In 1991, the chief technology officer of MCI Communications Corp. decided to relocate MCI's brain trust -- the 4,000-employee Systems Engineering division that created numerous breakthrough products -- from MCI's Washington, D.C., headquarters to Colorado Springs. An avid skier, he believed the mountains, low crime rate, healthy climate and rock-bottom real-estate prices would be "a magnet for the best and brightest" computer-software engineers.

He rejected warnings from at least half a dozen senior executives that Colorado Springs' isolated and politically conservative setting would actually repel the eclectic, ethnically diverse engineers MCI hoped to attract. Mr. Liebhaber argued that new hires would jump at the chance to live in ski country, while veterans would stay longer, reducing MCI's more than 15% annual turnover rate in Washington. The move, he contended, would also save money by cutting MCI's facilities, labor and recruiting costs. Besides, four other high-tech companies -- including Digital Equipment Corp. and Apple Computer Inc. -- had recently moved there. "One of the things that gave me more comfort was the fact that these other guys had selected Colorado Springs," Mr. Liebhaber says.

He was mistaken.

While many rank-and-file MCI employees, buoyed by generous relocation packages, made the move, numerous key executives and engineers, and hundreds of the division's 51% minority population, said no, or fled Colorado Springs soon after relocating.

"It was like living in a loaf of Wonder Bread," says James Finucane, who is of Japanese descent and whose wife is from Argentina. A veteran senior engineer, Mr. Finucane was considered MCI's top engineer until he took a job with a competitor back East in 1994. "There's no culture, no diversity, no research university, no vitality or resiliency to the job market."

The move isolated MCI's engineers from top management and from marketing colleagues at headquarters, undermining the spontaneous collaborations that had generated some of company's most innovative products. Meanwhile, the professionals Mr. Liebhaber hoped to recruit from outside proved difficult and expensive to woo, pushing the move's total cost to about $200 million -- far more than MCI officials anticipated. "Most of the savings we had hoped for never materialized," says LeRoy Pingho, a senior executive who oversaw the relocation.

As numerous companies consider relocating to smaller cities and towns, MCI's move shows the perils of transplanting urban professionals to the nation's heartland and segregating key operations. Dozens of former and current employees say Systems Engineering has lost its innovative and productive edge at a time when competition in telecommunications is fiercer than ever.

Mr. Liebhaber, who retired last year, acknowledges problems. "I had a lot of surprises and a lot of disappointments," he says. "But given what I knew then, would I do it again? For the benefit of MCI, I would."

In 1989, with the division fast outgrowing its Washington facilities, MCI officials asked Staubach Co., a Dallas relocation consultant, to conduct a search for a new location. The consultant suggested six metropolitan sites, including suburban Virginia, Atlanta and Denver. But Mr. Liebhaber pressed for Colorado Springs, which wasn't on the list.

A former International Business Machines Corp. executive who owned a vacation home in Vail and whose son attended college in Colorado Springs, Mr. Liebhaber said he had an inside line on IBM buildings that were about to be abandoned. He also believed MCI would save millions by replacing high-paid Washington workers who declined to relocate with young recruits and with lower-paid workers from Colorado Springs' military bases and from high-tech companies like Digital that were pulling out of the city. "We figured we could cut the average salary from about $70,000 to $40,000," Mr. Pingho says.

Alan Ditchfield, MCI's chief information officer and Mr. Liebhaber's second-in-command, argued that Colorado Springs' labor pool was vastly smaller and inferior to those in more urban areas. But Mr. Liebhaber said, "Don't worry, I can fill those jobs just by advertising in the ski magazines," Mr. Ditchfield recalls. "I said, `I don't want skiers, I want programmers.'"

In Colorado Springs, MCI executives easily wangled $3.5 million in incentives from local governments. But after meeting with the mayor, several expressed concerns about the city's ethnic mix.

"I asked [the mayor], `What is the minority population here in Colorado Springs?'" recalls Mel Forbes, an MCI corporate director who was one of the company's most senior African-American employees. "He said, `If you throw in the Indians, it's about 2%. And that's since you showed up.'" (The city's 1990 minority population actually was 9.1% Hispanic, 6.8% black and 2.3% Asian.) Mayor Robert Isaac says he recalls the meeting, but doesn't remember giving Mr. Forbes any numbers.

Mr. Liebhaber asked Mr. Forbes to help persuade black employees to make the move, but he refused. "Why would I entice them to do something I wouldn't do myself?" says Mr. Forbes, who declined to relocate and quit MCI last January to start his own company.

MCI bought an abandoned 220,000-square-foot IBM factory in January 1991 for $13.5 million, a bargain by Washington standards. But the facility, which was designed to make telecommunications products, needed extensive renovation to accommodate software engineers. Mr. Liebhaber authorized about $120 million from his division's $1 billion annual budget to customize his dream facility. Framing it with native pink sandstone and reflective blue glass, he tripled its size, adding a 50-foot-high skylighted foyer, a posh customer welcome center and expensive Western artwork.

When the move was announced in March 1991, many rank-and-file workers were enthusiastic. MCI's relocation policy paid for every expense imaginable. Costing an average of about $100,000 per employee, it included up to six months of temporary housing and living expenses, private-school tuition for workers' children and a full month's pay for miscellaneous expenses. And there were exceptional housing bargains. "In Alexandria, [Va.,] we had a tiny place on a 50-by-112-foot lot," says Jerome Sabolik, a senior software engineer. "For the same money, we got a 3,000-square-foot house on 2 1/2 acres." Thousands of workers -- far more than Mr. Liebhaber expected -- took advantage of the offer, undercutting his plans to recruit lower-cost employees in Colorado.

But there was far less enthusiasm among senior managers. James Zucco, Mr. Ditchfield's successor and the head of Systems Engineering, stayed behind and eventually left to join AT&T Corp. Also staying put was Gary Weisenborn, the division's No. 2 executive, who later moved to Bell Atlantic Corp. Mr. Pingho, who oversaw the division's financial planning and budgeting, declined to move and quit in 1993.

There was also significant fallout among the division's minority population. Although MCI declines to provide specific numbers, it confirms there was a reduction. According to former employees who had access to Equal Employment Opportunity Commission data, there were roughly 1,300 African-Americans on Systems Engineering's staff and a combined 700 Asians and Hispanics before the relocation. Since the relocation, minority representation has been cut almost in half, to about 600 blacks and a combined 500 Asians and Hispanics. "It was a disaster for diversity," Mr. Ditchfield says.

But MCI officials say that despite the reduction, its Colorado division is still more ethnically diverse than other local companies. "We think that we have numbers that are significantly better than the available work force there," says William D. Wooten, a senior vice president of human resources.

Among those who opted out: Tony Martin, a vice president of operations who is Asian-American, and Rod Avery, who designed the complex billing system for MCI's successful "Friends & Family" long-distance program. One of the company's highest ranking African-Americans, Mr. Avery moved to AT&T.

"Not enough of my key people came," concedes Mr. Liebhaber, who never made the move himself. Responsible for other facilities in Texas, Washington and New Jersey, he says he held meetings in Colorado Springs every two weeks "to be visible." But his determination to win MCI's president and chief operating officer position impelled him to stay close to executive suites in Washington. After rival Daniel Akerson won the spot, management reshufflings eventually removed Mr. Liebhaber from direct supervision of the Colorado Springs facility. "Colorado Springs became delegated to middle management," Mr. Liebhaber says. "And that was a real problem because the site didn't have somebody senior coming out there and supporting it constantly."

MCI officials contend that most employees have flourished in Colorado Springs, while those who resisted the move or quit never gave the place a chance. "Colorado Springs definitely isn't for everybody," says Barbara Denistone, a senior manager of employee relations. "But it's worked out for the vast majority of our people. I'd sling hamburgers before leaving Colorado Springs."

But many relocated engineers felt isolated from top management as well as from MCI's marketing staff. That prevented the daily, informal contact that had spawned successful innovations. "Friends & Family was literally formulated on a napkin" during an informal gathering of marketers and engineers who worked across the street from each other in Washington, Mr. Pingho says. "There simply can't be that kind of interplay anymore."

New products like Network MCI Business were initiated and executed by marketers alone. "The day I first heard about Network MCI Business was the day they started marketing it to the public," says James Ditmore, a director of technology who moved to Colorado Springs in 1993. Engineered by outside contractors and rolled out in 1994 at a cost of about $80 million, the product lacked the technical sophistication of earlier products developed by Systems Engineering. After sending 10,000 trial copies to customers, MCI insiders say half were returned.

The less-than-successful Network MCI roll-out marked "a change in the winds," Mr. Ditmore says. Many transferees began to question their future with MCI. "We were out of the loop," he adds. "Out of sight, out of mind."

Prior to the move, the division was a frenzy of activity. Workaholic engineers designed MCI data centers and sophisticated software that allowed the company to sell such products as "1-800-COLLECT," Friends & Family and advanced corporate-data services that together accounted for about 75% of MCI's total revenue.

"In Washington, I judged the productivity of my workers by how many pizza trucks showed up in front of our buildings at 6 p.m.," Mr. Ditchfield recalls.

But in Colorado Springs "the parking lot was emptying out by 4:30 p.m., and by 6 p.m. the building was a ghost town," says John W. Harding, a senior manager. "I was stunned." He says he and his fellow managers' came to expect transferring workers to show a 50% productivity decline in the months immediately surrounding their move, and a 20% drop after.

The slower pace was introduced, in part, by new local hires who required start-up time and who had strong family commitments and interests in the outdoors. "This whole notion of having a balanced life is something the Colorado people didn't just give lip service to," Mr. Pingho says. For MCI veterans, the mood was contagious. "I began to buy into that culture myself," says Mr. Harding, who estimates his average work week fell by about 15 hours. "If no one's there to work with, there's no point in being there."

Still-frenzied MCI marketers in Washington and Atlanta grew impatient and resentful, and began to go elsewhere to get projects finished quickly. That culminated in MCI's 1995 purchase of SHL Systemhouse Inc., a Canadian software-engineering concern that mirrored Systems Engineering's talents.

