There will be mistakes...it's how you clean them up

I was talking with a friend from the Chicago area last week on a variety of subjects, mostly world political issues, when she said "There will be messes...it is all in how you clean them up". Communication is the key. This applies to business as well.

Microsoft management did a poor job of communicating to Wall Street, during the April 06 earnings conference call, that next year we plan to spend about $2B more than analysts expected. The stock price dropped more than 20% wiping out $55B in market value. Microsoft management was incredulous. How could Wall Street react in such an immature way? How could a couple billion in additional spending wipe out $55B of market value? It is all about communication...and how you clean up your messes.

Microsoft should have communicated a clear plan, ahead of the earnings call, for how we planned to "invest" the money in new business opportunities, and the expected time frame to see results. Instead, it was suggested to analysts during the conference call that they should add $1.5B to $2B to their spending estimates for next year. It was only later, after the severe stock market reaction, that Microsoft "scrubbed the numbers" and clarified that it would be more like $1B, and gave clearer guidance on where the money would be invested. Too late. The market has already decided that given all the delays with "Longhorn/Vista" that the payoff for this $1B investment could be much longer than expected.

How could $1B in investment cause a $55B reaction? It is actually a rational response. The initial claim was additional spending of $1.5B to $2B. Wall Street applies a P/E multiple to earnings. Well it works both ways, that P/E also gets applied to spending which results in lower earnings. The P/E was around 21 at the time, so 21 times $2B is $42B of market value. The remaining $13B of lost market value is probably over reaction that may disappear over time.

It will take a while for the stock market to digest the late clarification that it will only be $1B of spending, and to factor in when the return on this investment will hit the bottom line. The stock price will eventually recover most of the loss. But, all of this could have been avoided with a clear communication plan.

Human nature? It is human nature to avoid bad news. First we ignore it hoping no one will notice. Then we explain it away as a non-issue...but no one really believes that. Then we come out and clarify what we meant to say...still minimizing the importance of it. Then, finally, we deal with the reality with hard facts and a good plan.

What should entrepreneurs do? Communicate clearly with investors, customers, partners, and employees. Make them part of the process. This is so simple, but it is amazing how many times companies mess it up. Human nature overcomes logical thinking. Communicate...

• What happened?
• Why did it happen?
• What are you going to do about it?
• When will we see results?
• How will this not happen again?

Remember that there are several important stakeholders in making a company successful. Employees, investors, partners, and customers all deserve clear and timely communication. Alienate any one of these groups and your business could suffer severe setbacks. Maybe not a $55 billion dollar setback...but relatively speaking it could be just as severe.

Communication is a two way thing. Blogs are a great way to communicate in a human voice what is happening in your company, and get honest feedback from people who care. Too much corporate communication is actually one way broadcasting. Press releases are largely ignored as marketing pablum.  Advertising is unadulterated spin. Engage in real conversation face to face, or at least in a blog. The benefits are huge...and you might avoid a $55B  mistake.

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Comments

[Ben]

Don,

Very interesting post. I wrote a brief story for IR Magazine, the magazine for the global investor relations community, dealing with your comments. It is online here:

http://irmagazine.thecrossbordergroup.com/DesktopModules/Lab_Issues/ArticlesView.aspx?tabID=0&ItemID=19532

I tried to speak someone in Microsoft's IR department but they did not want to comment. Does the company not mind you voicing your personal opinions in the public sphere?

[Don Dodge]

Ben,
I saw your article on the IR magazine web site. You did a nice, balanced analysis of the issue.

Of course Microsoft would prefer that I only say positive things but they also tolerate honest criticism. Microsoft is very progressive in its views on blogging.

Steve Ballmer put it best when he said about blogging, "Our people represent the company by talking to customers and partners every day. Blogging is just an extension of that communication."

The earnings conference call was a blunder. No two ways about it. Any time your stock suffers a $55 billion dollar hit...it is a serious mistake. We learn from our mistakes.

[panasianbiz]

I found your observations about Microsoft's managerial mistakes interesting, but I was especially intrigued by your suggestions to entrepreneurs about how to improve their communication with investors. Great job!