Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: Mergers & Acquisitions

Will Web 2.0 Lead to a New Bubble?

So there’s a new “next big thing” happening in the high tech world–that’s feels very, very familiar. In fact, it seems a lot like “déjà vu all over again”, to quote one of my all time favorite philosophers–Yogi Berra. I’m talking about the Web 2.0 phenomenon. The question I present is–what’s the difference between Web 2.0 and 1.0? Although there are obvious differences technologically, and there are a few wildly successful companies following a Web 2.0 style model–my reply is “not a lot” is different.

SOCIAL NETWORKING IS THE BATTLEFIELD

The recent buyout of YouTube by Google for roughly $1.6 billion dollars is what finally set me off to write this article. You see, this is EXACTLY the type of transaction that was representative of the bubble years. An overnight success, with a lot of eyeballs (ok, TONS of eyeballs!) and essentially NO revenue turns it’s twenty-something founders into near billionaires, just months after starting the company. Ok, it was 2 years, but you get the point.

Now we haven’t seen a transaction quite like this in a long time, but they seem to be picking up steam. MySpace was snatched up similarly by Fox for about a half a billion, also with almost no revenue at the time. Facebook also looks like it will be sold soon, to one of the new or older media companies, for a big chunk of change.

What’s happening is the Internet market leaders such as Yahoo, Google, Amazon, Microsoft/MSN, and older media companies trying to keep up, like Fox and Time-Warner–are fighting to get and retain the lead in all the important mass market Internet categories. The hottest one at the moment is referred to as “Social Networking”. The idea is that in Web 2.0, the user is much more of a producer of content in addition to being a consumer of it, so that the idea of online users as passive consumers of content is now passé. This new wave is hitting big with sites that are getting huge growth in traffic, like YouTube and MySpace, which enable their users to produce and publish their own content. But how much money’s really in it?

All the big players are afraid of missing this wave, and like most big companies with respect to societal shifts–have missed the boat completely, or have fallen behind their more innovative startup competitors. And yes, I now categorize Google as one of those less innovative, bigger companies. As much as they’ve tried to avoid that fate, they’ve grown very big quickly–and haven’t had a home-grown hit for a while in “Internet time”.

EYEBALLS FIRST, PROFIT LATER

What strikes me as so familiar about all this is that social networking from Web 2.0 looks A LOT like the “Communities” phenomena of Web 1.0. Both represent an attempt to “get the eyeballs first” and “we’ll figure out how to monetize them later”. Both are based upon the idea of getting people together on a user-driven site, as opposed to selling a specific product or service. And both are driven by a business model where the main source of revenue is expected to be online advertising.

Now I happen to believe that YouTube and MySpace will end up being able to monetize those eyeballs. But does that mean that everyone will?

Some of you might say that the difference is that online advertising has been legitimatized by Google’s unbelievable success with contextual PPC adverting, with their search engine Ads and Adsense network. That success is irrefutable. But does that mean it will go on forever, and that the public will tolerate text ads (or something even MORE invasive) littering nearly every square inch of unused webspace? Personally, I don’t think so. There is definitely a place for online advertising, and I expect it to continue to grow robustly for the foreseeable future. But everyone seems to forget that online banner advertising was also highly successful at the beginning of Web 1.0–until the public got tired of it, and tuned it out. Advertising revenue online dropped like a rock, and many companies were destroyed in the process.

Google has done a great job of improving on the online advertising model so that Advertisers became successful, allowing Google to ride on that success by taking a nice cut of the take. But even today, it’s getting more difficult all the time to make PPC campaigns pay off. The days of easy direct conversions to sales are gone in most markets, and using PPC as a lead generation tool–while still good business for many–is far less compelling. Will the PPC market leaders continue to grow fast for a while longer? I’m sure. Will it flatten out at some point in the medium term? I’m sure of that also. Will most of those companies that are raising huge amounts of venture capital, with online Ad-centric business models, find the same level of success? I’ll bet you everything in my bank account against this. In fact, I think that there is room for surprisingly few additional big players who DEPEND upon online advertising for their success.

PUBLIC MARKET EXCESSES

The other aspect that seems to distinguishes the Web 2.0 wave from Web 1.0 history is the lack of overheating of IPOs. In fact, the IPO market for Tech companies overall still hasn’t really recovered from the Web 1.0 bubble. In addition to the burn marks that remain on Wall Street’s hands with respect to Tech companies, SARBOX has also made going public less attractive to all growth companies. Exit strategies are more often based upon a sale than an IPO these days. But two things here: just because it hasn’t happened yet–doesn’t mean these IPO excesses won’t reappear later in the cycle. I believe we are still early in this one. Secondly, I wouldn’t preclude some type of financial bubble, even without public IPOs of nearly no-revenue companies like in 2000. Anytime hype over-inflates the value of assets, the downstream consequences can be severe. If bidding wars by the established companies get too out of hand, it could still end up having a real negative impact on the stock market and the high tech business environment, down the road.

HISTORY HAS A WAY OF REPEATING ITSELF

My final thought on this topic is that in the High Tech world, there is almost always more money chasing the “next big thing” than can receive an adequate return. This inevitably leads to many excesses, including a level of hype that can only lead to disappointment, for those who get in late or with marginal business plans. The result is a boom-bust cycle that we see re-enact itself over and over again. My thesis is that “eyeballs first, figure out how to monetize later” has always been, and always will be a flawed approach, for all but the fortunate few. If you’re buying into Web 2.0 in a big way, Caveat Emptor–Let the Buyer Beware. A history lesson can sometimes be the most prolific forecaster of all.

Will there be a Web 2.0 bubble, much like the original dotcom bubble? It’s too early to tell. But as I’ve outlined above there are some hints in the news that a repeat might not be that far-fetched.

That’s my take on Web 2.0–what’s yours?

