IBM to start-up: Industry vet responds to recession

LogLogic's Patricia Sueltz heard a clear message about the economy from investors. But she already knows a thing or two about navigating through tough times.

Jim Kerstetter Staff writer, CNET News
Jim Kerstetter has been writing about the high-tech industry since the 1990s. He has been a senior editor at PC Week and a Silicon Valley correspondent at BusinessWeek. He is now senior executive editor at CNET News. He moved back to Boston because he missed the Red Sox. E-mail Jim.
Jim Kerstetter
6 min read

Editors note: This is the first in a series of stories about the recession's effect on the tech industry.

Patricia Sueltz has had her share of blunt bosses.

LogLogic CEO Patricia Sueltz LogLogic

At IBM, Sueltz was CEO Lou Gerstner's technical assistant during Big Blue's dramatic turnaround in the 1990s. After that, she ran the services division at Sun Microsystems for CEO Scott McNealy during the dot-com bust from which many believe Sun has never truly recovered.

But not even the acerbic McNealy could have cooked up what 56-year-old Sueltz saw in front of her two months ago: A PowerPoint slide of a blue-shaded, gothic headstone with "R.I.P. Good Times" written in red. It was the first of 56 now-infamous slides used by venture capitalists at Sequoia Capital in a tough talk delivered to the executives of the companies in which they'd invested.

And if that wasn't enough, the third slide, a mangled pig on a butcher's block, drove home the point: The economy is heading south, rapidly. And if you want to save your company, you'd better find a way to trim the fat. Personally, Sueltz appreciated the blunt message.

"I'll take that over a bunch of saccharine, sugarcoated messages," said Sueltz, now chief executive of software start-up LogLogic.

Not everyone appreciated the dark humor, back when it was unclear just how bad the economy would get. But by now they should acknowledge the Sequoia venture capitalists had a point. By most measures, the high-tech industry appears headed for one of its many busts as the global economy sinks into recession. Industry research firms have been downgrading and downgrading their corporate spending forecasts for 2009. The PC market is in the dumps. E-commerce spending, for the first time, was down for the first three weeks of November from the same period a year ago. Even online ad spending, though still growing at a healthy clip, isn't expected to expand as rapidly as earlier forecasts. If you're not working for Apple, it seems, these could be the most trying times in decades.

For the tech industry, of course, booms and busts are nothing new. Venture-backed booms generate hundreds of start-ups and drive out aging companies that are no longer innovating. The busts separate the weaklings from the survivors, the smart ideas from, well, the not-so-smart. The PC boom in the 1980s drove out old tech giants like Digital Equipment Corp. and Wang. The PC bust consolidated that industry, just as the dot-com bust separated the survivors from the Pets.coms of the world.

Click for special report
Click for complete special report

Now? The Web 2.0 expansion of the last three years is just a boomlet compared to other industry expansions, and plenty of start-up employees are already losing their jobs. But the biggest concern for the tech industry isn't overinvestment in start-ups: It's the overall economy. Taking the air out of the Web 2.0 community likely won't impact as many people as a single round of layoffs at a giant like Sun, which recently announced plans to cut up to 6,000 jobs. Even healthy tech bellwethers like Hewlett-Packard are telling employees to take time off before the end of the year--a slightly more palatable option to layoffs.

Even worse, economists aren't sure how long this recession will last: A few months? A few years? Starting today, CNET News begins a series of profiles of people in various technology sectors--from the start-up execs getting a stern talking-to from their investors to the holiday shoppers in one of the housing foreclosure epicenters, Modesto, Calif. Their expectations and their means are often wildly different, but in a way, they're in this together: For tech executives, their employees, and even their customers, these are uncharted waters because the industry, as we know it today, has never faced this sort of economic uncertainty.

Saltwater in the face
For Sueltz, running a small company in bad times is a new experience. She's been at huge companies in bad times, and responding to problems isn't easy at companies like IBM and Sun--sort of like turning an aircraft carrier. At a start-up, the challenges are different: it's like being in a small ocean-going boat. Every wave, every gust of wind, feels like it could capsize you.

"But, you know, the best way to deal with it is to get right out in front," Sueltz said. "Sometimes it's good to get that saltwater in the face."

The gregarious mother of two started her career in the 1970s as a rare, female telephone pole climber for the old Pacific Telephone & Telegraph (some joke that must be where she got her famously strong handshake). Sueltz kiddingly portrays herself as one of the old-timers in tech these days, but there's little question that her decades of experience have taught her what to do in tough times.

There were plenty of bad days at IBM in the early 1990s. Hard as it may be to imagine for young people now, IBM had the makings of a company in a death spiral. Like DEC, losses were mounting, and the company was ill-prepared to compete with younger, more nimble competitors. It took Gerstner, an RJR Nabisco executive with no tech industry experience, to turn things around. The biggest lesson for Sueltz during those years working closely with Gerstner was making decisions fast, and sticking with them.

At one point, Gerstner laid off more than 200,000 people in 18 months, Sueltz recalls. No doubt, the impact was brutal, and old IBM towns like Poughkeepsie in upstate New York have never really recovered. But the alternative, IBM going under, was even worse. "It was a pretty horrendous time," Sueltz said. "But I learned from Lou. Swiftness, again, is so important. You have to be firm in what you do."

Sueltz went to work for Sun in 1999 and at one point was the executive responsible for 17,000 employees in Sun's services arm. Few big tech companies were as badly impacted by the dot-com bust as Sun, which grew fat off start-up customers and big financial companies rebuilding their networks for the online world. Unfortunately, when the spending spree ended, McNealy was slow to cut costs. He believed Sun revenues would quickly rebound. They didn't.

Sueltz, who is still friends with many Sun executives, would never actually blame her old boss for being an optimist. McNealy, the son of an auto executive from Detroit, understood the human impact of layoffs, and he believed his company's greatest asset was its employees, from the engineers in Sun Labs to the sales force. McNealy's bet turned out to be wrong, but Sueltz understood that trying to be decent when you have to make hard decisions is the least an executive can do.

Venture capitalists had a blunt message Sequoia Capital

After stints at Salesforce.com and start-up SurfControl, Sueltz became the chief executive of the security software company LogLogic; she started there a year ago this week. The San Jose, Calif., company, which makes software to track and store data on the network (a must-have to meet some regulatory requirements) has raised $44 million from venture investors and has 150 employees. There have already been a handful of layoffs over the summer (Sueltz won't say how many), but she's confident the company can be profitable within the next quarter or two, despite the souring economy.

Either way, she was already thinking about the economy when she went to the Sequoia meeting. "The global nature of the (economic problems) is what's worrisome to me," Sueltz said.

While the tombstone and butchered pig slides were splashy, the rest of the presentation was decidedly sober. It was both a lesson in how the economy got into such a pickle and a pessimistic look at what happens next: Possible stagflation, lack of significant consumer spending, an economic correction that could last for years.

The next day, as she briefed her own staff on the Sequoia meeting, the slides from the presentation were already leaking to the tech press. But Sueltz is confident LogLogic can withstand the storm. Costs are down, and their software seems like something corporate customers believe is a priority investment, not something that would be nice to have. "As a small company, I believe we were able to get ahead of the curve," and prepare for a rapidly souring economy.

Decisive action, Sueltz said, will be the key to steering her company through it. "It's that death by a thousand cuts..." she said, "that's completely demoralizing."

Next in the series: A Web 2.0 CEO on laying off staff: "I'm at peace with myself."