As the engineers' isolation grew, so did fears about layoffs. In Washington, layoffs were blunted by the availability of comparable jobs nearby. But in Colorado Springs, where MCI quickly became the largest employer, the job outlook was bleak. Mr. Sabolik, the software engineer, was laid off in a companywide restructuring that purged hundreds of full-time and temporary Colorado workers just 1 1/2 years after he and his wife relocated from Washington. He now treks to Denver to work on temporary contract.

Many working spouses also found job opportunities drastically limited. Mr. Finucane's wife had trouble matching the Montessori school-teaching job she held in suburban Washington. When she finally found a comparable position, she had to commute 70 miles to Denver.

Meanwhile, the Colorado Springs political climate grew increasingly polarized. An influx of more than 40 Christian organizations emboldened fundamentalists to run for school-board seats. Mr. Finucane says his concerns mounted when "my son told me that 30% of the kids in his high-school class didn't believe in evolution."

After a local Christian group sponsored Amendment 2, a highly controversial state law barring civil-rights protection for homosexuals, gay employees say they were the brunt of ugly name-calling. (The law was deemed unconstitutional by the U.S. Supreme Court in May.) As new local workers joined MCI, religious evangelism began to infiltrate the workplace. One Christmas, religious leaflets aimed at converting nonbelievers were distributed to every cubicle, offending many workers. Although MCI's human-resources managers issued a stern rebuke, it created "a feeling of constant paranoia at work," says one senior level manager who is gay. "I became fearful of being myself at work."

Though increasingly handicapped by his declining clout at MCI, Mr. Liebhaber tried to help relocated workers feel more comfortable in Colorado Springs. He committed millions in corporate dollars and resources to local schools, libraries and the arts. When the fight over Amendment 2 arose, he says he forcefully spoke out against it.

Mr. Liebhaber acknowledges that he underestimated the difficulty of the transition. Instead of workers focusing on developing great products, "you get all the angst and energy going into, `Is it the right or the wrong place?'" he says. A key disappointment: "We disrupted a lot of families."

But an MCI spokeswoman emphasizes that, "We have been above reproach in how we've tried to treat our employees and be a good corporate citizen in Colorado Springs." Despite recent layoffs, she says MCI remains committed to its Colorado Springs workers.

As the move's mixed results became apparent, senior executives used it as ammunition to criticize Mr. Liebhaber. In the end, the former highflyer was relegated to a small research and development group with only 100 employees.

"For a while it looked like Colorado Springs would be a major center for MCI," Mr. Ditmore says. "But it ended up being a branch, and a very remote branch at that. It's a beautiful place, but the long-term opportunities just aren't there."

Links to Internet sites regarding this article:
MCI in Colorado Springs by Loring Wirbel in Electrical Engineering Times

Management:
Employers’ Dilemma:
Whether to Regulate
Romance

The claim strikes fear in the hearts of managers everywhere. Just ask Lawrence J. Ellison, chief executive of Oracle Corp., who is now defending himself against a sexual-harassment suit. A former employee claims that after she threatened to break off their 18-month relationship, Mr. Ellison fired her. His trial is set to begin today -- Valentine’s Day.

Consider, too, Bobby Kimbrell, a now-retired South Carolina police chief. His former dispatcher claims in her harassment suit that after she broke off a seven-year affair he made "persistent sexual advances." Mr. Kimbrell says the relationship never happened.

Both men deny the harassment charges. Their cases point to a dilemma for employers: Today’s fling may turn into tomorrow’s filing. Yet as office romance becomes more common, companies are finding it increasingly difficult to set policies that shield them from liability without invading employees’ privacy.

Managers have every reason for concern: Sexual-harassment claims filed with the Equal Employment Opportunity Commission have doubled in the past four years, while payments by companies to complainants have tripled to more than $25 million. Civil lawsuits against companies and individuals may total twice that.

Though soured affairs are responsible for only a small share of the sexual-harassment claims, they are highly visible. Around the office, failed romances create "the worst possible situation," says Freada Klein, a workplace-bias expert who has mediated numerous office romances turned bitter. "These two people would prefer the other person didn’t exist on the planet. They can’t even talk to each other, and the whole office gets disrupted."

Amid increasing concern over employees’ privacy rights, companies have largely abandoned broad policies prohibiting coworkers from dating. Fewer than 10% of companies now have such policies, according to a recent study by the Society for Human Resource Management. But many companies continue to enforce bans on dating between supervisors and subordinates.

Despite recent moves to make its culture less formal, International Business Machines Corp. strongly discourages office romance. The sexual-harassment section of the IBM Manager’s Manual states: "A manager may not date or have a romantic relationship with an employee who reports through his or her management chain, even when the relationship is voluntary and welcome." The document adds that such parties wishing to date must inform management and that both employees must be willing to submit to a job transfer.

But workplace experts say even such stripped-down policies are unworkable. "The question becomes, when do you notify? After you kiss?" says Cliff Palefsky, a San Francisco employment lawyer.

And what if the employer suspects involvement, but the participants don’t volunteer any information? Do managers have the right to question employees about the nature of the relationship?

After one supervisor at a California semiconductor maker began dating a subordinate, managers called in the superior and asked if the two were "an item."

"What constitutes an item?" the man asked.

"Well, did you have sex?" the managers asked.

Figuring the woman would feel violated by his independent revelation, the manager said they hadn’t. But when pressured in a subsequent meeting, the subordinate admitted that a tryst had taken place. The manager then was fired for lying to his employers.

Several plaintiffs, armed with lifestyle-discrimination statutes, recently have sought to penalize companies for enforcing no-dating policies. Now enacted in more than 20 states, such laws are aimed at preventing discrimination based on off-duty behavior. Last year, IBM lost a suit filed by a manager who said he was forced out of the company after dating a subordinate. Daniel Mancinelli, a 23-year veteran, won a $375,000 jury verdict for breach of employment contract, after arguing that the company targeted him for relocation when he continued to see a subordinate in his chain of command. He argues that IBM’s policy is an invasion of privacy under California law. The case is now being appealed. IBM has declined to comment.

In 1992, two former employees at Rohr Inc., a Chula Vista, Calif., aerospace concern, were awarded $4 million for breach of employment contract. Kenneth Bingham, a director of Rohr’s human-resources department, and Susan Everett, a manager in the same department, were fired eight months after they began a dating relationship. Although Rohr had a policy precluding couples from working in a supervisor/subordinate capacity, the pair’s lawyer argued that 34 similar relationships at the company had been allowed to flourish. Rohr didn’t return phone calls seeking comment about the case, which the company is appealing.

In a case now pending, Del Armstrong, a supervisor at Goodman Manufacturing Co., a Houston air-conditioner maker, alleges wrongful termination. After warning him against dating a subordinate, Goodman managers fired him upon learning that he had married her. Mr. Armstrong contends that the company’s antidating policy violated the privacy-protection provisions of the Texas state constitution—and was unevenly administered as well. "Other people met and got married, but I was the one who got fired," Mr. Armstrong says. He contends that the company’s real objection was that it was an interracial marriage. Goodman officials declined to comment.

Legal experts say formal antidating policies can help shield a company from harassment liability. But because such policies are so difficult to enforce, they are usually applied unevenly.

"When I’m asked to write one of these airtight policies, I say, `Imagine your star revenue producer announces that he or she has fallen in love with a young associate in the division who works in another city,’" says Ms. Klein. "If you take such an approach, you’re going to end up having to fire people who you don’t want to see leave your employ or set up a double standard. And a policy not followed is a policy without a [legal] defense," she adds.

At a recent seminar, executives from a Wall Street financial-services firm debated whether no-dating policies have any deterrent effect at all. "One person even suggested that such policies may play a role in encouraging romance," Ms. Klein says.

Despite the current lawsuit against its CEO, Oracle, of Redwood City, Calif., has avoided instituting no-dating policies of any kind.

"It only causes more problems," says Ray L. Ocampo Jr., the company’s general counsel. Besides creating enforcement and legality problems, such policies can undermine a company’s ability to woo top talent, Mr. Ocampo says. "Which would you rather work for," he asks, "a company that legislates such things or a company that doesn’t?"

So what’s a manager to do?

"Basically, there’s not much to do except institute a clear sexual-harassment education program that includes warning members of management of the pitfalls of even consensual relationships. And that they may be held personally liable for what is later claimed to be harassment," says Mr. Palefsky. "But the solution isn’t to have a single black-and-white rule that reduces human emotions to one line in a human-resources policy. The bottom line is, you simply can’t legislate love."

Team Approach:
A Power Producer
Is Intent on Giving
Power to Its People
---
Groups of AES Employees Do
Complex Tasks Ranging
From Hiring to Investing
---
Making Sure Work Is `Fun'

"What kind of rate can you give me for $10 million at 30 days?" he asks the agent, who handles Treasury bills. "Only 6.09? But I just got a 6.13 quote from Chase."

In another room, Joe Oddo is working on J.P. Morgan & Co. "6.15 at 30 days?" confirms Mr. Oddo, a maintenance technician at AES Corp.'s power plant here. "I'll get right back to you."

Members of an ad hoc team that manages a $33 million plant investment fund, Messrs. Oddo and Hatch quickly confer with their associates, then close the deal. "It's like playing Monopoly," Mr. Oddo says as he heads off to fix a leaky valve in the boiler room. "Only the money's real."

It sounds like "empowerment" gone mad. Give workers more autonomy in their area of expertise? Sure. Open the books to employee purview? Perhaps. But what good could possibly come from handing corporate finance duties to workers whose collective borrowing experience totals a mortgage, two car loans and some paid-off credit-card debt?

Plenty of good, says AES, a maverick power producer that sells electricity to public utilities and steam to industry. "The more you increase individual responsibility, the better the chances for incremental improvements in operations," argues Dennis W. Bakke, the company's chief executive and one of its founders. He claims the team in Montville has matched, and once bettered, the returns of its corporate counterparts. "And more importantly," he says, "it makes work a lot more fun."

In the face of cynicism and outright opposition from some investors, Mr. Bakke, supported by AES co-founder and Chairman Roger W. Sant, has zealously shunned corporate convention. Although the company employs 1,500 people, has $500 million in revenue and operates in 10 countries, during its 13 years of operation it has never formed corporate departments or assigned officers to oversee project finance, operations, purchasing, human resources or public relations.

