I’ve got a new site for my blog http://www.thebittlcode.com as this site will be dedicated to business development for Workflow Analytics LLC.
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I’ve got a new site for my blog http://www.thebittlcode.com as this site will be dedicated to business development for Workflow Analytics LLC.
Please update any links or subscriptions.
This one’s from my first formal flying lesson. After performing the preflight check, the instructor let me start the engine, taxi out to the runway and take off. (Note: takeoff is real easy, landing is a little harder.) Anyway, we’re puttering over the plains of north Texas at about 4000 feet when the instructor says “I bet you’re wondering what would happen if the engine died right now” and he shuts the engine off. Well, I just looked at him waiting for the next piece of the lesson, and he was clearly disappointed that I wasn’t freaking out.
“Ok, smart-ass, so you’ve flown before.” Yes, my dad had me in Piper Cubs as soon as a lap belt would keep me from sliding off the seat. “Look around and find a place to land”, he says. So, with the altimeter spinning down from 4000ft toward ‘crash’, I look around and point to a big open field with a little row of shrubs at one end. “There”, I say. He has me restart the engine, with a bit of altitude to spare, and take the plane down to a few hundred feet off the ground. Things looked a wee bit different here. The field was actually what I can only describe as “elephant grass”. The stuff was thick and very tall. And those tiny shrubs turned out to be small trees hiding a shallow ravine with a creek running through it. The landing would not have been smooth. The plane would probably have been totaled, with serious personal injuries to all on board. The flying lesson of the day was “always try to land on a road”.
The management lesson
The management lesson of the day was “things always look a lot smoother from up high”. A lot of times the big thoughts in the PowerPoint look really straightforward and easy to execute. It’s fun and exciting to think up possibilities or concisely craft a general solution to a vexing problem. It seems so easy. “Why didn’t we think of this before.” “We should have these meetings more often.” The situation on the ground is always a bit more, shall we say, nuanced.
The Devil’s in the details
Often stated, yet oft treated lightly. As easy as it seemed to draft the plan in the conference room, there’s not enough time or energy in that forum to flesh out the details. The danger is in jumping ahead and delegating the implementation. What’s missing is the feedback loop from the implementers as to what challenges were inadvertently overlooked or minimized. Most often, the main issue is counting on full participation of resources already fully committed. Another frequent oversight is not accounting for ‘dead time’ in handoffs, process transitions, or review/approval loops. Then there there are the frictional losses of implementing a plan that hasn’t been sold to the organization, or includes contributors who aren’t committed or perhaps not even capable.
Why didn’t you say something?
You can’t always rely on the staff to automatically be the sanity check either. Everyone wants to please the boss. No one want’s to be seen as “Dr. No” for outlining all the possible contingencies with worst case implications. Especially when the leadership expresses great excitement (read: emotional ownership) for the idea on the table. Shooting the messenger is such a time honored tradition that it is a perceived threat even if it’s not a real threat. The management team needs to reach out to the front line and not just ask for feedback, but explicitly state that “bad news is OK”. And be on alert for body language or other behaviors that contradict that message. You rarely get a second chance at credibility.
Just add some pad and call it a day
On the other hand a blanket fudge factor without supporting analysis never really gets internalized or affects expectations. Just throwing in a general “pad” to the cost/schedule formula doesn’t make it real. (Although, I’m continually surprised at how often “twice the money and three times the time” works out forensically). Somehow, even though we can latch onto a stated goal with insufficient backup, we are equally adept at discarding counterpoints based on the same level of supporting information.
Some meat on the bone
One way to flesh out the subsurface hazards is to poll the team on percentage likelihood of obtaining each milestone at the projected cost/schedule. You can play around with the responses (e.g. average all entries for a given milestone, or drop the high and low if you have a large enough sample). Then combine the probabilities and apply that to the planned goal. The result will be illuminating, if not disconcerting, which may motivate all to dig a little deeper into the details. All the better to understand the realities of implementation. The pilot can usually change altitude to achieve a smoother flight, but the ground is not so easily modified.