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

3 Comments by admin on October 22, 2006
filed in B2C, Business Models, Financing, Mergers & Acquisitions, SaaS, Social media, Software/Product Development, Startup/Early Stage

Flattening of the Growth Curve

In every company’s history there comes a time (or two or three or four times!) when your momentum slows, and the sales curve begins to flatten. This can be one of the most trying and frustrating times for software and technology companies. It’s certainly not as difficult as the startup phase, when “crib death” is an ever present fear. And a no growth, flat revenue scenario is much preferable to declining sales combined with negative profitability that follows, which leads to a “death spiral” if no effective action is taken.

I do find this situation is often more confusing to company management than either the start up or death spiral scenarios. This is because it often occurs just after a period of fast growth and prosperity, where it seems that the company can do no wrong. As a result, senior managers are often in denial about what is happening—whereas in the startup or death spiral situations, the situation is much more obvious, usually motivating folks to take fast, decisive action.

Search for the Culprits, Blame for the Innocent

With flattening growth, it’s easy to blame things that may not be the true cause. I often here excuses and tactics such as the following:

“The marketing department just needs to put out better promotions. Fire the VP Marketing and bring in someone who will get the job done”.

“The sales force isn’t selling hard enough, they just need to close more deals. Get the VP Sales off the golf course and tell him to kick some butt, or he’ll be the next to go”.

“The channel is useless; they’re taking 30% but they aren’t pushing the products—take more deals direct”.

“We just need to charge more for our products; we’re leaving money on the table”.

“Cut the price to stimulate demand.”

“The UK distributor is fat, dumb and happy—sign two more of his competitors to motivate him and maximize sales in that country.”

Now some of these reasons may even be accurate, and some of the proposed tactics could be possibly be useful. But I have found, quite often, that things of this nature aren’t the fundamental issue, and beating up the sales force, cutting or raising prices, or messing with your channel balance may exacerbate the situation and make things worse—not better.

The Real Problem

Sometimes the answer is as simple as “All good things must come to an end.”

Growth cycles don’t last for ever, as much as every software & technology company CEO, VP marketing and VP Sales wishes it would. There is almost a natural cycle that occurs with revenue that often coincides with the life cycle of your products. Also, the economy changes, competition heats up, novel marketing programs age and are copied—which reduces their effectiveness, market segments get saturated, and customer budgets are re-targeted to the “next new thing.” Stuff happens—always. The only real question is when.

So what’s a befuddled and perplexed tech company CEO to do?

Finding a Solution

Well, the first thing I recommend is to really spend some time getting to the bottom of things. Instead of shot-gunning blame that may be misplaced, or impetuously blowing up established pillars of the business—conduct a real, objective analysis of the nature of the slowdown. I don’t suggest paralysis by analysis by any means, but do take the time to gather some data, so that your actions will be based on more than knee-jerk reactions.

Past that, it’s hard to generalize on a course of action, because the proper action will depend upon what you find in your analysis. But for the sake of discussion, let’s say that while there are a few factors that you find which could be leading to slower growth, there isn’t a “silver bullet” reason that can be “fixed” to get the revenue curve again pointed up and to the right. Below are some general steps that I’ve found may enable you to “restart growth”. I might add that many of them are most effective if you begin them prior to actual revenue flattening:

Try marketing programs you haven’t used before
Usually when you get in a period of high growth, there is a workhorse program or two that has worked well for you, and there is a tendency to “keep doing what works”. Unfortunately, even the best conceived marketing programs eventually run out of steam. One of the keys to having consistently good outbound marketing, is too be constantly testing new ideas, placing small bets, and fine-tuning them if there is enough success to continue. As I’ve said before, product marketing is part art, and part science—with the art portion unfortunately upfront. You need to do a little trial and error to find a good program, and then the science kicks in, using data you’ve gathered to optimize it. But the key is to be constantly testing new ideas, in good times and bad. If you wait until your growth has already slowed, you may scramble for quite a while, trying to find a new answer.

Have an internal “growth” brainstorming session
Ideally you are doing this before you fall into a revenue rut. But regardless, do bring together people in your organization to bring out the ideas they may have to give the top line a kick start. Do hold these sessions in an open, non-threatening and non-political environment. It’s important that people are able to speak freely, and not be ridiculed, if they come up with an idea that’s “too far out of the box”. That is often where strategic breakthroughs are made. And don’t just limit these sessions to executive managers. Remember, the people at the bottom of the org chart are often the ones closest to the business, and are sometimes able to more easily spot a big opportunity that the company could capitalize on.

Hire some outside help
Consultants have a very bad name in some areas—unfortunately, sometimes with good reason. But bringing in someone with deep marketing or management expertise, with a different viewpoint than the internal management team, can sometimes be the quickest way to new approaches that will turn the ship quickly. I’d recommend staying away from folks that that have a cookbook formula, have only been consultants and not operating executives, or take too much of an academic approach. Every company, market and point in time is different and needs to be analyzed as such. But hiring the right outside consultant or firm who is creative, analytic and “been there and done that” can have a big impact. PJM Consulting has often worked as a change agent in these situations, and increasing or restarting traction is an area of specialty.

Look at entering an adjacent market
If it’s determined that your current market space is getting saturated, one of the first things to do is to look at adjacent spaces. Preferably, look somewhere that you can leverage your current marketing, distribution and brand, but also possibly where you can apply existing company technology to a different customer’s problem. The key here is don’t go to a complete green field that looks attractive because it’s large or growing fast, but where you have no real possibility of competing. Again, it’s best to be taking this step in anticipation of slowing growth in your current business—rather than waiting until it happens. Getting traction in new areas can take some time.

Consider M&A to fill out your product line or distribution system
If you’ve been caught by a surprise slowdown and you need to do something quickly, a strategic acquisition can sometimes be the answer. I warn you to proceed with caution here. M&A is fraught with danger—statistics show that most acquisitions don’t work out well. You need to think it through, proceed carefully, and don’t get overly excited by the thrill of the deal chase. If done well, however, a strategic acquisition can be a real shortcut to entering an adjacent space, filling out your product line for an existing strong distribution system, or adding sales channels to your strong product offerings. This is another area where PJM Consulting has strong experience, and can offer assistance.

