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Commentary: Taking the CEO challenge

Ever thought you'd love to get the top job at a high-flying IT company? The challenges facing Exodus Communications' new CEO, L. William Krause, might make you think again.

By Ted Chamberlin, Gartner Analyst

Ever thought you'd love to get the top job at a high-flying IT company? The challenges facing Exodus Communications' new CEO, L. William Krause, might make you think again.

See news story:
CEO Hancock out at Exodus

He's got barely 30 days to execute a critical turnaround strategy for the troubled Web hosting services provider. And if he can't make it happen, his new job will likely disappear--and the company could very well disappear too.

Krause's most urgent problem will be coming up with enough cash to keep the company going in the short term. It won't be an easy task: Exodus stock is trading at well under a dollar--down from an all-time high of nearly $90--and may be delisted from the Nasdaq exchange. Under those conditions, and given the already edgy state of the capital markets, Krause will likely have a difficult time finding investors willing to bet on Exodus.

Cash is also the key to Krause's second-biggest problem: reassuring Exodus' jittery customers that the company can continue to be a viable business. The customers that use Exodus to host everything from databases to e-commerce sites are deeply worried about the possibility of service disruptions, or even the expensive, painful process of having to migrate to another service provider. Unless they become convinced of Exodus' viability--which will depend on the company receiving significant new investment--they're likely to decide they have to begin preparing for that migration immediately.

Exodus' problems provide a spectacular example of the deep troubles hitting the Web-hosting industry. Few sectors of the IT industry have been hit as hard by the recent economic downturn as this one, which only 18 months ago was gearing up for continuing growth rates of 300 percent per year. The recent sharp decline in economic activity--and the resulting massive excess capacity in Web hosting sites--reduced the growth in demand for Web hosting services so much that Gartner now predicts an annual growth rate of just 50 percent for the next five years.

An annual growth rate of 50 percent would be more than satisfactory for most industries--but it isn't nearly enough for a company that has grown as fast as Exodus. Like many of its competitors, including Genuity and Navisite, Exodus hired too many people, built too many facilities, burned through too much cash--and was too slow to see the signs of excess capacity and declining demand.

Even before the departure of its former chief executive, Ellen Hancock, Exodus had already taken some of the necessary steps to begin a recovery, including drastically cutting staff and spending. The one big, worrisome question is whether those changes--and the new CEO's further steps--will turn out to be too little, too late.

Gartner continues to believe that the demand for Web-hosting service remains strong--just not as strong as providers such as Exodus anticipated only a few months ago. If new CEO Krause can succeed in his turnaround plans, and especially if he can find capital funding in a hurry, his company might survive. Moreover, Gartner believes that Exodus is a strong acquisition target--if it can remain solvent.

(For a related commentary on Exodus Communications' problems, see Gartner.com.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.