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Optimism Is High, But Speed Is Crucial Record numbers of CEOs from America's fastest-growing companies are optimistic about the state of the economy over the next 12 months. However, many fast-growth firms are anticipating only moderate growth for their own businesses and may be prompted to over-hire from a shrinking labor pool as the skilled labor shortage worsens--even if it means reducing their corporate productivity. Those are the findings of the latest Coopers & Lybrand L.L.P. "Trendsetter Barometer" survey, and they are widely regarded as an important indicator of the coming business climate. The survey interviewed CEOs of 440 of the fastest-growing companies in the U.S., ranging in size from about $1 million to $50 million in annual revenue/sales. At the end of the second quarter of 1997, 82% of "Trendsetter" CEOs reported being optimistic about the economy (up significantly from the previous high of 75% at the close of the fourth quarter). This heightened optimism about the economy is coupled with a belief that traditional barriers to future growth are diminishing: concern about weak demand over the next 12 months (cited by only 30%, down nine points from a year ago), fears of increased taxation (25%, down 10 points), and worries about legislative or regulatory pressures (39%, down seven points). "Three potential sources of business stress over the next 12 months--weak market demand, taxes and regulatory pressures--are at their lowest levels since the inception of our 'Trendsetter Barometer' panel in 1991", says Jim Lafond, mid-atlantic cluster managing partner for Coopers & Lybrnad L.L.P. "Clearly, the tax-cut legislation being considered at the close of the second quarter contributed to an overall positive outlook."
Conversely, a shortage of capable workers is by far the No. 1 problem facing business owners today, and it is on the rise. Nearly two in three "Trendsetter" CEOs (65%) cite a lack of skilled, trained workers as a potential barrier to growth--13 points higher than a year ago. "Trendsetter" CEOs are expecting revenue growth of 24.7% over the next 12 months, down from the 28.9% they anticipated at the close of first quarter 1997, and 27.5% a year ago. An inadequate supply of workers may have been a factor, hindering the growth rate for "Trendsetter" firms and causing them to lower their estimates. Still, nearly all (95%) fast-growth firms expect positive growth, and 80% expect double-digit growth over the next 12 months. Plans for major new investments of capital over the next 12 months have also slowed, as only 55% are planning increased outlays (down six points from both last quarter and a year ago). The composite level of planned new spending for "Trendsetter" firms over the next year was also down on a quarter-to-quarter basis (from 14.1% of revenues to 12.7%). INVESTMENT PLANS Keeping with a nationwide trend, plans for major new investments in information technology were cited by more "Trendsetter" CEOs (62%) than any other aspect of their business. Other major planned investments include new product development (cited by 52%, up three points from the previous quarter), geographic expansion (48%, up five points), sales promotion (45%, up two points), and business acquisitions (32%, up two points). In contrast, fewer "Trendsetter" firms are now planning increased new investments in facilities expansion (cited by 42%, off five points), advertising (36%, off three points) and research and development (26%, off four points). Although revenue growth expectations and major new capital investment plans have been subdued, hiring plans have accelerated for "Trendsetter" CEOs--more than three-fourths (77%) plan to add new employees over the next 12 months. Only 3% plan on reducing their workforce, while the remaining 20% expect to stay about the same. Surprisingly, while the number of firms planning to hire is parallel to a year ago (78% last year), fast-growth firms now expect to add 14.2% additional full-time employees to their workforce, compared to 10.9% a year ago, (a 30% increase).
