Why do Companies really Fail?
by Angel Mehta, Managing Director, Sterling-Hoffman Management Consultants
"The outward freedom that we shall attain will only be in exact proportion to the inward freedom to which we may have grown at a given moment. And if this is a correct view of freedom, our chief energy must be concentrated on achieving reform from within". - Unknown
Failure is once again in vogue. Or more precisely, the study of how and why business failure occurs. Witness the cover story of a recent edition of Fortune Magazine: "Why Companies Fail." Typical of the magazine, the article is simple, direct, and right on the money. More importantly, the topic is timely - presumably why the magazine made it a cover story in the first place. Nothing sells like stories about failure (except perhaps stories of wretched excess.)
Failing, as we all know, represents a significant problem: it's expensive. Every time a startup fails, people lose their jobs, customers lose their investments, and investors lose their shirts. It makes sense that we're all obsessed with discovering techniques to avoid failure (or at least, avoid getting mixed up with people that fail.)
It would seem that the last thing we need then is yet another article discussing why people and organizations fail. Yet I believe, without question, that the majority of us have continually failed to catch onto a concept that business psychologists and a handful of corporate leaders instinctively understand.
My own perspective, after having listened to thousands of stories of failure, (scrutinizing every aspect of executive failure represents a good portion of every search consultant's job), is that most companies fail precisely due to a lack of emotional maturity in at least one (usually several) of it's key executives.
This message hit home (again) recently when a key executive we had placed into a silicon valley-based web services startup just over 12 months ago, was unexpectedly terminated. The company had killer technology, world-class venture capital backing, a large market, enough cash on hand to carry it to profitability, and early customer traction. What, I thought, when accepting equity as part of our fee, could possibly screw this up? Little did I know.
When the executive (who I'll call Sam) failed to return my quarterly review call recently, I became worried. A visit to the corporate website confirmed the worst - Sam was no longer listed on the executive team roster.
The company's line was simple: Sam had failed to achieve the revenue target last quarter. Obviously there was more to the story, and as I dug beneath the surface, I recognized an all too familiar pattern. In essence, it was the same story I had heard from hundreds of senior executives, entrepreneurs, and investors over the years.
When I finally caught up with Sam, he expressed to me that he had felt 'poor chemistry' with the CEO from the beginning. "I never knew what he was doing, and he never asked me what I was doing…he didn't seem to care." A few months later, the CEO hired a couple of executives from his old company and Sam began to feel even more alienated as some of his responsibilities were slowly shifted over to other executives that were part of the CEO's clique. On one occasion, Sam had closed a major account, but the deal collapsed because the product could not be delivered on time. Sam blamed it on the CEO's decision to remove his control over the professional services organization, pointing out that resources were 'suddenly and mysteriously' unavailable to support his sales initiatives.
The level of trust deteriorated until one day Sam mentioned to another member of the executive team that he was 'frustrated', and sometimes tempted to 'look around.' Of course, word leaked to the CEO, and the next meeting between Sam and the CEO turned into a screaming match, with the CEO accusing Sam of threatening the company and trying to launch a coup. A few weeks later, Sam was suddenly terminated.
What is ironic here is that there was never any blatant conflict between the CEO and Sam prior to the blowup. They simply never talked about the lack of communication. To this day, Sam remains mystified as to what the CEO had against him. Frankly, things aren't clear to me either. Even the board members seemed confused about what caused the chemistry breakdown in the first place.
Sam, I should point out, was well accomplished. He had been a star at one of the most prominent ISV's in the industry, had lived through several startups, and had the desire to work in an early stage venture despite the difficult market. He had received rave reviews from every blind reference we could track down, and passed a grueling interview process with flying colors. At the conclusion of the interview process, the search committee (including search consultants from our firm, the founders, and seasoned venture partners) declared Sam an all out 'stud'.
So what happened? Was our due diligence flawed? Was the entire search committee that stupid? Hardly.
In fact, there is absolutely no reason that this particular failure had to occur in the first place. Sam had the required domain expertise and skill set to deliver, not to mention the drive and work ethic vital to succeed in a startup. Why couldn't Sam and the CEO have sat down over coffee and put their feelings and concerns out in the open? Why couldn't our candidate have simply admitted to the CEO that he felt alienated from the group? Why did that last meeting collapse into a yelling match, rather than a rational discussion about the issues at hand, and how to execute going forward?
When I asked the candidate why he hadn't raised his personal concerns about communication with the CEO when they first came up, he replied, "How were they [personal concerns] relevant? Business was going fine."
Come again?! Clearly, business was not 'going fine.' But Sam's response was typical. Common practice in our world is to rely on quantifiable metrics like revenue, customer wins, margins, etc. in deciding whether business is good, or not so good. No algorithm exists for measuring the psychological maturity of an executive, or the collective emotional health of an executive team. We rarely study what we cannot measure - especially when money is at stake. But it is precisely this mysterious factor - a lack of what I will call "awareness" or psychological maturity - that interferes with the ability of a team or individual to execute (thereby causing them to fail.)
The idea of emotional maturity as a key factor in the success or failure of a team/department/company is not new. It has been researched and written about for years by business psychologists and consultants. Silicon-valley based author and leadership guru Pat Lencioni penned three leadership fables all designed to illustrate the subtleties of how such problems lead to organizational failure. Each book (best sellers - I might add) lays out a clear formula for achieving what I will call a psychologically healthy organization - and each blatantly puts the CEO at the heart of the initiative. (Pat Lencioni's books are mandatory reading for employees of my firm, by the way.)
What amazes me is that despite the volume and quality of knowledge available on the subject, it continues to draw little attention as a business priority. I question every venture partner I meet as to how much attention is paid to emotional maturity when hiring a new executive. The answers vary, from "a lot" to all out blank stares. When I ask if they'd recommend activities designed to help develop the emotional health of an executive team to a portfolio company, the answers are almost always negative. "It's a toss up - spend time winning a customer, or do a touchy-feely team building exercise," said one venture partner at a Sand Hill firm.
The latter is probably an extreme case. Most experienced builders seem to recognize that psychological maturity / awareness is a valuable trait in a CEO or entrepreneur. That said, obvious questions remain. This article does not provide a formal definition for the terms 'psychological maturity / awareness / emotional health', nor have I outlined precisely how a lack of the same stops a company from executing. And exactly why does it rank so low on a list of business priorities? Once recognized as a priority, how is psychological maturity developed?
Against my natural impulse, I will stop there. Questions like these deserve more than a paragraph, and I will attempt to address them over a series of articles to be published in this journal over the next 3 months. Further, I would like to invite your feedback on the subject to help in doing so. Please send suggestions or comments to: firstname.lastname@example.org
Angel Mehta is Managing Director at Sterling-Hoffman Management Consultants, and moonlights as a leadership / personal growth speaker. Sterling-Hoffman Management Consultants is a retained executive search firm focused exclusively on enterprise software companies.