Thursday, November 8, 2007

The Dark Side of Going Public

Over the past 10 years in my CIO role, I've been customer and counselor to many technology companies, some public and some private. Although all companies are different and each has its own unique story to tell, there are a few trends I've seen in public technology companies that make me think private companies have a special appeal

1. Ronco sales tactics on the last day of the quarter - "buy our new gizmo today and we'll discount it 50% as well as include a set of free Ginzu knives". Pressures to meet the quarterly numbers and meet stock analyst expectations force salespeople go to extremes to close sales. As a CIO, I refuse to participate in such end of quarter blowout deals. My experience is that today's once in a lifetime deals will be there on the last day of next quarter. This kind of bizarre sales behavior mortgages the future the company by creating less profitable deals in the short term that impact the company in the long term, generally after the salesperson has left.

2. Obsession with stock options - employees want to be millionaires and options seem to offer the road to easy street. This forces the CEO and Human Resources to spend an incredible amount of time developing options policies, strategizing to retain valuable employees with options, and updating Boards/Comp Committees on options issues. Such efforts distract the CEO from focusing on the products and services of the company. Admittedly, options allow companies to attract top notch talent, but by setting expectations that millions can be made through options in a year or two, there is less interest by all in building an organization for the long term by product innovation and customer service

3. The crushing burden of Sarbanes Oxley - I've see public companies and companies about to go public spend millions on SOX compliance. Of course Enron and WorldCom were inexcusable examples of corporate greed. However, the impact on honest, growing new companies is so extreme that dollars need to be taken from R&D and applied to people and systems with no other purpose than meeting SOX requirements. With less R&D resources, companies innovate more slowly, to the detriment of all.

4. Focus on the shareholders/stock price - I've seen some very odd behaviors motivated by stock price. “Let's do a merger to create visibility and enhance the stock price.” “Let’s announce a new product before it is ready to generate buzz.” The end result is that marketing departments are a year ahead of engineering departments. Customer service is outsourced to enhance profitability rather than build long term successful relationships. Product quality is less important than mergers and acquisitions.

5. Challenging Board relations – As a leader in IT, I am evaluated by the quality of my service, the success of my projects, and the satisfaction of my employees. Wouldn’t it be great if the CEO could present product innovations, employee feedback and customer loyalty metrics to the Board and be rewarded for success, instead of being managed as a function of share price?


I know that it sounds retro to believe that CEOs and employees would be satisfied by the wage and bonuses generated by excellent products and services. That CEO salaries would be 25-50 times the average employee wage and clearly computed based on performance metrics rather than multimillion dollar options gains. That companies would be built to last decades and not the boom-bust cycle of growth, IPO and decline.

In my field, Healthcare IT, there are a few very strong private companies such as eClinicalWorks, Epic Systems and Meditech. These companies are product and customer driven. They have thousands of engineers and only dozens of salespeople. They gain market share over time because of their amazing responsiveness to customer needs. Their customers dictate their growth rate, their salaries, and their strategy.

Of course I realize that the public markets give companies the capital they need to expand and that many companies have large startup costs that require substantial external investment. However, as an IT customer, I often wish that my needs were the most important driver to the Board, CEO, and employees of the nation’s IT companies. My advice to new IT companies - consider staying private, your customers will thank you.

5 comments:

Max said...

Hear, hear!

Matt said...

I have a question for you. One that might make a good post topic. It goes back to the one you made about choosing a phone, and some detail on the laptop you use, etc.


What Gadgets do you carry on your person on a regular basis? What do you like about them, what convenience do they offer for your job and for your personal life? What item is a must have? Looking back what gadget that you have today do you think would have helped you most while climbing the corporate ladder? When I say gadgets, I also mean webpages you read regularly, and software you find invaluable.

Ok, that's really a lot of questions, but I would really like your take on that sort of thing.

curious said...

Hey nice one, Thank you very much. Why such smart people spend precious hours writing away so that a not so busy person like me can get a chance to see other side of things never ceases to amaze me. I am just curious and that is all.
I work for a nasdaq traded HIT company begins with letter E and ends with ...sys.I always thought the board had the best interests of its customers. I am sure even the board realises that short term quick fix solutions like quarter - end cheap selling will be harmful to the outfit in the long run. As I am techie and non-financial kinds, where can I find the composition of the Board. I mean could i someway over the internet, find composition matrix of the shareholders. I wish to know if they are mostly individuals, are they financial houses etc etc ?

Thanks so much for your time.

John Halamka said...

For up to date SEC filings about companies, I use EDGAR at http://www.edgar-online.com/

Many companies will have a tab for their Board on their own web site.

For example, Eclipsys, it's on their site. (under the tab "about us").

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