Instead, such functions are handled at the plant level, where plant managers assign them to volunteer teams. The workers are expected to learn how to do the tasks effectively.

"It's what I call an ad-hocracy," says Robert H. Waterman Jr., co-author of "In Search of Excellence," who sits on the Arlington, Va., company's board. "People can get involved however they want, without worrying about crossing boundaries."

Until recently, there were only three levels in AES's hierarchy: workers, plant managers and corporate officers. As AES expands overseas, it has added a small fourth tier, division managers.

The structure -- which AES calls a "honeycomb" for its beehive-like frenzy and seeming lack of order -- stems in part from the founders' weary experience battling bureaucracy 20 years ago. They met during the mid-1970s energy crisis, when they ran a Ford administration energy-conservation office. Mr. Bakke, a devoted Christian who had never worked in the private sector but dreamed of "making a difference," found a kindred spirit in Mr. Sant, a committed environmentalist and former Stanford business professor. Together, they helped draft a law requiring utilities to buy power from independent producers, which generate energy using nontraditional means.

A few years after leaving government, they took advantage of the new law and started AES, using mostly coal-fired plants that produce electricity and steam simultaneously in what is called cogeneration.

Since then, AES's revenue has grown an average of 23% annually. Profit last year hit $100 million, up sixfold since 1990. But even though the company is publicly held and thus accountable to shareholders, the founders maintain that the bottom line isn't their top priority -- their "core values" are. By spreading responsibility across the work force, they hope to ensure that everyone hews to those values, listed as "integrity, fairness, social responsibility and fun."

Except for "fun," a lot of companies espouse principles like this. But few take them as seriously as AES -- and its empowered employees -- do. In the name of "social responsibility," for instance, employees in the late 1980s calculated how much carbon dioxide the Montville plant would produce over its useful life -- then planted thousands of trees in Guatemala to counterbalance the emissions. The cost was $2 million, equal to the company's annual profit at the time.

As for the "fun" goal, it goes to the heart of AES's corporate philosophy. Starting with a simple statement that employees should have "fun in their work" and be able to "enjoy the time" they spend there, Messrs. Bakke and Sant have fashioned a freewheeling organization that defiantly snubs many of the checks and controls that typify large corporations.

By fun, "we're not talking about Friday-afternoon beer busts," says Mr. Sant, the chairman. "Fun is when you're intellectually excited and you are interacting with each other. . . . It's the struggle, and even the failures that go with it, that makes work fun."

Plant technicians are given authority to budget for and purchase supplies ranging from mops to turbines, confident that management will support them most of the time. Engineers are delegated the authority to arrange financings for new plants and sometimes even to negotiate multimillion-dollar contracts. And before plant employees are hired, ad hoc teams of a dozen or more workers, from pipe fitters to accountants, evaluate applicants, including their ability to fit the AES mold.

It seems to work. Turnover is below 1% a year, the company says. The downside, however, is a reluctance to fire people who don't end up fitting in. "If we do have a weakness, it's that we're very slow to make corrections," says Buster Jarrell, a team leader of an AES plant near Houston. "It's hell to get them out."

Centralizing functions such as purchasing and hiring, Mr. Bakke contends, would mean that the majority of workers would feel less accountable and would be less well informed on corporate issues that he wants everyone to think about. "As soon as you have a specialist who's very good, then everyone else quits thinking," he says. "The better that person is, the worse it is for the organization. The information goes through the specialist, so all the education is to the person who knows the most."

Is giving coal handlers investment responsibility risky? Mr. Bakke thinks not. He notes that the volunteer team in Montville does have a financial adviser, and it works within a narrow range of investment choices; they aren't exactly buying derivatives. What the CEO likes about the arrangement is that "they're changed people by this experience. They've learned so much about the total aspect of the business, they'll never be the same."

Paul Burdick, a mechanical engineer, was asked to handle a $1 billion coal purchase after he had been at AES only a few months. "I'd never negotiated anything before, save for a used car," says Mr. Burdick, who pestered a more experienced colleague with questions until the man begged him off. "I was afraid to make some of the decisions."

He says the trial-by-fire was both invigorating and broadening. It also generated "tremendous peer pressure" to succeed. "That's the flip side," he says. "You're given a lot of leeway and a lot of rope. You can use it to climb or you can hang yourself."

Plenty of mistakes get made. Ann Murtlow, a chemical engineer with no experience in pollution abatement, was given the task of buying air-pollution credits, which industrial plants may trade to gain flexibility in meeting emissions rules. She spent $10,000 to buy an option for $1 million of the credits, only to discover that they were the wrong kind and were worthless to the AES plant.

"I felt pretty stupid," says Ms. Murtlow. Determined not to err twice, she educated herself and now is a company expert on air-pollution permitting. Major suppliers who are used to dealing with chief executives often find themselves negotiating with young AES project leaders like Ms. Murtlow.

But the AES system can create tensions with contractors. "I know of engineering and consulting companies who say they won't provide services to AES because of the way they solicit and manage the services such suppliers provide," says James E. Huston, a principal at Gemini Consulting Inc. who specializes in the power industry. They object in part because AES likes to have suppliers work on a contingency basis and assume some risk. But Mr. Huston says suppliers also complain that AES has "a lot of people in the project structure doing things the way they want to. They don't have any corporate policy around procurement."

Mr. Sant says, "Outside parties clearly are frustrated at having to deal with people who have more ultimate authority than top management. So many people want to come to the CEO, but we generally back off and say, `It's up to these guys. You've just got to work these relationships.'"

Without conventional managers at the helm, blue-collar workers can find the freedom unnerving. After the opening of the Shady Point, Okla., plant, one worker had nightmares of being chastised for things he couldn't control. "I'd been blaming others for not getting the job done," he says. "I suddenly realized that there would be no one else to blame anymore." Jeff Hamburg, a former AES executive, notes that "if the company is successful, everyone takes ownership, but if things go badly they take it terribly personally."

That is what happened after seven workers falsified water-discharge reports at Shady Point in 1992. The violation, which managers uncovered and reported to federal regulators, brought a $125,000 fine. Asked why they perpetrated the deceit, the workers told executives they had feared for their jobs if management learned about excess emissions. "It was really a shock," says Mr. Jarrell, who helped hire employees at the Shady Point plant. "They didn't trust our values, and we didn't fully understand their situation. They just didn't believe we'd stick to them."

Messrs. Bakke and Sant blamed themselves -- for not indoctrinating the workers well enough. They took 85% and 65% bonus reductions, respectively, and reeled off a public apology.

But the statement -- devoid of protective "spin control" -- apparently caused many investors to lose confidence in management. The stock lost half its value in a day. Shareholders sued. Morale fell. Directors called for a corporate reorganization.

Messrs. Bakke and Sant refused. "Mistakes are inevitable," Mr. Bakke says. "But that doesn't mean we abandon our values. The fact is, I feel strongly about principles and I'm not going to compromise them just to satisfy AES's stakeholders."

People, he adds, "will say that whatever happens, it's because of AES's loose, `unconventional' management approach. There will be intense pressure to make shifts and change. But we want to live this way. And we're going to continue to strive even though we're going to fail sometimes."

He will get little argument from the Montville investment team. "Who would have thought I'd be reading The Wall Street Journal every day and second-guessing Alan Greenspan?" says Mr. Hatch, the coal handler. "It definitely makes it a lot more fun to show up for work every day."

Slashed and Burned
---
Call It Dumbsizing:
Why Some Companies
Regret Cost-Cutting
---
They Find Profits Are Hurt,
Customers and Suppliers
Lost, Employees Miffed
---
`Mr. Peanut Disappeared'

Ms. Ford, a computer-aided designer and 17-year Kodak veteran, was snapped up by a local contractor that gets much of its work from Kodak. "I took the project I was working on and finished it here," she says. But instead of paying her $15 an hour plus benefits, Kodak now pays the contractor $65 an hour, and Ms. Ford earns $20 an hour (but gets no benefits).

Kodak's layoffs have left its engineering group in Rochester, N.Y., overworked and demoralized, Ms. Ford contends. "They're burned out and they don't even care. When they send a job over here and we say, `It's going to cost you X,' they just say `Go ahead,'" she says.

A Kodak spokesman acknowledges that the photography and imaging company has to outsource work during peak periods, and he adds: "There are a lot of challenges facing the company. People throughout the company are working a lot harder, but I'm not hearing that they're demoralized." He also says that by reducing staff, Kodak has saved money in computer equipment and workspace.

Corporate America loves to talk about the nimbleness and efficiency gained by restructuring. Pressured by low-cost foreign competitors that threaten to snare their customers and by Wall Street's demands for quick returns, executives have taken to cost-cutting with fervor. Some have been able to fight off rivals and reverse sliding profits.

Despite warnings about downsizing becoming dumbsizing, many companies continue to make flawed decisions -- hasty, across-the-board cuts -- that come back to haunt them, on the bottom line, in public relations, in strained relationships with customers and suppliers, and in demoralized employees. Sweeping early-retirement and buyout programs sometimes eliminate not only the deadwood but the talented, many of whom head straight to competitors. Meanwhile, many replacements arrive knowing little about the company and soon repeat their predecessors' mistakes.

"Cost-cutting has become the holy grail of corporate management," says Rick Maurer, an Arlington, Va., management consultant. "But what helps the financial statement up front can end up hurting it down the road."

In Digital Equipment Corp.'s 1994 reorganization, its second in as many years, the company eliminated hundreds of sales and marketing jobs in its health-industries group, which had been bringing in $800 million of annual revenue by selling computers to hospitals and other health-care providers world-wide.

Digital says it cut because it had to act fast. It was losing about $3 million a day, and its cost of sales was much higher than that of its rivals. Robert B. Palmer, the chief executive officer of the Maynard, Mass., company, saw across-the-board cuts in all units, regardless of profitability, as the way to go. Indeed, Digital has reported profits for the past five quarters and has positioned itself for future growth by forming alliances with Microsoft Corp. and other software vendors.

But in the health-industries group, the cutbacks imposed unexpected costs. Digital disrupted longstanding ties between its veteran salespeople and major customers by transferring their accounts to new sales divisions. It also switched hundreds of smaller accounts to outside distributors without notifying the customers.

