Two Efficiency Gurus Who Failed Their Own Course

Covey and Smith merged their companies--and now need help

In the past decade, Stephen R. Covey has become a cult hero to those looking for ways to make their lives and businesses more effective. His best-selling manifesto, The 7 Habits of Highly Effective People, has sold nearly 13 million copies since it was first published in 1989. By the mid-1990s, Covey had turned such commonsense bromides as "putting first things first" into nearly a $100 million-a-year empire of books, tapes, and seminars, and was counseling 82 of the 100 largest U.S. companies.

Covey had bigger ambitions, however, and in 1997, he combined forces with time-management guru Hyrum W. Smith, father of the Franklin Day Planner and author of his own best-selling efficiency tome The 10 Natural Laws of Successful Time and Life Management. The two men set out to create a juggernaut of efficiency training. "We intend to apply our expertise to our own merger," said Covey, 66, when the deal closed, "thereby creating a model merger for corporate industry."

It turned out to be a model all right, but not the kind Covey had in mind. A bloated bureaucracy, poor planning, and internal bickering helped turn Franklin Covey Co. into a poster child for highly ineffective organizations. On Oct. 12, the company announced that its fiscal 1999 operating earnings had fallen by 94%, to $4.4 million, on a 2% rise in sales, to $554.9 million. It also embarked on a reorganization that will include cutting 600 of its 4,200 employees, out-sourcing some administrative functions, and overhauling its sales force.

The humiliating retreat reveals a company that failed to follow the very advice it pushes. And now the two celebrity management gurus have been forced to take a back seat. In May, Franklin Covey's board appointed outside director Robert A. Whitman, 46, a Dallas financier, as chairman after he invested $75 million, for an effective 20% stake. Whitman installed two of his associates on Franklin Covey's board and ousted longtime employee Jon H. Rowberry as chief executive. Smith and Covey became non-executive vice-chairmen. They retain large stakes in the company but will stick to writing books and running seminars. "Stephen Covey and Hyrum Smith turned out to be better salesmen than managers, I guess," says Donald A. Yacktman, whose Yacktman Asset Management Co. in Chicago is the largest outside investor, with a 16% stake. The share price has plummeted from a high of 25 3/4 last year to around 8 today.

"COMICAL." The idea of combining the Covey Leadership Center Inc. and Franklin Quest Co. seemed like a natural. Franklin was the leading provider of time-management seminars. That fueled sales of day planners through its retail stores, which now number 127. Covey was tops in leadership seminars. Plus, Smith was buying premium content for his stores, through Covey's 7 Habits books and tapes and other authors he had under contract. Franklin Quest agreed to pay $137 million for Covey's company.

But from the start, the new company was beset by bickering, as Covey's staff sought to maintain a separate identity. It didn't help that Franklin and Covey kept separate headquarters. "There was so much internal fighting that it got almost comical," says Smith, 56. Divisions were especially strong within the company's 1,700-person sales force, which marketed its seminars and training sessions. Former Covey salespeople got higher bonuses than Franklin staffers. Covey employees also kept their free medical coverage, while Franklin's had to pay part of their premiums. So much for the win-win philosophy Covey espouses. "It really became an us-vs.-them culture," says board member Robert H. Daines, a professor of business administration at Brigham Young University, who had served on the Franklin board since 1990.

Moreover, basing most of the salespeople in Salt Lake City turned out to be a recipe for violating Habit No. 5 of Covey's book: staying connected with customers. In the early '90s, when clients were lined up to buy the company's seminars, the structure worked. But gradually, Covey's sales staff lost touch with customers--who became ripe for picking by an array of eager rivals. Seminar revenues, which had been growing by double digits, were up just 2% last year. For clients, "needs change daily, and you can't get an idea of what they need by calling up or flying in for a visit now and again," says Juan Gutierrez, vice-president for business strategy and improvement at competitor AchieveGlobal.

Also missing was the proactive approach that Covey teaches: "act or be acted upon." Franklin Covey was slow to convert its thick day-planning notebooks to electronic media. Only last year did it begin selling its organizer along with the popular Palm handheld device, for instance. Costs that seemed easy to cut became frozen, since neither side of the organization was willing to give in to the other. Overhead costs actually rose, to 40% of sales in 1998, up from 35% in '96, before the merger.

HOBBLED. As the stock tumbled, Rowberry--who had been Smith's chief financial officer--cut some nonessential operations, selling a 61-acre nutrition and fitness camp near St. George, Utah, and putting the in-house printing operation on the block. But Rowberry was hobbled by the perception among many former Covey staffers that he favored the Franklin side. "You needed someone from the outside who could ask the tough questions," Covey says. So the board turned to Whitman, the former CFO of developer Trammell Crow Co. who later fixed up Forum Group Inc., a chain of retirement homes that he sold to Marriott Corp. in 1995. Whitman didn't come cheap: In addition to the 10% coupon rate on his convertible stock, the company agreed to pay his Knowledge Capital Investment Group $100,000 per quarter to help draft a new strategy.

Now, Whitman is looking for a new CEO, but he's not waiting to shake things up. He is setting up eight regional sales offices and wants to squeeze as much as $30 million a year from costs. "Nothing is immune to being outsourced, if we think we can do it more profitably," Whitman says. He bought a leading sales-training company and an outfit that measures consulting effectiveness, to help make Franklin Covey a soup-to-nuts management consultant.

Cove says he's humbled by having firsthand experience with the kind of mistakes he draws upon in his writing and speaking. "It is much different when you go through it than when you look at it from some academic ivory tower," he says. At least there is an upside: Expect to see some fresh new lessons on how to deal with a messy merger in Covey's next book, due to hit store shelves late next year.

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