Moving Toward Perfection
I learned to drive in a car that didn’t have power steering. (Yes, I’m that old.) But that didn’t prepare me for my stint in the Air Force. I was in a tactical unit, which meant we had to be ready to go anywhere and set up shop on short notice. So all of our gear was either loaded on trucks or had wheels bolted on them. And, since we had to be light and lean, we didn’t have a bunch of truck drivers on the team. All us geeks had to pack and drive our own stuff. That meant I had to learn drive a truck. Two and a half tons to be exact. “Deuce-and-a-Halfs” they were called. And they didn’t have power steering either.
Without power steering
Now, I’m not a big guy. About 120lbs at the time. And messing with electronics doesn’t exactly build upper body strength. So, as I sat in the driver’s seat and attempted to turn the wheel in preparation for backing out the parking spot, I promptly pulled myself off the seat onto the steering wheel – which hadn’t budged. Ah, the seat belt! Silly me, I thought. I buckled up, tried again, and accomplished nothing more than severely compressing whatever it was I’d had for breakfast. The motor pool Sergeant, who had amused himself watching my antics, eventually filled me in that it’s a lot easier to steer when the truck is actually moving. What a difference. With the truck moving and the engine taking the work of rolling the tires holding up all that weight over the pavement, course correction was a modest increment of required force easily accomplished by a 120lb comms tech. Though, truth be told, I still needed the help of the seat belt.
It’s much easier to be agile when your moving. If you’re trying to write the perfect product spec or business plan you’ll never deliver. Look, no one’s saying to deliver crap, but perfection can’t be attained in isolation. You can’t know everything about how your product will be expected to perform until it’s released into the wild. Your customers can’t know all the ways they’re going to use it until the get their hands on it (or their kids get their hands on it) and kick it around a bit. Even if you manage to satisfy your hypercritical self, you’ll fall short of somebody’s expectations. The startup world has already learned this and turned it into a mantra, or mantras actually. “Fail fast”, “Iterate often” all speak to the need to get a core offering out there and see where the user base wants to take it.
What could go wrong?
Release a product, get feed back, adjust, rinse and repeat. The hard part, of course, is figuring out what to fix and what to ignore. Which customers are right, or represent the target market and which ones are niche interests or one-offs. You still have to do a good job defining your goal. If not, you’ll end up with ‘feature creep’ or ‘code bloat’. Without a clear target, you may end up with a product that most people think is ok, but no-one is particularly excited about. More importantly, vet and remember your underlying assumptions. Any time you wonder if the goal is still valid, recheck those assumptions as well. If the footings have shifted, then adjust. But, if the assumptions still hold, hold the goal as well and make your tradeoff decisions accordingly.
By the way, when your overarching goal is well defined and consistently applied, the process of working through adjustments and tradeoffs will be much quicker. It’s a lot easier to get where you want to go when you’ve got the way points preloaded in the GPS. Even if you don’t have power steering.
Team Building Is Shared Experience Under Pressure
Ok, I went through military basic training, disaster drills, fraternity hell week, and more than my fair share of corporate-team-building-off-sites. And they all seemed pretty silly at the time. The hazing, the overblown strictness and protocols, the seemingly pointless exercises. It wasn’t until I spent time with combat veterans, first responders and, yes, even startup founders that it all started to make sense. The fundamental currency of teams is trust. And trust is formed through shared experience under pressure.
A Basic Training Story
Let me start with a basic training story. During one of the ubiquitous locker inspections, I watched my Training Instructor palm a small piece of paper and pull it out of the pocket of one of my dress uniform shirts. Failing inspection was a minor “Form 341” offense, but it was portrayed by my T.I. as the end of the world. It was a tense moment. He was truly in my face. “What’s this?” he yelled, so that all of Lackland AFB could hear. “Piece of paper, sir” I responded… a little more quietly. “What’s it doing here?” he yells back (at least the guy ate breath mints). Pause. “Guess I missed it, sir”. He took my Form 341, I got my demerit, it was over and he moved on to the next guy.
So What’s The Point?
