The Key to Risk Taking is How You Handle Failure

First you have to find the problem. If there is no problem then it doesn't matter what solution you have. Tom Mendoza is President of NetApp (Network Appliance), a technology company that specializes in advanced network storage and disk recovery. This is the story he shared with us last evening.

Let's take a look at the impressive numbers NetApp posted before the tech stock market crash. The company went from zero to 1 billion in 6 years, and has grown to 3 billion in revenues. From 1998 to 2000, it grew an astounding 22,500%. Then 9/11 happened. In 2001, nobody was buying; NetApp went from startup to hypergrowth, then through recession and recovery, all within a few short years. Today NetApp's largest customer is Yahoo, which wasn't even on their radar back then. How did all that happen?

In business, you find out how good you are when you have a problem. Everyone was great in the '90s -- cash was flowing, and the stock market was happening. When recessions hit, a company finds out what it's made of. NetApp decided to embrace honesty as the best course. As soon as the company missed a quarter, it got all employees together to talk about the fact that people were not buying.

There was only one layoff. It happened quickly -- within 2 hours, 75 people were gone, about 8% of the staff. Everyone who was let go because business needed to be resized was treated with respect. It was the right thing to do and it cemented the relationships with the remaining employees.

Medoza's advice in those cases is to "make your decisions fast, be clear on what you will and won't do, and then act forcefully."

A strong culture is most important in times of difficulty

During the dot com craze, while most people were worried about stock price, Tom's main focus was on how to sustain an advantage. When the recession hit -- after nearly a decade of aggressive growth -- NetApp's stock plummeted. The turnaround was extraordinary and completely due to the company's culture. Passion, integrity and respect laid the foundation to the decisions the organization made.

First, NetApp decreased the investment in their core business. A counter intuitive move. Then they bet on where they thought the market was going to go. "The key to risk taking," said Mendoza, "is in deciding how you will handle failure." If this sounds familiar, it's because it's another way of saying: decide when to stick with something, and decide when to quit. The truth is that everyone loves a success story and nobody likes to hear about failure.

The instinct is to protect and hold close what you have -- you could do that, or you could go ahead and try to figure out if your customers have a problem. When you're in hypergrowth mode, you can work on everything, when you're deep in a recession, you need to focus your efforts.

In a recession, your ROI needs to be on a much shorter cycle

Say 18 months; that's about all customers will give you -- they are hurting too. NetApp worked on consolidating the information, going from many software licenses to fewer, for example. Then, it devised a way to go to disk directly instead of tape, which would save time and effort, with an eye to protecting clients' information. In short, they kept it simple.

NetApp looked to grow by narrowing sales territories and investing more in its channel partners, and by doing that, they helped customers think about choice. The company's key strength? Its ability to execute -- so they put together a process to speed things up.

Build something you'll be proud of for the rest of your life

It's all about the culture, really. Whenever decisions need to be made, people at NetApp get the issues on the table with the right people in the room, and have an open conversation. Things never, ever get taken out of the room and talked about outside the forums where decisions can be made and then executed.

The six values that form the bedrock of NetApp's culture are:

1. Attitude -- remember to check yours regularly, it is not a constant. Seek the feedback of others. How do you check in with yourself?
2. Candor -- this has to be done right at the top. It means being honest with yourself as well as with others. It also means being an active listener, ready to open your mind to other people's ideas. Do you embrace listening as a strategy for execution?
3. Catching someone doing something right -- people can nominate a peer at any time. They email Mendoza directly and he calls them personally to congratulate them. If you respect the people who work with you, you need to show that you care about them. Have you thought about how you communicate with the people who help you succeed in business? Do you thank them? Do you do it often enough?
4. Leadership vs. management -- all leaders have something very important in common: they make you feel in such a way that you never want to let them down. There's a sense of being in this together. Mendoza spends 1/3 of his time visiting offices and talking with employees and customers in person. Who are your leaders? As a leader, do you set the tone for behavior? People emulate what you show you care about.
5. Setting time-bound, measurable goals -- people set their expectations too low. Activity is your enemy because you may not ask yourself if you're active on the right things. In observing all successful people, Mendoza came to the realization that they all set 90-day or short term goals to aim for. Set three personal goals you wish to achieve. Write them down and don't tell anyone. Why? Because if you do, you will lower you bar in an attempt to demonstrate that you can do it. Then go ahead and set three professional goals. Share those with your internal customers -- they will help you refine them. Ask: will I be proud of myself if I do this?
6. Embracing change -- you need to do this constantly. Think about what's next, challenge yourself. Remain agile in learning and growing. How are you embracing change in your work?

Think about what kind of message your behavior sends employees and customers. NetApp set up customer councils, five throughout the year, in which they share where they think the industry is going and what they think their priorities are going to be. These are tremendous opportunities to have a candid conversation about the business.

"The real goal," said Mendoza at the University of Notre Dame, his alma mater, "is to find a company with values that you believe in and one that will create a sustaining business model over time. You want to focus on whether the company has a market that will grow, a business model that works, and the potential to make a long term contribution."

And the numbers show it

In 2007, NetApp ranked #6 on Fortune Magazine's annual "Best 100 Companies to Work For" list; it has ranked consistently in the "Best 100" for the last 5 years, leaping 21 spots from the previous year as employees cheered enhanced benefits for parents of special-needs children, widespread use of flex schedules, and a soaring stock (up 50% in 2006)

In 2005, NetApp ranked in the Top 12 "Best Managed Companies in America" by Forbes Magazine based on its growth rates in both sales and earnings/share. (NetApp averages ~35% annual revenue growth while its industry averages <10%).

[photos from the endowment for the Mendoza Business School at Notre Dame]

Comments

[Joe Raasch]

Customer councils are parmamount to success for any business! We employed these at GE. Partly as a guiding coalition, partly as an early warning system. When a company gets the right clients on the council, and the clients understand their advisory role, it is a beautiful, powerful opportunity.

Companies willing to have these candid, courageous conversations, and act on the guidance, will build sustainability and value for their clients for years to come.

[Valeria Maltoni]

Joe:

I'm beginning to really warm up to the idea that customer service *is* the new marketing. Staying in touch with the reality of how your product and service are perceived and used is paramount. I've seen too many circular conversations inside organizations.