Think it through before you start shooting

There are obviously endless other potential ways to explore when attempting to jump out of a revenue rut. I wanted to suggest a few to stimulate your thinking—and more importantly, steer you away from some “knee-jerk” reactions, that often make your situation even worse.

What have you done in the past when you need to restart growth? Post a comment below and fill us all in on your strategies.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

4 Comments by admin on April 19, 2006
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Marcom, Mergers & Acquisitions, Product Marketing/Management, Promotion, Software/Product Development, market research
tagged , , , , , , , , , , , , , , , , , , , , ,

Should You License Your Technology?

So when should you license your technology to other companies? This can be a complicated question, since I always say “no one sells your product like you do.”

Depending upon your tendencies, there is a bias toward holding everything you develop close to the vest, unwilling to give that hard-earned technical advantage to another company. Or you may be on the other side of the fence, and want to very quickly “cash in” on a technological development—thinking that there are very large companies out there that can do a much better job selling the product than you can.

So really, what’s the right approach? Just like most other decisions facing managers of technology companies, there is no one simple answer. It really does depend on your situation.

Have a Process

The best way to approach a decision of this nature is through a methodical, logical process. It shouldn’t be done emotionally, or without proper data. To come to the optimal answer, you need to be very honest about the position of your own company in the market, your priorities, company strengths and weaknesses, and the level of resources available to you. In addition, you need to have a solid understanding of the potential of the technology in the market, whom might be an attractive licensee, how interested they may be, and “can you license to someone else and still sell your own version”?

These, and many other questions, should be answered before you reach a conclusion. All too often, however, I see companies make a snap decision on whether to pursue a licensing strategy or not. This is very strategic question for a company, yet I have seen the decision made on a whim—with less thought than “where should we have lunch today?”

What have you got?

So let’s walk through an example process. First of all, what have you got–really? Is this IP something that is a fundamental step forward, or a “nice to have?” Things that are fundamentally unique, you will want to think very carefully about before sharing with others. It may be the best thing to do, but I would recommend thinking it through most carefully, if you have something truly unique and desirable. Lesser inventions carry lesser risks of lost opportunity costs, if they are licensed out.

Does it fit the Core Business?

Second, how does it fit with your current business? If it doesn’t fit with your core business, and you have no reason to “run away” from your core business, the decision becomes a lot easier. If your current business is thriving and you have quite of bit of runway left to pursue in that market, opening up a second business has a high likelihood of becoming a distraction—potentially harming the core business. Plus, it is very likely in this instance, that you will not be able to do the new opportunity justice, anyway. So to avoid sub-optimal outcomes in both business areas, it almost always makes more sense to license the technology to another player, whose business is a better fit—and one who will dedicate the resources required to gain success.

Can you “have your cake and eat it too”?

Third, if it does fit the core business, can you license it to other segments on a non-exclusive basis? This is an important question to consider. If the answer is yes, I call this “having you cake and eating it too.” The answer to this question is dependent upon a couple of things. Are there “fences” that can be set up between your market segment, and that of the potential licensee?

As an example, let’ say you have a new enterprise application that is different, but complementary, to your existing core product. This new product can be sold to the same type of large corporate customer that your existing product is sold to. But this new application also has strong potential in government markets, where you have no current presence. The government market is very different, and contacts are crucial to success. Instead of trying to build distribution into this new government market from scratch (which can be time-consuming), it is potentially a very wise move to license the new product to a company with existing, strong government business. They can sell it under their own label, put marketing money behind it, provide support, etc. In this way you have accessed that market, without entering into an area outside of your core competency, and without spreading around your scarce resources.

Non-exclusive licensing can be a great compromise

This is the type of “complementary” licensing deal that can be very effective in optimizing your total return on a technology. The key to this strategy is for there to be a good “fence”, so that you don’t create channel conflict between you and your licensee. In this example, you’re in the corporate market, and the licensee is in the government market. So it’s very clean and complementary, basically incremental revenue with little costs.

There are other examples of non-exclusive licensing where you end up competing with your own product under a licensee’s label. This can work as well, but it’s a lot trickier to manage. You will run into channel conflict issues, much like selling your own labeled product through reseller channels, with the added twist of another brand involved in the competition.

The final thing to consider is timing. How well protected is the technology, and how fast is the technological curve moving in this market space? If the market isn’t moving fast technologically, there may be no one overtaking you quickly. A sleepy, slow moving market tips the scales toward keeping the technology and developing the market for it in-house, rather than aggressively licensing it to others. Regardless of your resources, it becomes more likely that you will have time to exploit the IP, when there is little fear of someone leapfrogging your technology. If on the other hand, you’re positioned in a brutally competitive market with rapidly evolving technology, the arrow moves the other direction. In this case, IP is a fleeting advantage, and one that better be used ASAP, before it becomes obsolete. This scenario begs for a strategy of aggressively licensing the technology, to obtain the best return possible, in the short period of time that the IP will be relevant.

There is, of course, much more to consider when undertaking a decision to license/not license out your technology. This discussion provides an introduction to some of the major points that should absolutely be reviewed in any licensing discussion.

I’d love to hear some stories about your own licensing efforts, and hear points of view from a different angle. Post a comment or email me your thoughts.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on October 21, 2005
filed in B2C, Business Development, Business Models, Corporate Strategy, Distribution Channels, Mergers & Acquisitions, Pricing, Startup/Early Stage
tagged , , , , , , , , , , , , , , , , ,

Shooting Stars or Industry Stalwarts—What Makes a Great High Tech Company?

You’ve seen them many times. The software company that starts off like a bullet, racing at the high tech equivalent of 0-60 mph in 4 seconds. These companies come out of nowhere, and are an immediate factor in their market.

There are many examples, in nearly every major market segment. Netscape comes to mind as one of the more famous. Peregrine Systems here in San Diego is another example. I’m sure every reader can think of many more.

