Tick Tick Tick

Baldwin Louie — Mon, 16 Apr 2001 18:00:00 -0400

Sitting in his spacious office at the Delray Beach, Fla., headquarters of Office Depot (ODP), CEO Bruce Nelson can hear the clock ticking. All eight of them.

You can hardly blame Nelson, 56, for being obsessed with time. With responsibility for 947 stores around the world - from Tokyo to Poland to Denver - Nelson is constantly tracking operations in more than eight time zones. The clocks on his office wall are also a reminder that he may not have much time to fix his troubled company.

The job of CEO has never been leisurely, but Nelson's typical 14-hour day is a sign of changing times. Never before have CEOs had to accomplish so much so quickly - or else. The number of CEOs failing the speed test reached new heights from October to March: 679 chief execs of U.S. companies departed during that period, a rise of 56 percent from the same time a year ago, says outplacement firm Challenger, Gray & Christmas.

The churn is usually blamed on shareholders who have grown impatient during this economic slump. But there are other, technological factors at work. The pervasiveness of information technology as well as the high expectations created by the performance of technology and Internet firms in recent years have led companies to expect faster results from their leaders.

"The pace of business has increased a lot in the new economy," says Joe Galli, who voluntarily left his post as chief executive of VerticalNet (VERT) after 24 weeks to lead Newell Rubbermaid (NWL). "Decisions need to be made faster. It's not a job anymore where you can sit back in the office and monitor operations."

Even the most technologically savvy leaders can feel overwhelmed by the speed with which they must make decisions. "It's put the CEO on call 24 hours a day," says Scott McNealy of Sun Microsystems (SUNW). "People expect me to answer e-mail within 24 hours."

The rate with which the ax falls on CEOs has also accelerated. In the early 1980s, most CEOs seemed to last at least 10 years, often longer. Challenger data suggests that today five or six years is more the norm. And many don't survive that long. Gillette (G) ousted Michael Hawley after 18 months. Procter & Gamble (PG)'s Durk Jager stepped down after 17 months. By these measures Nelson, who took over the corner office after his predecessor was fired 8 months ago, still has some breathing room.

The Internet industry, which has weathered a year of mounting shutdowns, may have seen the worst of the carnage, according to a report released Wednesday.

The number of dot-coms closing their doors dropped to 41 in March from a high of 53 in both January and February, according to Webmergers.com, which compiled statistics on shutdown and merger-and-acquisition activity in the first quarter.

"One month does not a trend make, but I really think it's time for the shutdown to start peaking," said Webmergers President Tim Miller, who authored the report. "The bulk of the bulge has moved through the python."

Part of the explanation may be that there are fewer surviving at-risk dot-coms left to fold. Since the beginning of last year about 370 Internet companies have folded, including nearly 150 in 2001 alone, according to the San Francisco-based firm.

Webmergers launched in mid-1999 to help dot-coms trying to sell their businesses. It also compiles closures and mergers-and-acquisition statistics.

While e-commerce companies bore the brunt of the shutdowns last year, professional Web services firms are getting hit this year, the report shows. In 2000, e-commerce outfits comprised 54 percent of all failed Internet companies, compared with 43 percent this year. Meanwhile, the percentage of professional services firms that went under rose to 7 percent from 4 percent.

A steep drop in information technology and outsourcing spending and the loss of dot-com clients is forcing smaller professional services and consulting firms, such as Osage Systems, Quintus (QNTSE) and Firetalk Communications, out of business, Miller said. The trend is also prompting layoffs at companies such as Viant (VIAN), Organic (OGNC), Sapient (SAPE), Scient (SCNT) and Razorfish (RAZF), as well as a massive sell-off of assets by MarchFirst.

Another emerging trend is the free fall of ad-based Web companies offering free stuff, such as Internet access and disk storage space. "The myth that you can give massive amounts of things away for free on the Internet and still make money has been disproved," Miller said.

Companies that have survived the shakeout are holding onto their cash or spending less on acquisitions than they did last year. Buyers spent $13.2 billion for about 380 companies during the first quarter, including $2.2 billion on 184 companies that serve as destination sites. That compares with nearly $52 billion spent on about 230 Internet destination sites in the first quarter of 2000. For all of 2000, buyers spent more than $87 billion on 910 acquisitions involving Internet destinations. Figures for non-destination mergers and acquisitions for last year were not ready for release, Miller said.

The decline in mergers and acquisitions and in spending from last year reflects "the extreme caution among buyers, a dramatic decline in valuations and a relative lack of large blockbuster deals," the report concluded.

