“If you stop innovating, you will have a difficult time getting back to growth” - Larissa Herda
Larissa Herda, Former CEO of tw telecom
Photographer: Will Feldman, Garlic Media Group
In an effort to best serve the Blackstone Entrepreneurs Network, we are asking various members to share their stories as they led their company through a former economic downturn. Throughout her tenure as CEO of tw telecom, Larissa Herda navigated two major economic downturns which forced her to make incredibly challenging and transformative business decisions. These decisions allowed tw telecom not only to endure, but to grow and thrive. We spoke with Larissa about her experience with a mass layoff, maintaining viability in an unpredictable market, and the power of vulnerability.
Larissa took the helm of tw telecom inc., formerly Time Warner Telecom Inc., as CEO and President on June 19, 1998, and led the company through a successful $290M IPO in 1999. She later also became Chairman and held the title of Chairman and CEO until November 2014 when the company was sold to Level 3 for $7.3B. Currently, Larissa sits on our Board of Directors as Treasurer of the Blackstone Entrepreneurs Network.
The first recession Larissa confronted as a new CEO was the 2000 telecom/dotcom downturn. tw had been growing quickly with a peak stock price of $94, which plummeted to 47 cents as the tech bubble burst. At that time, 70% of tw telecom’s revenue was coming from telecom and internet companies, many of whom were failing, with 14% of revenue coming from WorldCom, who subsequently declared bankruptcy in 2002.
Larissa received critical advice during one of her board meetings which proved key to the company’s survival. The advice came from a CEO of a telecommunications hardware company whose business was a leading indicator of the disruption that was yet to come, while tw telecom’s business was a lagging indicator. He shared, “Larissa, what you are seeing in your business today is not a reflection of what is coming at you. I’m just telling you right now, our revenue has fallen off a cliff and no one is buying. You need to react now and you need to cut deeper than you think you should.”
tw telecom was not yet a profitable company and it was at significant risk given the composition of its customer base, so although it was emotionally challenging, Larissa took his advice and made the tough decision to lay off 1000 of their 3000 employees. Over a companywide call, Larissa shared with her employees that in order for the company to have any chance of survival, layoffs were necessary. She expressed how hard it was for her to come to the decision to begin layoffs, and was clearly upset. She could not her emotions on the call. This frustrated her at the time, because she felt that sharing her honest feelings so openly was a sign of weakness and made her unfit to be a CEO. However, her authenticity was unexpectedly welcomed. Letters from employees who got laid off began to arrive thanking her for her honesty because it showed them how much she cared. They understood that the decision was difficult for her to make, and that in order for other employees to keep their jobs, and for the company to survive, it had to be done. They didn’t want her to worry about them.
The demonstration of heart and caring from leadership inspired the organization to rally around the mission of surviving the battle.
During this period, Larissa spoke to other CEOs in the telecom industry to determine what other leaders were doing to lead through this stressful time. “I spoke with the CEO of one of the largest telecom companies in the US and even he wasn’t sure what to do next. His emotions were raw as he expressed his concerns about the future of his company. This helped me recognize that I wasn’t alone, and even though I was a fairly new and inexperienced CEO, I realized we were all dealing with a new set of challenges, there was no script, and no one had the answers. It was up to our team to figure out the right path for our business. We had to plan not only for survival, but for the future.”
Larissa acknowledges that right now, we are all feeling this sense of uncertainty, loneliness, and fear. “As a leader, it is even more pronounced because your decisions not only impact the future of the business, but people’s lives. Yesterday, your business plan was sound. Today, through no fault of your own, it’s broken. That is what happened to us, and it was devastating. Once we got through mourning that fact, and securing our survival, it was time to plan for the uncertain future.”
One of the lessons Larissa learned is to constantly look around the corner for those things that could happen that are completely out of your control, and create a plan. Something unexpected is going to happen. For tw telecom, it was the internet/telecom bust and then the great recession. For leaders today, it is this virus.
“If you stop innovating, you will have a difficult time getting back to growth. I made a personal commitment after the first recession that I would never allow the company to be in a position that required laying off so many of our employees again.”
“How are you going to secure your future, move forward and make sure that this will never happen again?” During and after the first recession, Larissa decided with her team that they needed to dramatically diversify their revenue stream by targeting new customer segments with new products and innovation. The process took years because the entire business needed to be retooled. But in the end, those decisions created a growth engine with a differentiated product portfolio which provided them with a defensible market position going forward. Importantly it positioned them to weather the next big challenge, the Great Recession.
Another crucial lesson Larissa had learned from the first recession was the tremendous negative cultural impact that massive layoffs have on an organization. It took years to rebuild the culture and trust after the internet bust. “When employees are worried about losing their jobs, it inhibits collaboration. People go into a defensive posture to protect themselves, and sharing information and moving business forward becomes very difficult.”
At the beginning of the 2008 subprime lending crisis, tw telecom had healthy growth, and was still investing significantly in the business. Suddenly the near collapse of the financial system caused companies in every sector to lay off people and stop investing. Employees everywhere became afraid. “I could already see that familiar defensive posture taking hold in employee behavior. We quickly assessed our position as a company using our prior experience and data from the first recession, and decided that we could best weather the storm by continuing to invest in our growth. That also meant investment in our people. But we needed the hearts and minds of the employees to make that happen.” Larissa felt that employees needed certainty, and to know that she, the management team, and the board would do everything they could to protect their jobs. Larissa publicly expressed to her employees, “I commit to you, that if we grow by even one dollar each year during this recession, we will not lay off a single person. We’ve got your back. But, I need you all working together to make this happen. Help me keep this commitment to you.” This simple message transformed the organization, people were no longer afraid, they broke down silos and they drove success yet again.
“We were the only company in our sector that grew both years during the recession and accelerated our growth after the recession, both top-line and bottom-line, without any layoffs. I remain very proud of that particular accomplishment.”
“My goal in the second recession was to keep people inspired. When people are fearful of not paying their bills they are not thinking about how to work better or smarter. Many businesses don’t understand how much that hurts them. If there is any way to protect your employees, do it.”
“Don’t follow the herd, try to create your own path.” At the time, companies were laying off employees solely because other companies were doing it. Many could have afforded not to. tw telecom could have made that same choice. They chose a different path. It’s important to protect your shareholders, but first and foremost, take care of your employees. “If I take care of the employees, they will take care of the customers which benefit the shareholders in the long run.”
There is no doubt that we are living in an unpredictable landscape as COVID-19 continues to reshape businesses’ viability and culture. Leaders are looking for answers on how to best navigate their difficult decisions. “Acting fast and aggressively is what you must do right now. But you also have to think about what you can be in the future. Innovation is key. You can either cease to exist or become a leader in your industry.”
“After managing through two recessions I spent a lot of time thinking about and understanding future risks. In 2009, I got educated on the existential threat pandemics could pose to our business as a result of the H1N1 scare. I was intent on protecting our business from interruption and getting ahead of it, so I directed our team to create a pandemic plan and the ability for all employees to work from home for many months at a time if necessary. We spent a few million dollars doing it, and the truth is, I was a bit ahead of my time. I think my team thought I was a little crazy, but they did it. Although we didn’t use it for a pandemic, it greatly increased our productivity during Colorado snowstorms for years to come and paid for itself many times over!” Yes, better to be too prepared and be able to laugh about it later…