March 28, 2024

DealBook: Zynga’s Tough Culture Risks a Talent Drain

Mark Pincus, Zynga's founder and chief executive.Jim Wilson/The New York TimesMark Pincus, Zynga’s founder and chief executive.

Zynga’s chief executive, Mark Pincus, got an earful from employees last month.

In dozens of e-mails to a companywide list, frustrated workers complained about the long hours and stressful deadline periods. The quarterly staff survey solicited 1,600 responses, with plenty of criticism, including one person who said he planned to cash out and leave after the initial public offering.

Mr. Pincus took note, going through the comments and highlighting select excerpts. At a Zynga meeting several days later, he read some of the most acerbic words. Mr. Pincus said he was aware of the problems, but needed the staff’s guidance to fix them.

Few Internet start-ups have grown as swiftly as Zynga, creator of a sprawling network of virtual farms, cities and poker tables that is preparing to go public in one of the most highly anticipated offerings this year.

Led by the hard-charging Mr. Pincus, the company operates like a federation of city-states, with autonomous teams for each game, like FarmVille and CityVille. At times, it can be a messy and ruthless war. Employees log long hours, managers relentlessly track progress, and the weak links are demoted or let go.

But that culture, which has been at the root of Zynga’s success, could become a serious liability, warn several former senior employees who agreed to speak on the condition of anonymity because of fear of reprisals.

As the discord increases, the situation may jeopardize the company’s ability to retain top talent at a time when Silicon Valley start-ups are fiercely jockeying for the best executives and engineers. It could also hamper deal-making, a critical growth engine for Zynga, which has spent about $119 million on acquisitions in the last two years.

“Zynga should be an example of entrepreneurship at its best,” said Roger McNamee, a co-founder of the venture capital firm Elevation Partners. “Instead it’s going to be a Harvard Business School case study on founder overreach — this will be a cautionary tale.”

Already, signs of trouble are emerging.

In July, Zynga lost a bid for PopCap, a mobile game company. Zynga offered $950 million in cash.

But PopCap’s founders worried about the company’s reputation after hearing rumors of the company’s rescinding share awards and fierce internal competition, said two people with first-hand knowledge of the situation. Instead, PopCap agreed to a rival offer from Electronic Arts, worth $750 million in cash and stock and the potential of an additional $550 million if certain earnings goals were met.

Several start-ups have also rebuffed Zynga this year, including Rovio. This summer, Rovio, the maker of the popular mobile game Angry Birds, walked away from discussions of a deal worth roughly $2.25 billion in cash and stock, three people briefed on the situation said.

With the I.P.O. fast approaching, competitors are preparing to poach disgruntled staff members. This month, one recruiting firm sent cookie baskets to some 150 Zynga employees.

“I expect a lot of game and tech companies will begin recruiting Zynga’s talent after their equity becomes liquid,” said Gabrielle Toledano, head of human resources for Electronic Arts. “Competitors will make the case that they offer much more compelling opportunities for creative people.”

Zynga declined to comment, citing the mandatory quiet period before its I.P.O.

While from the outside Zynga may have the fun and whimsy of the Willy Wonka chocolate factory, the organization thrives on numbers, relentlessly aggregating performance data, from the upper ranks to the cafeteria staff.

General managers submit weekly reports, measuring factors like traffic and customer satisfaction. Every quarter, teams assess their priorities under an Intel-pioneered system called “objectives and key results.” And Mr. Pincus, a professed data obsessive, devours all the reports, using multiple spreadsheets, to carefully track the progress of Zynga’s games and its roughly 3,000 employees.

“It’s very similar to a New York investment bank,” said Lou Kerner, an analyst at the brokerage firm Liquidnet, who has followed Zynga for years. “It’s data-driven, and it’s intense.”

The data pipeline allows Zynga to fine-tune its games to optimize engagement, helping the company attract some 270 million unique users each month, many through Facebook. The four-year-old Zynga, which has emerged as the Web’s largest social game company, recorded $828.9 million in revenue in the first nine months of 2011, more than double the period a year earlier. It is also the rare Internet start-up that is profitable, earning $121 million since the start of 2010.

But the heavy focus on metrics, in this already competitive industry, has also fostered an uncompromising culture, one where employees are constantly measured and game designers are pushed to meet aggressive deadlines. While some staff members thrive in this environment, others find it crushing. Several former employees describe emotionally charged encounters, including loud outbursts from Mr. Pincus, threats from senior leaders and moments when colleagues broke down into tears.

For the top performers, the rewards are handsome. Zynga dispenses lavish gifts like vacations and $100,000 in vested stock. After the game Mafia Wars reached a milestone two years ago, Zynga sent the team to Las Vegas to celebrate, buying some 80 plane tickets and providing $500 in cash for each person and luxury hotel accommodations, according to one former senior employee.