The high-flying days of the Internet industry started taking a turn for the worse a year ago this month. Until then, VC funding was flowing, dot-com jobs were abundant and a new Web company opened almost daily. Prior to April 2000, a few dot-coms quietly shut down, but what was once a rarity became a trend with the demise of Healthshop.com and Violet.com. May 2000 was a banner month for closures with big names such as Boo.com, Toysmart.com and Digital Entertainment Network (dossier), as well as Pixelon, whose evangelical founder landed in jail, and half-baked BBQ.com.

Today's CEOs are like "small ships in a turbulent sea - they have very minimal control over their destinies," says Jeffrey Garten, dean of the Yale School of Management and author of the recent The Mind of the CEO. The image of CEOs as mere mortals buffeted by forces they cannot harness - such as technology-driven globalization - contrasts sharply with the conventional view of corporate leaders as superstars. Lee Iacocca of Chrysler is the archetype of the flamboyant, old-school CEO, credited with bringing his company back from the dead with his unbending will.

Iacocca's steady hand is no longer enough to steer a company in today's choppy seas, where technology makes it possible for competitors to emerge almost overnight. Speed is the key asset in the global economy, yet CEOs still have to make correct decisions or face the consequences. In 1999, when Wall Street analysts were bubbling over learning software for kids, Mattel (MAT) CEO Jill Barad decided to buy the Learning Company (dossier). But the software firm began hemorrhaging money almost immediately, a problem Mattel hadn't predicted. Nine months later Barad moved on. "Leadership comes into question more quickly today," says Kenneth West, a senior consultant for corporate governance at TIAA-Cref and a board member of Motorola (MOT).

Then again, a CEO can't ponder big decisions too long for fear that a new competitor might get the upper hand. Recall how former Oracle (ORCL) executive Tom Seibel blindsided Oracle when he launched Seibel Systems, forcing the software giant to play catch-up. "There are so many more players in the game," says Garten.

CEOs can thank the formerly high-flying technology and Internet companies for putting them in this speed fix. As companies like eToys (ETYS) (now bankrupt) and Amazon.com (AMZN) grew at triple-digit rates, investors and corporate boards came to expect better results from their companies. "Venture capitalists have created a get-rich-quick philosophy that [has] penetrated the corporations," says Mike Hagan, CEO of VerticalNet. "It's like a baseball manager: You've got two years to get me to the playoffs; no more five-year plans." Former Maytag (MYG) CEO Lloyd Ward found out that the growth he envisioned for his Fortune 500 company wasn't enough to please investors. "I remember talking about 10 to 15 percent earnings growth, and there weren't many takers," says Ward, who lasted only 15 months as Maytag CEO before taking the helm at iMotors.

Tech and Net companies also put pressure on CEOs to rapidly improve stock prices. "I think there were a lot of people managing traditional companies that probably had more pressure that they put on themselves," says Neil Austrian, who is on the board of directors at several companies, including Office Depot. Austrian insists that no responsible board would expect to see an artificially high stock price. But CEO sackings often coincide with a sinking stock price. Last year after Office Depot's stock dropped from $11 to $6, the board fired then-CEO David Fuente. "That's what's distressing to me," says Tom Neff, chairman of the U.S. division of executive recruiting firm Spencer Stuart. "It really is too short-term-oriented, and it's certainly not very forgiving."

The faster you go, the more likely you are to crash. That's a lesson former Office Depot chief exec Fuente learned the hard way. He came aboard in 1986 shortly after Office Depot was founded as a single store in Fort Lauderdale, Fla. Initially a hands-on and inquisitive leader, Fuente led the company through a lengthy period of dazzling growth, turning it into the nation's premier office-supply chain. In 1997 Office Depot had $8.1 billion in sales and 641 outlets in 10 countries, including France and Colombia.

The accolades poured in as the company grew 40 percent or more annually and its stock rose tenfold from 1990 to 1995. During those years, Fortune picked Office Depot as the 15th-best stock on the New York Stock Exchange (dossier), returning 223 percent to investors. The Miami Herald named Office Depot Florida Company of the Year, and Fuente repeatedly appeared on Forbes' list of America's highest-paid bosses.

How fast the glitter fades. By 1996 mass-market retailers like Costco and Wal-Mart began nipping at Office Depot's market share while its biggest rival, Staples, was becoming more of a threat. Anxious Office Depot shareholders pushed Fuente to hastily add 223 stores from 1998 to 1999. In the rush managers made poor decisions, unveiling outlets in too many markets. The stores performed poorly. "There was a lot of pressure to open stores, and open a lot of them," says Eileen Dunn, VP of investor relations. "We extended ourselves too thinly across too broad an area."

