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John Donahoe’s Transformational Adventure

eBay’s John Donahoe Eight years into her tenure as eBay CEO, Meg Whitman called her former Bain & Co. colleague, …

eBay’s John Donahoe

eBay’s John Donahoe

Eight years into her tenure as eBay CEO, Meg Whitman called her former Bain & Co. colleague, John Donahoe, to interest him in coming to the San Jose, California startup to learn the business and maybe take over after she completed her tenth year. She had no successor and the eBay board wanted her to name one. In 2005, he joined the company as president of eBay Marketplace and three years later became president and CEO. It didn’t hurt that eBay founder Pierre Omidyar, who still owns 12 percent of the company, was in Donahoe’s camp. Today he leads a global ecommerce and payments powerhouse with 2011 revenues of $11.7 billion. The company recently reported its biggest revenue increase in six years, as sales in Q4 2011 rose 35 percent from the same quarter in 2010. eBay has hundreds of millions of users in every country where Internet connections can be found; 62 percent of its revenues come from activities outside the U.S. (PayPal’s is about half.)

Prior to joining eBay, Donahoe spent 20 years at Bain & Co. in Boston, where he oversaw a number of businesses (and became acquainted with presidential hopeful Mitt Romney). So far during his tenure, he has transformed eBay’s core businesses with a strong focus on innovation and customer access. In addition to the retail site, eBay encompasses PayPal, GSI Commerce and now X.commerce, the company’s technology platform unit open to developers and merchants. PayPal now processes $125 billion in payments and is growing 30 percent a year.

Under Donahoe’s watch, the company has aggressively grown payments, making major strides in reinvigorating its core marketplace business. But none of this came easily. On his third day on the job, Donahoe set off a firestorm of protest when he went public with his plan to transform the company. As he told Chief Executive’s J.P. Donlon at the magazine’s CEOtech event at Stanford Business School, the company faced a deteriorating position despite upbeat financials. The market pounded the stock. Internal messages became vitriolic. Donahoe was even the subject of YouTube video, where he was compared to a German guard in the holocaust film, Schindler’s List. “I was going to face 10 years of decline, á la AOL or Yahoo! unless I made really aggressive change,” he says.

To make matters worse, the Great Recession ripped through the economy in the middle of the turnaround, forcing him to lay off 10 percent of the company. “That first year was not fun,” Donahoe recalls, “but my leadership team realized that the alternative—slow, steady decline—was worse.” He also credits the board for invaluable counsel and support in making the transformation work, a lesson that might benefit neighboring HP.

The experience prompted Donahoe to adopt throughout his organization a universal customer-focused measure when viewing performance—its Net Promoter Score (NPS). (Created by Bain consultant Fred Reichheld, the Net Promoter Score is a measure of customer satisfaction that asks: “On a scale of 1 to 10, would you recommend this company to a friend?” A score of 8 or better makes one a promoter, a score of 5 or less makes one a detractor. Ten percent of eBay senior management’s compensation is tied to NPS improvement.)

His long-term goal? “To build a great and enduring company,” he says. “Amazon has done it so far, which isn’t easy, considering Silicon Valley loves the bright, shiny object and drinks the bathwater like nothing you’ve ever seen. Saying his successor will need to be a different kind of leader just as he is different from Meg Whitman, he adds, “As the second CEO, I would like to hand it off in better shape to the third CEO, who then can do so for the fourth and a fifth.”

How is technology changing your business?

Technology has accelerated the pace of change. When I joined eBay six years ago, I remember my first year or two feeling that I could not keep up with the pace of change of the Internet. In the world of commerce and payments, we expect to see more change in how consumers shop and pay in the next three years than we’ve experienced over the last 15. The reason for this is this device [holds up a smartphone].

Consider the iPad and how people consume media differently today because of it. I don’t know about you, but I was the last guy in the world who ever got rid of my physical newspaper, because I loved it. And now, with the iPad, it almost feels archaic at times to open up the physical newspaper. And the iPad’s less than three years old. We’ve been talking about [the evolution] of media for a decade, right? Probably longer. Suddenly the emergence of this one device changed consumer behavior at a stunning pace.

Well, the same thing’s happening to shopping and paying. For example, Red-Laser is a barcode scanning application that we bought a couple of years ago. It enables anyone with an iPhone to scan a barcode of any item inside a store, recognize the item within seconds and bring up that exact item at a range of prices all across the Internet. With another application from Milo, a company we bought, the device can bring up that same item in nearby local stores. So, if you bought something, it could be available to be picked up at the store or shipped home. Is this an offline or an online transaction? In reality, it’s both. The reality is that consumers are embracing these technologies. No one knows exactly how consumers will behave a year or two from now. It’s sounds trite to say they are in charge, but that’s what is really happening.