So what was the point of all that? I could have called him on it, argued that I just checked my pockets prior to inspection… blah, blah, blah. He knew that I knew he put it there. First, I was the quiet under the radar guy who had, so far, stayed out of trouble and as a result was a bit separate from the team. Aloof might not be too strong a word. I hadn’t screwed up and endured the wrath. He knew a lot guys wouldn’t trust me because of that. And if I argued, the whole flight would have payed a price as well. I’d be throwing them under the bus to save my “spotless record”. Second, he needed to know if I would obey my superior under pressure, no questions asked, or if I would feel compelled to debate and discuss. In the heat of battle, you need to know your followers will follow. Period. Mistakes will be made, bad decisions happen. But as “E0” lowest level enlisted guy, you don’t know the whole story so you’re not the one to bring it up at that particular point in time. He was testing my reaction. And the rest of the flight probably guessed I didn’t leave that paper in the pocket, so they knew I took one for the team. The team dynamic changed palpably for me personally after that point.
Why The Pressure Part?
Why not just shared experience? Why the pressure part? Well, if you talk with someone who saw and enjoyed the same movie you did, you’d have a shared experience. You might even go see a another movie they liked based on that. But chances are that experience wouldn’t give you confidence to enter hostile territory with you watching one half and they responsible for the other. Chances are you wouldn’t automatically assume that, when all hell broke lose, they’d hop on the bus to the scene with you. And you’re not likely give this person part of your nest egg to start a business any more than they would you. There’s not a lot of depth/strength in plain shared experience.
Pressure creates stress and stress identifies weakness. A maintenance chief I once new was fond of saying: “If it doesn’t work, force it. If it breaks, it needed to be replaced anyway”. So the more weaknesses are identified and repaired or replaced, the higher the trust that things will work well when the pressure is on. Works with people too. It’s illuminating to see how folks react to being asked/told to do something they wouldn’t ordinarily do in the interests of achieving a common goal – with not a lot of time to think about it. SEALs don’t keep a lot of earnest people around if they’re not fully capable and totally committed. They can’t afford the stakes.
It’s About Transitions
Fine, so what does that have to do with running a business? Everything. Businesses don’t always do such a great job of culling the herd. If your employees don’t trust one another – even if there’s just one person they don’t trust, you don’t have a team. You have a group of workers. When things are going ok, they’ll just be inefficient. When the crap hits the fan, you will fail because the distraction and friction from the lack of trust will cost you dearly at the worst possible time.
Worst possible times are usually transitions. Start of a new business, launching a new product or entering a new market are obvious transitions. Here, the consequences are repeatedly missed milestones, cost overruns and revenue shortfalls. The mother of all transitions is the merger or acquisition. Here you’re trying to merge two teams who have established, over time, a level of trust that is now being challenged. You will never dismantle the exiting informal team structures no matter how many one-on-ones, and craftily created org charts you devise. Unless you find a way to create new shared experiences under pressure you will endure inefficiencies at best and untold interpersonal dramas at worst. Strong, committed, respected leadership might be able to wrestle that through day-to-day operations, but finding a way to accelerate the process during the first 3-6 months is a more effective approach. Whether creating a new, jointly staffed internal project or rotating a series of mixed teams through some appropriate off site event, a new layer of trust must be formed quickly.
The Human Side of Due Diligence
a view through the looking glass
This never happens, right? You wade through the teasers, pour over books, work up a few LOIs to get a couple of promising businesses. Then you go through your whole due diligence process. The team tackles the financials, talks to a few customers. You interview top executives as well as some key contributors they point out. Everything looks good. You make your selection and you close.
Less than a year later you wonder if you’ve dropped into an alternate universe. You can’t believe it’s the same company. Performance is down. There are untold levels of executive drama. Overall company morale has vaporized and those key contributors have left the firm.
People happened. The company is full of them. They have issues. Issues with each other, with themselves and with anyone coming in from the outside. These issues become well integrated into the operation, essentially masked by processes, procedures and reporting structures. You probably spotted the inefficiencies, but the root causes are what blew up.
