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| Home - Industry Article - Sep 02 Issue |
What Getting Real in Today's Environment Really Mean |
By Phillip Lay, Managing Partner, The Chasm Group
Today most people recognize that the tech industry is experiencing the toughest times in more than a generation, with little signs thus far of when things will lighten up. By now, after more than two years (yes, it's been that long!) since the internet bubble was first punctured in April of 2000, I would have expected most company CEOs and management teams to have got real about the predicament they were in. Unfortunately, in my daily contacts with executive teams and Boards of software companies, I still see that hope-based (or their sibling despair-based) management attitudes still predominate over a more grounded mindset that I will refer to as reality-based management. From where I stand, the lack of a realistic approach, more than any other single 'internal" factor, is serving to delay a return to more viable or even prosperous times for the market as a whole. Even worse, I would argue that adopting a variation on the hunker-down-and-hope approach - as many companies seem to be doing - is likely to lead to failure of the business. To use psychologists" jargon, if untreated, the refusal to face squarely up to the need for tough, perhaps, radical decisions, is almost certain to be pathological - i.e., it will cause the organism's demise.
In previous articles I have referred to the importance of contrarian thinking, a quality that is especially vital when times are bad and all about you are losing their heads. What I mean by this is that it is during tough times that companies can separate themselves from the herd by having the courage to row upstream against the prevailing currents of defensive management and conventional thinking. Thus, instead of hiding in a bunker to weather the storm, it is critical that management teams drum up the energy and initiative to address the tough decisions that will give their companies a fair chance to survive the current storm to fight new battles [OK, that's enough with the mixed metaphors!].
Here is my challenge to all those management teams who are reminded on a daily basis of the deflating fact that the companies they have spent five years or so building have an enterprise value equivalent to zero or less. Before I continue, allow me clarify what I believe is meant by 'enterprise value', a metric introduced by securities analysts to compare the real market value of tech companies. As we all know, many such businesses continue to be unprofitable well after their IPOs, despite having cash in the bank from such liquidity events as secondary offerings (the private-company equivalent being those companies flush with cash from recent D, E or F rounds, and still operating unprofitably). 'Enterprise value" is a measure that, among other things, subtracts a company's cash resources from its market cap (or market valuation, for private companies); today, despite having cash in the bank, many notable public software companies have a close-to-zero or negative enterprise value as a result of this calculation. You can debate whether or not cash should be part of the enterprise valuation, but Wall Street prefers to count this conservatively, especially in companies with money-losing operations, on the skeptical basis that if the company is still losing money after all this time, what's to say that the cash won't be frittered away before investors can get their hands on it?
Thus, taking into account the various indicators that the market is using to send companies a message (such as, if in the currently depressed stock market your company is being attributed a zero or so enterprise value; or if your product category today does not look so 'investable" or promising as it once did; or even, assuming there is no assured upturn on the horizon for software companies as a class), it is reasonable to ask what company management teams are doing to give their companies a chance to avoid the failure syndrome that is consuming many of their fellows? Unfortunately, my perception is that most teams are still operating out of an excessively tactical frame mindset, thus effectively not giving themselves a real chance to survive today's perfect storm. So, what are the key signs that hope-based attitudes are continuing to predominate over reality-based approaches? Below I have listed five factors, with a specific emphasis on sales-related inhibitors, and have compared approaches that are likely to result in a downward spiral (the first set), versus those in which management is taking the right kind of action to maintain or restore vitality in the business (the second set):
Five signs that the Board and e-team may be presiding over a pathological spiral:
1. Business model: Companies conceived and launched on one fundamental business model during the boom (e.g., software licensing, custom-project services, transaction services, or subscription services) that opt to make only gradual adaptations to the existing organization instead of actually redesigning their structure and processes in order to operate the new model effectively (*);
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