The CEO’s New Challenge:

Managing Two Companies at the Same Time

December 2013

by Joseph J. Esposito

It is not unusual for the heads of publishing companies nowadays to feel that they have to manage two companies simultaneously. The first company is the established business. This business has products in the marketplace, a staff dedicated to having those products reach the widest audience, and an established network of customers, who reliably pay for these products.

With those payments comes cash flow, without which there is no business. It is the mandate of every head of an organization to protect and manage that cash flow. If it disappears, even for a short period, the company may have to borrow money or even, in extreme circumstances, sell stock to an outside investor—who will immediately begin to clamor for tighter controls on cash flow.

The second company is harder to define. This company involves a new entity, an in-house startup, which aims to do something different from Company #1. The second company may involve an entirely new suite of products, but more often the characteristic of the second company is that it is expected to reach out to a new category of customers; the most ambitious plans involve both new products and new customers.

This means that much of the staffing and procedures of the first company—which was set up to reach one kind of customer—won’t be all that useful for the second company; the established infrastructure may actually be a liability by getting in the way of Company #2.

This is all the harder to deal with when the second company determines that it has to “pivot,” making the kind of sharp turn in business direction that is not uncommon for a startup. The people working in Company #1 may feel whipsawed as they watch Company #2 suddenly head off in a new and unexpected direction. Can’t these people make up their minds?

Cash at the Core of Conflict

The two-company phenomenon gives rise to a conflicted CEO. On one hand the resources of the company—including the all-important cash flow—must be brought to bear on keeping the first company working properly. This requires attention, and it also may require periodic strategic investments. For example, the first company may have to invest in a format change (think of the migration from PDF to EPUB), or it may need to rework its software platform to accommodate mobile devices. Many acquisitions by established companies are designed to keep Company #1 competitive in a marketplace that does not stand still.

This is one way to view even major acquisitions such as the agreement that brought Blackwell to John Wiley a few years back. That acquisition enabled Wiley to remain competitive in the race to capture library consortia dollars. It remains to be seen what Elsevier will do with its acquisition of Mendeley, but it seems likely that Mendeley (which at one time apparently thought of itself as an upstart, a Company #2 operating without the baggage of a Company #1) will be absorbed into Elsevier to support Elsevier’s Company #1, that is, the sale of scientific publications on a subscription basis to academic libraries and research laboratories. This is one use of cash flow, which only Company #1 generates, to invest in Company #1 to keep it vibrant.

Conflict occurs when Company #2 makes a claim on the attention of the CEO. That claim is likely to take the form of a request for cash, cash that is being generated by Company #1 sitting across the hall. That cash is not unlimited—and it never can be. If Company #2 wants to hire four top-flight software developers, that could cost somewhere around $750,000 a year including overhead, money that Company #1 wants for, say, a new marketing plan or a series of refinements for the existing products—or that shareholders want in their pockets.

The CEO’s task is made more difficult because Company #2 is burning cash, not generating it. What kind of tax can the CEO put on Company #1 in order to nurture Company #2 until #2 is ready to stand up straight and carry its own weight?

I write from experience. In the mid-1990s I was responsible for the fortunes of Encyclopaedia Britannica. The core encyclopedia business (Company #1) was in print. It involved a huge staff of sales and marketing people and administrative services to support them. But we knew that that our existing business was mature and that we would have to build a digital business alongside it. So we started Company #2.

This involved multiple iterations. First was a division, Compton’s Multi-media Learning, which developed digital tools for a secondary brand (Compton’s) controlled by the parent. Later we moved some of the team working on Compton’s to Encyclopaedia Britannica itself (the product as distinct from the eponymous company) and created one of the first commercial Internet services, Britannica Online. That product has been significantly enhanced over the years and can be found at britannica.com.

It would be an understatement to say that the two companies were at war with each other. Things often turned nasty. The people involved with Company #1 resented what they saw as the special privileges (and unorthodox compensation structure) of Company #2; the people involved with Company #2 saw those working on #1 as hopeless dinosaurs. Charges flew back and forth.

I spent much of my time mediating between factions, including a board that wanted nothing to do with Company #2—just give us our dividends every year, and let’s adjourn the meeting. To be the CEO of a company undertaking a major strategic transition is a friendless activity. But if you wanted friends, you would not want to run the shop.

