By Joe Cahill April 08, 2013
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Mary Tolan’s resignation as CEO of Accretive Health Inc. completes a dubious hat trick for Chicago business. In the past four months, three CEOs have hit the exit at hot companies that suddenly turned cold. Daily-deal peddler Groupon Inc. bounced Andrew Mason in February, and Glen Tullman left electronic medical records company Allscripts Healthcare Solutions Inc. in December.
More troubling than the CEOs’ fates are the souring fortunes of the companies they led. Until recently they were growing fast, hiring in droves and putting Chicago at the center of important new industries. Then it all stopped.
While their businesses differ, their trajectories are similar. Groupon, the best-known of the group, appeared out of nowhere to land on the cover of Forbes with the title “fastest-growing company ever.” But financial results have underwhelmed since an overhyped IPO in late 2011. Groupon stock fell 76 percent last year.
Accretive, which helps hospitals collect payment from patients and insurers, posted torrid revenue growth until the Minnesota attorney general last year accused it of overaggressive collection tactics. Then Accretive said it would have to restate three years’ worth of financial statements. After more than doubling in the two years following a 2010 IPO, the stock has lost almost two-thirds of its value.
Allscripts has been around longer than the two others, but it took off a few years ago when President Barack Obama made electronic recordkeeping a key component of health care reform. Investors flocked to the company, which doubled its size with an acquisition in 2010. But merger integration problems and boardroom infighting ensued. Shares fell 50 percent last year as revenue stalled and profit vanished.
In its own way, each illustrates the perils of rapid growth. Eye-popping revenue increases can blind investors to serious flaws in a company’s business model, operations and management.
Groupon demonstrates that a company can grow quickly for a time without creating a fundamentally sound business, notes Heather Brilliant, global director of equity research at Morningstar Inc. in Chicago. Ms. Brilliant says Groupon’s inability to produce consistent profits stems from its lack of “a sustainable business model.”
Accretive, meanwhile, shows how hard it can be for up-and-comers to establish basic operational controls and accounting procedures. Missteps in these areas can have devastating consequences, as Accretive has learned. “It’s kind of like driving a car at high speed,” says Tim Loughran, a finance professor at the University of Notre Dame. “If we make a bad decision, it’s disastrous.”
Allscripts’ merger integration struggles underscore how quickly a company’s growth can outstrip its management capabilities. Larger companies require more-sophisticated organizational structures and different managerial skills than a startup. “A great entrepreneur does not always make a great manager,” Ms. Brilliant says.
I hope the recent CEO changes reflect a commitment by company directors to address these issues and not just an attempt to appease Wall Street with an executive scalp. Each company has at least a fighting chance at longer-term success. It’s encouraging that Accretive and Allscripts have named new CEOs with significant management experience. Groupon seems to be looking for somebody similar.
Despite their tendency to run off the rails, dynamic young companies like these are critical to Chicago’s future. They create jobs, attract talent and capital, and keep Chicago relevant in an ever-evolving global economy. Many local startups could play that role in the years to come, if they heed the lessons of Accretive, Allscripts and Groupon.
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