The lure of the corporate turnaround

Michael Parides was looking forward to a smooth, gradual transition into the top job of CEO when he took the No. 2 position of chief operating officer at Gadzoox Networks (NYSE: ZOOX) in June of last year.

He thought he would spend a year or more in his new position, being groomed to replace Bill Sickler as president and CEO of the maker of equipment for storage-area networks. As it turned out, Parides didn't even have two months.

Three days after his COO appointment was announced, the company warned of disappointing quarterly results. Seven weeks later, with the stock trading nearly 70 percent below its prewarning price, Sickler resigned and Parides was thrust into the chief role in "an acceleration of the succession plan" originally plotted by the Gadzoox board.

He was also thrust into the growing ranks of turnaround artists, daring executives who jump on sinking ships of a company and attempt to boost its stock price and revive its earnings, revenue and market share.

When the executives succeed, they get showered in the glory of reviving a company. But failure means hitting bottom with the ship--after what many term excruciating work.

With the markets in a downward spiral, demand is growing for these daring corporate saviors. More than 200 dot-coms went under in 2000, and another 49 shuttered their operations in January of this year, according to Webmergers.com.

And it's not just the small Net companies that need help. Even mighty Yahoo (Nasdaq: YHOO) announced this week that it is looking for a new CEO.

While some executives see these gloomy times as stressful, others such as Rakesh K. Kaul, former president and CEO of Hanover Direct (AMEX: HNV), thrive on turnaround work.

"The majority of executives are not suited for a turnaround," Kaul said. "It is a very unique situation, and it requires extraordinary leadership."

Hanover Direct reported an operating loss of $95 million in 1996, the year Kaul took over. Four years later, the catalog retailer was back to an annual operating income of $17.4 million.

Kaul came to Hanover from another catalog retailer, Fingerhut, where he was vice chairman and chief operating officer. He was involved with the creation of Fingerhut's credit card unit, Metris Companies (NYSE: MXT), which went from concept to publicly traded company in less than four years.

Being an executive with a seasoned company or the leader of a start-up doesn't offer the same level of gratification as a turnaround, Kaul said.

"Start-ups certainly carry risks in terms of the marketplace, and they certainly have the risk of whether the business model will work," he said. "But from a management point of view, the challenges are not that great at a start-up, in my opinion."

A new company offers a blank slate that makes it easier for an executive. But a troubled company requires more work and effort, Kaul said.

"That is an enormously, enormously satisfying proposition," Kaul said. "Only when you have lived it can you know what it feels like. I feel very good about accomplishing the turnaround of the Hanover merchandise business."

A painful but ego-boosting process
Parides doesn't share Kaul's excitement.

"Those people are crazy," Parides said, laughing briefly. "The sheer pain of how many things you have to change...It's painful, it's time-consuming, it's challenging on an intellectual and on an emotional basis."

Gadzoox hasn't completely turned around, but things have improved, Parides says. In the latest quarter reported--Parides' first full quarter as CEO--the company beat analysts' earnings estimates.

Turnaround specialists are often fueled by ambition and ego fulfillment, said Neil Scheer, a management consultant with Morton H. Scheer & Co., which specializes in crisis and turnaround. "If these individuals are fairly well placed in a successful situation, they're bored," Scheer said.

And the chance for a higher position, even at a shakier company, attracts people, said Tom Ferrara, president and CEO of CareerEngine Network.

"If you're not a CEO, there's always the lure to become a CEO," Ferrara said. "If you succeed in a turnaround, you can begin making a successful career as a CEO. And if you fail, it's not as much of a scar, because it was sour before you came."

Those appeals make it fairly easy to find would-be turnaround executives, Scheer said. "The question is, 'How good are they?' It really started to manifest in the ྌs, when banks were cutting back...and every out-of-work banker hung out his shingle as a 'crisis-turnaround artist.' You'd see stacks and stacks of all these brochures of all these crisis-turnaround managers that nobody ever heard of."

What makes a good turnaround CEO?
Righting a capsized corporate ship can make an executive into a business demigod. Lou Gerstner's rescue of IBM from its troubles in the early ྖs has become the stuff of business legend.

But it also can destroy a reputation if you stomp on a lot of people along the way.

"If you come in and just tear the place up, you make a lot of enemies. People leave," Ferrara said.

Changing a company's attitude is one of the first things that must be done, executives say.

"I think we created a slightly different culture than existed before," Gadzoox's Parides said. "I think the company was more likely to seek consensus at the expense of a willingness to confront problems. The truth is, companies often seek harmony at the high cost of making the tougher decisions. We have to address what's in front of us. We don't have time to delay.">