So what is the difference between one of these “shooting stars” and the Microsoft’s, Hewlett Packard’s and Dells of the world? After all, in the beginning, they pretty much all look alike on the surface.

Cutting Corners

I believe if you look under the covers, however, there are real differences. It’s the difference between a fast rising house of cards, and a mansion built to withstand Hurricane Katrina. You start with a solid foundation when you go to build something lasting—which of course a house of cards is lacking completely.

Now most of the time, people don’t intentionally set out to build a house of cards. It usually happens when the stress and strain of the marketplace gets in the way. That’s when management begins taking short cuts. It’s often an incremental thing. Cutting expenses in that key project, so that you can appease Wall Street by making next quarter’s numbers. Accepting just a slightly less than normal quality level, to allow that behind-schedule new product to finally get out the door. Hiring just a few less engineers than was in the plan for this year. Reducing the corporate, brand-supporting Ad buy—a ten percent reduction won’t hurt—will it?

It’s all just meant to be temporary—but cutting corners has a way of becoming permanent by default, especially when there is brutal competition, or extreme pressure from the Street.

Winners Maintain the Foundation

Every great company has a foundation that it is built on—and the care and maintenance of that foundation is a non-negotiable expense for long-term success. With HP, it was historically the R&D; budget and reliability of its products. The R&D; monster was always fed, because product innovation was what fueled the company’s growth for over 60 years. And for a long time, reliability was never compromised. The product might end up being a little too costly, a little too big, a little too heavy or late to market—but it was built like a tank, and the products were unquestioned leaders in reliability. Indeed, I would say that the HP brand stood for strong reliability for many years. Now that the company has lost it’s way a bit, I don’t know that the HP brand still has the same reliability cache, which it had in past years. Still it’s a quality brand; mind you, just not quite the same. The maniacal devotion to quality just isn’t quite there anymore. And it’s funny that just about the only thing that has been truly “invented” at HP in recent years is the word “Invent” being placed alongside the logo in advertising. Ironically, even with the dearth of HP engineering invention in recent years, R&D; expenses remain high relative to competitors—the worst of both worlds.

Microsoft was built on monopoly power and paranoia. And I don’t mean that in a negative sense. Depending upon your perspective, Microsoft either shrewdly created the DOS/Windows monopoly position it has enjoyed for years—or luckily fell into it. I suspect it was a bit of both, but no matter. Since realizing their position, Microsoft has never lost their aggressiveness, or failed to leverage their monopoly platform. Some believe they’ve overstepped at times, and I have always felt that they left a lot of money on the table rolling things into the Operating System—essentially given it away for free. But they’ve reacted every time there has been a threat—Apple, WordPerfect, Novell, Lotus, Netscape—the list of road-kill is quite long. Some of their moves may have been overkill, as their paranoia seems to present every software company in the world as a potential threat to their dominance. But they never took their eye off the ball, building and protecting their OS and Office franchise with as much firepower as required, for as long as it took. Even though Microsofties are very pleasant to deal with on an individual basis, the company as a whole is predatory. They believe it’s their birthright to sell every last line of software code in the world. I believe that this aggressive corporate culture is a big part of the foundation that Microsoft is built upon. It has let them survive and thrive since the infancy of the PC until today—alive and well for the fight with the latest pretender to their throne—Google. But more on Google later.

We’ve examined a couple of long time winners—now let’s look at one of those classic shooting stars—Netscape.

Formula for Losing

It looked like the next big thing—the Microsoft if the Internet Age. They were to be the successor to the throne. They were the darlings of High Tech, and Microsoft was shaking in its boots. It was one of those times where Bill, Steve and the Microsoft gang got caught napping a bit. They didn’t see the Tsunami of the Internet coming at them—until it was almost too late. But the boys from Redmond recovered in time, and put all hands on deck until they finally smothered the upstart Netscape. So what happened to Netscape?

Well, in large part, Microsoft happened to Netscape. Microsoft put together a Herculean effort to change their company to compete in the Internet Age. But they stumbled a bit a first, giving Netscape some breathing room. Early versions of Internet Explorer, like some much software out of Microsoft, were not very good. They were almost laughable, to be frank. But Microsoft is the Terminator of the software business. It just keeps throwing people and money at the problem, and version after version comes out until they get it right. Unfortunately, Netscape had never built a solid foundation to combat this onslaught, in my opinion. The browser was what they were about. But an early decision to use the browser as the “razor” in that classic razor/blades marketing strategy, turned ultimately into a flaw. Intending to make their money on Servers, I feel that they neglected to keep the Navigator Browser as the market leader. It was a tough battle, with Microsoft bundling IE into the OS. But they needed to find a way, through innovation, to keep Navigator in the forefront of the browser wars. It was a tough task—no doubt. But once that browser franchise began to erode, their reason for existence began to fade away. It was really their foundation—which began to crack when it wasn’t built to last. The other mistake, which compounded their plight, was fighting a multi-front war with Microsoft—much like Hitler in WWII. They didn’t have the corporate infrastructure or resources, but chose to compete head to head in every market Microsoft was in. Novell made the same mistake, both companies buying some second-rate competitors to Microsoft, just to get in the game. Instead, they should have focused their resources where they had a lead, and a chance to win—Netscape in Browsers, Novell in Networking. History tells us that the upstart must focus and win decisively in that first battlefield, before they move on. Or they almost certainly will be crushed.

How Will Google Do?

Which brings us back to Google. They are the current technology darling and high flier, next big thing, and the latest threat to Microsoft. Once again, Microsoft is treating this threat as real. Right now, we’re at that stage where it appears Google is winning. But I remember when Novell and Netscape were, too. It didn’t last. And I see some parallels emerging—Google is diversifying rapidly, even recently making noises about competing with Microsoft in office sof
tware. That would be a huge blunder, in my opinion. Eric Schmidt, the CEO of Google, is a veteran of mammoth battles with Microsoft from his time at both Sun and Novell. It will be interesting to see what he has learned from the past.