"Trendsetter" firms also plan to hire contract or part-time workers (the full-time equivalent of 4.9%) for their composite workforce. Altogether, "Trendsetter" CEOs are planning to add 19.1% full-time equivalent employees over the next 12 months. "This planned increase in new hiring exceeds the typical corresponding increase in anticipated revenue growth," notes Lafond. "It could break the pattern of higher productivity in effect among growth firms since 1995. The 'Trendsetter' productivity index has increased this quarter to .57 full-time equivalent employees for every percent of expected revenue growth--its highest point since the third quarter of '95, when the index was .61. Some 'Trendsetter' companies may now be hiring preemptively in anticipation of a severe shortage in the future." New hires would be chiefly comprised of professionals and technicians, sales and marketing staff and administrative personnel. Production workers and skilled workers would be hired to a lesser degree. One strategy more firms are adopting to keep pace in this fast-growth environment is teaming up with other companies in strategic mergers or acquiring them out-right. However, how quickly they complete that task can have a big impact on how successful the merger or acquisition becomes. Firms that took a fast-track approach when tackling a merger or acquisition reported achieving more than 80% of their objectives, according to another survey by Coopers " Lybrand. In contrast, firms following a slower approach reported almost a 50% failure rate. In an effort to access new products, increase market share and reduce costs, more companies than ever before are scrambling to put together mergers and acquisitions. After the transaction occurs, most of these firms find themselves in a post-merger slump, which includes reductions in productivity, morale and profit margins. However, the study by Coopers & Lybrand, "Speed Makes a Difference; A Survey of Mergers " Acquisitions," finds that a rapid transition can lessen those effects on business performance, while a slow transition can actually worsen them. In fact, 89% of the surveyed firms believe they should have instituted a more rapid transition.MERGER BOOM "American business is undergoing the greatest merger boom in its history. In 1996, transactions added up to more than $650 billion--nearly twice the volume of the peak year of the 1980s," says Mark L. Feldman, partner and managing director, merger and acquisition consulting at Cooper & Lybrand. "Last year we saw more than 100 transactions worth $1 billion or more." Employee morale and effectiveness are greatly influenced by how quickly the integration of firms takes place. Those firms that chose to make speedy transitions achieved greater confidence in the new company's direction and in its management, as well as more rapid execution of new plans and product strategies.
Additionally, when companies implement communications plans and integrate operational policies and procedures early in the transition, positive results are produced quicker--including improved performance in cash flow, productivity and profitability. The success of key employee incentive programs also depends heavily on early communications plans. Firms that developed post-transaction incentives early in the process reported more favorable changes in energy and enthusiasm than those that were slower (77% versus 55%). Technological progress, enhanced company reputation and image, and higher stock prices were also reported as benefits of early plans. Transition teams play a significant role in mobilizing employees to help meet the firm's objectives. Coopers & Lybrand found that those firms which quickly activated transition teams realized more favorable results in key integration objectives than their slower transition counterparts: improved energy (83% versus 50%), enhanced morale (81% versus 67%), speed of decision making (66% versus 33%), and reduction in internal competition (51% versus 33%). "The evidence is in. After you cut through everything, the real success factors are speed and execution," adds Feldman. The key objectives that motivated firms to enter into mergers were only met about half the time. And, of these, most were achieved as a direct result of the merger/acquisition: reduction in the number of competitors (attained by 77%), access to new brands (72%), and entry to a new industry (69%). Conversely, the least achieved goals were operational, particularly cost reduction goals, including in reduction in manufacturing costs which was achieved by only 8% of the firms. The joining of two different cultures and business methods ultimately causes problems once the deal is completed. However, post-transition problems were reported less by fast-transitioning companies than the slow-transition firms: favorable "employee commitment and motivation" (92% versus 70%), positive changes in customer relations (83% versus 67%), and optimistic outcomes from employee communications (84% versus 63%). The leading post-merger problem, reported by almost half of all firms surveyed (47%) is a difference in operating philosophy. Other compatibility difficulties mentioned include management practices (cited by 41%), information systems (39%), and administration procedures (26%). "The winning companies are the ones that don't just decide, but act--quickly and decisively--while their slower counterparts are still waffling over 'vision statements' and wringing their hands over operating style differences and compatibility problems," says Feldman. Coopers & Lybrand surveyed 124 companies nationwide of diverse geographies and industries for this study. Of these, when surveyed, 8% were describing a merger and 92% were describing an acquisition. The elapsed time between the initiation and the close of deal averaged 7.5 months. The participants were medium to large firms with average company revenues of $1.4 billion and company employees of 6,400.
HIRING PLANS To keep pace with a growing economy and competition, high-tech CEOs also have more aggressive hiring plans than their non-high-tech peers, planning to hire at a rate twice that of the non-high-tech firms: 19.5% of their current work force vs. 9.7%. Not surprisingly, seven in 10 high-tech CEOs cite a lack of skilled, trained workers as their No. 1 problem over the next 12 months. "In high-tech organizations, success depends on the strength of a company's employees, a firm's intellectual assets," says Maheu. "Successful companies must be able to find the right talent in this supply-constrained economy and then keep those people productive and satisfied." In fact, finding and keeping qualified people has emerged as perhaps the single biggest challenge facing business owners in high-tech fields. Competition for those employees has become so fierce that workers in certain fields, such as computer programming, are often the subject of bidding wars among several companies.
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