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Why do Companies really Fail?

By Angel Mehta, Managing Director, Sterling-Hoffman Management Consultants

“The outward freedom that we shall attain will only be in exact proportion to the inward freedom to which we may have grown at a given moment. And if this is a correct view of freedom, our chief energy must be concentrated on achieving reform from within”.
- Unknown

Failure is once again in vogue. Or more precisely, the study of how and why business failure occurs. Witness the cover story of a recent edition of Fortune Magazine: "Why Companies Fail." Typical of the magazine, the article is simple, direct, and right on the money. More importantly, the topic is timely – presumably why the magazine made it a cover story in the first place. Nothing sells like stories about failure (except perhaps stories of wretched excess.)

Failing, as we all know, represents a significant problem: it’s expensive. Every time a startup fails, people lose their jobs, customers lose their investments, and investors lose their shirts. It makes sense that we’re all obsessed with discovering techniques to avoid failure (or at least, avoid getting mixed up with people that fail.)

It would seem that the last thing we need then is yet another article discussing why people and organizations fail. Yet I believe, without question, that the majority of us have continually failed to catch onto a concept that business psychologists and a handful of corporate leaders instinctively understand.

My own perspective, after having listened to thousands of stories of failure, (scrutinizing every aspect of executive failure represents a good portion of every search consultant’s job), is that most companies fail precisely due to a lack of emotional maturity in at least one (usually several) of it’s key executives.

This message hit home (again) recently when a key executive we had placed into a silicon valley-based web services startup just over 12 months ago, was unexpectedly terminated. The company had killer technology, world-class venture capital backing, a large market, enough cash on hand to carry it to profitability, and early customer traction. What, I thought, when accepting equity as part of our fee, could possibly screw this up? Little did I know.

When the executive (who I’ll call Sam) failed to return my quarterly review call recently, I became worried. A visit to the corporate website confirmed the worst – Sam was no longer listed on the executive team roster.

The company’s line was simple: Sam had failed to achieve the revenue target last quarter. Obviously there was more to the story, and as I dug beneath the surface, I recognized an all too familiar pattern. In essence, it was the same story I had heard from hundreds of senior executives, entrepreneurs, and investors over the years.

When I finally caught up with Sam, he expressed to me that he had felt ‘poor chemistry’ with the CEO from the beginning. “I never knew what he was doing, and he never asked me what I was doing…he didn’t seem to care.” A few months later, the CEO hired a couple of executives from his old company and Sam began to feel even more alienated as some of his responsibilities were slowly shifted over to other executives that were part of the CEO’s clique. On one occasion, Sam had closed a major account, but the deal collapsed because the product could not be delivered on time. Sam blamed it on the CEO’s decision to remove his control over the professional services organization, pointing out that resources were ‘suddenly and mysteriously’ unavailable to support his sales initiatives.

The level of trust deteriorated until one day Sam mentioned to another member of the executive team that he was ‘frustrated’, and sometimes tempted to ‘look around.’ Of course, word leaked to the CEO, and the next meeting between Sam and the CEO turned into a screaming match, with the CEO accusing Sam of threatening the company and trying to launch a coup. A few weeks later, Sam was suddenly terminated.

What is ironic here is that there was never any blatant conflict between the CEO and Sam prior to the blowup. They simply never talked about the lack of communication. To this day, Sam remains mystified as to what the CEO had against him. Frankly, things aren’t clear to me either. Even the board members seemed confused about what caused the chemistry breakdown in the first place.


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