What do you think—is Google the next Microsoft, or will they end up as a footnote like Novell or Netscape? Post a comment and tell me what will happen—and why.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on October 10, 2005
filed in Business Models, Corporate Strategy, General Management, Mergers & Acquisitions, Operations, Product Marketing/Management, Startup/Early Stage

VC Blog

For those of you in early stage companies looking for funding, I wanted to let you know about an excellent site I have run across. It’s Allen Morgan’s Blog (http://allensblog.typepad.com/allens_blog/). Allen is a venture capitalist with Mayfield, one of the premier VC firms in Silicon Valley. I don’t know him personally, but his Blog is full of honest, informative information on a topic which usually only discussed “on the surface”, with a lot of typecasting. Allen gives an “under the covers” look at VCs and the funding process. It’s a very informative and interesting read. I highly recommend it.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on August 7, 2005
filed in Business Models, Corporate Strategy, Financing, General Management, Mergers & Acquisitions, Startup/Early Stage

Layoffs and Bureaucracy

I’ve been reading the stories on the major layoff at HP this last week, and it really struck a nerve. HP announced this week that they are going to reduce their workforce by 14,500 people over the next 18 months. It was no big shock, since HP has been paring down their employment levels, and has been generally concerned about their cost structure, for the last several years. Their main competitor, Dell, is a lean and tenacious predator that has set their sights on crippling the HP computer and printer businesses. And actually, the cuts weren’t as deep, and the timeframe longer, than many analysts had predicted. Still, it represents nearly 10% of the workforce of this venerable technology company.

There are many reasons that layoffs occur, and sometimes they are well thought out, and necessary. I’m going to focus today, however, on a common situation I’ve seen repeated over and over, using the HP story as a model.

HP is of special interest to me because I’m an HP “Alum”, having worked there for 5 years back in the eighties. I have also worked with the company since I began my consulting practice. I have many friends and acquaintances still there, and have always had positive feelings about the company. So while I’m a long way from an insider, I’m also not exactly a dispassionate observer, either.

More than a special story, though, this is the very common one of a once revered technology giant whose growth has slowed. DEC, COMPAQ, WANG, IBM, the list is long and the downstream results mixed.

There are two basic ways to view this story, and I am on the fence between the two. The first looks at it from a financial point of view. HP, in the opinion of most financial analysts, has become bloated, with high staffing levels and other costs. This is undoubtedly true. It’s an unfortunate fact that when a company has a lot of success over a long period of time, inefficiencies and excess tend to creep in.

BUREACRACY’S BEGINNINGS

And make no mistake; HP was VERY successful for an almost INCREDIBLE period of time. Even today, the company is hardly a train wreck. It’s still making a lot of money, and to my knowledge, never had a money-losing year. That’s in a corporate history of around 60 years. It’s a very enviable record, and one that didn’t happen by accident. I’ll touch more on that later. With this kind of success, unfortunately, comes the freedom to be not very disciplined. One of the most common mistakes that occurs as a result is that PEOPLE GET HIRED BECAUSE THEY CAN. The cash flow allows it—so more people get hired. In this respect, companies seem to follow the same path as humans. You don’t see to many fat people in poor, developing countries where food or incomes are limited. The same with developing companies with limited cash flow–there are very few “fat” Bureaucracies.

When starting out as a company, there is always a lack of the people resources to optimize the business. So in the beginning, hiring with growth is a good idea. But at some point a line is crossed, and the net impact of those additional people becomes a negative, rather than a positive. This is the “Bureaucratization” of a company, and it’s a very bad thing. It’s not something that happens overnight, but more of an incremental, gradual occurrence. But once it does seep in, it changes your company culture in profound ways.

Discussions become more internal, rather than externally focused on the customer. Individual success becomes more reliant on internal political skills, rather than business skills such as increasing revenues, decreasing costs or creating great new products. In the extreme, this leads to “empire-building”, which happens when success is defined by the size of your domain, rather than its performance. At HP, Bill and Dave (Hewlett & Packard) instituted early on a policy of holding annual staffing growth to a set fraction of revenue and profit growth. I believe that this policy was one of the keys to holding off the inevitable bureaucratization of the company for a very long time.

Once started, the Bureaucracy is a self-sustaining organism. Because you have some many people and so much overlapping of responsibilities, the lines of communication grow ever more long and complex. So you need to add more people, to make sure that all of the busy work that is created in the process is done. It’s the ultimate vicious circle, and causes huge inefficiencies that permeate throughout the company.

Unfortunately, this seems to be the inevitable fate of every company that grows big enough. While not necessary theoretically, from an empirical perspective it seems to be a natural course of events. Some stave it off for a very long time by being cognizant of it, usually by keeping individual business units small and decentralized. HP became a very big company before its bureaucracy got a foothold—but it did occur. Often, but not always, the rate of bureaucratic growth is inadvertently quickened, when a small company that is growing fast decides it’s time to bring in “big-time” management. This inevitably leads to hiring senior managers from larger organizations, who are used to the trappings and management methods of bureaucracy. And so it goes. It seems that it happens to all companies at some point if they continue to grow, no matter how successful they’ve been. Companies grow so big that they eventually implode under their own weight.Bureaucratization, I believe, is the major phenomenon that leads to layoffs in large, successful companies like HP. The financial manager within me says that this layoff needed to happen and is long overdue. The company’s costs need to be brought closer to Dell’s or disaster is looming. I strongly believe the company has the ability to do more with a lot less people, as I opined in the discussion above. But there is another side of this that needs to be considered, and often is given short shrift by financial and industry analysts. Businesses exist to make a profit, and this must be the first and foremost consideration. So we’ll put aside the tremendous personal cost that is being inflicted on these affected 14,500 people being laid off, as well as their families. I strongly believe that these layoffs with cause a deep cut into the flesh of this company, one that will negatively affect competitiveness. In the case of HP, I feel this is particularly true. Here’s why.

