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 [servers] 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

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