Should McNealy step down?

Scott McNealy is a crusader - but questions are beginning to be raised about whether it might be best for Sun if he let someone else take the helm

Gartner's Fall Symposium in Orlando, Florida. Sunshine, palm trees, Mickey Mouse and a re-casting of old computing themes in new names. There's also the perennial cavalcade of executive keynotes from industry heavyweights: Intel's Craig Barrett, HP's Carly Fiorina, MCI's Michael Capellas, Microsoft's Steve Ballmer and Sun's Scott McNealy.

Barrett, Ballmer, Fiorina and Capellas were present and accounted for, but no McNealy this year. No calling Microsoft a "hairball" or IBM a company that wants to "Hoover your wallet." Scott's absence at the event was noted by many attendees. What could be more important, at this critical point in time for Sun, than the opportunity to communicate his vision for turning Sun around to 6,000 important (or potential) customers? There are attendees here that allegedly pay $86,000 a year just to be a part of Gartner's most elite group of pampered CIOs and get access to the industry heavyweights. 

According to a Gartner spokesperson, "Scott couldn't make it. There was a conflict in his schedule, perhaps due to the fact that the conference is being run a week later than it is normally run each October." But when asked the same question, Sun's spokespeople were mum. A search of the Web revealed no record of any public appearances this week. For as long as the agenda for the event has been published, his name hasn't been on the docket.

If there's any question about his priorities, then that question is probably reflected in the next question I'm hearing from several sources: is it time for McNealy to step aside?

It has been a few weeks since Merrill Lynch analyst Steve Milunovich wrote a note to that firm's clients in the form of an open letter to Sun's CEO Scott McNealy. The note was sent in response to one of the worst revelations in Sun's 21-year history regarding the company's performance. Those revelations officially materialised in last week's reporting of Sun's quarterly performance, which McNealy addressed by saying "We're doing our best to be a disruptive innovator. We think it's working. It's not showing up in the numbers, and we're not happy with that." 

In the letter, Milunovich suggests that Sun's recent attempts to reinvent itself don't go far enough, and he offers McNealy advice on how to bridge the remaining gap. At the top of the list is an attitude adjustment for McNealy and a 7,000-person workforce reduction. After the latest announced cut, approximately 35,000 employees will remain. (For a contrasting financial analyst viewpoint, Mark Stahlman of American Technology Research, which provides independent research to institutional investors, believes that Sun has a sound strategy moving forward.)

Now that everyone who's affected by Sun has had time to digest both the financial news and Milunovich's letter, one fundamental question remains. With $5.5bn of cash still in the bank, should McNealy bypass the makeover altogether and simply step aside? It's such an obvious question that I'm surprised Milunovich, who called McNealy an "impediment", didn't take his castigation that one extra step (although he did suggest the installation of a Yin-like COO to balance the Yang of McNealy). For whatever reasons, Milunovich stopped short of calling for McNealy's resignation. To find out why, I called Milunovich's offices but was unable to penetrate his call screeners and was told that "Steve Milunovich's office has declined to comment."

Since Milunovich wasn't willing to comment on the McNealy question (and McNealy turned down the opportunity as well), I thought I'd give the Gartner analysts a call. Each time I attend one of its semi-annual conferences, Gartner rolls out an army of Sun experts that seem to know the company inside and out. To find out where the research company stands on the Sun leadership apparatus, I got a hold of Gartner vice president and distinguished analyst Yefim Natis.

Natis made it clear that neither he nor his company would go on record as saying that McNealy needs to go, but questioned his leadership. "We have questioned if he is able to continue to lead without changing the vision for the IT industry that he has had. The vision has been successful over the years, but it has now become a barrier. We do believe that radical change in the company's management approach is needed. Whether that means McNealy should appoint a replacement, or should find a partner in leadership, or should step down and leave the decision to Sun's board of directors, I can't say. Those are the various options."

In terms of what the vision has been, and what it needs to be, Natis believes that Sun is paying an insufficient amount of attention to partnerships. "In modern industry, it's very difficult for a single standing vendor to compete," said Natis. "Microsoft and IBM know this and now partner in various capacities. Sun, on the other hand, has abandoned its partnership with BEA and that will prove to be a great loss. On the J2EE front where partnership with licensees is equally important, Sun is seen as dominating, not accommodating. They're just not seen as a great partner. So, there has to be a new vision and a new direction. One shortcut to this could be to put a new man in charge. But, without a new vision or strategy, that could be worse than what you have now. Ultimately, change is required and unless he is able to change, then maybe McNealy should go. So, if you're asking me if that option should be considered, the answer is yes."

What's my personal take on the situation? I like McNealy, especially his tenacity and accessibility. He reminds me of the time I worked on the set of Miami Vice when, during breaks, Don Johnson would run off to hide in his trailer while his co-star Philip Michael Thomas would walk up to you and introduce himself and shake your hand. He's like the baseball player that stays until the last ball is autographed.

Implicit in his message is the notion that Sun is not greedy or monopolistic, although you have to wonder if McNealy had Microsoft's market position, how magnanimous he would be toward competitors. R&D is the key to Sun getting out of its tailspin.

McNealy is thoroughly convinced that if you give him a few minutes of your time, you will see the light. Deep inside, he believes that he is on the side of righteousness and it's the courage of those convictions that keep him from changing his business card. From his point of view, the hell he's going through is far worse than the hell that business leaders will go through if they don't wake up and smell the coffee. He's not in it for growing his substantive personal fortune, he's in it for the crusade.

Unfortunately, nice guys, white knights in shining armour and crusaders sometimes finish last. Although Sun is far from last, it's in a pinch and it has been in one for 10 consecutive quarters. During that time, his competitors, most of which never fell out of profitability, sank their teeth deeper into the niches that are Sun's traditional sweet spots. To make matters worse, Standard & Poor's just announced that it has put Sun on a credit watch.

In his open letter to McNealy, Milunovich wrote "Scott's brash and contrarian personality have been synonymous with the company's image and success. Unfortunately, the act is getting old." Milunovich's observation is actually two years and $2bn short (give or take). I said the same thing two years ago in a story about how McNealy's rhetoric isn't resonating. In my interview with McNealy, he cried foul, saying he gets baited. But the rhetoric has never really stopped. If he continues to fight his war for market share with his sarcasm and castigation of competitors, it's worth asking if he can retain control of the company.

McNealy has done all he can for the ailing Sun. He's earned his stripes as an industry pioneer and he's also earned a nice, long and relaxing vacation. It could be that he has the right vision to move the company forward, but can't get rid of the "beleaguered" label tattooed to his forehead. Now, while Sun is still in the game and cash rich, would be a good time for McNealy to consider taking that vacation.

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