THE HP WAY

HP had traditionally one of the strongest, most positive corporate cultures in high tech history, called the “HP Way”. It’s treatment of employees, and the loyalty they returned, are legendary. Having experienced it for myself, I can testify to its power. Frankly, it’s a little difficult to fully explain to someone from outside the company. But HP people know. At HP, you felt as if you were part of a favored, select family. The policy was to hire slowly and carefully, and the dismissal process was the same. People were valued and treated with great respect. The effects on an individual were generally considered upfront in any decision that might include them. PEOPLE were correctly viewed not as just an important resource, but the very flesh and blood of the company. The company was highly decentralized for a long time, and individuals were given great responsibility within their sphere of competence. No doors on offices, even senior managers, and NO LAYOFFS. I worked in a $350M division, but it felt like I was working in a small, entrepreneurial company. Decisions happened quickly and they weren’t handed down, but were likely to flow up the chain of command for approval. As a result of this culture, employees were unusually loyal, and worked on behalf of the company in a manner that an owner might—with the company’s best interests in mind. And most people at the time were not eve
n option-holders. If not completely unique, it was highly unusual within big corporate America.

And most importantly—it worked. HP had a run of great financial success that lasted more than a half-century. The creation of this corporate culture wasn’t some touchy-feely, social experiment—it was good business. Yet even today, most of the lessons of HP’s success, and other like-minded corporations, appear to be lost on corporate America. In most large corporations, employees are treated like expensive desk chairs. They are welcomed when new, but are worn down by usage by the corporation over time. When they become a bit frayed along the edges, or there are too many in number for the current level of operations, they are discarded quickly and without much regret. They are downsized, right-sized, or part of a reduction-in-force—an impersonal transaction hardly appropriate for the “flesh and blood” of the company. To some corporate managers, they are little more than another balance sheet transaction. Most corporate executives seem to see it as maybe a bit unfortunate, but simply a normal and necessary part of doing business.

A CONTRARIAN’S VIEW

I view it differently, as I’m sure you’ve ascertained by now. I believe in most circumstances major layoffs have profound, negative impact of the company’s long-range ability to maximize financial results. This is hard to measure, of course. The short-term impact on the income statement from large layoffs is comforting to senior management, since the results come quickly and are easy to measure. In the case of HP, the new CEO, Mark Hurd, inherited a situation—he didn’t cause it. He has been generally well received within the company, and seems a much better fit in style and substance than his controversial predecessor, Carly Fiorina. He was brought in to improve the company’s fortunes going forward, and I’m sure that he’s just doing what he believes needs to be done. There is a good chance that he will greatly improve the performance of the company in the near term. It’s been done many times in similar situations before—IBM comes to mind as one. IBM is a solid company, but not what it once was. Like IBM, HP has been changed forever, and I doubt it will ever regain its former greatness. I can’t think of another case where the major company has reverted to its prior form after a severe traumatic restructuring. The HP culture has been eroding for many years, and this latest layoff may be the final nail in its coffin.

So, should HP have executed this massive layoff? I can’t answer that—it’s a complex situation with good points to be made on both sides. Its competitive position has been weakened by poor expense controls, and as I stated previously, can undoubtedly operate more efficiently with fewer people. However, one has to remember that HP isn’t hemorrhaging cash—it is making money, and has plenty of liquid resources. So the other view can be taken that a massive layoff is a drastic step.

MANAGEMENT SHOULD DO A BETTER JOB

Either way, my takeaway message is that layoffs happen far too often, are to be avoided at almost all costs, and should be used only in dire circumstances—as a last resort. Most importantly, corporate management isn’t doing its job if it allows conditions that necessitate layoffs in the first place to take hold—the unrestrained growth of the bureaucracy, during periods of growth. Bureaucratization may indeed be inevitable, but it should be RESTRAINED and DELAYED as long as possible. Hacking large numbers of employees periodically during slow times doesn’t take much management skill, or creative thinking. Shareholders shouldn’t reward it. Mass layoffs have a hard-to-measure, but very REAL, negative impact on the company’s ability to compete in the long run. That’s my opinion—and I’m definitely in the minority on this issue. Post a comment and tell me why I’m wrong.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

No Comments by admin on July 24, 2005
filed in Corporate Strategy, General Management, Mergers & Acquisitions

Partnering

Forming Partnerships, or Strategic Alliances, is one of the key elements that make up the business development function in technology companies. I believe that alliances are underutilized, in many ways. Conceived and executed properly, alliances can greatly extend the partner companies reach in the marketplace.

VARIOUS AND SUNDRY PARTNERSHIPS

There are many types of collaboration that fall under the umbrella of “Partnering”. Let’s examine a few of the most common:

Third Party Programs—Probably the best understood category of partnering. Partnering in this manner is generally low risk, but low reward for both parties. A program usually consists of many smaller partners gaining modest benefits from a larger company. The larger company gains (or at least the illusion) from having a large number of partners working with their product/technology.

Industry Consortiums—Represents another well-understood category. Mild benefits are usually obtained by the participating parties, including some publicity, a stamp of approval, and the opportunity to network with other consortium members. The unique aspect of this form of partnering is its one-to-many relationship, as opposed to “one-to-one” or “one-to-few” relationships found in most partnerships.

Sales Agents—Many people might not consider sales agent relationships partnerships, at least not strategic. But they certainly are. There is usually a minimum of entanglement here, simply a contract that provides a commission for sales generated or leveraged. The product doesn’t change hands between the partners, and there is often less training and support involved, relative to other partnership types used for product distribution.

Service Agreements—These agreements occur when a company doesn’t want to relinquish the sales function for its products, but for some reason it needs a third party for servicing. These agreements are common in high-end hardware markets, where 24/7 on-site support is critical. Storage Hardware or Mainframes are good examples. They are also seen in more commodity markets, where a company has decided that service/support isn’t their core competency, and that a third party can handle service/support at a lower cost. The use of Indian Call Centers by PC manufacturers such as Dell is a recent example of this concept.