When you change the ownership of a company, you break an emotional contract that exists with every employee. You inject a level of uncertainty into the whole organization, from senior management to the front line. Past value assessments, assumptions, alliances, “tolerated” relationships are out the window. Senior management is distracted, and has been throughout the vetting process. Everyone else is grasping for the “new normal”. They are pre-occupied with re-establishing that emotional contract in the context of the new world order. Worst case is that things degrade to “every man/woman for themselves”.
By the way, standing up at the company meeting and saying “we love you guys, nothing will change, just keep doing what you’re doing” is perceived, rightly or wrongly, as bullshit. Always.
How did these issues get missed?
Well, to be honest, you probably weren’t looking. It’s not something that’s on the front burner of business assessment. Sure, you talked to a few folks, but not too many so as to maintain confidentiality through the deal process. Besides, subjectively, everything seemed to be running smoothly.
Your team is well trained in the quantitative methods. In fact, they’re explicitly focused on objective assessment, lest emotion unduly influence the buy decision. In addition, there’s never enough time. Maybe there’s a funding window, or time sensitive market opportunity that’s driving the deal. The team is running flat out. Thus, neither the process, nor the team charged with carrying it out, allows for a meaningful assessment of the company culture.
There’s got to be a better way.
There exists, in every enterprise, an informal structural network that supports, and many times supersedes, the official one. This is the one that reflects (to steal McCregor’s book title) the human side of (the) enterprise. Just as with the formal structure, operational and financial data, this informal structure can be analyzed for stress points, vulnerabilities, and even a few hidden gems.
Figuring it out, though, is a very different process requiring very different skills. It also involves far more members of the target company. Since it’s usually not desirable to telegraph your intentions, adding an army of industrial psychologists to the due diligence team to test and analyze the company psyche is impractical. Nor is it financially justified. Except for extreme situations, where it may detect a ticking time bomb, the impact of this analysis wouldn’t be a deal breaker as much as ‘transition smoother’. The results are more likely to be the difference in a couple of points swing in the multiple, top line and EBITDA. In essence, the difference between a winner and a yawner.
The practical approach is to send in a seasoned operations specialist as a separate exercise, which can precede, coincide or lag the on-site due diligence team. This person must be able to relate to front line staff, middle management and senior execs in a way that promotes openness and trust in 1:1 settings. S/He needs diverse experience to assess a broad range of situations on the ground. Most importantly, they need the emotional intelligence to frame questions and analyze answers in the context of informal structure.
Oh, and if the current owners balk at such an exercise, well then you’ve learned something critically important before making any commitments.
There has been much hue and cry about the difficulty in finding qualified talent despite a demonstrable surplus of candidates. Traditional search is fine for many jobs and yields acceptable candidates most of the time. But, when you’re looking to staff a high performance team to break new ground and achieve extraordinary results, the critical skills are not easily parsed by search engines or volume recruitment. Perhaps, to steal a song lyric, we’re “looking for love in all the wrong places”. A quick survey of job postings across sources (e.g. LinkedIn, Indeed.com, and other aggregators) shows high importance placed on “top school”, “same job elsewhere” and a laundry list of specific must haves. While these criteria represent the safe bet envelope that lends itself to automated filtering, they aren’t a guarantee of top candidates. The underlying strength of personal referrals is that they bring insight into the true critical success factors; Judgement, Character and Passion. Maybe flipping the search criteria upside down would yield better results faster.
What’s Wrong With A Narrowly Defined Search.
Well, nothing, if you just want a narrow pool of results. But that narrow pool is only the starting point, from which you must refine further, taking into account the following weaknesses of the traditional initial screen.
Formal schooling is the time honored method of accelerating experience. As Warren Buffet has been quoted as saying: “It’s great to learn from your mistakes, better to learn from other peoples’ mistakes”. In the end, however, learning the results and not experiencing the method is a shortcoming when it comes to a lean, high performing enterprise. It’s the unique balance of theoretical and experiential knowledge that marks the exceptional candidate. As years pass, the value of (and any premium from) type and source of formal schooling is diminished by a fullness and diversity of experience. You can’t teach how to be a combat veteran. Only experiencing actual warfare accomplishes that.