What about concerns people have with safety and security? How does this figure into your business?

There are two kinds of security. One, is your privacy. Second, is the safety of, in our case, your financial information. The latter is something we’ve dealt with from the beginning of the company, because eBay moves $60 billion of volume in real money moving. PayPal moves $125 billion of volume. The heart of the business model of PayPal—its key value proposition—is that one never shows your financial information. The way PayPal works is you load your financial instrument into your PayPal wallet, into the cloud, whether it’s your credit card, your bank card or all of the above and PayPal never shares that. Anytime you use PayPal on the web buying from anybody, this is never shared. This is also true when using PayPal on a mobile device.

What the norms and standards are around privacy will come under a lot of scrutiny in the next 6 to 18 months, both here and in Europe. In Europe, it’s going to be a much bigger deal. There’s also a demographic divide. How my kids think about it is very differently than how I think about it. Fundamental to the discussion is having transparent policies.

Similarly, consider how the Internet has become a major tool in national security, in cyber warfare. You may have read that the Obama Administration considered cyber warfare in Libya before they decided on actual warfare. They decided they didn’t want to use cyber warfare, because they don’t want to start a cyber arms race just yet. With their attacks on Google, the Chinese realize the Internet has becoming a tool of national security. I don’t any of us know how this will play out.

ebay must face continual cyber attacks. How do you deal with that and what have you learned?

It’s a curse and blessing that eBay was an early target. There is an enormous global online fraud ecosystem. We’ve got probably as many as 5,000 people that work fulltime on our proprietary technology and risk models. But it’s like Whack-A-Mole. The bad guys get in and you whack them down. They try another way in and we whack them down again. There are countries—I won’t say which ones, but Eastern Europe, Soviet Union, China and Africa are the biggest sources—where we’re get hit daily with tens of millions of attacks. It’s a fulltime job to try to maintain a safe environment.

You’ve made a number of acquisitions and divestitures—notably Skype–since you’ve been CEO. Strategically, what are you trying to accomplish?

One of the most important things a chief executive does is to find what business you are going to be in and how you plan to compete. When I took over as CEO I sold Skype despite its phenomenal growth—it was growing 80 percent a year—and the fact that it was one of the coolest brands on earth with close to 500 million users worldwide. But Skype didn’t have any synergies with eBay and PayPal.

We had initially bought Skype six years ago because we thought it would ease friction on commerce. But it turned out not to. It was a great way of connecting people, but it had nothing to do with commerce and payments. I felt we could not be good at multiple things in a fast-changing industry, so, we divested Skype. I’m glad we did, because Skype couldn’t sustain this rate of growth indefinitely and has a completely different set of competitors and a different competitive environment, in technology and innovation than eBay and PayPal.

How will mobility evolve and what is your strategy for adapting to it?

I take a dynamic view. When the iPhone came out, we launched our eBay mobile app for it about two-and-a-half years ago. In its first year, it did $700 million. In the second year, it did $2 billion. This year, we expect almost $5 billion of volume. Fifty million people have downloaded it to their Apple or Android. We’re one of the top 10 Apps and were lucky to grab this real estate early. But that’s just phase one of mobile devices.

The way we use these devices a year from now will be different from the way we use them today. Think about Siri, the personal intelligent assistant that responds to your verbal commands. It can be used to locate restaurants and summon contacts. We’ll have an app where I can take a picture of your coat. J.P., I like your coat. I’ll take a snapshot. And, boom, it’ll show me coats that look just like yours [by] using visual recognition and visual search.

The other thing to keep in mind is while the iPhone has been very app-based, Android and others are likely to rely on HTML5, which is, if you think about it, how you search the Web and get lots of different results. This has been slow on a mobile device because it’s not optimized for it. But HTML5 technology allows you to search all across the Web and have an app-like interface.

So, if you and I were to sit together a year from now, I could stand in the hallway beforehand and send the command “look up JP’s recent background” and, boom, that information’s going to come up. It won’t be constrained by apps. The broader message is: just as no one ever would’ve predicted the impact the iPhone has had, no one can predict how smartphones are going to be used a year or three from now.

