Why Cleaning
House Can Create a Bigger Mess
Replacing
the CEO of a struggling startup is relatively easy. But when the new boss then
decides to obliterate existing top management, the troubles seem to multiply.
Executive director, Ed Kaplan Family Institute for Innovation
and Tech Entrepreneurship, Illinois Institute of Technology
I
have been concerned for a while now--even as the stock market continues to
lurch upward and carry tech stocks to new heights-- that things are getting
tougher in the trenches. Securing follow-on financing is more challenging these
days and investors are both more realistic and more demanding as well as far
less patient than they've been in the past. Not good news for
newbies.
I'm also seeing
strategics take a step or two back and disappear at the last minute from deals
that were "done" but for the ceremonial dinner. Except that they
weren't all done and the businesses waiting to cash those checks blew up
instead of celebrating. From the corporate's perspective, it's a lot better to
have wasted a bunch of time examining a deal than to lose a lot of money
investing in a bad one. In the first case, it's likely to lead to a slap on the
hand while the other's gonna be a kick in the pants.
Maybe this is all
an investor reaction to the reduced upside and liquidity (ease of exits) that
the market is currently offering as compared with the risks, brain damage, and
multi-year struggles that even the best of startups represent. When things are
taking longer to blossom, and the far-off promise and remote horizon of actual
profits continues to recede, the idea of making 50% to 100% returns on your
money every 6 months with a couple of phone orders to buy stocks like Stitchfix
or Netflix starts to look awfully attractive.
But there's a bigger
issue for the entrepreneurs running businesses that are now caught (hopefully
momentarily) in that nasty space between nothing and nirvana. Boards and
investors start to get antsy, too, and look for quick fixes, fire sale
liquidations, or-- perish the thought-- changes in management. The typical
tenure of a startup CEO isn't that long to begin with and when everyone is
looking for "change" -- without any real idea of what that means for
a particular business--it's easy for the person running the business to feel
like there's a target painted on his or her back.
This is not a happy
prospect, and I think we are gonna see a lot more coming. But I'm actually okay
with replacing the CEO when the ship has stalled and there's no real salvation
in sight. The problem is with directors and investors who bring in a new
leader who then shows the rest of the management team the door. In this ritual
house cleaning the new CEO too often ends up throwing out the baby with the
bath water.
If this kind of
wholesale dumping of the incumbent C-level team is even arguably appropriate,
then both the board and the prior CEO have been asleep at the switch for years.
And I'm seeing this happen every week now in larger and smaller businesses,
where the mantra of change (almost for change's sake) without any real
guidance, direction or plan is the flavor of the week. Instead, it's
another way for investors and directors to buy time, ignore certain obvious
realities about the business, and watch while the deck chairs are shuffled for
the umpteenth time.
So, here are a few
hints for both incoming CEOs and the boards that bring them in:
(1) The new CEO
doesn't know where all the bodies are buried and what closets hold the most
skeletons, but others on the team do know. So, even if they aren't the best bet
for the business in the long run, tossing them out prematurely is a sure
formula for failure. And, I might add, the board doesn't really know the new
CEO that well either on Day One; giving the new leader unlimited license and
adopting a laissez-faire approach makes very little sense. You don't have to
look any further than the revolving doors at Hewlett Packard over the last ten
years for clear evidence. Counting on your search firm to get the pick 100%
right is equally foolish. Even the best headhunters suck at telling you the
real story--they're just looking to close the sale.
(2) Adding a
bunch of new people to any enterprise at the same time (even if they've
previously worked with each other at different places and under different
circumstances) exponentially increases the risks of making major mistakes in
the early going. Changes, especially in company culture, don't come easily and
they rarely begin until the new management starts taking actions rather than
just talking about what's going to happen. But, if a half dozen people are
running around and making random decisions (especially about people) before
there's even a clear alignment on direction and strategy, the message to the rest
of the business couldn't be any worse or less productive. Measure twice, cut
once.
(3) Your
key employees (the ones you need to keep and re-recruit to the new mission) and
your most important customers are also likely to be plenty nervous about the
changes being made and looking for as much stability and continuity as
possible. In every case I've seen, senior people who were quickly shoved out
not only knew a great deal about the business, they also knew and had
long-standing personal relationships with a lot of the key customers.
Here again, some of
those relationships and even customers may not have been helpful (or even
profitable), but you can't really determine that without spending some time
looking under the covers. That's why it helps to have a few knowledgeable
people on board to assist and guide you in that process of discovering what's
what.
Bottom line: wholesale
house cleaning without taking the time to do it right can be very hazardous to
the health of your business.