That said, it’s not a given that the “same job elsewhere” should be weighted too heavily. The investment caveat “past performance does not guarantee future results” is apropos here. Someone’s track record is rarely a singular effort. The degree of support provided by other team members, employees, supervisors or mentors is difficult to discern from a CV or formal interview. Only after a period of under- or non-performance in the new position does it become evident that an individual’s accomplishments were, in fact, not individual accomplishments. Needless to say, especially for lean entrepreneurial ventures, this can be fatal.
As for the laundry list of must haves, these often look like a piling on of all the wish list items a group sitting around a conference table could come up with. Chances are only a few are truly must haves, and should be vetted against the near term objectives set for the position and the firm. The rest should just be left off and used as bonus points later in the screening process. If you screen based on a laundry list of alphabet soup acronyms and buzz words for every communications protocol, your likely to miss a candidate who has deep understanding of applied communication theory, but maybe only applied to a portion of the wish list. You may very well end up with a candidate who has worked with them all yet lacks the knowledge of when to apply which and why.
And, there are times when ten years of experience is just one year, ten times. All of which is to say, at the end of this process, you may still not have the fire starter or rainmaker you need.
And Now For Something Completely Different.
So, what makes Judgement, Character, Passion the key discriminators and how do you recruit and search using these criteria?
There are not many tasks left in the running of an enterprise that are cut and dried. Those that remain are handled by computers. To plagiarize the title of one of my favorite management books; the human side of enterprise is about adjudicating the dichotomies and ambiguities of day to day business. This is where Judgement comes in. As important as it is to be able to use all the tools and analytics in a given situation, at the end of the day it’s Judgement that ascribes the weightings to the data and ultimately sets the decision. There is always an emotional component to a critical decision. Judgement is the art/skill that balances that component.
Successful teams bond on the basis of shared experience under pressure. This is the underlying principle of the various Outward Bound type programs, military basic training, and even the silly antics of fraternity/sorority hell week. But how do you screen for membership on the team in the first place. What if you don’t have the luxury of rotating a certain percentage of players out every few months. What trait can be used as a predictor of performance in a team environment. Character is, in essence, the measure of how you behave when no one’s watching. It’s about how you react to pressure. It’s about how you treat people in general. Character begets trust and trust is a core value of high performing teams.
The essence of high performance teams is that they are extremely lean. That means constant ‘extra effort’. For people to put forth that effort on a consistent basis, they need to be excited about what they’re doing and who they’re doing it with. Passion is the ultimate force multiplier. The candidate who brings Passion to the team brings the contagious energy that fuels above average productivity. It also provides the momentum that carries though the inevitable down cycles and disappointments that are part of any meaningful endeavor.
So, Here We Are.
This is a case where automation doesn’t necessarily equate to efficiency or effectiveness. For all the ease of generating boilerplate resumes and cover letters, posting, distributing, sorting and screening electronically, the “soft skills” that make up critical success factors elude software. A different approach may be called for. What if, instead of crafting the detailed job description, requirements and company filler, a simple problem statement was put forth. Candidates would be invited to posit approaches and perhaps relate relevant experience in a brief narrative. Reviewing the responses would demonstrate Judgement (appropriateness of response), Character (stated inclusiveness of other contributors in either methodology or experiential narrative) and Passion (general tone of the response). Preparing such a narrative would, in itself, be a limiting factor/filter on responses. The results would present a interesting set of candidates indeed.
Of course, nothing beats a trusted personal referral.
Just about everyone associated with any form of replicated creative product – music, books, movies, you name it, is wrestling with how to get paid for the content in the electronic paradigm. Perhaps it’s time to reevaluate some underlying assumptions.
What if consumers won’t pay for content. What if they believe they never have. What, then, have they been wiling to pay for, and what are they still willing to pay for. What does this all say about the business of content creation and, most importantly, what is the take away message for emerging artists.