Distribution Agreements—This is a common, but often poorly executed form of partnership. The errors usually occur when the Channel partner is treated like an end-user, rather than the true partner they should be viewed as. Distributors and Resellers need to be treated as an extension of a company’s sales force. Sadly, they often are not, leading to such misguided policies such as channel stuffing and over-distribution, which lead to problems that become extremely difficult to resolve.

Joint Marketing—Cooperation on marketing matters should be where most companies reap the greatest benefits. Partnering in this area is really low risk, can have great benefits, and is a great way to get started with a new partner. There are so many ways that companies can cooperate in joint marketing; the list is really only limited by your imagination. Some of the ways I’ve been able to utilize these types of partnerships include discounted product promotional bundles, trade show space cost-sharing, joint press releases (of course!), sharing of prospect and customer lists, referrals, and joint direct mailings. The great thing is that there are many areas to explore, to find overlap in the two companies interests.

Product Integration—Integrating the products of two companies is what often comes to mind when you think of partnerships. It can make great sense, and the potential rewards are great. However, there are some reasons for caution, prior to jumping straight into this, as I’ll discuss below.

POTENTIAL PITFALLS

As discussed above, a partnership or alliance can take many forms. As a result, there is a lot of confusion and disagreement as to what even constitutes a “good” partnership. Let’s take a closer look at two partnering categories, and some common missteps:

The PaRtnership

You see a great many press releases go out trumpeting the partnership between company A and company B. The release goes on to discuss the great benefits that will accrue to customers and the two companies making the announcement. The language tends to be vague and laced with terminology like “synergy” and “market leading value proposition”. More often than not, that initial press release is the high point of the partnership, and little is heard about it subsequently. You may have heard the term “slide-ware” to describe products that exist only in PowerPoint. This type of partnership is the alliance equivalent to slide-ware—I call it a “PaRtner-ship.”

Product Integration Fiasco

On the other end of the partnership spectrum, technical folks usually think of alliances in terms of product integration. Technical integration can be the basis for a great partnership. However, it’s a lot of work and a big commitment for both parties. The danger is that the partners too quickly dive head long into the product integration work, basing their decision on an impulsive belief that it “makes sense”.

In a typical scenario, the two products are complementary, and from an engineering (and often customer) perspective it looks like a marriage made in heaven. Several dangers are lying in the weeds, however. First of all, any product development effort runs a high risk of failure. When you put together two disparate engineering teams who have never worked together on a project, that risk rises exponentially. Usually both engineering departments have their own product releases to worry about concurrently, which are always higher priority. Lack of communication, low priority, cultural differences and ego can easily conspire to lead to a failed integration project, or at least one lacking the features to be of much leverage in the market. At this point, the partners have spent a lot of money and precious engineering resources with little in return, leaving finger pointing, and a search for scapegoats as the next step.

In addition, it takes much more than good product integration for commercial success by the partners. If there isn’t a solid plan for marketing cooperation and distribution (see above!), even technically elegant product integration partnerships will leave both parties disappointed. Alliances that are born from product integration, unless carefully thought out and efficiently executed, can lead to disappointment by one or both of the partners.

There are many “gotchas” involved with working together to push and pull the combined solution in the market. It helps to have some practice working together prior to making the big bet on technical integration. That’s why I often recommend to my clients that product integration be a step down the road in an embryonic partnership, not a beginning.

PARTNERSHIPS MAKE SENSE—BUT EXECUTION IS KEY

So are partnerships to be avoided? Not at all! They are one of the areas that can make be a huge differentiator for your company in a competitive market. But the take-away message here is that too many partnerships are conceived as great ideas—and peak right there. Like most business activities, the devil is in the details, and execution is the key to success. When I’m working with smaller clients with limited capital for marketing and sales, I often recommend an aggressive partnering program. If executed correctly, the company and its partners can gain cost-efficiencies and marketing economies of scale far exceeding their own siz
e. But I have two key pieces of advice before you embark on a new partnering program:

1) The very definition of a partnership is a “win-win” relationship for BOTH parties. Takers don’t build winning partnerships—givers do. Offer to take the first step, do the first piece of the project. A partner that believes you are acting in his best interests will be very impressed, and willing to provide support that you never dreamed of. Build that relationship by being the first to “give”; the trust you build will came back to you multiple times and set the stage for a profitable, long term partnership.

2) Do start, but start small. I’ve discussed above the many pitfalls of moving too fast. It’s best to pick something easy, with obvious benefits to both parties. Working successfully on a small project creates momentum, and helps build the trust and familiarity that is crucial to success on more ambitious future projects. I will often suggest a simple list swap of prospects as an initial step. If either party views even that with suspicion, a blind mailing can be done to each other’s list, where the actual lists don’t change hands. Building a prospect or customer list is very capital-intensive; by partnering with just one other company, you can both double your lists overnight. It’s almost a certain Win-Win, creating excellent leverage, and no financial investment by either party. It’s easy to succeed, and sets the stage for discussions on additional collaboration.

I’m sure you get the picture—does this make sense to you? Post me a comment below so we can get this discussion going.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

4 Comments by admin on July 19, 2005
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, Mergers & Acquisitions, VARs
tagged , , , , , , , , , , , , , , , , ,

Do High Tech Acquisitions Make Sense?

I was reading a while back about the proposed merger between two well known tech companies. Two major technology companies, one making a comeback from bankruptcy and the other mired in a long slump, with several years of negative predictions about their business prospects.

I am not an insider and didn’t know the specific details of this merger. It seems to make at least some sense, but the analysts  generally panned the deal.  I didn’t have enough solid knowledge of the situation to decide whether it’s a good idea from a strategic perspective or not.

What I do know is that it probably will fail.

ODDS AGAINST IT

Predicting failure is a pretty big statement for someone with limited knowledge of the specifics of a deal. But I can make that statement because numerous studies have shown that 40-80% of all mergers fail. That’s a whole bunch of investor money down the drain. And in High Tech, it seems like you have to look very hard to find an example of a really good merger or acquisition.

