Warning Signs

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Just because people have a bad feeling about the company doesn’t mean they’ll be ready when disaster strikes.

By John Buchanan

Warning Signs

John Buchanan is a journalist, author, and screenwriter. He lives in Cocoa Beach, FL. His last article for the magazine was "The Next 90 Days" in the Spring 2013 issue.

Sometimes companies implode, spectacularly, with little warning, in a blaze of CNBC headlines, hastily arranged press conferences, heated accusations and denials, shareholder lawsuits, calls for congressional hearings, and photos of dazed ex-employees holding file boxes in front of the HQ building. Enron, WorldCom, Lehman Brothers, Tyco . . . you know the names.

But more often, failing companies do so gradually, under pressure from disruptive technologies, global competition, demographic shifts, and/or bad management decisions. Quarter after quarter, executives, mid-level managers, and rank-and-file employees carry on as if the chart arrows angled upward instead of downward, crafting optimistic internal memos and investor reports.

Of course, upbeat projections and rah-rah rhetoric eventually clash with reality. “I remember the sound of walking down the hallways at Kodak on those old floors,” says Dana Manciagli, who joined in 1996 as VP of worldwide marketing only to watch one of America’s most iconic companies self-destruct after failing to comprehend the existential threat of the digital imaging technology that would transform—and effectively end—the film-based photographic and movie markets Kodak had dominated for a century. “It just felt so out of date inside that building,” she says. “Even the logo, when you drove up to the headquarters in Rochester, seemed out of date. The whole culture of the company, the low energy level, just seemed out of date. It didn’t feel like a technology company. And for me, that was one of the ‘aha’ moments. They just weren’t moving fast enough. There was no pep in their step, as there is in thriving companies. Everything about the company and the culture was slow and tired.”Buchanan3

Lynore Abbott had a similar experience at Polaroid, where she worked for five years as a project manager. Like Kodak, the revered company failed to successfully transition to the digital age. “The first year, I just thought of it as difficult going,” Abbott says. “Then, when I experienced the first wave of layoffs, I realized what was really going on. Then I started to realize the places we were trying to get to as a business—and to understand that we weren’t really making any real strides in those directions.”

As Polaroid’s market position worsened, so did Abbott’s level of frustration. When she joined the company in 1992, it had twelve thousand employees. By the time she left in 1997, there were half that many. “In that kind of environment, it can be very difficult to motivate your staff,” she says. “People start thinking, ‘In another year, only half of us will be here.’” In fact, her team dwindled from fifteen technicians down to just three. “That makes it hard to maintain a productive work environment,” she says. “People spend too much time worrying about the future. And when they’re concerned about the survival of their jobs, they are not as creative as they are in a healthy environment. And the situation just gets worse and worse when you see management going behind closed doors to try to figure out a way to do something about the problems. That just makes people think they will lose their jobs even faster.”

Even worse, Abbott says: The best and brightest employees seem to grasp the deteriorating circumstances first and jump ship the fastest, exacerbating an already bad situation.

It also creates a painful personal experience for anyone who has opted to be loyal and stay. “That’s because they have invested so much time and energy into the company,” says Mark DeVerges, practice leader at Asheville, N.C.-based executive recruiter Kimmel & Associates, which specializes in the notoriously boom-and-bust construction industry. “To see your company suddenly go in the opposite direction of the one you’ve become accustomed to causes all sorts of Monday-morning quarterbacking. You start wondering whether there is something more you could have done, or whether there was something happening that you weren’t paying enough attention to. And most people tend to think that way, even if it was decisions made above them that really caused the problem. But no matter how it has happened, they almost always wonder, ‘What could I have done differently?’ And that causes a lot of guilt and anxiety, even though nine times out of ten it really has nothing to do with them directly.”

Can This Ship Stay Afloat?

