She's Helping Yahoo Act Normal

First there was the dream: Everybody gets to be a millionaire! Then there was the nightmare: Will I have a job? Now there's a back-to-basics search for clarity: What's the new deal between Yahoo and its people? Libby Sartain, who joined the Internet standard-bearer from Southwest Airlines, is offering some answers.

It was gut-wrenching, watching the stock plunge by nearly 97%. So was slogging through six losing quarters. But for Twain Mein, a senior producer and five-year veteran at Yahoo, the darkest moment came in the spring of 2001, when 400 of his colleagues were pink-slipped. "Those layoffs were a big blow to this company's spirit," says Mein. "All of a sudden, we weren't unbeatable. And we couldn't figure it out: Who are the bad guys? Who is doing this to us? And what happens next?"

What happened was the bust, and for Yahoo's employees, it played out an unrelenting drumbeat of bad news. The losing streak started in early 2000. First there was ridicule: Critics blasted the high-flying Internet company for trying to make itself a stand-alone Web portal when its chief rival, America Online, acquired a vast empire of media properties through its purchase of Time Warner. Then the dotcoms began dying off, and Yahoo staggered into a Sahara desert of online advertising. The company's stock price began a long, ugly descent from an all-time high of $237 into the single digits. In the spring of 2001, Yahoo cofounder Jerry Yang teared up at a companywide all-hands meeting as he tried to steel people for even more turmoil. The first-ever round of layoffs came next, followed by the forced departure of Yahoo's longtime chief, Tim Koogle. Koogle's replacement, Terry Semel, the former co-CEO of Warner Bros., also drew his share of barbs. "We were all asking the same question: 'Who the hell is this Terry Semel?' " recalls one Yahoo staffer. "He was from a different planet."

If there was any question whether Yahoo has been utterly transformed by the high-tech economy's downfall, those doubts were snuffed when Semel addressed Wall Street last February. "You aren't going to see us try to do 15 different things in a week," proclaimed Semel. "We are totally focused on the 2 or 3 things that we really want to do. And we are going to build on those things slowly, cautiously, and deliberately."

Slow. Cautious. Deliberate. Not long ago, linking those words with Yahoo would have been preposterous. But the Internet wunderkind has outgrown some of its youthful exuberance and adopted a sustainable, back-to-basics style, reinventing itself as it grows up. Yahoo soared during the boom and was brutalized by the bust. Now it has arrived at a new, temperate place. Some of the company's youthful operating principles endure: Employees still move quickly, even as the executive team strategizes cautiously. But this new, sober Yahoo is also ruled by some harsher realities. The company expects its people to make prudent decisions, to be resilient and adaptable to change, and to understand that no matter how much they pine for it, they're not going to get the bubble back.

"People are over the fantasy of becoming instant Internet millionaires," says Elizabeth "Libby" Sartain, Yahoo's chief of people and VP of human resources. "They're also getting past some of their fears. We're back to generating growth and profits, and people are starting to trust that Yahoo is going to be here for the long term. Now they're looking for some clarity in their careers. They're asking, 'Where do we go from here?' " More than anyone else at Yahoo, Sartain is the person who has to answer that question.

Libby Sartain has an infectious laugh and a near-permanent, face-splitting smile. Her personality is outsize and out-front. She favors hugs over handshakes. But Sartain is no pushover. Until two years ago, she was chief of people at Southwest Airlines, where she led all of the human-resource functions for its 29,000 employees and helped the airline win world renown for its dynamic corporate culture. She arrived at Yahoo in August 2001, just when the company's performance and morale (not to mention its stock) hit bottom. Since then, she has worked tirelessly to help Yahoo's 3,500 employees endure the most wrenching period in the company's history. Her journey from Dallas (Southwest's home base) to Silicon Valley and the 20 months that she has spent rebuilding the people side of Yahoo offer hard-headed lessons in what it takes to sustain a career that matters -- for the people at Yahoo and for Sartain herself.