Moves That Suit Maturity

The pressure to build more Company #2s is growing in the publishing industry for the simple but by no means obvious reason that most established publishing sectors are mature. What makes an industry mature? The definition I use is that an industry or industry segment is mature when overall it fails to grow by 10 percent or more each year. That’s 10 percent growth for the industry, not for any one participant in that industry. By this definition most publishing segments have been mature for a long time—and most companies in them would have done well to get started on a Company #2 a while ago.

Here are a few examples of Company #2s in different segments:

● The college textbook business, as mature as any segment, is now experimenting with moving the point of adoption from individual instructors to institutions. This requires reconfigured digital products, new pricing, and a differently trained sales organization.

● The K–12 segment, which grew up on the funding from state- and district-level initiatives, is now developing more learner-centric products, many of which are being sold directly to affluent parents. A key aspect of this segment for Company #2s is how data-intensive it is becoming.

● Large trade publishers, which had sold books almost entirely through distributors, are now experimenting with developing marketing databases of end users, which could be a first step toward a launch of a direct-to-consumer marketing strategy. Keep your eye on the newly merged Penguin Random House for a glimpse of how the giants will battle the behemoth from Seattle.

● Journal publishers are copying the success of PLoS ONE and starting their own Gold Open Access services. Suddenly authors are customers.

CEOs usually realize that a Company #2 is not only desirable but necessary when it becomes clear (usually only to the CEO, who is out there with no support either in management or on the board) that doing a better job with Company #1 is not going to bring anything more than modest gains because the overall business environment is becoming less welcoming. This is a difficult insight to come to. It is very hard for an established publisher, even a highly successful one, to contemplate the possibility that doing a good job is not good enough, or at least it’s not good enough any longer.

A publisher can bring the best editors to bear on the marketplace; the company’s cost structure can be lean and tightly aligned by the CFO; the marketing department can identify every prospect and find a way to serve them; but it may be to no avail when the broader market conditions turn adverse.

Tyrannosaurus rex stomps through the swamps to the terror of all, but place our hideous lizard in a cold dry spot and he is helpless, frightening no one except perhaps tiny rodents as he comes crashing to the earth. The problem for the successful established publisher when the ecosystem changes around the enterprise is that there is nothing to be said for being enterprising in the established way.

This is where the conflict comes in—indeed, CEOs have to invite it in, even though it is an affliction that they will have to bear personally. Recognizing that this is about to happen, however, can make the pain of managing an in-house startup less severe.

Steps to Take

The first thing to do is to communicate to both staff and the board that the current situation is mature. This requires presenting third-party market analyses (for credibility) and lots of facts and figures; and, to avoid the creation of a cycle of fear, simultaneously presenting a suite of scenarios where the company, in the form of Company #2, can grow and become dominant. It’s never good to present a single scenario because no one has that strong a grasp on the future.

The second action item is identifying the opportunity to pursue and the people who will be put in charge. And here is the hardest thing to do organizationally: the head of Company #2 cannot be involved with the operations of Company #1 at all. The conflicts are too great, the stress overwhelming. The head of Company #2 must report directly to the CEO. That’s where the stress belongs, with the CEO, who is being paid to manage it.

The third task, which may be the most important of all but is rare in publishing, is creating a budget line for research and development. This line is sacrosanct; it must never be cut if the performance of Company #1 is below expectations. Company #2 is a critical investment, not a financial reserve.

Of course, the best communicator in the world cannot persuade everyone. There will always be Company #1 people who will look askance at those in Company #2 and vice versa. It’s too much to ask everyone to have strategic vision and courage; if everyone did, everyone would be a CEO. Nor is it wise to invest too much in changing a company’s culture. Culture grows out of the material circumstances of operations; someone who is a Company #1 salesperson, for example, will never be fully comfortable contemplating the sales strategy of Company #2.

But for a CEO, being pulled in two directions is part of the job. Get started on Company #2 right now, and drive yourself crazy.

Joseph J. Esposito is president of Processed Media, an independent management consultancy providing strategic advice, operating analysis, and interim management in the area of digital media to publishing and software companies in the for-profit and not-for-profit sectors. He writes extensively on digital media and has been awarded research grants from the Hewlett, MacArthur, and Mellon Foundations.