Tom Watson's Timeless Advice

As I looked for some material for the first entry in this blog I found this article I transcribed in 1984 from Newstrack. It is particularly fitting for today's issues. Enjoy!

Tom Watson's Timeless Advice

Most business failures do not stem from bad times, they stem from poor management; and bad times just precipitate the crisis. It is during prosperous times, the kind we are coming into now, when we sow the seeds for the next bumper crop of bankruptcies.

I won't claim credit for the above observation, it came to me from the late Arthur K. "Dick" Watson, younger son of Thomas J. Watson, Sr., who founded IBM. His father, Dick told me, was serene and confident in bad times. While the rest of the world was wringing or sitting on it's hands, Tom Watson was forceful, confident and moving ahead. But prosperity unsettled him, he was uneasy with it. Like a good ship's engineer he could detect those sounds of trouble others found easy to ignore.

As with so many stories I heard from Dick Watson during the years I worked for him, that story about his father puzzled me and I brooded about it. Why this curious fear of good times in business? It was only after I had been through a whole economic cycle of the venture business that I realized why Tom Watson was unsettled by good times. They really are the times when we sow the seeds of our own later destruction.

Recessions are blamed for failures, but in fact they're simply harvest times for the crops, of seeds so lightheartedly sown in better days. What are the signs? What is the difference between taking advantage of prosperity and being beguiled by it? One sign I think is taking on projects that have to succeed or they will take the company down with them. This is the kind of project some businessmen attempt to undertake when things are booming and they are feeling especially macho. There is rarely justification for reacting like a poker player turned compulsive gambler and pushing everything into the center of the table. Businesses are just too hard to start to risk them when anything short of survival is at stake. Of course, I am not talking about startup companies, which are always a gamble, but about drawing to an inside straight with the future of an established business.

Sloppiness, especially with people, is another seed which is sown in good times and reaped in bad. When orders are pouring in, and customers are quoting the sales for us, it is not hard to convince yourself that now is the time to scoop up everyone you can hire just to fill those orders . . . don't do it. Lose orders, lose share of market, but don't lose control of the business by bringing in weak personnel. Their ineptness their lack of real loyalty and the inability to train them properly will hurt, margins in good times and destroy the business in bad. Though it shows up later in a business's life, bidding wars to get key personnel are another sign of trouble ahead. For example, this is the second year of boom times on Wall Street and some wirehouses are deep into this kind of thing. I've heard of successful stock salesmen who are demanding and getting $75,000. to $150,000. in upfront bonus money as well as Vice Presidencies as a reward for switching loyalties. But loyal for how long?

The millennium delusion is another of prosperity's beguiling traps. In the late 1960's for instance, a great many otherwise intelligent business people fell into the delusion that prosperity was going to go on forever. With our superior understanding of economics, the reasoning went, the extremes of the business cycle were things of the past... wise government policy would eliminate them. A sharp little recession in 1971 came as a nasty shock to this belief, but 1974 was the absolute killer. It was a killer because the logic of the millennium delusion leads people to overexpand and to become avid borrowers and just at the time that they should be cutting back.

Until I had considerable personal experience in running businesses, old Tom Watson's words as expressed to me by his son, didn't make much sense. How could prosperity be more dangerous than recession? Well, it can be and it is. It was for a good reason that Tom Watson, Sr. was regarded as one of the great businessmen of all times. This column may sound faint hearted and old fogeyish to ambitious young business people eager to turn the rising economy to maximum advantage. To paraphrase, "whom the gods would destroy, they first make overconfident".

By the way, there is a flip side to Tom Watson's advise, just as booms are a time for caution, so are recessions a time for boldness. Watson knew this well. During the depths of the depression, Watson, unwilling to lay people off, kept turning out punch card machines for which there was no visible market. Then came the new deal and social security and IBM was the only company that could supply the needed equipment. IBM made a great step forward when other companies were pulling in their horns. The time to be bold is when nearly everyone else is timid. But when nearly everyone else is bold a little timidity is an excellent thing to have.

(Transcribed from Newstrack Executive Tape Service, February 21, 1984
Original Article from Forbes, January 16, 1984)