Diamond in the rough: surviving a 'downdraft': the descent following the bursting of the tech bubble was horrifying. From this near-death experience, there are lots of lessons to be learned in management resilience and mounting a comeback.

• Author: Bergstein, Mel
• Position: LEADERSHIP

THE U.S. ECONOMY was finally confirmed in December 2008 to be in a recession. It is probably going to be deeper and longer than we'd like it to be. Executive management of many, if not most, companies in every sector of the economy will be facing hard times in the coming years. This is going to be a new experience for most of the executive management teams who are leading companies today. You would have to reflect back to the early 1980s to have an experience that even approaches the potential of the coming economic slowdown.

The last downturn the U.S. experienced was right after the turn of the millennium when the tech bubble burst. Economists told us that was a short and shallow and recession. Capital spending took a sharp turn down, but it was focused on technology investment. Consumers also spent less in 2001 and 2002. But, their spending only slowed; it never contracted. In the main, the economic slowdown in 2001-2002 was relatively mild, except in the technology sector. And in tech land, the services part of the technology sector suffered a vicious and prolonged downturn. Most of the small tech services companies did not survive. The larger companies struggled, downsized, and were damaged, at least temporarily.

So, if this downturn we are experiencing will be vicious and prolonged, what lessons can we learn from the companies that were in the eye of the maelstrom in the 2001-2002 downturn? Diamond Technology Partners was one of those companies, and its experience might well be instructive.

From $80 million to $3 billion market cap

Diamond was founded in 1994 to fill a gap in the market between the long-established consulting firms McKinsey and Accenture. Diamond's positioning was well-conceived and its plan was reasonably well-executed. It attracted supportive venture capital, blue-chip clients, and the highest-quality people. Diamond went public in 1997 at $5.50/share, with revenue of roughly $40 million and a market cap of $80 million. Diamond grew quickly (although purposefully not as quickly as others) and by mid-2000 the stock peaked at $107 (after a 3:2 split), with a market cap of roughly $3 billion and revenue approaching $200 million. In late 2001 Diamond bought a pan-European consulting company roughly half its size, which was a significant purchase on a relative basis.

Then, the bottom fell out as the tech bubble burst. Diamond's original (principally North American) quarterly revenue peaked at $63 million in the December quarter of 2001. Ten quarters later, in spring 2003, Diamond's North American revenue had fallen to $14 million. The European revenue, which had been over $35 million in the April quarter of 2001, the first fully consolidated quarter, fell to $12 million nine quarters later. The company's revenue began a steep recovery in spring 2003, basically two and a half years after the beginning of the decline. Today Diamond has a healthy, profitable, cash flow positive and growing business.

But, during that two and a half year downturn, Diamond's consulting headcount was reduced from 1,141 to 454. Its administrative staff suffered bigger relative cuts. Its market cap shrunk from a peak of $3 billion to a trough of $44 million. The stock price, which had peaked at $107, troughed at...