Fuente's demise came last July, after Office Depot revealed dismal second-quarter results. On sales of $2.6 billion, net income was down 22 percent from the same quarter a year earlier. Six days later, the board handed the CEO title to Nelson and made Fuente chairman. "We were ready for a fresh set of eyes," says Monica Luechtefeld, executive VP of e-commerce. Fuente, as it turns out, was one of 76 CEOs replaced that month.

Bruce Nelson was just what the struggling company needed: a straight shooter who got down to business without wasting precious time. The fact that Nelson "is what he is" is what managers at Office Depot like about him. "This is a CEO of a global, Fortune 500 company, and he's sitting there salivating over a pizza," recalls Dunn of a recent dinner with Nelson at Pizzeria Uno.

Nelson feels the same way about office products. He has spent most of his career immersed in filing cabinets and thumbtacks. He headed up BT Office Products USA in the 1980s and then Viking Office Products (dossier), which was acquired by Office Depot in 1998. After two years overseeing Office Depot's international wing, Nelson was tapped for the top spot. "One of the things the Internet has done is change the rules of business, change the expectations of what speed is," says Nelson, a college cross-country athlete from Utah who still runs when he can find the time. "Today a new CEO has less time to prove or demonstrate that he or she can deliver."

Nelson knew from the start that drastic measures were called for, but he didn't want to repeat Fuente's mistake of moving too quickly. So the new leader began examining a wealth of data generated by the company's sophisticated information systems. "[Nelson] can go through millions and millions of reports every day and can spend no time talking to people," says Dunn.

Suspecting that many Office Depot stores weren't pulling their weight, Nelson analyzed each outlet based on a dozen criteria like return on investment, growth and profitability. "We basically looked at the performance of the entire chain," says Nelson, leaning back in his chair for a rare moment of relaxation. "We queried the database for a list of all the stores that weren't fitting these minimum hurdles."

The database analysis turned up 109 stores that Office Depot might be better off without. But that, Nelson says, was just the beginning. Data doesn't tell you everything. Human observation and judgment still count. So Nelson and a handful of top executives visited each of the 109 stores in a whirlwind tour that lasted through the fall. They wanted to determine whether the study had missed anything. Was there a shopping mall going up across the street that would bring in new business? Was the store in a poor location?

By the new year, Nelson announced plans to shutter 67 stores in the U.S. and three in Canada - about 8 percent of the company's North American outlets. Four Office Depot markets - Phoenix, Boston, Cleveland and Columbus, Ohio - would be vacated entirely.

The cuts were by far the deepest in Office Depot's history - a realization that the company's haphazard growth had left it in need of an overhaul. But there was more to the downsizing than that. New CEOs often make big cuts to please investors. "There's an expectation that, boy, you gotta do something," says Nelson.

And so the question is: Has Nelson done enough to satisfy shareholders? That's hard to say. During the five months it took to decide where to trim the company, Office Depot's numbers remained shaky. Though third-quarter earnings per share were up over the same period last year (when one-time credits are included), fourth-quarter earnings per share were down. Following the January downsizing announcement, the stock price got a lift and now hovers in the high $8 range. Another bright spot: In the fourth quarter, sales in stores open at least one year grew 4 percent - not a big jump, but more than Staples' 3 percent growth.

Nelson accepts that he'll be held responsible for Office Depot's performance, even though some of the retailer's most serious problems - particularly an upsurge in competition from Costco, OfficeMax (OMX) and Staples - are ones he can do little about. "It's more intense, it's more focused, and there are more of them," says Nelson of the competition. "That is out of your control, and it puts pressure on selling prices, it puts pressure on margins."

All Nelson can do, aside from working long days, is delegate as much as possible. Decentralizing authority has become increasingly necessary at large corporations, and Nelson has embraced it. Still, he admits he lies awake at night worrying whether his lieutenants have absorbed key lessons about winning in today's economy. "There's no such thing as a free lunch!" Nelson booms, explaining that he plans on holding his VPs accountable for their performance. "If I don't do that very well, I won't be here very long."

Is Nelson's own day of reckoning approaching? Though Office Depot board member Austrian declines to talk specifically about the CEO, he says, "I don't know how anybody can be expected to perform in a year, particularly if it's a turnaround scenario." For his part, Nelson acknowledges the pressure of time. "I would expect that the average length of a CEO [term] will be far less in the future," he says, "than it has been in the past." The clocks are ticking.

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