The Lords of Tech What Were They Thinking?

Remember the late 1990s when such high-tech CEOs as Cisco

Systems’ John Chambers, Nortel Networks’ John Roth and Oracle’s Lawrence

Ellison beat Wall Street’s high expectations each quarter without breaking a

sweat? Well, since the downturn hit last November, it seems they’ve been

reading some far less accurate tea leaves. Despite awful economic indicators,

each CEO continued to talk up stellar outlooks almost up until the day they

dropped earnings bombshells on investors.

Indeed, the reversals were stunning. After reaffirming

sales-growth projections of 50% to 60% in early December, on February 6 Chambers

reduced Cisco’s 2001 estimate to 40%. On February 15, one month after his last

rosy reports, Roth halved his growth outlook from 30% to 15%. And Ellison? After

telling BusinessWeek on February 8 that Oracle could hit its 30% growth target

for the year, Oracle posted just 9% sales growth in the quarter ended February

28.

Dec 4, 2000 "Let me be clear. We are not changing uidance." John Chambers, CEO, Cisco		Feb 6, 2001 Cisco lowered sales-growth projections from 50%-60% to 40%.
Jan 18, 2001 "Demand has not changed." John Roth, CEO, Nortel		Feb 15, 2001 Nortel lowered revenue growth projections for 2001 to 15% from 30%.
Feb 8, 2001  "I think we can" continue to grow 30% a year."  Lawrence Ellison CEO, Oracle		Mar 1, 2001 Oracle posted 9% third-quarter revenue growth.

Sudden jolts



To hear many a tech exec tell it, such optimism was justified well into

January and February. All over Silicon Valley, companies now say they saw

solid-looking deals evaporate at the last minute as nervous customers killed

projects.

While this downturn has admittedly been rapid, that’s no

excuse for giving wildly optimistic guidance to investors. Particularly when

executives were themselves selling shares. Just ask William Lerach, a partner

with Milberg Weiss Bershad Hynes & Lerach and the king of shareholder

lawsuits. He is considering filing an insider-trading lawsuit against Oracle,

based in part on Ellison’s sale of 29 million shares of stock on February 1, a

month before Oracle slashed its growth prospects. "Why didn’t he wait and

take the benefit of the surprisingly good quarter he expected?" asks Lerach.

He notes that this was Ellison’s first stock sale in almost five years and

that Chief Financial Officer Jeff Henley sold shares in January as well. Neither

executive would comment, although a spokesperson explained that Ellison had a

limited time to sell before his shares expired, and Henley sells shares every

year at this time.

So how can companies improve their guidance? Mostly, by

getting real about growth prospects. Only a handful of tech outfits trimmed

forecasts as the economy soured. Many others naively assumed that their company

was uniquely positioned to withstand a slowdown. "We’re sort of

recession-proof: As things get tougher, you need more," Sun

Microsystems CEO Scott McNealy told BusinessWeek in early Dec.

And even when customers started nixing deals, too many CEOs

bet they could pull out the quarter by finding new ones. A top supplier to

Cisco, for example, says of its late-year optimism: "We knew their order

rate was already going down. It had to be unbelievable arrogance."

Nevertheless, lots of companies still need to ratchet down

expectations. Most analysts say Cisco’s and Nortel’s revised growth plans

remain far too optimistic. Others knock IBM for not backing off a bullish growth

projection made in January.

The most important step companies could take toward

improvement may be to temper the practice of tying commissions to sky-high

quotas and instead reward salespeople for bringing in business in a more

predictable fashion throughout the quarter. Up to 40% of some tech companies’

revenues now come in the last week of the quarter, as customers wait for big

discounts from managements stretching to make their numbers. That game paid off

hugely on the upswing. Unfortunately, the price on the downswing is just as big.

By Peter Burrows in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Small businesses also are using the Net to save big bucks–enough, in many

cases, to make a pipe dream a going business. Selling Beanie Babies and other

collectibles online out of a bedroom in his Oklahoma home, Perry Calton is

grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new

marketing channels. E-mail and discussion newsgroups can be far less expensive

and more effective than direct mail and print or TV advertising. Carrie Hardy,

founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends

newsletters to 1,100 past customers and posts messages on scrapbooking

newsgroups. Instead of buying $80, three-line ads in trade magazines that never

drove any traffic anyway, she spends nothing and gets a far better response:

After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,

pioneered by eBay in 1996. Besides spurring the formation of thousands of new

small businesses online, they have prompted existing businesses to branch out.

Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory

Procurement Services, directly to consumers over eBay–leading to what he hopes

will be a twofold-plus jump in sales this year, to $7 million, and a gross

profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool

their resources against their bigger and louder competition in ways they can’t

do in the physical world. The American Booksellers Association, which promotes

independent bookstores, runs a program called BookSense.com that allows members

to offer amenities only big chains could offer before, such as gift certificates

good at any member store. Moreover, their online customers can order any book in

print from their site, even if they don’t stock it themselves. Kerry Slattery,

owner of Skylight Books in Los Angeles, partly credits the program for a

higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging

success. Most entrepreneurs are running into obstacles on the Web that are hard

to overcome with limited staff and resources. One of the toughest jobs:

providing superior customer service. After all, to make up for what they may

lack in product breadth–not to mention customers’ ability to click instantly

to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections

are still largely unavailable, especially in rural areas, leaving many small

businesses stuck with snail-like modem connections. And many worry that they

could lose a lot of customers if their connection goes down. Says Deepinder

Sahni, vice-president at researcher ami-Partners: "What we are hearing is

that they are hesitant to put their crown jewels–their companies–on the

Internet."

For many small businesses, the prospect of competing with the online

behemoths is daunting–for good reason. It may be only a matter of time before

the big guys notice how well they’re doing and jump onto their turf. So they

must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved

online. Their problem: too much business. When Jordan Dossett posted her

graphic-design portfolio a year ago on eLance.com, a Web marketplace for

freelance workers, she was buried under an avalanche of work offers from

companies as far away as Russia. So she quit her job as art director for a law

firm and opened The Design Studio in her Washington (DC) home. After hiring

three employees, she expects to rake in $350,000 in sales–and a tidy gross

profit of $250,000. "I had no idea the amount of demand out there,"

she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of

dead dot-coms would love to have had.

By Arlene Weintraub in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc