NEWS.com

The lure of the corporate turnaround

By Sergio G. Non
Staff Writer News.com
March 9, 2001, 4:50 PM PT

Mark Parides was looking forward to a smooth, gradual transition into the top job of CEO when he took the No. 2 position of chief operating officer at Gadzoox Networks in June of last year.

He thought he would spend a year or more in his new position, being groomed to replace Bill Sickler as president and CEO of the maker of equipment for storage-area networks. As it turned out, Parides didn''t even have two months.

Three days after his COO appointment was announced, the company warned of disappointing quarterly results. Seven weeks later, with the stock trading nearly 70 percent below its prewarning price, Sickler resigned and Parides was thrust into the chief role in "an acceleration of the succession plan" originally plotted by the Gadzoox board.

He was also thrust into the growing ranks of turnaround artists, daring executives who jump on sinking ships of a company and attempt to boost its stock price and revive its earnings, revenue and market share.

When the executives succeed, they get showered in the glory of reviving a company. But failure means hitting bottom with the ship--after what many term excruciating work.

With the markets in a downward spiral, demand is growing for these daring corporate saviors. More than 200 dot-coms went under in 2000, and another 49 shuttered their operations in January of this year, according to Webmergers.com.

And it''s not just the small Net companies that need help. Even mighty Yahoo announced this week that it is looking for a new CEO.

While some executives see these gloomy times as stressful, others such as Rakesh K. Kaul, former president and CEO of Hanover Direct, thrive on turnaround work.

"The majority of executives are not suited for a turnaround," Kaul said. "It is a very unique situation, and it requires extraordinary leadership."

Hanover Direct reported an operating loss of $95 million in 1996, the year Kaul took over. Four years later, the catalog retailer was back to an annual operating income of $17.4 million.

Kaul came to Hanover from another catalog retailer, Fingerhut, where he was vice chairman and chief operating officer. He was involved with the creation of Fingerhut''s credit card unit, Metris Companies, which went from concept to publicly traded company in less than four years.

Being an executive with a seasoned company or the leader of a start-up doesn''t offer the same level of gratification as a turnaround, Kaul said.

"Start-ups certainly carry risks in terms of the marketplace, and they certainly have the risk of whether the business model will work," he said. "But from a management point of view, the challenges are not that great at a start-up, in my opinion."

A new company offers a blank slate that makes it easier for an executive. But a troubled company requires more work and effort, Kaul said.

"That is an enormously, enormously satisfying proposition," Kaul said. "Only when you have lived it can you know what it feels like. I feel very good about accomplishing the turnaround of the Hanover merchandise business."

A painful but ego-boosting process
Parides doesn''t share Kaul''s excitement.

"Those people are crazy," Parides said, laughing briefly. "The sheer pain of how many things you have to change...It''s painful, it''s time-consuming, it''s challenging on an intellectual and on an emotional basis."

Gadzoox hasn''t completely turned around, but things have improved, Parides says. In the latest quarter reported--Parides'' first full quarter as CEO--the company beat analysts'' earnings estimates.

Turnaround specialists are often fueled by ambition and ego fulfillment, said Neil Scheer, a management consultant with Morton H. Scheer & Co., which specializes in crisis and turnaround. "If these individuals are fairly well placed in a successful situation, they''re bored," Scheer said.

And the chance for a higher position, even at a shakier company, attracts people, said Tom Ferrara, CEO of CareerEngine Network.

"If you''re not a CEO, there''s always the lure to become a CEO," Ferrara said. "If you succeed in a turnaround, you can begin making a successful career as a CEO. And if you fail, it''s not as much of a scar, because it was sour before you came."

Those appeals make it fairly easy to find would-be turnaround executives, Scheer said. "The question is, ''How good are they?'' It really started to manifest in the ''80s, when banks were cutting back...and every out-of-work banker hung out his shingle as a ''crisis-turnaround artist.'' You''d see stacks and stacks of all these brochures of all these crisis-turnaround managers that nobody ever heard of."

What makes a good turnaround CEO?
Righting a capsized corporate ship can make an executive into a business demigod. Lou Gerstner''s rescue of IBM from its troubles in the early ''90s has become the stuff of business legend.

But it also can destroy a reputation if you stomp on a lot of people along the way.

"If you come in and just tear the place up, you make a lot of enemies. People leave," Ferrara said.

Changing a company''s attitude is one of the first things that must be done, executives say.

"I think we created a slightly different culture than existed before," Gadzoox''s Parides said. "I think the company was more likely to seek consensus at the expense of a willingness to confront problems. The truth is, companies often seek harmony at the high cost of making the tougher decisions. We have to address what''s in front of us. We don''t have time to delay."

News.com

Tight labor market results in fewer firings

By Rachel Konrad
Staff Writer
April 11, 2000, 1:15 PM PT

update The flip side of America''s tight labor market--filled with employers desperate for qualified workers--is a subject most executives are loath to acknowledge: Fewer people are getting fired.

Although statistics are sparse, anecdotal evidence in the reduction of fired workers abounds. The phenomenon is especially evident among companies in the technology sector, where job growth is high, employee turnover rates are acute, and many start-up companies have inexperienced human relations staffs.

"The line of subordination has moved," said Anne Pasley-Stuart, CEO of Pasley-Stuart Human Resource Consultants in Boise, Idaho. "With my technology clients, managers are more willing to tolerate more misbehavior. There''s a willingness to work with employees experiencing difficulty--to spend more time counseling them--because it''s so difficult to replace them."

The Bureau of Labor Statistics does not compile data on the number of workers who are involuntarily terminated. Most states, including California, do not distinguish between fired and laid off workers when determining unemployment benefit eligibility.