Tough Times Demand Bold Moves

When Sartain signed on with Southwest in 1988, the airline had been struggling to take off for 18 long years. Back then, Southwest counted 5,000 employees and a fleet of about 75 planes; revenue was less than $1 billion a year. By 2000, Southwest had innovated its way to becoming the world's most profitable airline. At a time when most companies were up against labor shortages and were fighting the talent war, Southwest was being flooded with 10,000 ré sumé s a month. The once-tiny airline was widely recognized as one of the country's best places to work. "It was a great time to be at Southwest," Sartain recalls in her new book, HR From the Heart (Amacom, 2003). "But it was also a great time to go."

Sartain always believed that the currency of her success had little to do with past accomplishments -- and everything to do with her ability to make an impact on the airline's immediate future. By the spring of 2001, she knew that her personal ROI at Southwest was in decline. She believed the company's rush to innovate had slowed. In her view, the airline's leadership team was insular; it needed fresh thinking and new ideas. "My husband said that I had outgrown Southwest, but that sounds so arrogant," she says. "I had outgrown my usefulness to Southwest. I think I had become an irritant to them."

Sartain had formed hundreds of friendships during her 13 years at Southwest, and her identification with the company ran deep -- almost to the point where she couldn't imagine herself thriving anywhere else. Leaving the airline was "like getting a divorce -- horribly wrenching." She figured she would take the summer off to regroup. But then she heard that Yahoo was hunting for a new head of HR, and in early July, she began interviewing for the position at Yahoo's Sunnyvale, California campus. Her friends thought that she had lost it. Southwest's balance sheet and margins were tops in the business. Just when the rest of the aviation industry was in a tailspin, she was giving up a first-class seat on the best-run airline in the country.

But after a day of meeting with the executive team at Yahoo's sleek glass-and-steel headquarters, Sartain was convinced that the company's troubles were really opportunities to make an impact at a big-brand Internet company. "I spoke first with Jerry Yang, and he was so focused on culture -- whether he knew it or not," she recalls. "Then I met with [CFO] Sue Decker, and she talked about how people's stock options were under water and how we would have to reinvent rewards to keep people motivated. To have the person holding the purse strings put such a high priority on investing in people -- that was important.

"The icing on the cake was when I met Terry Semel," she continues. "Terry was so focused on building bench strength. He said, 'We're looking at businesses to buy, and we might not have anyone to run them. I need someone to come in here and help me find great leaders who can make money.' I thought, 'This is the most fantastic opportunity in the world.' "

On the day that Decker called to make an offer, Sartain fielded a competing offer from American Airlines. Joining American would have been the safe thing to do. She could have stayed in Dallas; moving to another major airline would have made for a natural transition. Jumping to Yahoo would be a gamble. Semel's turnaround could easily fail. Still, she and her husband left Dallas and set off for Silicon Valley. Libby Sartain was now a Yahoo -- in every sense of the word.

Learning to Live With Uncertainty

One afternoon during Sartain's first week at her new job, Yahoo held a reception for her. There was a band, wine, and beer -- and no small talk. "I'd ask people, 'What's the first thing I should work on?' " she recalls. "And nearly everyone had the same answer: 'We need to know what Terry is thinking. He needs to announce his plan and tell us what to do.' "

After arriving at Yahoo in May, Semel spent months huddling with the heads of Yahoo's 44 business units. The meetings were casting calls in disguise, a chance for the new CEO to get a read on his leadership team and spotlight businesses that could make the cut and those that had to go. But as Semel listened and took his own counsel, the rest of the company continued to work at its customary feverish pace. For people who live by a fast clock, Semel's three months of study felt like forever.

Sartain didn't hold back. In one of her first meetings with Semel, she told him what was on people's minds. "Everyone was waiting for him to make a big announcement," she says. "They didn't think he was moving fast enough." Semel replied that he didn't care what people were saying. He wouldn't make any announcements until he and his team had formulated a plan. Yahoo was growing up. The days of getting everyone into a room and sharing strategy secrets were gone. People would just have to learn to live with uncertainty. "Not knowing where we were going was tough, but at least for a few months, that was the truth of the matter," concludes Sartain. "We didn't know, and we said so. It was the only way to build trust."