At the industry's annual conference, "I had customers coming up to me and saying, `I haven't seen a Digital sales rep in nine months. Whom do I talk to now?'" recalls Joseph Lesica, a former marketing manager in the group who resigned last year. "That really hurt our credibility. I was embarrassed."

Resellers of Digital computers, who account for most of its health-care sales, also complained about diminished technology and sales support. "There were months when you couldn't find anybody with a Digital badge," complains an official at one former reseller who had been accustomed to Digital sales reps accompanying him on some customer calls. "They walked away from large numbers of clients." Adds Richard Tarrant, chief executive of IDX Systems Corp., a Burlington, Vt., reseller that used to have an exclusive arrangement with Digital: "Now, they're just one of several vendors we use."

Many Digital customers turned to International Business Machines Corp. and Hewlett-Packard Co., and so did some employees of Digital's downsized healthcare group. Mr. Lesica says some laid-off workers went to Hewlett-Packard and quickly set about bringing Digital clients with them. "That's another way DEC shot itself in the foot," he says.

Such wounds aren't unusual when longtime sales relationships are disrupted. "Nobody sits down and asks, `What's going to be the impact on our customers?'" says D. Quinn Mills, a Harvard Business School professor. "It falls between the cracks all the time."

Gary Gorden, director of health care at Digital, defends Mr. Palmer's strategy. "He had to make some quick decisions," and when you do that "you will throw part of the baby out with the bath water," Mr. Gorden says. "He might have thrown out an arm and a leg, but he didn't throw out the whole body." He acknowledges that Digital failed to properly communicate its plans, but he says, "You can't afford to hit the customer one-on-one anymore."

But in a wide range of industries, low-cost strategies are especially likely to backfire with high-end customers. "Being the `low-cost producer' is possibly the stupidest business trend in the last 30 years," says Eileen C. Shapiro, a Boston-based management consultant who wrote a book, "Fad Surfing in the Boardroom." She adds: "What you want to be is low-cost relative to the benefits you offer customers. In a case like this, an important benefit customers want is the individualized, dedicated sales force."

Another set of downsizing problems arose after Kohlberg Kravis Roberts & Co.'s 1989 leveraged buyout of RJR Nabisco Corp. Under KKR, debt-burdened RJR Nabisco's divisions came under pressure to slash costs and improve profit margins. A herd of consultants were brought in, and they recommended merging the sales force of Nabisco Foods, which makes such products as Grey Poupon Mustard and Milkbone dog biscuits, with that of Planters & LifeSavers Co., which makes its trademark candies, nuts and other confections.

The problem: The two businesses had very different products and sold to very different markets. Nabisco mostly supplies groceries and supermarkets; Planters mostly sells to smaller outlets, including drugstores and convenience stores. "Sales reps can't push mustard, dog bones and candy," a former Planters vice president says. "They have distinctly different outlets. To expect sales reps to wrap their minds around all the products and represent everything in a bundle is overly simplistic."

Without adequate sales representation, Planters lost sales, company insiders say. (RJR doesn't disclose sales of specific products.) Buyers felt abandoned. "You had a new salesperson calling on a buyer where there was no established relationship," says John W. Seeley, president of American Consulting Group Inc., a Harvard, Mass., firm that has advised Nabisco since 1978. "It clearly put them at a competitive disadvantage."

The division also slashed advertising spending for Planters Nuts, a major product, by about 70% between 1991 and 1994. "Mr. Peanut disappeared," says Steve Martinez, a sales rep who oversaw the Planters brand for Brandshaw Inc., a Nabisco agent in California. "They had the most recognized figure in nuts, and they just said `See ya.'"

Initially, the cost-cutting helped boost profit margins. But the division's operating earnings shrank to about $15 million last year from about $60 million in 1993, analysts estimate.

Planters's president, John Mitchell, attributes the profit slide to outside forces, including a price war, changing consumer tastes and new labeling requirements. He says the division maintained its overall promotional budgets and added part-time sales reps to cover candy outlets.

But the cost-cutting "clearly had a deleterious effect over the long run," contends David Leibowitz, an industry analyst at Burnham Securities in New York. The Planters line "lost its reputation as the only premium brand in the industry."

Sometimes even small cutbacks backfire. During a round of cost-cutting in 1993, Continental Airlines stopped carrying aspirin on its flights. The move would save only $20,000 a year, but a few such savings added together, the airline figured, would start to bolster the bottom line.

After a while, however, Continental noticed that callers to its customer hotline were griping about the lack of aspirin. In addition, flight attendants said passengers needed headache relief.

A new chief executive made reversing that error one of his first moves. Gordon Bethune, named to head the airline in 1994, restored the aspirin. The lesson, says Sarah Oates, a spokeswoman: "That we listen to our customer . . . instead of focusing so heavily on costs."

Reversing other cost-cutting moves can be more expensive. Last year, to cut costs before a pending merger, Connecticut Mutual Life Insurance Co. offered a lucrative buyout plan to its 1,675 workers. About 900 accepted-more than twice the anticipated number-forcing it to refill 400 positions.

"We clearly underestimated how many people would opt out," admits John J. Pajak, the vice chairman in charge of the buyout. "We should have done a better job of communicating about the opportunities that are going to exist after the merger."

By offering a minimum of 26 weeks of severance pay, the Hartford, Conn., insurer estimates it paid out $16.9 million in severance for jobs it subsequently refilled. "But the economics aren't what they would appear at first blush," Mr. Pajak says. "Senior employees are mostly the ones leaving. And we're bringing in new entrants at the lower end of the wage scale." He estimates that the company will thereby save $10.4 million a year.

The question is, to what extent are those savings offset by the new hires' lack of experience? Ms. Shapiro, the consultant, contends that a company is set back severely by the loss of "knowledge and judgment earned over the years. That's the stuff that gives you a real competitive advantage in the long run." Human-resources experts estimate that it typically costs $50,000 to recruit and train a managerial or technical worker.

Kodak, too, is restaffing some positions it recently eliminated. Ms. Ford, for example, was called for one temporary Kodak job by an employment agency that didn't realize Kodak had let her go. "I said, `That's exactly where I got laid off from,'" she notes. "I would never go back there. I don't ever want to go through that stress again."

Others try to reduce employment costs by replacing experienced veterans with less expensive contract workers. But that can heighten a company's chances of being represented by people who perform poorly -- or worse. That's what happened at Peoples Natural Gas Co., which hoped to save more than $1 million last year by replacing its 35 meter readers with contract workers. "We thought we would be able to get the same quality by outsourcing as we would with our own employees," says Elmore Lockley, a spokesman.

But on March 19, one of the new meter readers allegedly raped a Peoples Gas customer while on a call. Overnight, the Pittsburgh company faced "a major challenge, not only from a public-relations standpoint but from a human-tragedy standpoint," Mr. Lockley says.

Peoples, a unit of Consolidated Natural Gas Co., set up a toll-free number to field customer concerns. It told the 6,000 customers who had given copies of their house keys to meter readers over the years that it would return the keys and give each $60 to install new locks. Meanwhile, it has stopped reading meters altogether, while it decides whether to buy electronic meter-reading equipment, hire another outside company -- or bring back its old readers.

Of course, no one can know with certainty whether retaining the company's own meter readers would have prevented such an episode. But Peoples clearly believes that its own people were more carefully screened. It has filed a lawsuit seeking unspecified damages from its former contractor, Bermex Inc., a closely held firm in Southfield, Mich. The suit, filed in the Court of Common Pleas in Westmoreland County, Pa., accuses Bermex of breach of contract by allegedly failing to conduct proper background checks, as promised, on its employees. A Bermex attorney declines to comment. The alleged rapist is awaiting trial.

Cutbacks that result in poor customer service can also lead to hefty penalties. Nynex Corp. recently was ordered by New York's Public Service Commission to rebate $50 million to customers because its reduced staff fell behind in responding to problems.

Nynex's early-out programs for managers and craft-level employees, which have trimmed about 12,000 jobs since 1993, have caused labor shortages as well. Nynex has hired back hundreds of former employees, including managers already receiving pensions.

One of those is John McGovern, a former field tech foreman who returned to work full time last June. He says he still gets full retirement benefits as well as a weekly paycheck from Nynex. "They have a lot of new employees and a lot who have little experience," the 61-year-old Mr. McGovern says. "They needed people to watch quality and train."

Even greater than the rehiring expense is the blight on Nynex's reputation for customer service -- right when its core market is opening up to competition for the first time. "Their past reputation for customer service is their key competitive advantage," says Joe Kraemer, a management consultant at the A.T. Kearney subsidiary of Electronic Data Systems Inc. in Rosslyn, Va. "But they've put all that at risk, just to gain a few cents per share in a given quarter. It's just plain dumb."

A Nynex spokesman acknowledges that customer service has suffered from the cutbacks and says the company is now hiring hundreds of workers to improve it. "Did we make some mistakes in offering our early-out program prematurely?" says Arnie Eckelman, its executive vice president for quality. "In some cases, yes. But it was based on an assumption that service demand wouldn't grow as fast as it has."

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Management:
Longevity-Reward Programs
Get Short Shrift

The hallways of Mr. Wallick’s home in Canton, Ohio, are filled with an array of certificates marking the milestones in his 31-year career as a Timken steel-mill worker. Down in his rec room, a mantel clock that he and his wife picked out from a Timken gift catalog rests atop the family television.

But these days, once-paternal companies like Timken are trying to move away from rewarding employees for long service. Many are reducing service-award programs—and a few are eliminating them entirely. Besides wanting to save money, these companies hope to tilt recognition more toward performance and away from years of loyal service.

The roster of companies reducing or eliminating longevity-reward programs in recent years includes some well-known names: International Business Machines Corp., Scott Paper Co., Merck & Co. and American Express Co. According to an American Management Association survey conducted for The Wall Street Journal, 14.2% of the 522 responding companies that reward, or once rewarded, longevity either reduced or eliminated such programs in the past five years.

The cutback effort strikes a raw nerve with many an employee who craves recognition for "giving the company the best years of my life." Some are fighting to keep the awards, which range from simple pen-and-pencil sets to fancy silver trays.