But experts say the ratio of unemployed to fired workers is roughly proportional: As overall joblessness decreases, so does the frequency of forced terminations. That means a big drop in the number of firings is a likely accompaniment to the 4.1 percent U.S. unemployment rate in March, which marked a 30-year low.

Publicly, managers say the historically low unemployment rate does not translate into lower standards for new hires. They also cite examples of employees terminated for egregious workplace offenses, ranging from on-the-job drunkenness to sexual harassment.

But privately, many executives and middle managers lament the high cost of executive talent searches and lengthy learning curves for new hires. Many admit that they have kept marginal employees because they fear they won''t find a more able replacement in a timely manner.

"There''s a certain baseline for being fired that hasn''t changed: If someone brings in drugs or weapons, they''re out," said one HR administrator in a small technology company in Southern California. "But if they''re unable to work with a group or if they have poor social skills, we have to tolerate it because it''s a seller''s market."

Companies also may have a financial incentive to retain marginal workers.

According to the human resources portal HR.com, the cost of a replacement worker is two to three times the cost of a retained worker. The cost increases as the salary and position of the worker to be replaced increases.

Bottom line: An inefficient employee probably costs the employer less than finding and paying for a maximum-efficiency replacement; it cuts down on the hassle, disruption and risk associated with a new hire.

Start-ups face additional concerns in deciding whether to fire.

Michael Closz, vice president of marketing and sales at Fortress Technologies of Tampa, Fla., said the decision to fire an employee looms especially large for small businesses. His company employs 55 people, all of whom work in close proximity to one another. As a result, the company can''t afford to have "weak links" sapping the productivity of the entire team.

"We''re all in this together, so we have to find out why they''re slacking," Closz said.

Executives and consultants say few companies retain clearly incompetent workers or misanthropes with no ability to participate in team projects. But they often retain unproductive employees and those who engage in slightly deviant behavior: chronic tardiness, unexcused absences, temper tantrums and a distinct lack of social grace.

Working with what they''ve got
Does this mean offices are filled with sub-par workers unqualified to perform the tasks for which they were hired? Will the historically low unemployment rate eventually translate into companies staffed by antisocial slackers?

Not necessarily.

"It can be a good thing if you can take an employee who genuinely enjoys the company and turn them around," said Tom Ferrara, chief executive of New York-based CareerEngine, an online network of category-specific career sites for information technology, sales, finance, law and medical positions.

"If that person is just lazy and isn''t doing a sufficient job, and you keep them there because you''re afraid (that you can''t find a replacement), it can cause problems," Ferrara added. "Peers look around and see that a person is getting the same amount of money but doing a quarter of the work, so why should they bust their ass?"

To avoid a systemic productivity drain, companies are adapting to the reluctance-to-fire phenomenon.

Several of Pasley-Stuart''s clients have sent cantankerous employees to anger-management workshops, with results bordering on the miraculous. Quarrelsome but intelligent employees who may have been fired in a slack job market learned to control their rage and probably benefited outside the office as well, she said.

Several HR executives said the tight labor market forces them to reposition problem employees. Instead of getting the ax, they''re getting a transfer.

"We''ve moved people from sales to account management or marketing," Ferrara said. "Maybe they''re not good at outbound cold-calling, but they''re good at maintaining relationships once an account has been established."

Vickie Strong, human resources director for Pixel Magic Imaging of San Marcos, Texas, has had numerous successes with the transfer-instead-of-fire approach.

"We just recently told an employee, ''We have another position here that would be a better fit for you and the company and would make you happier,''" said Strong, whose firm employs 180 people and is on an aggressive hiring binge. "People go into it with an open mind, not thinking that they were just being pushed out."

Aiming for smooth sailing
Fortress Technologies'' Closz said the root of most firings is a communications breakdown: A manager doesn''t understand why an employee behaves in a certain way, and an employee doesn''t communicate his needs. The dysfunction escalates until the frustrated manager fires the disgruntled employee.

To avoid breakdown, Closz invites disparate wings of the 55-person company onto his boat. The next cruise will unite product development engineers with salespeople.

"They realize that the sales folks aren''t so bad, and the developers aren''t just a bunch of geeks," Closz said. "We try to fix bad attitudes. We try to find out what the problem is before it gets out of control."

Although fewer people seem to be getting ousted from technology companies, other industries feel the low-unemployment pinch.

Jeffrey Clark, president of Production Stamping in Milwaukee, moved his 70-person metal stamping firm last year to a depressed neighborhood with roughly 15 percent unemployment, compared with the Wisconsin average of 2.8 percent. He wanted to be closer to eager workers.

He also started an "amnesty" program that allows workers convicted of nonviolent crimes to take unpaid leave with a guaranteed job upon their release from jail. A similar program allows leaves for substance-abuse rehabilitation programs. The company also gives flexible shifts to paroled workers with curfews.

"We really had to reach out," said Clark, who bought the 51-year-old company last year. "We were losing employees who were good employees, valued employees, through bouts with the law...In this job market, we weren''t willing to cast away employees who had trouble with the law."

Keeping workers at what cost?
Despite examples of rehabilitation, some say fewer firings may stifle innovation.

Russell Hoffman, 43, said his motivation for starting his own company came in part after he was fired. He''s now owner and chief programmer of The Animated Software Co. in Carlsbad, Calif., which produces educational software for professional training programs.

"I took a look at what I was doing at the time and said, ''No one can fire me if I''m working for myself.'' It''s a nice position to be in," he said. "Who knows how many people would come up with interesting ideas if they weren''t working for someone else."