Free advice from Enron's freefall

Jan. 1, 2002
TO QUOTE a comedian whose name escapes us, no one is totally worthless. You can always serve as a bad example. That saying certainly can be applied to

TO QUOTE a comedian whose name escapes us, no one is totally worthless. You can always serve as a bad example.

That saying certainly can be applied to Enron Corporation, reportedly the largest company ever to declare bankruptcy. Before it filed Chapter 11 December 2, the company had assets of $63.4 billion. By mid-January, some of those assets had been given away in exchange for a third of future profits. And the headquarters in downtown Houston announced a sale on houseplants — $15 for most, $20 for big ones. Thousands of employees lost their jobs and a major portion of their retirement savings, but at least they could get a good deal on a dracaena.

We will leave the analysis of where Enron went wrong to our counterparts at Forbes and The Wall Street Journal. But as we read the reports on the company's demise, certain phrases keep coming up, phrases that we have heard in our travels through the truck body and trailer industry.

Since it's a lot less costly and painful to learn from the mistakes of others, let's take a look at a few quotations from some of the coverage of the Enron case. See if any of these are applicable to a company near you:

  • “They were not the best at watching their cost.” Enron management has been widely criticized for not staying on top of its operations. Sometimes because of neglect. Sometimes because of operational complexity. Enron Chairman Ken Lay stunned one reporter when he admitted that some of the things his company was doing were over his head. Is there something in your company that you are not addressing? Is there something that would be more efficient or profitable if it could be simplified?

  • “Accounting really matters.” Some of Enron's accounting practices appear to be designed primarily to obfuscate. Accounting systems should deliver accurate information so that the business owners and shareholders have an honest picture of how the company is performing. Are you confident of the clarity that your accounting system provides?

  • “You make enough billion-dollar mistakes, and they add up.” Not many companies are big enough to make a billion dollar mistake, but maybe we make the same one-dollar mistake a billion times. Clearly some marketing programs have been widely recognized as contributing to the woes of today's tractor and trailer manufacturers. Maybe it's ordering too many vehicles for a chassis pool that is putting truck equipment distributors in a bind. Whether they are one-time blunders or repetitive losses, where are the costly mistakes being made in your business?

  • Dwindling margins. “Behind all the analysis of Enron was the assumption that the core business was thriving,” one news source said. “It was still growing rapidly, but margins were inevitably coming down as the market matured. Once that growth slowed, any weakness would start becoming more apparent.” Enron consistently returned 9-10% on invested capital during the first half of the 1990s, but then fell to the 6-8% range the second half. As bankruptcy approached, the company was barely earning its cost of capital. Closer to home, margins weren't stellar for trailer manufacturers when they built more than 300,000 trailers a mere three years ago. It's no wonder many companies are hurting in a year when they only produce half that many.

  • “We didn't want someone stuck in the past, since the industry of yesterday is no longer.” Enron created a culture that placed a premium on cataclysmic changes. Those who had trouble accepting the company's vision of a radically transforming future were fired. Our industry frequently is criticized for being on the other end of the spectrum. Somewhere in between, we should find a balance. What innovative new products, services, or systems should you introduce and when? Conversely, how much should you value your core business and your traditional ways of serving your customers?

  • Excessive debt. Enron's bankruptcy filings show $13.1 billion in debt for the parent company and an additional $18.1 billion for affiliates. Perhaps $20 billion or more debt will be found off the balance sheet. While financing plays a vital role in today's business, it's clear that excessive debt brought Enron down. Are you comfortable with your company's debt position? If not, what should you do to strengthen it?

  • Communicate honestly. What do you do with bad news? How much (and when) do you tell customers, employees, and vendors when times get tough? When the worst happens “don't pretend you smell zinnias,” one commentator wrote. “If Enron had lined up the financial help it needed and made some public disclosures early and fully, it probably could have called on its reservoir of admiration to survive. This is corporate-crisis management lesson numbers one, two, and three: You can't manage bad news. You can only face up to it. When things go wrong, get it all out — and get it all out fast.”

Just some things to think about now that your company is worth more than Enron.

About the Author

Bruce Sauer | Editor

Bruce Sauer has been writing about the truck trailer, truck body and truck equipment industries since joining Trailer/Body Builders as an associate editor in 1974. During his career at Trailer/Body Builders, he has served as the magazine's managing editor and executive editor before being named editor of the magazine in 1999. He holds a Bachelor of Journalism degree from the University of Texas at Austin.