Management: Sudden Economic Downturn Tests Chief Executives
The New York Times 05/16/01
by Reed Abelson
Roger Siboni had never experienced anything like it. One day, investors were rewarding a sevenfold annual increase in sales at his company, E.piphany Inc., by pushing its stock price above $200 a share. Then, seemingly without warning, they began to worry about costs and a slowdown in sales, and the stock started a descent that reached as low as $7.
"I don't recall ever seeing such a rapid drop-off from exuberance to despair," said Mr. Siboni, the 46-year-old chief executive of E.piphany, a San Mateo, Calif., software company that went public less than two years ago. "It's almost like someone's flipped a switch."
As the exaggerated swings in stock markets illustrate, many investors have never had to navigate a bear market. At the same time, there are many chief executives whose memory of the last economic slowdown is dim.
During the last recession of the early 90's, most of today's top executives were not in the jobs they now hold - and many were not even among a company's senior management.
While managing during any economic downturn is a challenge, executives face a particularly formidable task this time around.
After a decade in which companies flourished seemingly without effort - the longest period of uninterrupted economic growth on record - many executives now face a radically different environment, according to management consultants and some of the executives themselves.
Shareholders have become deeply skeptical, demand has slowed drastically in many areas and there is intense pressure to cut costs to show profits or, at the very least, to conserve cash.
Executives who have led their companies only through rapid growth are having a difficult time, said Peter Crist, a vice chairman of Korn/Ferry International, an executive recruiting firm. "I can guarantee you that they have the deer-in-the-headlights look when they get to a soft spot," he said.
Mr. Siboni acknowledged that the suddenness of the slowdown had rattled his peers. "This has hit the psyche of every C.E.O. across the U.S., and even globally," he said.
While some of the youngest and least- experienced managers are found among the many companies that were created in boom times, even some established companies lack a lot of gray hair in the executive suite. "You have companies that have lost so many of their top and middle managers that they are dependent on someone who was in school during the last downturn," said Gary Stibel, principal of the New England Consulting Group in Westport, Conn. Many of those managers went to dot-coms and other start-ups, and some were asked to leave.
The combination of a widening gap between the performance that investors expect and what companies can deliver, combined with the high level of turnover among chief executives, is creating what Chris Zook, the head of the worldwide strategy practice for Bain & Company, describes as the management equivalent of "the perfect storm."
Executives are also being forced to rethink what they tell Wall Street and the kind of promises they can make, according to executives and consultants.
"Companies have been in a trap of false enthusiasm in the last six to eight years," Mr. Zook said.
While some chief executives may still think they can get away with promising double-digit growth in revenue or earnings even when they may not be able to deliver, most are learning a newfound realism based on old-fashioned business methods that were learned the hard way by those who were around in the last recession.
No one says that having lived through the last recession was complete protection against this decline, of course, and even relatively seasoned chief executives like John T. Chambers at Cisco Systems seem to have been caught unaware.
Mr. Chambers, who joined Cisco as a senior vice president during the last downturn, said last month that a 30 percent drop in third-quarter sales at his company was symptomatic of a broader slump that "may be the fastest any industry our size has ever decelerated." He likened the slowdown that Cisco was experiencing to "a 100-year flood."
But experience with an earlier recession may help executives steer their companies through the current slowdown. Gone are the days when promises of growth were enough to levitate a stock, which helped many executives look like heroes.
"The slogan du jour was get big, fast," recalled Mr. Siboni of E.piphany, which had been blessed with a stock price that topped $216. Mr. Siboni joined the company in 1998 after a 20-year career as a consultant with KPMG Peat Marwick.
Back then, he said, "so much of our efforts were directed at modulating the highs." Today, the emphasis is on digging out of the lows.
Mr. Siboni, for example, is paying careful attention to his company's costs, especially after revenue proved disappointing in the first quarter. He is exiting less profitable businesses like software integration because the high cost of hiring people makes profits hard to come by.
Like many other executives, Mr. Siboni must also use a stock that is trading around $11 to motivate employees who for the most part know only what it is like to work in a company with a rising stock price and seemingly unlimited potential.
At a recent meeting, for example, he tried to persuade his employees that the current period "is probably a more important time in your career than the last five great and glory years."
He argues that those who prove themselves during these hard times will benefit from the lessons they have learned and the depth of their experience.
Executives who were once punished for not delivering dazzling dot- com-style results say that by not being caught up in the mania, they are having an easier time making their case to the investment community now. Harry M. Jansen Kraemer Jr., the chief executive of Baxter International, recalled the questions from Wall Street about why Baxter, which makes blood products, vaccines and other medical products in Deerfield, Ill., could not increase its annual earnings as much as 25 percent.
"We didn't grow at 20 to 30 percent when some of the craziness was going on," said Mr. Kraemer, 46, who has spent the last 19 years at Baxter and was named chief executive in early 1999. But his focus on delivering profits that he knows Baxter can achieve, in the midteens on a yearly basis, means that the company's stock is now being rewarded and is trading near its 52-week high.
Unlike many companies, Baxter is not in a position radically different than it was a few years ago, according to Mr. Kraemer. The company has always been under pressure to contain expenses, for example, because it cannot increase its prices to protect its profits. "What you have to do now is what I have to do every year," Mr. Kraemer said.
Certainly some young executives are not convinced that having run a company through the last downturn would make their job any easier today. Managing during times like this "is not something you can learn from one downturn to the next," said Guy Gecht, the 36-year-old chief executive of Electronics for Imaging, a Foster City, Calif., company that makes devices for printers.
Mr. Gecht, who was a software manager during the last recession, now oversees a work force of about 900 people. The company warned last June that its second-quarter earnings would be lower than Wall Street was expecting because of lower demand. Electronics for Imaging's stock, which reached about $69 in April, fell as low as $11 by October.
When the economy began to slow, Mr. Gecht said that he met with his senior managers and talked about how to handle the shifting environment, and they discussed what steps they needed to take. The company now gives clearer guidance trends in sales and profits, he said, and this has helped it meet Wall Street's expectations for the last two quarters. As a result, the stock has rebounded somewhat, to trade around $29.
Mr. Gecht is also focusing on talking with employees. Until very recently, he said that he used to block out an hour each day on his calendar to walk around the offices and talk to people, hearing their concerns and explaining the company's strategy.
Other executives, however, say that they think there is a clear benefit to experience.
"The most important thing you learn about a business cycle is that it ends," said Umang Gupta, the 51- year-old chief executive of Keynote Systems, a San Mateo, Calif., company that helps other companies measure the effectiveness of their Web sites.
Mr. Gupta, who created an earlier software company that went public and prospered until it stumbled in the mid-90's, when Mr. Gupta left, thinks the perspective offered by seeing an economic decline is useful.
Last year, for example, Mr. Gupta said he and his management team were convinced that the boom would end, given their experience with other business cycles, so they raised as much cash as they could before the bubble burst. Although the company went public in September 1999, it raised $350 million for itself in a secondary offering in early 2000.
The company has also shifted its client base away from Internet companies that may or may not survive to corporate clients like Bank of America and Charles Schwab.
"That requires a hardheadedness," Mr. Gupta said, and an understanding that the company cannot afford to do everything.
Experience with slowdowns can give executives the perspective needed to choose wisely among difficult options.
In the coming months, many executives will stumble, cutting staff too deeply or refusing to become realistic about how quickly their businesses can grow.
"True leaders really shine in a downturn," said Mr. Crist, the executive recruiter. "The impostors are defrocked in tough times."