When Timken’s Mr. Wallick saw a posting on his shop bulletin board announcing a cutback in the company’s service awards, he saw yet another setback for employees. The company-owned park where his son caught his first fish is gone now. So are other niceties, like the birthday card he used to receive from the company each year.

"I knew it was one of a million they’d printed up, but it was a nice gesture," says Mr. Wallick. "It showed they cared about you."

After years of trimmed benefits and wage freezes, the steel and bearings manufacturer’s cutback of the service-awards program added insult to injury. So, for the first time in his life, Mr. Wallick sat down and wrote a letter to the company president expressing his disappointment.

In the weeks following the December 1993 announcement, Timken received scores of letters condemning the change. "We didn’t really think that eliminating some of the lower-year awards would concern anyone," says Michael E. Flood, Timken’s director of human resources. In the end, the company reinstated all of the service awards.

Despite resistance, the cutback trend is gaining force. "Traditional service awards have become survival awards," says Tom Green, a sales manager for Herf Jones Co., which administers service-award programs. "There is no question that companies today are moving away from them."

Indeed, even mentioning the word longevity is increasingly frowned upon in the service-award industry, where it is sometimes called "the L-word." In this age of re-engineering and retrenchment, long-serving employees are often seen as "deadwood," marginally productive workers who must be rooted out. To some managers, rewarding long service reinforces the very attitude of entitlement they are trying to stamp out.

Last year, Scott Paper dropped its entire service-award program as part of a broad restructuring. "We [were] rewarding longevity and the status quo; the status quo had been an abysmal failure," says Albert J. Dunlap, a turnaround specialist hired as chairman and chief executive last year to revive Scott’s sagging fortunes. Mr. Dunlap concedes that he "got some grief" over the move, but he wasn’t swayed.

Like other companies cutting awards, Scott also cited a desire to cut costs. "Everybody likes to go to big dinners and get nice awards," Mr. Dunlap says. "But it’s not right. You’re using shareholders’ money," he adds.

Yet awards programs typically represent only a minuscule portion of overall operating budgets. "Companies spend far more on coffee breaks," says Jerry McAdams, vice president of Maritz Inc., a St. Louis performance-research company. "The real impetus for tanking these awards is because of the message they send."

Adds Mr. Green of Herf Jones, "Longevity is less a part of our culture today. It just isn’t valued as much."

Others say the staff-cutting trend partly pushes companies to eliminate service awards. "It’s a little two-faced to lay off people and then hold a fancy anniversary dinner that costs [an amount equal to] the salary of a terminated employee," says Michael Losey, executive director of the Society for Human Resource Management. "And what about situations where somebody goes to the 25-year dinner and gets laid off the next day?"

That is essentially what happened at BankAmerica Corp.’s Bank of America unit last fall when it announced a layoff right after mailing invitations to its 25-year service awards dinner. "We struggled with the idea that we were sending mixed messages by inviting people who had already been laid off," says senior vice president Alex Reyes, who manages the bank’s benefit programs.

Mr. Reyes says consideration was given to not inviting the laid-off workers. But Bank of America had already endured a "phenomenal backlash" after it trimmed its service awards several years earlier, only to reinstate them. Rather than subject itself to more resentment, the bank decided to invite the laid-off workers anyway.

Several terminated workers called Mr. Reyes to ask if it would be an embarrassment if they attended. "I said, `Of course not,’" the official recalls. "They may be upset that they’re being let go, but they still want that gold ring."

He adds: "Most people can say, `I’m being recognized for my past contributions. But under the new employment contract, that doesn’t guarantee me of getting to my 50th anniversary.’ I’m not saying people are happy about that, but that an understanding has been reached."

For his part, Timken’s Mr. Wallick says he has no illusions about the so-called new employment contract. "This is the age of the free market," he says with resignation. "Most people don’t feel that bond of family that they used to feel with their employer. Whether it’s good or bad, I don’t know." But he is absolutely sure of one thing: "It used to be a lot more fun."

Management:
How One Hotel
Manages Staff’s
Diversity

At a hotel with a multicultural guest register, such diversity can be a competitive advantage. "We have a diverse clientele, and we need a diverse work force to serve them," says human-resources director Ray Falcone. But managing people from such a wide range of backgrounds presents a constant management challenge.

Prickly racial, ethnic and gender concerns are an undercurrent in virtually every interaction at the Marriott, and some workers are quick to charge discrimination when conflicts with managers arise. Just maintaining a basic level of civility can be a daily struggle.

The Marriott has had little choice but to adapt. Applicants for housekeeping jobs are mostly blacks or immigrants from Asia or Latin America. Few others are willing to don pink housekeeping uniforms to clean about 30 rooms a day. But in the years ahead, managing multiethnic and multiracial employees is likely to become an increasingly important skill throughout the business world as people from diverse backgrounds enter more industries and rise higher on corporate ladders.

At the Marriott, it isn’t always easy. "I don’t lower my standards for anybody," says Jessica Brown as she swipes a white cloth around the base of a hotel-room toilet. A quality-assurance manager, she has just shrugged off the curses of a resentful housekeeper whose work she criticized.

Dust on a light bulb. A single hair on the bathroom floor. A candy wrapper under the bed. Ms. Brown shakes her head disapprovingly, then makes check marks on an inspection form listing 68 measures of cleanliness. She gives the housekeeper a score of 95 out of 100, the lowest in the worker’s 11 years at the hotel. Grabbing away a tray Ms. Brown has deemed dirty, the housekeeper mutters racial epithets.

Ms. Brown is unfazed. She and the other housekeeping managers have suffered worse insults. When she rewards African-American housekeepers, she says, she is chided by Latin Americans for favoring her own. When she commends Hispanics, blacks grumble. She herself is of both Jamaican and Honduran parentage, but she doesn’t speak Spanish.

Marriott managers are instructed to bend over backward to be fair about issues large and small. To ensure that days off are spread equitably, for example, rooms director Susan Gonzalez agonizes over each week’s schedule for the housekeeping department’s nearly 400 workers. Her records tracking holiday requests go back four years, and she uses the data to show that choice days are doled out evenly.

Marriott International Inc.’s "guarantee of fair treatment" policy allows workers to appeal grievances all the way to the company chairman. Top management regularly bestows second and third chances on poor performers, and a recently introduced "peer review" procedure allows workers to review disciplinary actions.

In required diversity training classes, managers are taught that the best way to cope with diversity-related conflict is to focus narrowly on performance and never to define problems in terms of gender, culture or race. "It’s too sensitive," says Ms. Gonzalez, the rooms director. "And no matter what you say, it is going to come back at you."

When performance problems that aren’t easily measured arise, she addresses them in terms of personality, which often has a cultural component but isn’t an overt invitation to a discrimination charge. That is how she handled a troublesome assistant manager who rotated into the department 18 months ago. Whether due to his personality or his upbringing in the Caribbean, she says he was difficult to supervise.

While the sweet-natured Ms. Gonzalez extracts work from subordinates with polite requests, he often framed requests as demands. He also became belligerent when his female supervisors assigned him work he felt was beneath him. For example, he repeatedly disregarded Ms. Gonzalez’s requests to label racks of water glasses so that each room attendant he oversaw would be responsible for an assigned allotment.

At wit’s end, she appealed to his ego. "You need to do something to leave your mark on this department," she told him. What management would remember, she said, would be a new program that would last even after he had moved on. He returned two days later with a proposal: "I have a new program," he told her. "We should label the glass racks."

Finding the right way to give orders can be a challenge. Responding to a guest’s request, assistant manager Helena Blat dials a housekeeper’s electronic beeper. "Hello Daaaling, how you doing?" she answers when the Hispanic housekeeper calls back. "Honey, could you do a cleanup in [room] 1246? Oh thank you, Daaling!"

She would never address, say, a Haitian or African-American housekeeper in such fashion, she says. "I would say, `I really need your help,’" says Ms. Blat, employing a sober tone.

A Jewish refugee from Latvia, Ms. Blat had never encountered a black or Hispanic person before she arrived in New York in 1989. She began as a housekeeper at another hotel and was promoted to supervisor, where she says she studied her fellow workers’ cultural styles and learned how best to coax work from them.

"There are cold people and hot people," she maintains. "Spanish people are party people. They’re willing to help out, but you approach in a fun way when you need something. Others need to know that it’s serious when you need something done."

Other managers say that while cultural background shouldn’t be an excuse for poor performance, some situations require tolerance. When a guest with an overflowing bathtub needed immediate attention, manager Victor Aragona chose to fix it himself rather than disturb a room attendant’s daily Islamic prayers. Unable to reach the man by beeper, Mr. Aragona had raced up to his floor to find him prostrate on a towel in the housekeeper’s closet bowing to Mecca. "It wasn’t fair or efficient to have him fix the problem," recalls Mr. Aragona. "My priority was a flood, his was God."

The hotel’s diversity classes, which all managers attend, identify a variety of cross-cultural norms, such as body language, eye contact, touching and religious customs. But most managers learn what works through trial and error.

Raised in a predominantly white community on Long Island, N.Y., Ms. Gonzalez says the hotel’s diversity forced her to face her prejudices head on. When an African-American colleague invited her to dinner at a soul-food restaurant in Harlem, she says she fretted over whether it was safe to wear her black leather coat. She had never visited Harlem, and after reading news accounts of a murder over such a coat, she decided to put it on inside out. "My friend looked at me and said, `Chill out, Sue,’" Ms. Gonzalez recalls.

Veteran managers acknowledge that conflicts are unavoidable. When Cynthia Keating became a manager overseeing someone she had once reported to, the new subordinate avoided her for months. Another worker told her the person was resentful and felt the fact that Ms. Keating was white played a role in her ascension.

She decided not to confront the subordinate but also vowed never to "overcompensate" by giving the person plum assignments or favorable work schedules. At the same time, she tried not to exert her new authority in ways that might appear dictatorial. In the end, "all you can really do is hope [the resentment] goes away eventually," she says. "And it usually does after a while."

While few minorities have penetrated senior management, they are being recruited for entry-level management jobs. Richard Morse, resident manager, believes that veteran workers know hotel operations better than entry-level management recruits from hotel schools. And "diversity in management is good because there’s diversity in the work force," he says. "If you bring in a manager who speaks perfect Spanish and perfect English, it’s an asset. There’s a comfort level for people who speak English as a second language."

