they needed to ensure the organization scaled consistently.
“We recognized when we went international that it’s a little harder to communicate with your team,” Weed recalls. So, at Cogent’s first worldwide finance team meeting in 2006, the five Cs were finally rolled out as formal guiding principles.
Ten years later, anyone making important decisions at Cogent follows the five Cs. As Weed works to keep Cogent scaling sustainably, this system provides an elegant solution.
Of all of these overriding principles, communication comes first. With the expansion Cogent has undergone, disorganization is a major risk. Some of the company’s major leaps—going public, becoming a tier-one provider, and expanding into Europe—all happened through acquisition.
“Communication works, especially when you’re expanding internationally,” Weed says. “We’re not meeting-mongers, but we have consistent meetings, tracking issues that we’ve determined we need to work on. That’s communication.”
To monitor a growing business, consistency is Weed’s next principle. Cogent primarily sells one product and keeps processes the same across countries whenever possible. “The more flavors you have, the more difficult it is to manage your business,” he warns. And while he admits it is not always possible with international differences, Weed tries to keep every process standardized, from hiring to billing.
“It’s not always possible in a worldwide organization, but we try and have everyone following the exact same template for every process, whether it’s hiring a person or billing a customer.”
Consistent processes mean data is easier to compare for decision-making, which leads to Weed’s third C. “Centralizing means, if you can see the whole population, a set of data, or transactions, it’s easier to notice the exceptions, the differences, or logical traps,” Weed says. And he would know: Cogent researched 121 acquisitions between 2001 and 2004, and Weed always brings new data, like billing information, into his central system rather than maintaining many separate ones.
“When you’re spending a lot of time adding things together just to see what the world looks like,” he cautions, “it’s not very efficient and it takes longer.”
On cost reduction, Weed is careful with his words, but he admits to a level of attention to detail that is uncommon for his position at a company this large. “I don’t want to give away any secrets here!” he says, smiling. “But actually, between founder and CEO Dave Schaeffer, myself, and the controller, we sign every check that comes out of Cogent. For a company our size, you’d think it’s unreasonable, but it helps us stay in close contact with where the money’s going.”
The final C is the product of the other four: cash flow positive is the ultimate goal at Cogent.
“If you’re doing those things—you’re communicating, you’re consistent, and you’re centralized—it’s much easier to reduce costs and you can see trends easier,” Weed says. “That leads, of course, to being cash-flow positive.”
As Weed points out, Cogent has been cash-flow positive for several years now. This is no small feat, considering the continuing fall of prices. “We’re basically selling the same product from the original business plan, which is pretty remarkable considering we’ve been in the business for fifteen years,” he adds.
As for future plans, Weed says Cogent plans to stay consistent. With buildings in forty-one countries and no plans to branch out, the company now plans to add more buildings to that existing network.
“The challenge is to increase unit growth,” Weed says. “We train our sales reps better and provide them the tools to be successful. It’s not magical. If you’re persistent and you’re selling a low-cost product for something everyone wants, that’s a good start.”