Those who do not perform can perish.

In March 2009, Zynga hired its chief people officer, Colleen McCreary, who formalized the hiring structure and started to trim weak performers, cutting about 30 employees by that summer. Mr. Pincus began drafting “M.I.A.,” or missing-in-action, lists to keep track of senior employees who were not doing a good job or who needed to be placed on more ambitious projects.

That year, Zynga also started to reduce equity packages through demotions. Some employees were offered a choice: take another role with the same salary and a smaller equity package, or leave the company. It affected only a limited number of senior employees, several people close to the company said.

“If I was egregiously failing, then maybe it would be O.K.,” said one former senior employee, who left after being asked to give back some equity. But “it seemed systematically driven.”

The practice, even if rarely applied, runs counter to the traditional Silicon Valley model, where people join risky, unproven start-ups in exchange for substantial equity. But Mr. Pincus, a graduate of Harvard Business School and a former Wall Street hand, sees Zynga in a different mold, aiming to build a more perfect meritocracy, according to people close to him.

“Mark Pincus has the reputation that he is driven to the point of a madman,” said Michael Pachter, a Wedbush Securities analyst. “Zynga is driven because it has a gigantic competitive advantage right now.”

But Zynga could face a serious reaction.

In the spring of 2009, Zynga was courting MyMiniLife, a game company that later developed the underlying technology for FarmVille and many of Zynga’s games. During one meeting, the topic turned to compensation. A Zynga senior vice president, clad in jeans and leather cowboy boots, whipped out his wallet and a stack of hundred-dollar bills. He chucked the money at a MyMiniLife founder and asked him if that was enough, said one person present at the meeting.

“It was insulting,” this person said.

While MyMiniLife eventually agreed to a deal that formed the backbone of FarmVille, discontent soon surfaced. The team was stretched, juggling tough deadlines, technical flaws and demands for more data, according to two former employees. A few months later, as FarmVille approached 20 million users a day, a respected project manager abruptly quit the team. Soon after, the majority of the game’s staff members, including those of the just-acquired MyMiniLife team, threatened to walk out unless Zynga replaced the group’s general manager, these people said. The company relented.

While such a culture is not uncommon in the game industry, it can create problems. Employees at Electronic Arts and Activision Blizzard have filed lawsuits against their employers, with claims of hostile work conditions and withheld compensation. In 2006, Electronic Arts settled two class-action lawsuits by game artists and programmers for about $15 million each. The Activision suit is still pending.

Zynga has made efforts to change its ways. The company has added data centers and expanded teams to ease the burden on its engineers. It is also encouraging managers to schedule a bigger buffer between project phases and to give teams the week off before a game’s debut. Zynga — which offers employee perks like acupuncture, Friday happy hours and a cafeteria with organic food — is also spending millions on focus groups and other initiatives to strengthen its manager training programs.

Mr. Pincus is also trying to soften his managerial style. Ms. McCreary has spent significant time with the executive, coaching him on his tone and constructive criticism. In 2010, the company also hired an outside consultant to do a “360-degree review” of Mr. Pincus. The consultant interviewed employees and board members and produced a report filled with feedback.

Still, rivals say Zynga will have to do more to bolster its image, or risk losing its appeal as an employer at a time when resources are scarce. Zynga’s towering public valuation — a boon for investors — may only further dissuade recruits, who may turn to younger start-ups with more potential.

“We’ve learned that when companies treat talent as a commodity, the consequences are severe,” said Ms. Toledano of Electronic Arts. “It takes years to repair a reputation.”

Article source: http://feeds.nytimes.com/click.phdo?i=8d10c5a26c6c7ff8032b47515777c8bb

An Airbnb Tour of New York City

Bed placement is not up to you when you stay at somebody’s apartment. Here, I was right next to the window and got an earful at 3:30 a.m. when the scavengers came around to pick over the recycling container in front of the building.

Article source: http://feeds.nytimes.com/click.phdo?i=eee252cc55cd521bf5080199156b3275

DealBook: Profit Up 24%, Citigroup Seeks Global Growth

The New York bank Citigroup said that earnings rose 24 percent in the second quarter.Robert Caplin/Bloomberg NewsThe New York bank Citigroup said its earnings rose 24 percent in the second quarter.

Vikram S. Pandit, chief of Citigroup.Andrey Rudakov/Bloomberg NewsVikram S. Pandit, chief of Citigroup.

8:43 p.m. | Updated

For two and a half years, Vikram S. Pandit was forced to hunker down to fix Citigroup’s troubled businesses and fend off the bank’s critics in Washington.

Now, after reporting a 24 percent profit increase for the second quarter, Mr. Pandit, Citi’s chief executive, is starting to play offense.