Ok, the baseline premise is that consumers have never paid for content and are loath to start. What they have been paying for, and continue to pay for willingly, is ACCESS. Whether that be a communications channel, a piece of physical media or a seat in a venue; those are tangible assets that a consumer can assign value to… a song or a story is not so easy to quantify.
Think of it like this:
It’s not buying a CD of YOUR MUSIC,
it’s BUYING A CD of your music.
It’s not going to a club or hall to HEAR YOU PLAY,
its GOING TO A CLUB OR HALL to hear you play.
It’s not using an on-line source to obtain YOUR MUSIC,
it’s using an ON-LINE SOURCE to obtain your music.
The key is that the shift in emphasis applies even if they really are explicitly looking for your music. The value is placed on the method of access (physical package, convenient/comfortable venue, elegant user interface).
Supply and Demand
There is also a subconscious awareness of the economics involved. The knowledge that there are far more talented creators out there than there is capacity to experience them all. Such an oversupply drops the value to nil. Any real value to the consumer is in the screening, packaging and distribution of some subset of the abundant (over) supply.
In the old days, this was provided by Radio stations, record labels, clubs, which promoted the content in order to attract consumers to their method of access. Thus the content was essentially advertising to attract buyers to the “access product”. Radio stations make money on the advertising/underwriting of being on air, and only care about the content in the sense that it attracts listeners. Record labels are concerned with unit sales, the content being their market differentiator to sell those units. Clubs make money selling food or beverage or just a seat, and the content , then is just the lure to fill the hall. License fees (performance, synchronization, duplication) represented the cost of that advertising and were paid by the providers, not (directly, at least) by consumers.
Case Study: iTunes
What about iTunes you say? Here again what consumers are paying for access. Many alternative on-line music schemes founder in the face of iTunes because iTunes has invested in the access experience where the customer perceives actual value, and is therefore willing to pay to access a song via that channel.
Ok, Now What
So here’s the “chicken and egg” conundrum. In order for the consumer to be willing to pay for access, it has to want access to something and that something is the content. If they can access the content for free (terrestrial radio, internet file sharing, a friend’s CD) they’re less likely to pay for access via any other channel… unless there is some compelling value to the access itself. After all, some folks are still selling music on vinyl. There is a compelling value to some consumers with respect to vinyl as a medium. The same collection may only be 9.99 on iTunes or 5 dollar CD special at CD baby, but people pay more for the vinyl… again… for the same songs. They want the music, they pay for the method of access, in this case physical packaging. In the case of something like iTunes there are compelling features such as ease of use, search proficiency, size of catalog and seamless integration with players.
Perhaps where traditional record companies go wrong is misunderstanding the value proposition to their customers, or even who their customers are. Somewhere along the line, as the number of access options expanded, buyers in traditional channels decreased. This resulted in the backhanded approach of DRM which, of course, only further limited access to their product and the death spiral began in earnest.
This, of course, throws the whole compensation model on it’s ear. The question is not that an artist be compensated for every instance of their work out in the wild, but rather that they negotiate a sales commission for each piece of stock, or connection minute their content draws in. Content manufacturers and distributors need to reassess their means of providing access and adopt new methods. Yes there is lower pricing, but there are also lower costs. It means restructuring the value chain to the current realities and letting the big chips fall where they may.
Moore’s Law specifically refers to year over year increases in transistor density (roughly doubling every two years), but the implications are for improved system price/performance. The effect, however, extends beyond integrated circuits and the systems that use them. It ultimately impacts the business models for almost any vertical market including the services that are provided in that market. This connection is often overlooked by business owners.
With increased power density in commodity computing devices, the need for purpose built hardware is reduced. The result is a lower cost per seat for a given application. This, one would think, would be a boon for a business as reduced capital expenditure should equate to higher margins. However this benefit is short lived if it exists at all. The problem is that the end user equates value with the physical devices not the intellectual property behind the application. The result is, much like service and support contracts, there is a perceived value ratio of application to hardware that remains relatively constant. At least within an order of magnitude. So when the piece of gear needed to perform a certain function comes in a specially designed system that costs 1M$ and that price drops to 10K$, the perceived value of the software drops proportionally. This in spite of the fact that the software is more complex, has more features and adds more value. Taking this one step further to the service end of the business and you can see how someone walking into an establishment that is shown a monstrous piece of hardware that will be used in the service can intuitively accept a high price for that service. When that service only appears to require the very same commodity computer they have at home, they can’t seem to associate the appropriate value of the application, nor the specialist who runs it.