The New Currency of Work

A month after Sartain arrived in Sunnyvale, Yahoo's stock sank to its all-time low of $8 per share, spurred in large part by the September 11 terrorist attacks and the final meltdown of the dotcoms. In the weeks prior to September 11, a few delusional souls were still acting like it was 1999: Sartain recalls having lunch with a talented employee who complained that he was the same age as Jerry Yang, and he hadn't made his first million. But the 97% plunge in Yahoo's market capitalization shook people out of their self-denial. With their stock options nearly worthless, reality set in: Yahoo's world had gone from bad to worse.

In the heyday of the dotcom boom, growth companies like Yahoo used stock options as one-size-fits-all compensation. But the crash in Internet stocks has brought with it some fresh thinking about compensation, as companies seek alternatives to stock options. For the first time ever, Yahoo has rolled out a pay-for-performance bonus plan for business leaders, which has triggered a cascade of complaints from those who went unrewarded. "It's been painful," sighs Sartain. "I don't think we're going to do it the same way next year."

Even as it experiments with new incentive plans, Yahoo still remains committed to options and to the notion that workers should own a stake in the business. But the primacy of stock options no longer holds. "One thing I learned at Southwest is that you manage the good times as if they were bad times, because the bad times are going to come," says Sartain. "The same thing applies to your career. We want people to think of options as a long-term investment in the company. If you stay with us and build a career here, we believe that these options are going to be very valuable to you. But you can forget about becoming a millionaire overnight. That dream is finished."

From Revolution to Evolution

As 2001 drew to a close, the economic fallout from September 11 triggered another round of layoffs at Yahoo. This time, as the new head of HR, Sartain was the point person for managers who had to deliver pink slips. In all, about 800 people were let go that year. For a company that values working relationships above all else, the layoffs were more than painful. "Layoffs are a defeat for a company," says Sartain. "There was a grieving process, and then a lot of fear crept in, because we couldn't say what people really wanted us to say: that we'd never have any more layoffs. We weren't going to make a promise that we couldn't keep. Once again, people just had to learn to live with uncertainty."

In November, Semel finally unveiled a turnaround strategy that continues to evolve. He divided Yahoo's 44 business units into five groups (including the addition of HotJobs, the employment site, and Inktomi, the search-technology provider). And he pushed Yahoo to focus like a laser on growth and earnings. As a result, the company is working furiously to deliver premium services -- such as online personals and souped-up email -- for paying customers (2.2 million thus far). It has launched a high-speed Internet-access service, which it cobranded with the Baby Bell SBC Communications Inc. Yahoo and SBC now plan to take its broadband Internet-access service nationwide. And in an effort to develop new sources of online advertising, Yahoo began generating advertising sales linked to search results.

At first, the new emphasis on profitability was met with skepticism -- if not outright hostility -- within Yahoo. "There was a fair amount of resistance toward the strategy of monetizing our businesses," says Sartain. "There was a fear that if all of our efforts were put into profit making, we'd starve R&D and lose our innovation."

But last year showed just what ROI can do for R&D: Yahoo put together three consecutive in-the-black quarters, enabling it to fund new technology initiatives. This year, Yahoo pro-jects that revenue will reach $1.2 billion and may even exceed its peak during the dotcom boom. At least for the moment, Yahoo is back on a winning track. But not the fast track. Semel and his executive team are betting that perseverance, not speed, will ultimately win the race for more market share.

Is the goal now to build a Yahoo 2.0? Sartain dismisses such talk. "That's old language -- it's not what we're about anymore," she explains. "We're trying to build a company that will last over time. And that's going to require evolutionary growth, not revolutionary growth." Left unsaid: Strategies for such growth will come slowly, cautiously, and deliberately.

Bill Breen (bbreen@fastcompany.com) is a Fast Company senior editor.

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