He says that is one of the reasons he recently promoted a Latin American desk clerk to assistant housekeeping manager. He believes, he adds, that "Latin women love to be managed by Latin men."

Such statements make Mr. Falcone, the human-resources director, wince. Matching Hispanic managers with Hispanic workers may make practical sense, he says, "but you risk being perceived as aiding stereotypes." He favors a color-blind approach to filling all positions, which he believes is the only way to eliminate bias in the work force.

Despite his best efforts, though, the hotel’s departments segregate themselves naturally. Employees refer friends and family members for open staff positions in their departments, and managers willingly consider their suggestions.

"When we need people, we ask the ladies," says Ms. Brown, who recruited a friend of her sister’s. "We get really good workers that way."

Management:
Managers Leaving Big Companies to
Run Little Start-Ups Can Be
Fish Out of Water

Sound familiar?

This might be a reference to the recent move of Alex Mandl from the presidency of AT&T Corp. to Associated Communications LLC. But the scenario is far from unique. Indeed, it applies to scores of executives from whom Mr. Mandl might learn an important lesson: Big fish who jump to little ponds often can be fish out of water.

One who seems to have found this true is Richard Gerstner. Once in line for the top job at International Business Machines Corp., Mr. Gerstner, brother of current IBM chief Louis V. Gerstner, had left the computer giant after suffering a debilitating, misdiagnosed bout with Lyme disease. Cured in 1993 and eager to run a company, he joined Telular Corp., a fledgling 125-employee cellular communications company with $12 million in annual revenue.

Mr. Gerstner’s big-company instincts didn’t serve him well in his new venue, according to former Telular officials. Expenses mushroomed as he brought in a cadre of high-priced senior executives, rapidly expanded operations and pushed to relocate to fancier digs. "He wanted to replace tile floors with plush wool carpets," says Joel Bellows, a former Telular director. "We had one senior executive for every million dollars in revenue."

Mr. Gerstner did help to propel a successful initial public offering in 1994, but Telular foundered as ballooning expenses outstripped sales. Forced from daily management responsibilities by the board in 1995, he resigned from Telular last November. He declines to comment on his tenure at Telular.

Executive recruiters and venture capitalists who place chief executive officers in start-up companies say the financial backers of these companies—particularly those in risky high-technology areas -- are seeking seasoned, big-company names. Too often, however, executives who chuck the security of a Fortune 500 corner office to strike out for the El Dorados of the Internet or biotechnology fail to realize the rules are different.

They must learn to live without big staffs and big budgets, while mastering the details of often unproven technology. They must nurse relationships with company founders who may resent their presence, while winning over board members and employees. And they must prepare for the possibility that the venture may fail, leaving their careers high and dry.

"You have to build a new organization without killing the culture that’s there," says David Beirne, the headhunter who recruited Alex Mandl for Associated Communications. "You can’t sit in an ivory tower if you’re going to be CEO of a start-up."

The key relationship, he says, is with the board of directors. "It’s got to be crystal clear that you’re the one in charge," Mr. Beirne says. "If the founder’s going to run the company, don’t go."

Charles Levine learned that lesson in spades. Recruited from AT&T to run tiny CadForms Technologies in 1993, Mr. Levine says he clashed with a founder who, he says, wouldn’t let go of the reins of the telecommunications concern. Though John Notarianni had promised to step aside, Mr. Levine says, "I found what he really wanted was an administrative assistant." Mr. Levine finally called on CadForms directors to fire the founder; they balked. Frustrated, Mr. Levine quit in 1994 to pursue another offer.

One strategy for avoiding such collisions is for CEOs and founders to negotiate clearly separate roles in advance. At Firstfloor Software Inc., a Mountain View, Calif., Internet technology start-up, founder David Cardinal helped to persuade former Dataquest Inc. CEO Judith Hamilton to come in as president and chief executive by stipulating that he would focus on product development as Chief Technology Officer. "We’ve worked through it as we’ve gone along. We’re lucky," says Ms. Hamilton, who took "an incredible reduction" in income by passing up a post at Dun & Bradstreet to gamble that her stake in Firstfloor will turn to gold in a public offering.

Management experts say start-ups are like corporate turnarounds, where tight deadlines and scarce resources can turn any mistake into a company-threatening crisis. "You’re bringing someone in to do a tough job the founder couldn’t," says Patricia Sawyer, partner with Smith & Sawyer, which places top executives in start-ups. "The clock is ticking, and the backers want to see everything happen quickly."

That means CEOs must dive into details of daily cash flow, product development and financing that most have left behind as they climbed the corporate ladder. Former Merck & Co. Chief Executive P. Roy Vagelos says he is back walking the labs again as chairman of Regeneron Pharmaceuticals Inc. He is also wooing business partners and worrying about the books. "I wasn’t used to paying attention to the source of the money," he says. "At Merck [the source] was our revenues. But we don’t have any revenues at Regeneron."

Life in a start-up can be like flying "an F-16 at the treetops," says John Thompson, vice chairman at executive recruiter Heidrick and Struggles. And that can be rough on a manager accustomed to measuring self-worth in terms of a big capital budget or a large staff, he says.

J. Bruce Harreld, who quit his job as chief information officer of Kraft General Foods Inc. in 1993 to become president of Boston Chicken Inc., says he found himself taste testing new recipes and quizzing friends about what phone system to buy. At Kraft, a 300-person taste panel would have tested the food, and the telecommunications staff would have bought the phones. Mr. Harreld says he eventually decided day-to-day operations at a start-up "isn’t my cup of tea." Last year, he joined IBM as head of strategic planning.

And what if you do everything right? "It’s still a crap shoot," says Steve Zecola, who resigned an executive position at MCI Communications Inc. in 1993 to start Go Communications Corp., a wireless-communications concern. In fast-moving technology markets, a few weeks’ delay in a new product or an unanticipated attack by a rival can derail even a well-run enterprise and put the top executives back on the job market.

Steeped in MCI’s entrepreneurial culture, Mr. Zecola raised $125 million from investors, assembled a crack management team and set about bidding for government licenses to offer wireless telephone services. "But a couple of cowboys came in and bid up the price," he recalls. "It was so high we couldn’t make a profit, so we liquidated the company. We did everything right, and we got whacked on the side of the head."

---

Do’s and Don’ts for Small-Company Chiefs

Management experts, venture capitalists and small-company veterans offer these tips for executives considering a jump to a little company:

-- Forge a Bond with Founders. Keeping a start-up’s founders on board without diluting management control is a critical test for a CEO, experts agree. Many start-ups crash when founders quit, taking their technical knowledge with them.

-- Ask Hard Questions Before It’s Too Late. Does the business plan make sense? Do you trust the board? "You’ll be throwing yourself in front of a locomotive every day," says John Thompson of Heidrick & Struggles. "If that’s painful, don’t do it at any price."

-- Master the Details. How much cash is there today? Is the software team on schedule? Who’s going to talk to the venture-capital firms? If the boss doesn’t know, no one will.

-- Recognize the Risks. Few start-ups pay $20 million signing bonuses. More often, executives accept steep pay cuts in return for equity stakes that could be worth millions—or nothing. A failed start-up can be a career-crippling detour. Have money in the bank.

Management:
Managers Aren’t Always Able to
Get The Right Message
Across With E-Mail

"E-mail is by far the most powerful tool a manager has," says Larry Crume, a vice president at software maker AutoDesk Inc. "But it’s also the most abused."

In the U.S., more than 23 million workers are now plugged into e-mail networks, and three times that number will be connected by the year 2000, according to the Electronic Messaging Association in Washington. But experts say supervisors regularly—and mistakenly—employ e-mail to avoid face-to-face confrontations with workers.

Jaclyn Kostner, president of Bridge the Distance Inc., a company that holds seminars in "virtual leadership" for managers who work apart from their staffs, says one manager at a major telecommunications company that she advises subjects employees to "Friday afternoon dumps" -- assignments via e-mail that arrive minutes before workers go home for the weekend.

Even worse, she says, some managers use e-mail to send performance reviews and other sensitive documents. "I know two people who received termination notices electronically," says Ms. Kostner.

Another problem of the medium is a lack of consensus among users as to what it represents. Is an e-mail message, in fact, mail, with all the weight of a letter or written interoffice memo? Or should it be regarded as an off-hand remark?

The ambiguity creates misunderstandings. After Massachusetts Institute of Technology Professor Chris Schmandt rejected a portion of a graduate student’s thesis, the student returned with an e-mail message written by the professor more than a year before. "He pulled out a piece of my old e-mail and said, `Look, you told me to do this and I’ve done it. Therefore [the project] must be finished,’" says Mr. Schmandt, who teaches at MIT’s Media Lab. Mr. Schmandt stuck to his rejection but concedes he should have been more careful. "I treated e-mail informally, like a phone call," he says. "Now I feel like I have to be guarded about every e-mail I send."

Although some users treat e-mail as if it were written with disappearing ink, electronic messages leave a cybertrail that can come back to haunt the indiscreet. Last year, Chevron Corp. paid $2.2 million to settle a sexual-harassment lawsuit filed against it by four female employees. Evidence presented by the women’s lawyers included e-mail records listing 25 reasons why beer is supposedly better than women. (In settling, Chevron denied the women’s allegations.)

E-mail users should also avoid heated electronic arguments, says Jeffrey Christian, president of executive recruiter Christian & Timbers in Cleveland. He learned this lesson when a subordinate recently sent him an e-mail proposal regarding management bonuses and how to motivate workers: "I disagreed completely, and my response was brash," Mr. Christian recalls. "I reacted from an emotional perspective, and it created a lot of unnecessary problems."

He says he had to apologize for his response.

"Criticism and sarcasm just don’t come across well on e-mail," says Brad Silverberg, a senior vice president of Microsoft Corp. "E-mail doesn’t have the nuances of real-time human conversation." He says, for example, that subordinates often mistake his opinions for orders. Senior-level managers "lose track of the impact your e-mail may have on people," Mr. Silverberg says.

