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Management clinic: Failure and how to avoid it

Management clinic: Failure and how to avoid it

When managers of a mildly successful start-up company start to spin off responsibilities, there can be a number of pitfalls.

My company was rocking at the 1995 Lotusphere event. Lotus Development announced that we had been selected as one of the 200 or so Premium partners in the country. Even better, Jim Manzi, then-CEO of Lotus, personally presented us with a coveted Beacon Partner Award. Future management mistakes, however, would eventually negate our outstanding credentials and compel me to dissolve the Notes business I'd spun off as a separate entity.

But things looked very different on January 2, 1997. That was the day our company's first professional manager, Dave, reported to work to run our Notes department. Up to that point we had had an unorganised group of Notes developers who collectively weren't quite breaking even.

Dave came with extensive experience and glowing references. We believed that he was the one who could bring order to our chaos.

Dave quickly began generating consistent profits and increased sales. He added a training division and a separate integration arm. His results were impressive enough that I decided to spin off the Notes department into a separate company and make him president. In theory, this would eliminate the distractions of selling hardware and software and allow him to concentrate on building a true consultancy. The plan was to eventually sell the new company at a much loftier price-to-earnings ratio than hardware-centric integrators typically receive.

The original staff of nine swelled to 22 over the next two years, but sales failed to keep pace. Small losses grew to large ones that started to seriously deplete our financial resources. I was forced to step in and first pare back the Notes company and then shut it down as a separate entity. This was painful from several standpoints: personal failure, customer dissatisfaction, employee layoffs and, hardly least of all, economic loss.

But from my experience I did manage to learn five valuable lessons that I'd like to share. Of course, your cost for this information is several hundred thousand dollars less than mine.

1) Beware of success. In Al Ries' book Focus: The Future of Your Company Depends on It (Harper business), he cautions owners of businesses at about the $US10-million annual-revenue level - which happened to be our revenue range when we spun off the Notes division - "This is about the time when the founder decides the company is getting too big and delegates operating responsibility to three or four key people. Result: each person takes his or her box and runs in a different direction."

2) Don't underestimate your own contributions to your organisation's success. By taking a hands-off approach to our Notes company, I inadvertently withheld much of the energy and sales that result from my personal involvement in our daily business.

3) Be sure to align your incentives with your objectives. The stock options I offered Dave kicked in only at higher revenue levels, inducing him to build long-term sales at the expense of short-term profits.

4) It's better to suffer a quick death than a long, agonising one. Treat every division as if it were a stand-alone company. Unless you're running an Internet business backed by venture capital, quickly pull the plug on any division or spinoff that fails to generate profits.

5) No matter how competent your management, constantly monitor the numbers. If I had paid more attention to our climbing payroll costs and increasingly aged accounts receivables, I would have noticed that big troubles were afoot. Managers need to put relevant metrics into place and then take decisive action when the numbers demand it.

Steve Kaplan is president of RYNO Technology, a California-based solutions- integration company. You can reach him at skaplan@ryno.com


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