Book Excerpt September 18, 2009, 1:01PM EST

Book Excerpt: 7 Lessons for Leading in Crisis

In an edited excerpt from his new book, 7 Lessson for Leading in Crisis, Bill George writes about the importance of leaders acknowledging reality--and their own role in creating a situation

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In Leadership Is an Art, Max DePree writes, "The leader's first job is to define reality. The last is to say thank you." Before you can lead your organization through a crisis, you have to acknowledge that you are indeed in one. Next, you have to get everyone else to acknowledge it as well. Only then can you define the problems accurately and develop plans to deal with them.

Why is this so difficult? Leaders often go into denial about the urgency and severity of the challenges they are facing. Or they tend to blame external events, people, or organizations for their problems. Without accepting that the problem is theirs to fix, they cannot understand what they are dealing with. Often the hardest part is to acknowledge your role in the origins of the crisis. Even when leaders acknowledge their responsibility, they may face significant resistance from their organizations in solving it because people have great difficulty in admitting their mistakes. This is why crises require so much skill on the leader's part.

Philip McCrea learned the hard way how difficult it is for a young entrepreneur to face reality in his fledgling business. Founding San Francisco–based Vitesse Learning in 2001 at age thirty-two, McCrea saw only upward possibilities for his Webbased sales training company. McCrea was highly skilled in bringing in contracts, which often contained significant amounts of custom software for his young software team to develop. Starting with only $1.2 million of capital, Vitesse made money its first two years.When it missed its 2003 targets by 40 percent, McCrea was forced to raise an additional $500,000. Vitesse rebounded strongly in 2004, thanks to expanded agreements McCrea negotiated with numerous divisions of Johnson & Johnson, as well as moving into financial services and a custom contract with Corning.

McCrea was a born optimist whose entire life had been successful. He noted, "I sometimes get too aggressive about the results we will achieve. It has been a challenge for me to open up and see that I don't have all the answers." In 2005 McCrea's business turned down once again, shortly after he moved his family to New Jersey to be closer to his customers. With software programmers left behind without clear leadership, software costs escalated, leading to a new cash

flow shortfall. McCrea hesitated in addressing the core problem of leadership in his software group. Strapped for cash, he instead searched for external options and decided to sell Vitesse to a Canadian company with a software team in Nova Scotia.

The merger did not go well, as attempts to migrate software development to Nova Scotia led to sharp reductions in quality and extensive customer complaints. Eight months into the merger, McCrea resigned, feeling the business had no future. Six months later, the Canadians declared bankruptcy and shut down the company, and 175 people lost their jobs.

McCrea described the previous two years as an "emotional rollercoaster." For the first time in his life, he had to acknowledge he had failed. "I had to look myself in the mirror and accept my failure," he said. "My greatest growth came through learning that failure is okay. During this time I was intolerable. Although I wouldn't admit it, I was depressed and got angry very easily."

After reflecting on what went wrong, McCrea became CEO of ClearPoint Learning, a sales training software firm with low-cost operations in India. Having learned from his mistakes at Vitesse and how important it is to face reality, he felt well positioned for success at ClearPoint.

It isn't just entrepreneurs who struggle with facing reality. Veteran leaders have an equal amount of difficulty. In 1991 Salomon Brothers faced possible criminal prosecution for submitting false bids to the U.S. Treasury, but its management was in complete denial about what had happened. This caused its largest shareholder, Warren Buffett, to take control of the company.

Buffett's first task was to get the organization to face reality. He immediately forced top management to resign, although its leaders were denying any knowledge of the false bids.