Of course, for any employee facing potential unemployment due to circumstances largely beyond his or her control, the next question is whether there might be some way to turn around the foundering enterprise, whether management can actually accomplish that task, and whether one is in a position to possibly make a difference. “What you should do when you raise the alarm is not just say, ‘Here’s the problem,’” says Abbott, now a consultant who sometimes deals with such quandaries on behalf of her clients. “You have to offer some idea of a solution. And if you do that, your supervisors or management are much more likely to listen to you.”

The sooner you get out of a failing company, the better.

At Polaroid, she says, many people made suggestions and tried to map out a new direction for the company. But the downward spiral had already begun—no one’s recommendations could counter trends in fundamental metrics such as sales and cost structures as well as a general bottom-line disarray.

In going through the experience, Abbott realized that by nature, big companies tend to sustain established momentum and are able to move in only one direction—even if it is toward disaster. Part of the reason for that, she says, is that it takes time for distress signals to be recognized and truly understood. “And it also takes a long time for those signals to get up to the decision-makers, the people who can actually change direction,” she says. “But at the same time, corporate politics tend to try to eliminate the bad news, so often it doesn’t really get up to the right people.”

Manciagli experienced a similarly destructive dynamic at Kodak. “Unless top executives and senior management have a mandate and financial motivations to change the direction of a company, there is nothing that executives or managers at the next levels down can do to overcome cultural barriers,” she says, adding that she made numerous attempts to leverage her hefty job title in order to motivate Kodak to face the digital threat head on. “But,” she says, “once my direct manager got stuck between ‘change’ and ‘no change,’ he reverted to the company’s traditional thinking and toed the old guard’s line.”

Meanwhile, notes Michael D. Teare, a former senior VP of a major construction company who experienced back-to-back implosions over a six-year period, there is often a good practical reason why senior executives are reluctant to intervene in a volatile, dangerous set of circumstances. “As you move up in a company, in a sense the more vulnerable you become,” he says. “The larger your title, the bigger the bull’s eye on your chest.” Roll the dice on pushing a radical solution to a potentially catastrophic situation, he suggests, and you are as likely to be out on the street as you are to be hailed as a hero.

Although startups or smaller companies, by nature, are more nimble, Abbott says, politics and an aversion to bad news often silence rank-and-file managers who spot trouble and try to do something about it.

“And,” Abbott says, “in my experiences of implosions, even if management wants to regroup, they don’t know how to do it, so they just work harder on the bad plan that is causing the company to fail.” In other cases, most notably startups and young enterprises, Abbott has also observed that a lack of trust between investors and the management team prevents them from actually working together to find a way to turn things around.

For Teare, the unexpected and painful end came suddenly, as the immediate result of a single decision by the owner of the privately held company Teare had helped lead for a decade. When the company lost its ability to bond projects through its longtime service provider, the owner refused to assume personal responsibility for future bonding obligations—and, in effect, killed his own company overnight.

After that debacle, Teare faced a second implosion six years later when another major construction company he had helped build collapsed under the weight of the 2007-08 industry downturn.

Post-Polaroid, Abbott moved on to another company that failed when an industrywide recall of a key component undermined its telecom business.

Teare and Abbott’s point is that a successful company can collapse very quickly as the result of a single development rather than a longer pattern of erosion. But either way, the damage is done.

However, Bill Westwood, senior partner in Korn/Ferry International’s leadership and talent consulting practice in New York, cautions against pessimism and resignation: There are plenty of well-known examples (Apple, anyone? General Motors?) of enterprises that survived the onslaught of threatening circumstances—along with predictions of doom and even Chapter 11 filings—to survive and flourish again.

As an example, Westwood cites a veteran industrial supplier that went through bankruptcy and is today healthier than ever. “They made the turnaround work with a great number of executives who were onboard and who went through that fire of downsizing, diminishment, plant closings, reductions in force—all of those very traumatic things,” he says. “For those executives who chose to stay and remain in the cauldron, it was a very challenging and difficult time. But what you saw in those who were successful was that they had the agility to re-envision a different company. And secondly, they had the kind of resilience that allowed them to live up to that old saw, ‘It’s not the challenges that are presented to you, but how you respond to those challenges, that differentiates the successful from the unsuccessful.’”

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The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.