Facebook launched its app on Apple using HTML5 the day Steve died. Steve was probably the greatest visionary in the last 25 years. Even he couldn’t predict how consumers were going to use something. Believe me, Mark Zuckerberg or Larry and Sergey and Jeff Bezos—the best visionaries in this space—will all tell you that they can’t predict how consumers are going to respond. What I can do is put something out there that enables consumers to behave the way they want to behave and then pay attention to it and double-down in how they’re doing it.

Technology has a way of upending competition. For example, not long ago Apple was considered an also-ran and Nokia the market leader. What might be the unintended consequences of new technology that may affect your business?

In technology, a lot of innovation comes from young, upstart companies. So, the biggest threat to my company is not anybody who exists today. It’s someone who starts something new, with a completely different paradigm. And so, if the question is what keeps me up at night, it’s just this: What’s out there that we’re not seeing?

Think about this for a second. The Web came into existence 15 years ago, more or less. Netscape was the great, first, Web company, right? Mark Andreessen’s on our board. Netscape’s gone. AOL was the next phenomenon. AOL was the Facebook of its day. Today it is in a long, slow, steady decline. Yahoo! was the next phenomenon. It’s now facing challenges.

eBay was a global phenomenon, the hottest thing on earth. Inside the company, people just kept hoping and wishing it would last indefinitely. Soon, people started innovating around eBay. And eBay woke up as an eight-year-old company, realizing, holy cow, we’re screwed! We’re getting cannibalized! We’re getting disrupted!

This meant we had to go through a brutal process of reinventing ourselves, which sounds strange for a 10-year-old company. But fundamentally, changing and reshaping what was a good asset and a good business model became necessary in order to be prepared for tomorrow’s environment.

What did you have to confront culturally to overcome internal resistance to change?

The trap we faced was that financial results were out of sync with the reality. Financial momentum continued even when the underlying customer realities were not what they needed to be. Over time, the user experience on eBay shifted. In the early days, it was funky and cool. The seller was a husband and wife [team] in Iowa selling stuff on eBay on nights and weekends. You bought something on a Tuesday and they got around to shipping it on Saturday. They put it into a shoe box, put some newspaper around it together with a nice piece of candy and a note on top. You got it the following week and thought, “How cool. It’s so personal.”

About four or five years ago, this became an unacceptable experience. You wanted next-day shipping or two-day shipping or three-day shipping. You wanted the item professionally wrapped and packaged. You wanted to track it along the way. You wanted to be able to return it. We had 25 million sellers who didn’t know how to do that, and it was showing in our results. Our growth rate went from 70 percent to 50 to 30 to 10 to 5 to minus 5, because consumers were voting with their feet. I was forced to confront what everyone had sort of known, that eBay had not kept up. That involved changing almost everything about our whole ecosystem. It was brutal.

If people understood that the company had to catch up with user’s expectations, why were they not open to changing how eBay conducted its operations?

The trap of success is wishing the situation could return to the way it was. Nokia’s still wishing it will go back to the way it was—and it ain’t. People would say, “boy, we’ve really changed. We’re 25 percent different than we were last year.” The problem is we needed to be 75 percent different. Deep down, when you’ve had such white-hot success that eBay enjoyed, everyone wished it would go back to that.

I had to replace 70 of the top 100 people because I realized very well-intentioned people couldn’t make that transition. Yet ironically, these same people could go to another company and make that transition because they didn’t have historical baggage at their new company. With new people, we embraced a three-year turnaround process that was pretty brutal. It meant upsetting some sellers who were making their livings on eBay who were unable to adapt to the revised rules and policies that our customers wanted.

Why John Chambers Paid It Forward to Donahoe

As a new CEO, John Donahoe says the best advice he received was from Cisco’s John Chambers, whom he had never before met.

“Being the CEO is a lonely job. And the longer you’re in it and the more successful you are, the lonelier it is. You will find fewer and fewer people you can talk to,” he remembers Chambers telling him. “The reason I will give you an hour is because the guys at HP, when I was a novice CEO, gave me more time than they should have on the condition I return the favor to younger CEOs. You are now one of those, and I will spend the time with you conditional upon your doing the same.”

“Here’s how it will work. I have no agenda. The time is all yours. You talk about whatever you want. It will never leave this room. You will probably talk for some period of time about what your problems are. And then, I will probably throw out 10 ideas. You will find that five of the ideas you’ve already thought of. Three of the ideas are really stupid and don’t apply. One idea is moderately useful. One idea is decently useful. If I knew which one was going to be decently useful upfront, I would tell you. But I don’t, so you get 10. You now have 57 minutes.

About JP Donlon

JP Donlon
JP Donlon is the Editor-in-Chief of Chief Executive magazine.