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches from Buenos Aires to Bucharest, including more than 200 in major cities across the United States. The bank is in the middle of stitching together its disparate technology systems — a mammoth effort known internally as Project Rainbow — and spending more than $1 billion a year to keep up its prized global transaction services franchise.

As a result, expenses have shot up more than 9 percent from last year and are expected to remain elevated though the end of 2011. Investors may have to wait a year or longer to see the payoff.

Despite an earful from Wall Street analysts, Citi executives say that after several years of cutting back on investment spending, they need to loosen their purse strings to make up lost ground.

John Gerspach, Citigroup's new finance chief.Citigroup, via ReutersJohn Gerspach, Citigroup’s finance chief.

“Coming out of the crisis, there wasn’t a lot of investing going on in 2008 and 2009,” John C. Gerspach, Citigroup’s chief financial officer, said during a conference call with journalists.

Stronger rivals like JPMorgan Chase, Goldman Sachs and Wells Fargo have been investing all along. Now, Mr. Gerspach added, “We are in investment mode.”

How Mr. Pandit keeps close tabs on expenses while building out his global banking franchise is perhaps his next great challenge. After clawing Citi back from the brink of collapse during the financial crisis, he has been engaged in an ambitious plan to transform it from a sprawling financial supermarket to a leaner, more focused company.

Mr. Pandit has been successful shedding assets, improving risk management and severing the bank’s ties with the federal government. His efforts, however, have not lifted Citi’s share price. It has floundered since the completion of a reverse stock split in early May that took the price to around $45 from $4.50. On Friday, it closed at $38.38, down 1.64 percent.

Citi showed the inherent power of its franchise when it pulled off a second-quarter profit of $3.3 billion, up from $2.7 billion last year, despite a sluggish global economy. Many analysts were skeptical of that headline.

Despite modest loan growth and strong investment banking fees, almost half of the bank’s pretax operating profit came from the reversal of more than $2 billion of funds the bank had set aside earlier to cover credit card and other loan losses.

And unlike the solid gains that JPMorgan showed on Thursday, revenue at Citigroup fell 7 percent from a year earlier, to $20.6 billion.

Profit in Citigroup’s investment bank was down by almost one-third from a year ago, falling to $1.2 billion. Traders on the currency, interest rate and mortgage desks were hard hit, while Citi’s equity derivatives group also reported lower revenues.

Its North American banking operations also struggled, with a litany of mortgage troubles continuing to weigh on its results. “I consider mortgages the biggest risk we run,” Mr. Gerspach said.

Although tighter supervision and the smaller size of Citi’s mortgage unit allowed it to avoid the charges that swamped Bank of America and Chase’s results, Citi was still forced to set aside an extra $224 million to cover potential losses on securities backed by faulty loans that it had sold to investors. That brought its total reserves to $1 billion.

The bank also raised its projections of mortgage servicing cost increases to around $70 million a quarter — double its prior estimates, although nowhere near the billion-dollar charges taken by its larger peers.

Abroad, the news was mixed. For the last two years, the bank’s consumer businesses in Asia and Latin America have been one of the few bright spots. Loan losses eased faster in those regions than in the United States, and corporate lending has been quicker to gain steam. That was true again in the second quarter, when nearly 60 percent of profit came from emerging markets.

But its European results were weak, particularly in its investment banking unit.

And then there is the expense problem. Operating costs for Citi’s core operations rose to $10.1 billion, a 14 percent increase from a year ago. Bank executives said that about one-third of that cost could be attributable to unfavorable exchange rates and another third to increased legal expenditures tied to mortgages and other issues. The rest comes from technology investments, hiring and other expansion efforts, largely outside the United States.

“We don’t like the idea that our expenses are going to be above guidance any more than anyone else does,” Mr. Gerspach said. “You can either manage back down to the guidance by cutting investment programs, or you can agree to press on.”

Some Citi analysts and investors, who have a long history of hearing the bank’s executives make promises they cannot fulfill, were skeptical. Others say the bank has little choice.

“The company was on its death bed, and the investing they were doing was to make sure they survived,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “Now, they are looking to make up for that period of time.”

Just as with investment spending, Citigroup will be playing catch-up to its main competitors when it comes to buying back its own shares. JPMorgan, for example, announced that it had repurchased about $3.5 billion of the company’s stock in the second quarter. Mr. Pandit has said that the bank is unlikely to do so until sometime in 2012.


This post has been revised to reflect the following correction:

Correction: July 15, 2011

An earlier version of this article misstated the loss for Citi Holdings. The group’s loss was $168 million, not $168 billion.

A photo caption with an earlier version of this article misstated the second quarter for Citigroup’s earnings. It was this year, not last year.

Article source: http://feeds.nytimes.com/click.phdo?i=98201d74947ab60be31a863407d7df18