by Rob Enderle

How Tech Companies Can Succeed by Going Private

News Analysis
Sep 26, 20136 mins
IT LeadershipIT StrategyTechnology Industry

BlackBerry, BMC and Dell are three of the latest tech companies to go private after a series of stumbles as public companies. To s쳮d in the latest chapter of their business lives, these firms need to undo the damage done by going public in the first place. It's easier said than done.

This week BlackBerry joined BMC and Dell in attempting to go private as a means of restructuring for the future. At the core of this move, though, is a bigger concern that has broader meaning for the technology industry: It’s increasingly clear that one of the fastest ways for a company to stagnate is to go public.

I think three things cause this: An excessive focus on quarterly results, a tendency to cobble together management teams and a sudden surge of wealth for folks not properly trained to deal with it.

Now, going private, or being a private company in the first place, isn’t a bed of roses, either. Rich and powerful but inexperienced investors and invasive venture capital companies can force a company down a different path to failure, while swapping sound financial analysts for a bad funding partner can be like jumping from the frying pan into the fire.

Care must be taken with funding partners. Most professional CEOs know this, but young startup CEOs often don’t — and many promising young companies are killed by those who fund them accidentally.

Let’s talk about the aforementioned three reasons that going public in the first place so often kill innovation.

Obsessing Over Quarterly Results Puts Profit Ahead of Innovation

Mark Hurd’s reign at Hewlett-Packard demonstrated this point all too well. Financial analysts love him because he improved bottom-line results, but Hurd got those results by excessively cutting costs, including research and development spending.

For instance, HP was working on one the best smartwatch designs I’ve ever seen, but Hurd killed the project in order to make his numbers. This could have been HP’s iPod, but Hurd opted for the safety of happy financial analysts instead of a shot at an Apple-like future. And he got a bonus for doing this.

This is why public companies have so much trouble innovating. It isn’t that they don’t have great ideas. It’s that the CEO has to make trade-offs between funding them and making quarterly numbers. Few CEOs will trade a big bonus for the possible chance to unveil a hit product, given the long odds of a hit product succeeding and given that bonuses aren’t tied to individual products.

Related: Stop Working and Start Innovating: It Can Pay Off

This is one of the things that made Steve Jobs interesting. He didn’t seem to care about quarterly numbers much and focused instead on setting perceptions around those numbers while creating hit products.

Jobs gamed the system so he could innovate and meet his numbers (at least while he was well). No other CEO has yet figured out how to pull this off. Jobs took risks as if Apple was a private form. It’s kind of amazing when you think about it.

Public Company Management Now Focuses on Blame

When a company goes public, it tends to step up its human resources policies to ensure executives aren’t pulled into discrimination litigation, wrongful termination litigation or dealing with unions directly. This desire to avoid a mass of painful employee management problems, coupled with the need to hold down employee costs, tends to force a company into doing stupid things.

Rules on manager/employee relations, forced rankings, salary averaging, peer reviews and other practices — none of which were present when the company was private and innovative — come into play, focusing management on how much people are paid rather than what they actually do.

Related: 11 Profiles in Bad Leadership Behavior

Employees who used to work well together are forced to compete or report on each other. Both trust and creativity plummet — and executive management will chalk this up to bad luck, not a series of bad decisions made to assure that their lives were more pain-free. You’ve likely experienced this yourself when surrounded by policies that seem to force out the most creative, productive employees and favor the most politically oriented and useless.

It amazes me that anything gets done at the modern public company. It’s structured to avoid innovation, as it’s focused like a laser on blame. Innovation comes with risk, risk increases the chance of failure, and failure is a blame magnet. It’s a vicious cycle.

Money, It Turns Out, Isn’t Much of a Motivator

I remember Bill Gates lamenting the amount of wealth that early Microsoft employees acquired — not because they were greedy, but because it pushed many to retire prematurely. The firm lost the very skills it desperately needed as a newly public company.

Those founders who do stay inadvertently create a big disparity between themselves and the employees who come in after the firm has gone public. They look at their far wealthier peers with envy, knowing they’ll never get the same level of reward, regardless of their accomplishments.

The work of Abraham Maslow and Frederick Herzberg, taken together, suggests that money isn’t a motivator at all but works incredibly well as a de-motivator. Give an employee a windfall and he doesn’t work harder — in fact, he may just up and quit — while the employees working around him are demoralized. They may leave, too, hoping for a similar reward from another company that they feel they won’t get if they stay where they are.

Commentary: Stop Demotivating Me!

Finally, folks who acquire a lot of wealth at once often don’t know how to handle it and can have issues with gambling, substance abuse or expensive habits that eventually overwhelm them. Affairs, divorces and other bad behavior are all too common. All these things affect job performance, often dramatically.

Going Private Means Undoing Much of What You Did When Public

For BMC, BlackBerry, and Dell to succeed as private companies, these firms will need to undue much of the changes they went through when first going public and ensure that the decisions that crippled them as public companies aren’t reinstated once they go public again.

People must be free to collaborate and innovate, the firms have to focus on results instead of blame, and risk must be promoted more than failure’s punished. Oh, and the gains an employee or executive gets from the eventual public offering need to be pushed toward retirement and away from the near term. If this isn’t done, then the firms are less likely to succeed as private companies — and are almost certain to stagnate.

My grandfather used to say the smart man isn’t the man who doesn’t make mistakes but the man who doesn’t make the same mistakes twice. In this case, it’s so very true.

Rob Enderle is president and principal analyst of the Enderle Group. Previously, he was the Senior Research Fellow for Forrester Research and the Giga Information Group. Prior to that he worked for IBM and held positions in Internal Audit, Competitive Analysis, Marketing, Finance and Security. Currently, Enderle writes on emerging technology, security and Linux for a variety of publications and appears on national news TV shows that include CNBC, FOX, Bloomberg and NPR.

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