Reversals of Fortune
The view from the Fountain Room at San Francisco's Fairmont Hotel was spectacular -- a sweeping vista of the city's gleaming skyline. It was July 16, 2001, and Jeffrey Rodek, CEO of software maker Hyperion Solutions (HYSL ) Corp., had invited 24 of his top managers to dinner at a place that seemed to sit on top of the world. All the more reason why what he told them came as a shock. After playing Elton John's dirgelike Funeral for a Friend, Rodek announced that the evening's repast would consist of bread and water. "We don't deserve any better," he said.
Rodek's shock treatment kicked off a remarkable turnaround at Hyperion. The company had lost money in two of the previous three quarters, and its stock was trading at 14. Today, it has been profitable for seven straight quarters, and its shares trade at 35. Rodek reorganized the company from five overlapping business units to one and cut in half the time it took to get paid by customers. Most impressive, he managed it during the tech industry's deepest and longest slump.
Hyperion has loads of company these days. Dozens of tech outfits have pulled off impressive recoveries. In fact, 19 of the companies on BusinessWeek's Info Tech 100 list this year swung from losses to profits in the past four-quarter period. They're all over the map, from Nextel Communications (NXTL ) Inc., No. 1 on our list, which provides mobile-phone service, to Unisys (UIS ) Corp., No. 53, which sells technology services. The number managing turnarounds in previous slump years was much lower: seven on last year's list, and nine in 2001.
How did so many companies reverse their fortunes in such turbulent times? While simply getting costs in line played a role, most of these companies made fundamental shifts in the way they do business. They retooled their organizations, overhauled their sales strategies, invested in new technologies, and, after months or even years of work, started making money again. "It's not enough to become efficient. They have to reengineer their companies," says Philip H. Birnbaum-More, a management professor at the University of Southern California's Marshall School of Business.
These stories offer up lessons for hundreds of other companies still mired in the slump. They show how to maneuver a business into a position of sustainable strategic advantage. Perhaps the most important lesson is to strike hard and take advantage of the sense of crisis. "It's effective to hit the panic button," says Shyam Chidamber, professor at American University's Kogod School of Business. "Smart, well-managed companies do this."
Now, with demand perking up, these companies are in better fighting shape than they were in the go-go times. While analysts expect overall tech industry revenues to rise only in the single digits this year, consensus earnings estimates collected by Thomson Financial First Call have profits increasing 30%, after rising just 6% last year.
The long downturn marked a coming of age for many tech companies. It forced many CEOs to take stock of themselves and make fundamental changes. Cable-TV pioneer Edward S. "Ted" Rogers, CEO of Rogers Communications (RG ) Inc. in Toronto, No. 20, had always followed the mantra of growth at all costs. But in 2001 his board demanded a change: better return on fixed assets. "I'm an entrepreneur. We tend to be all over the map," says Rogers. "In the past two years I've tried to improve my skills as a manager. And I have learned the key word is 'focus."'
What he focused on was improving his existing businesses -- cable, mobile phone, and media. In the past, like other cable companies, Rogers Communications would invest in expensive network upgrades long before consumer demand materialized. Now it does things incrementally but moves quickly when it detects demand. That strategy shift allowed it to reduce capital expenditures by 22% last quarter.
While Rogers Communications stuck with its core strengths, lean times have forced other companies to make radical decisions about what businesses they should be in. For many, that means fleeing commodity markets where only the high-volume, low-cost players can win. Unisys shows how this is done. Starting in 1998, it exited the markets for PCs and low-end servers and concentrated on services. In 2000, it focused on business-process outsourcing services, such as check- and Medicaid claims-processing, for a handful of large markets -- including transportation, financial services, and government.
The payoff has finally arrived. Last quarter, 79% of Unisys' revenues came from services and just 21% from hardware, compared with a 70-30 split the other way before the company launched its push to reverse course. That allowed Unisys to boost net income by 20%, to $38.5 million, on just a 3% increase in revenues.
A number of companies took the radical step of using bankruptcy court to get back on track. Mobile-phone carrier Nextel Communications didn't seek bankruptcy protection itself. But it spun off its debt-laden international subsidiary, Nextel International, which sought protection from bankruptcy in May, 2002. By the time Nextel International emerged last November as an independent company called NII Holdings Inc., it had reduced debt from $2.8 billion to $500 million.
Now, Nextel and NII Holdings get the benefits of a tight partnership without the burdens of financial interdependence. Nextel, which owns one-third of NII Holdings, stands to reap rewards from NII's enormous potential as a leading mobile-phone provider in Mexico, Brazil, Argentina, and Peru. There is only a 25% cell-phone penetration rate in those four markets, vs. 52% in the U.S. Meanwhile, NII taps into Nextel's technical expertise, reselling its pioneering walkie-talkie service.
Some of the most remarkable revivals have come from companies that have figured out how to thrive despite being in commodity businesses. Prime examples: PC disk-drive makers Seagate Technology (STX ) No. 14, and Western Digital (WDC ) Corp., No. 6. Both companies consolidated factories and slashed their staffs to stem their losses. But cost-cutting alone wasn't enough. The companies needed to innovate superefficiently. Western Digital reused the core engineering for its PC products to create new disk drives for video game consoles and enterprise storage, with little increase in expenses. Profits last quarter jumped 184%, to $54.5 million, on a 19% revenue increase, to $706 million. "There's nothing wrong with a commodity business if you have the right cost structure and build the right number of drives," says CEO Matthew Massengill.
A return to booming revenue growth may still be a ways off for the tech industry, but CEOs are no longer running their companies on bread and water. Hyperion's Rodek treated 100 managers to a February dinner at the Mark Hopkins Hotel in San Francisco, where they dined on Australian lamb chops and grilled swordfish. And on May 29, NASDAQ recognized the company's success by inviting Rodek to push the button to start trading at the exchange's headquarters in New York's Times Square.
That marks a symbolic end to the tech industry's long stay in Wall Street's doghouse. And that's the biggest turnaround of all.
By Faith Keenan