Of course, there are examples to the contrary. Computer Associates built a huge business and shareholder value with an aggressive acquisition strategy, over a long period. Cisco Systems has made many acquisitions of smaller technology companies, purportedly with great success. They profess to have the “secret sauce” on how to make acquisitions a success-and maybe they have. These are two high profile examples of large companies succeeding with M&A; as a major part of their strategy. But for every Cisco or Computer Associates, there’s probably 10-20 who have failed with a prominent M&A  strategy. Symantec made claims like Cisco for a long time, but ended up unraveling a number of their acquisitions. The recent HP-Compaq mega-merger didn’t pan out too well (especially for one former rock star CEO name Carly!).

TOUGH FOR THE UNINITIATED

So how do deals usually work out for the “average” company that might make an acquisition every couple of years or so? Not very well, in my experience.

I have been involved in numerous acquisition projects, both as a consultant and on the inside of an acquirer. I spearheaded one project internally which led to acquisition of a software company, which I then had to integrate into my business unit I was running at the time. You know what? The buying is much easier than the integrating!

And this, I believe, is where the great majority of mergers and acquisitions fail. People at the top fall in love with the “deal”—the strategic fit, the potential boost in short term revenue, the new products added to the portfolio, and generally with the “numbers” of the deal. Investment Bankers and M&A consultants emphasize the financial terms and other “hard” aspects of the potential deal—to the near exclusion of the “soft” factors of the deal. Most of all, I think it’s easy for senior management to become “deal-junkies”—quickly addicted to the adrenaline rush that comes with deal making. Unfortunately, all of this tends to obscure a really important fact. In High Tech, when you acquire a company, you don’t really gain ownership of the people—the key factor that makes a company in our business a success or failure.

MANY PATHS TO FAILURE

The integration of the two organizations and their employees is almost always an afterthought. No one gives much thought to this aspect until Senior Management has already decided they want to do the deal. Then it’s time to start to figure out how two, often disparate, cultures will mesh. In reality, these steps should be reversed—the cultural fit should be studied very closely at first, then other factors of the deal should be examined. IF THE CULTURES DON’T FIT–USUALLY YOU HAVE A DISASTER ON YOUR HANDS. It won’t matter how well the numbers work, how much cost you can take out, or how much geographic or product synergy you envision. It will be a disaster.

There are many other ways an acquisition can turn out badly. Let’s list a few:

Integration of MIS: There have been many good companies that have struggled (or even choked to death) trying to integrate incompatible back office systems

Product Integration: This is especially true in the case of software companies. A software company “takes out” a competitor. They then spend the next five years trying to integrate the two code bases. Or they kill one of the products, alienating the user base they just acquired. This one occurs over and over again.

Overlapping Brands: The HP-Compaq merger is a good example of this problem. HP paid a huge price for Compaq, and much of the value was in the Compaq brand. Did they need another brand—and what have they done with it since the merger? Customers then didn’t know which brand of computer they should consider buying—HP or Compaq. They kept both brands, and didn’t segmented them in any meaningful way. This causes confusion as well as duplicitous expenditures. What’s worse, many times one of the brands is simply ditched—which is the equivalent of throwing millions (or billions!) of dollars of brand equity out the window after your purchase.

Dueling Managements: This is symptomatic of that really funny deal, the “merger of equals”. No one decides who will run the company until after the merger is final. This results in an internal “struggle to the death” for control of the company for the next year or two, while the remaining competitors run past.

Channel Conflict: Maybe both companies have large dealer networks with a lot of overlap. Or the acquirer is primarily a direct seller, and the target primarily sells through the channel. These issues can be some of the toughest to manage. If done poorly it will lead to large, sudden revenue reductions.

Exit Strategy for the Target: Often times there doesn’t even need to be “cultural” people problems for disaster to strike. If the acquired company views the deal primarily as an opportunity to “cash out”, there will be a mass exodus of key people to the nearest beach, people that you need for the acquisition to make sense. Or worse yet, they stay and become working zombies until their obligation runs out. It’s pretty hard to put effective “golden handcuffs” on everyone.

IT’S THE PEOPLE, STUPID

There are many more ways to failure than I could list. But they are all minor in scope compared to the likelihood of the “culture clash”. To begin with, all of the people in the company being acquired are “freaking out”. Will I have a job? Will I being doing the same thing in the combined company if I keep my job? Will I have the same benefits? Who will I report to? I’ve heard the managers in the new company are raving lunatics who eat their young! In the acquiring company often the same fears exist to a slightly lesser extent. All of this leads to suspicion and distrust between employees of the two companies.

Even a proposed merger is an opportunity for the rumor mill and imaginations to run wild. Key talent is now open to exploring what opportunities might be available in the outside world. Sometimes the brain drain might start almost immediately, well before the deal is even consummated. So the problems begin early on. The stage may be set for failure, and the ink isn’t even dry on the merger agreement. All the while the guys in the Executive Suite are toasting themselves with Scotch, and patting themselves on the back. Eventually they get around to forming a committee to look at “integration issues”. But management focus often doesn’t really shift to this potential culture clash until the merger is consummated–and the fires have already started.  Productivity crawls to a halt, while new turf battles emerge. People you don’t want to lose are leaving left and right. The guys at the top don’t know what hit them–until the wall of fire is too high to extinguish.

ACQUISITIONS CAN WORK—BUT SHOULD COME WITH A WARNING LABEL

I hope that all of this doesn’t come off as negative to the extreme. It’s only meant to caution. There are actually many good scenarios that can lead to successful acquisitions. Software companies who look to buy to fill a hole in their product line, or acquire technology to quickly jump on an emerging market segment, as a good example. These types of deals can make tremendous sense, if executed properly.

But in Software and other High Tech markets, product cycles are short, and differential advantages are fleeting. As a result it’s all about the people, since differential advantage needs to be continually re-created. So the next time you think about making an acquisition to solve a business problem or accelerate your growth—think about the people first.

I’d like to hear about your M & A; experiences—drop me a note.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on June 8, 2005
filed in Business Development, Business Models, Corporate Strategy, General Management, Mergers & Acquisitions
Newer Posts »