Taking Stock / Beware of Homo Victorious

Who said this, two years ago: "There's a profession called management, although not everyone believes it exists. Management is a collection of moves that have to be made, and it doesn't matter what industry you're in. There are principles and rules, and the only variables are the starting conditions and circumstances. A good manager has to evaluate the situation and adapt his tools, because wherever you go there are people who want to work. The process of restructuring the company is behind us and its management is not a mission."

Want a hint? It's the same man who told the media on Wednesday: "We aren't trying to cover up anything. The quarter was not a good one. We made mistakes in our strategy. Our transition from a technology company to one specializing in insurance is taking longer [than projected] and the learning period is painful."

Yes, that's Yitzhak "Itzick" Sharir, who took the helm at the computer company Sapiens International (Nasdaq: SPNS) at the end of 2000. Like many companies, Sapiens ran into trouble after the technology boom lulled it into inflating its expenses. Its previous CEO, Danny Falk, quit after Sapiens' attempt to merge with Ness Technologies failed, and Sharir was brought in to turn the company around.

Sharir turned the crisis into an opportunity. He slashed costs, changed the company's focus and guided it to profitability. A year after taking the CEO's seat, he declared victory and turned his attention to the media, sharing every last detail of his rehabilitation drive with reporters and readers. He described how he changed the CEO's car to a Mazda and abolished first-class flights, to instill in the company a culture of financial prudence.

Crow chow

A year or two ago, losing $1.3 million in a quarter was no big deal, given the atmosphere of crisis. But doing so today, when the market is recovering and Sapiens, as Sharir himself said, was supposed to have left the blues two years behind it - now that's another story.

He blames the dip on failure to implement strategy and admits he made mistakes. One big mistake was to declare victory too soon. Sapiens' case is worth a second look mainly because we suspect it may be the model for a lot of firms whose managements rush to declare them cured, revived, healthy as horses, only to find themselves eating crow.

It's only human to want to declare success as fast as possible, and 2001-2003 were the hardest many a manager had ever had to weather. The sudden transition from the heady heights of boom to the despairing depths of bust reduced many a good manager to exhaustion. Many say they were the worst two years of their lives.

Company losses accumulated, banks piled on pressure, investors and the media howled. Managements were starved of positive coverage and more and more tempted to call every sputtering candle flicker "the light at the end of the tunnel."

Sometimes a management needs to declare success just to restore the faith of the banks and investors. They claw their way back to profit in a given quarter, declare success and race off to the banks to sweeten loan terms, or to the stock market to raise money in bonds. Sometimes they have to declare success just to win back the faith of their own workers.

But prematurely declaring arrival at a safe harbor can be dangerous. Enterprises can turn arrogant and lose focus - worse, if they disappoint again, faith can evaporate overnight.

In Sapiens' case, the premature announcement of victory may have been more calculated. Six months ago, as the stock market soared, the company managed to raise NIS 75 million with an offering of convertible bonds.

Sapiens is an example not just for over-eager managers, but also for investors who uncritically buy a company's recovery success story. A market rally can be hazardous for many companies that find it harder to cut costs and keep wages down from day to day.

Many firms cheering the rally find themselves facing competitors, or even newcomers attracted by restored profitability who really recovered, and who need to invest in equipment, marketing, servicing or advertising.

Managers and investors should keep a sense of proportion. They shouldn't rush to announce that bad times are over - nor should they buy stories of triumph. Most companies that sank into difficulties aren't out of trouble yet, and investors should anticipate a lot of disappointment down the line.