E-mail, however, is considered an indispensable tool at Microsoft during the hiring process, Mr. Silverberg says. As job candidates move through various levels of interviews during the company’s rigorous one-day process, interviewers pass to one another e-mail highlighting the day’s progress. "If the feedback is `This is a person we really like,’ then the nature of my interview changes," Mr. Silverberg says. "Instead of probing and questioning, I can turn to selling." He says this often helps the company make hiring decisions by the end of the interview day.

In fact, managers who shun e-mail "are somewhat out of the loop," says Robert Kraut, a professor at Carnegie Mellon University’s Human Computer Interaction Institute. In a recent study of a major international bank, Mr. Kraut notes, "people who used e-mail were substantially more aware of what was going on in corporate headquarters."

Still, e-mail can be too much of a good thing. "I get 80 e-mails a day, and 60 of them are because I’m copied from multiple levels," says AutoDesk’s Mr. Lynch. "I can put filters on my mailbox. But I tell my people the best filter is to show self-restraint."

In sending e-mail to the boss, some subordinates use the "George Factor," named for the "Seinfeld" television character who, after leaving his car in the company parking lot, is offered a promotion by bosses impressed that his car was there when they arrived at work and still there when they went home.

Ms. Kostner of Bridge the Distance says: "People have confessed to me that they do the e-mail after dinner but delay sending it until late at night."

Management:
Signing Bonuses Rise
to Counter Rich Pay Plans

To help unlock Alex J. Mandl from his post as president of AT&T Corp. and heir apparent to the chief executive spot, Associated Communications L.L.C. paid him a signing bonus of $20 million in cash.

That’s what it took to entice Mr. Mandl to leave behind a top spot at one of the biggest companies in America, more than $10 million in AT&T stock options and other benefits, and roll the dice with a previously unknown start-up.

While Mr. Mandl’s steep compensation package isn’t likely to be matched anytime soon, signing bonuses have been climbing steadily in recent years. That’s largely due to the proliferation of so-called golden handcuffs—contract provisions that prevent executives who leave employers prematurely from exercising stock options and cashing in profit-sharing plans and other benefits. "Executives have gotten pretty opportunistic," says Matt Ward, a stock-compensation expert at consultant Watson Wyatt & Co.

De rigueur for chief executives, the practice has spread to middle-level executives as companies seek to buttress the eroding bonds between them and their employees. "Companies have their hooks into more and more people," says Robert Salwen, president of Executive Compensation Corp. of White Plains, N.Y. "And the ante keeps going up as pay packages escalate."

Certainly, Mr. Mandl’s cash bonus is in the stratosphere. It appears to be four times as big as the previous record, when Eastman Kodak Co. lured George Fisher from the No. 1 job at Motorola Inc. in 1993, partly with a $5 million cash payment. Kodak said it wasn’t entirely a signing bonus; instead the company said in its proxy that the payment was in part "reimbursement for compensation and benefits that [Mr. Fisher] would forfeit" by leaving Motorola to become Kodak’s first outside chief executive.

The same thing happened when Louis Gerstner left RJR/Nabisco Corp. to head International Business Machines Corp. the same year. He received a one-time payment of $4.3 million in cash.

Associated Communications paid Mr. Mandl $20 million in large part because it is so small and unknown. "It’s compensation for the incredible risk he’s taking," says David Swinford, a principal at consultant William M. Mercer Inc. "If he fails, he becomes damaged goods." Associated Communications is a private Washington, D.C. firm that is 55%-owned by publicly held Associated Group Inc. of Pittsburgh. The unit Mr. Mandl will run will use a little-noticed slice of the wireless spectrum to offer businesses a way to bypass their local phone companies for Internet access, video links and high-speed data access.

Signing bonuses have been popular for more than a decade but rarely reached the seven-digit levels until a few years ago. The escalating packages have prompted controversy especially when they’ve been offered to new chief executives of companies in bankruptcy proceedings. In those cases, creditors have sometimes balked. At start-up companies, rich cash signing bonuses have been rare, because these businesses often have more equity to spare than cash. Mr. Mandl is benefiting from the fact that Associated Communication’s parent company amassed a fortune by operating and selling off early cellular networks and cable systems.

For the hiring company, signing bonuses invariably pose a risk. If the new position doesn’t work out, "you have no protection from the person walking away with the [bonus] cash," says Dennis Carey, a managing director of SpencerStuart, an executive search firm.

Now, some companies are beginning to take protective steps, says Carol Bowie, editor of Executive Compensation Reports, a Fairfax Station, Va., newsletter that tracks trends in executive pay. For example, she says that when Continental Airlines paid a $1.5 million signing bonus to Gordon Bethune in 1994, the company stipulated that the former Boeing Co. executive had to repay the entire amount if he left before the first year, and 50% if he left in less than two years. Hired at Continental as president, Mr. Bethune is now chief executive.

At Owens-Corning Fiberglas Corp., Glen Hiner recevied a $900,000 signing bonus when he became chairman and CEO in January 1992. The Toledo, Ohhio, company also replaced his pension from General Electric Co. where he had been a top executive. In return, Mr. Hiner agreed to pay liquidated damages of nearly $1.4 million if he left Owens-Corning without good reason before January 1993. The sum dropped to $225,000 after three years on the job.

Mr. Mandl’s new contract includes similar provisions, say people familiar with the agreement. Although he receives some cash up front, part of the $20 million is "back-ended," payable at the end of the five-year employment agreement. Moreover, Mr. Mandl will have to repay part of the bonus if he leaves before the contract has ended.

Mr. Mandl’s deal also includes a $1 million-a-year salary and a huge equity stake in the company, which could yield far more than the signing bonus.

Like others who’ve pocketed large signing bonuses, Mr. Mandl may face resentment from his new employees who typically question why an outsider is being paid so much to take the job. Management experts say steep signing bonuses put intense pressure on executives to perform immediately like superstars while also winning the respect of their subordinates.

Mr. Mandl is "under enormous pressure to prove his worth," says Mr. Carey. "If he’s getting paid like Michael Jordan, he’d better perform like him, too."

After-Merger Advice
Busies The Consultants

America's merger boom is going great guns, earning Wall Street investment bankers record salaries and bonuses. But it is in the aftermath, when the two companies are struggling to integrate cultures and systems, that the process often breaks down.

Michael Z. Kay knows corporate America's track record on mergers and acquisitions is less than stellar. "More don't work out than do," says the chief executive officer of LSG Sky Chefs.

So when his airline food-service company sought to acquire its archrival, Caterair International Inc., in 1995, he mustered the best help he could find. Months before the $600 million deal closed, he hired a battalion of consultants to facilitate a smooth transition.

Change-management experts from accounting firm Price Waterhouse helped him persuade Caterair managers that the transition team they had been asked to join was more than just a rubber-stamp committee. Andersen Consulting, a Chicago-based unit of Andersen Worldwide that already managed Sky Chefs' data-processing systems, helped the two companies meld their information systems. And human resources consultant Hewitt Associates LLC developed a plan to even out inequities in wages and benefits.

In the scheme of things, Mr. Kay says the $2.5 million spent on outside consultants was a drop in the bucket. To the consulting firms, however, such engagements have become big business.

"This is one of the next waves in consulting," says Colin Price, a Price Waterhouse partner who assisted Mr. Kay in the Sky Chefs/Caterair transaction. Since 1992, his firm has seen a sharp increase in the number of consultants working on merger-related projects, which now bring in about $500 million annually to the firm. Unlike the situation in the past, when companies saw little risk in mergers, he says, "executives have listened to what journalists and academics have said about the failure of mergers. We don't have to convince people that they need help."

Most of these consulting contracts involve merging operations after the deal is done. "We're seeing a ton of this work," says Charles J. Roussel, the partner in charge of Andersen Consulting's newly formed Mergers, Acquisitions and Alliances Center of Excellence. He estimates that about a quarter of Andersen's 44,000 consultants are now assigned to postmerger projects. Typical is Andersen's recent assignment to help consolidate the credit card-processing units of Chase Manhattan Corp. and Chemical Banking Corp. after the two companies merged in 1996.

Although most merger consulting focuses on such postdeal work, some consultants are involved from the very beginning. Strategy consultants from firms such as New York-based McKinsey & Co. and Boston Consulting Group Inc. of Boston, for example, say they often suggest acquisitions as a means to pursue growth strategies. "It goes so far as recommending specific candidates and doing evaluations of possible targets," says Ennius E. Bergsma, a director at McKinsey, which now takes on about 200 merger assignments annually.

Big Six accounting firms long have offered premerger audit and tax accounting analysis to clients considering mergers and acquisitions. But as firms like accountants Ernst & Young and Andersen Consulting have developed large consulting practices, they have broadened their offerings to include a wider range of premerger analysis. Such work increasingly overlaps the "due-diligence" analysis traditionally done by investment bankers.

Unlike investment bankers, who focus mainly on financial analysis, consultants assess relative intangibles such as corporate culture, management retention, technological compatibilities and the likelihood that potential syngeries can be realized.

"We have a better understanding of the costs and challenges of putting together the two organizations," says James S. Marpe, who directs Andersen Consulting's financial services merger and acquisition practice.

At a time of sky-high market valuations, consultants say such premerger analysis is in high demand. "If you know you're going to pay a premium, you do double due-diligence to be sure you're going to derive the value," says Andersen's Mr. Roussel.

But there are some reservations about the broadening role of consultants in mergers. Some executives fear that once consultants insinuate themselves into the process, they will either take charge or try to extend their assignments longer than they are needed.

"Most consulting firms want to come in and do the whole deal," Larry V. Rankin, senior vice president of BetzDearborn Inc., the company that resulted from the $632 million acquisition last June by Betz Laboratories of Grace Dearborn, a division of W.R. Grace & Co.

In the months following the companies' plan to combine, Mr. Rankin says he was approached by "two to three consultants a week" offering to create comprehensive plans to integrate the combined businesses. Although he knew he needed outside help, he feared consultants would get too involved in decision-making. "We're the experts in running this business, and we needed to make all the decisions," he says.

In the end, he hired about half a dozen consulting firms, which helped coordinate the merged company's planning efforts, integrate its computer systems and advise on several plant closings. But he says he "managed the consultants very carefully" and limited the duration of their engagements. "These things don't come to an end unless you bring them to an end," he says.

Management:
For Ex-Chiefs,
It Can Be Tough to Take
a No. 2 Title

"Playing second fiddle now."

Especially in the current megamerger mania, this is the fate of one corporate top dog and first fiddle after another.

Earlier this month, Michael Ovitz, the powerful head of Creative Artists Agency Inc., agreed to take a subordinate post at Walt Disney Co. Days ago, Thomas G. Labrecque, chief executive officer of Chase Manhattan Corp., agreed to take the No. 2 slot in a much bigger bank that would be formed by Chase’s merger with Chemical Banking Corp.

And in the latest development, Ted Turner, the strong-willed head of Turner Broadcasting System Inc., may become a mere vice chairman of Time Warner Inc. if an acquisition of Turner Broadcasting by Time Warner, now being negotiated, goes through.

The prospect of Mr. Turner playing a supporting role anywhere astonishes many who know him and raises an important question: Can managements work effectively with one or more former No. 1’s on the scene?

History shows that shifts in position can succeed—sometimes. But the obstacles are enormous, especially if the No. 2 is an entrepreneur. "It’s a rare relationship where a true partnership is formed," says Robert A. Damon, a managing director of SpencerStuart Inc., an executive recruiter. "In general, the acquired CEO moves on and does something else."

Many say a reduction in rank could be especially difficult for an entrepreneur such as Mr. Turner. He hasn’t reported to a boss since his father, who ran a sign company where the younger Mr. Turner worked, died more than 30 years ago. He doesn’t manage by consensus. Indeed, the company that carries his name is the product of ideas that others dismissed as crazy. For instance, media moguls were initially incredulous over his proposal of the 24-hour all-news cable station that became Cable News Network. Likewise, virtually no one besides Mr. Turner saw the wisdom in 1985 of spending more than $1 billion to buy the MGM film library.

Mr. Turner revels in his unpredictability. He is known for his emotional volatility. His skills are more of a builder than a negotiator. Still, associates say, Mr. Turner has mellowed with age and with his marriage to actress Jane Fonda, his third wife, and thus might be more able to adjust to a minority role in a major company.

Nowadays, many chief executives have a good reason to make a success of a No. 2 job. "If you look at the tremendous consolidation in the entertainment and media business, as well as in banking and other industries, the big guys are getting much bigger," says William D. Simon, managing director of entertainment and media at Korn/Ferry International, executive recruiter. "There aren’t as many No. 1 positions available as before."

But knowing this doesn’t make the transition to a secondary role any easier—especially for an entrepreneur. "Entrepreneurs have no patience for execution," says Charles Raben, managing director at Delta Consulting Group, a New York management-consulting concern. "They have a naive sense of how to change a large organization," he adds. "They become upset because things don’t happen fast enough."

Many executives who rise via the traditional corporate ladder often have a relatively easy adjustment to the No. 2 spot. "People who come up the corporate route and then become No. 2 through a merger often succeed in the No. 2 role," says Patrick Pittard, a managing partner at executive recruiter Heidrick & Struggles Inc. in New York. He points to the successful bank merger that formed NationsBank in 1991. When C&S/Sovran chief executive Bennett Brown ceded the top spot to NCNB Corp. head Hugh McCall, Mr. Pittard says it worked out "because Mr. Brown had been a No. 2 before."

But the list of entrepreneurs who traded king-of-the hill titles for smaller roles in bigger organizations tends to be a study in frustration.

H. Ross Perot, who sold his Electronic Data Systems Inc. to General Motors Corp. in 1984, had hoped to play a key role in turning around the struggling auto maker. But, determined to stir up GM, the feisty Texan attacked its board of directors as yes-men. By 1986, he had so agitated GM’s chief executive Roger Smith that Mr. Smith offered him $700 million to leave the company. Mr. Perot took the money and stepped down, eventually starting his own company, Perot Systems Inc.

Another who didn’t fit in as a lesser light is Martin J. Wygod, founder and former chief executive of Medco Containment Services Inc. Mr. Wygod appeared to be on track for the top job at Merck & Co., which bought Medco in 1993 for $6.6 billion. But after four months, he decided he didn’t want the job and soon resigned from the company.

Mr. Wygod, an entrepreneur who has helped start five companies whose stock is publicly traded, has had several of his companies bought by large corporations. "But I tend to like to do my own thing," he says. He has since moved on to run Synetic Inc., a small Montvale, N.J., manufacturer of plastic products for the pharmaceutical industry.

Other entrepreneurs have made their exits even more quickly. Wayne Huizenga, who built Blockbuster Entertainment Corp. into a multibillion business and sold out to Sumner Redstone’s Viacom Inc. last year, departed within two months. "There was never a sense that he was going to be a long-term player at Viacom," says William D. Simon, managing director of entertainment and media at Korn/Ferry International.

Mr. Huizenga, who earlier built Waste Management International Inc. into one of the country’s largest waste-disposal concerns, has since gone on to start another waste-management company. "He was out the door as soon as the transition was complete," says Mr. Simon.

But Heidrick & Struggles’s Mr. Pittard says even strong-willed entrepreneurs can be useful contributors if they decide to stick around. His advice for Time Warner: "Turn Ted loose on some issues. The one thing that would be a travesty is to not let him loose with his vision."

And at a rapidly evolving company like Disney, Mr. Ovitz will have plenty of opportunity to shape the future, something every CEO craves. "He’s coming in at an especially advantageous moment in time, because the vision is very much evolving after the buy-out," says Korn/Ferry’s Mr. Simon. "He’s going to be part of the articulation and the implementation of the vision."

Another plus for the likes of Messrs. Ovitz and Turner: If things don’t work out, there are sure to be plenty of other options waiting.

AT&T: The Second Breakup:
Rash of Corporate Breakups,
Spinoffs Enriches Investors and
Company Coffers

Spinoffs and breakups like the one that drove up AT&T Corp.’s stock by 11% yesterday have produced a gold mine in the past two and a half years for divesting companies and investors.

"The days of the conglomerate or the highly diversified company may be passing," says David Nadler, chairman of Delta Consulting Group Inc. in New York. He attributes the current breakup fever to "a fundamental restructuring of the portfolios of corporate America as they search for real versus illusory value." He adds, "We will see more of this."

The race by businesses to slim down and focus on a few core strengths has created nearly 100 new spun-off companies since 1992, according to a study by J.P. Morgan & Co. and Securities Data Co. Including AT&T’s breakup announcement and a slew of pending deals, spinoffs have generated billions for corporate war chests.

Breakups enable companies to jettison historically troubled divisions and raise cash for new strategies. Also feeding the breakup mania are tax advantages and a surging stock market that laps up spinoff news as well as new offerings. At a time when chief executives are increasingly judged by their companies’ stock performance, the stock-price surges that often result make spinoffs tempting. ITT Corp., Sears, Roebuck & Co., General Motors Corp. and Viacom Inc. have had run-ups in their share prices following spinoff announcements or completions this summer.

"I was dealt seven cards and I’m trying to draw a higher hand," says Dana G. Mead, chief executive officer of Tenneco Inc., a Houston conglomerate that has divested three of the seven units that existed when he joined the company in 1992. Last February, the company took its Albright & Wilson PLC chemical business public in an offering that raised $800 million. It recently completed a spinoff of its Case Corp. farm-equipment maker, raising $1.3 billion.

"We believed we could build more shareholder value by redeploying assets into less cyclical businesses," says Mr. Mead, who plans to use the cash to buy businesses in automobile parts and packaging. "I hope I’ll be calling with some news in a few weeks," he adds.

Like investors burned by long-underperforming stocks, Mr. Mead and other corporate chiefs typically dump historically laggard divisions after they’ve turned them around.

After years of poor performance, Case was a prime spinoff target by 1992. Trouble was, no one wanted to buy it. When things finally started to turn around in 1993, Tenneco sold 29% of the unit in an initial public offering. As Case stock shares have nearly doubled during the past year, Tenneco has reduced its stake gradually to 24%.

GM also sold on good news when it shed its National Car Rental subsidiary last spring. After taking a $744 million fourth-quarter charge in 1992, GM brought in turnaround artist Jay Alix. Once National turned the corner in late 1993, GM put it on the block.

But poor past performance isn’t the only reason for the current surge in spinoffs. New strategies often conflict with old ones, causing companies to dump businesses even when they’re growing.

For example, a handful of telecommunications companies have decided to spin off booming cellular-telephone operations so they can move into "personal communications services," or PCS. That’s in part because federal regulations prohibit companies from selling both cellular services and PCS in the same markets.

Pacific Telesis Group has already completed a cellular spinoff, while Sprint Corp., after investing $700 million to create its cellular unit, recently announced plans to spin off the division early next year. The likely payoff for Sprint: about $4 billion, according to analysts’ estimates, much of which the company will pour into its new PCS push.

Some observers question the rationale for dumping a thriving concern to invest in an unproven business area, however. But Sprint executives are betting that with millions of cellular phones filling customers’ hands, the maturing cellular business may not see the rapid growth it enjoyed in the past.

Another, less common reason to spin off: internal management feuds like the one that has rocked W.R. Grace & Co. The Boca Raton, Fla., medical and chemicals concern has been embroiled in a power struggle since its CEO was ousted earlier this year.

In June, directors voted to spin off National Medical Care Inc. rather than accept a $3.5 billion buyout offer from that unit’s chairman. National Medical, the nation’s biggest kidney-dialysis company, accounted for more than one-third of Grace’s $5.1 billion in sales last year.

Constantine Hampers, National Medical’s chairman and co-founder, launched his surprise bid last spring—days after Grace directors passed him over for the top job at Grace. Despite the rejection of his buyout offer, he will continue to run the Waltham, Mass.-based concern once it becomes independent.

Grace chose the spinoff after also rejecting an alternative proposal to merge National Medical with a much smaller rival. Investors had long argued that National Medical wasn’t receiving an adequate valuation while it remained part of Grace.

Still, a breakup doesn’t ensure a company success, especially when it involves a huge corporation like AT&T. "It’s not like shooting fish in a barrel," observes Barbara Goodstein, a Rothschild Inc. vice president who tracks spinoffs. "This is a massive restructuring that will have to be managed very well by the managers."