So, in the case of both the solution supplier and service provider, it becomes more difficult to charge premium rates for the product/service. In fact it becomes difficult to charge rates that cover costs, resulting in a downgrading in the overall level of service. The effect of this downward pressure is greatest on mid market products and services. The business gets forced down market where they meet competitors from the low end reaching up with new capabilities. The irony is that the key differentiator, level of service, also becomes a burden as providing that service eats into the remaining margin.
The net effect is that, as the fine print says on any investment prospectus, past performance is no guarantee of future results. For those who run their business based solely on experiential knowledge, the results are typically disastrous. Only continual quantitative assessment of current technologies and market dynamics, can insure competitive positioning going forward.
Navigating Growth Transitions
Market Share, Margin and Management
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries…and partly from the incredulity of mankind, who do not truly believe in anything new until they have actual experience of it.” – Machiavelli
Any engineer (or therapist) will tell you that transitions are where things go wrong most often. Business schools wax eloquent on tools and techniques to measure and evaluate performance but these are primarily steady state measures or ‘moment in time’ snapshots. Those measures can be misleading during transitions, often with dire consequences.
Strong market share performance would appear to be a validation of a given business practice model when, in fact, market share growth requires constant re-evaluation and modification of said model. Margin is regularly taken to indicate general health and efficiency of operations when, in fact during periods of rapid growth, there exist inherent inaccuracies which mask cost structure anomalies that are unsustainable in the steady state. Finally, the structure and composition of the management system requires special attention during growth transitions as different size plateaus require different skill mixes and support infrastructure.
One of the common missteps during rapid growth of an organization is holding on to an operating model too long. The thinking goes whatever worked to get this far should be sacrosanct lest everything fall apart from “losing the recipe”. Markets are driven by customers not products or services and as such are not homogeneous. Therefore, growing market share by definition means an increased diversity of customers and their requirements. This necessitates adjustment of the operating model to account for that diversity, or the business will eventually shrink back to a size appropriate for the niche served by original model. A couple of examples might better illustrate the point, one from a product and one from a service perspective.
Take the Leatherman Multi-Tool, a product first introduced as a single universal pocket tool. How many variations are there now? How many does Leatherman themselves produce? Clearly as the market grew, so did the range of customer needs. The business model that makes one thing and one thing only is vastly different than the one that has many offerings and has to adjust it’s processes to meet fluctuating demand across those offerings. The first works fine with serial process, the second requires paralleled tasks, divisions of labor, resolution of conflicting objectives and other complexities that add structure and overhead to the process. While the serial process can be forced to make all variants, delivery will suffer in both delivery time (queuing theory) and quality (human error induced by asymmetric job design).
From a service provider perspective, consider Manhattan tour guide services. At the startup/niche size of a single tour guide doing custom tours for a small tour group you have low fixed costs and can provide maximum flexibility, even adjusting the tour while in progress based on customer needs. When you grow to the size of Grey Line Sightseeing tours you are forced to reduce your level of service in order to serve the larger market. You can no longer adjust the tour in real time for a specific customer without risking the alienation of all the others who possibly couldn’t care less about the detours objective. (Ironically that would most likely include someone who had already benefited from such a redirection). Also, you are unlikely to completely replicate the knowledge of a single tour guide across multiple tour guides and thus reduce the depth of information provided.
So one can see how holding on to an operating model that was stellar in the startup/niche phase becomes untenable at some point in the growth curve and that changes in structure and the level of service envelope are inevitable for long term success.
Read enough financial analyst reports and you may come away thinking that margin is the Holy Grail of business metrics. Read enough annual reports of organizations forced to downsize after periods of rapid growth and you might change your mind. The underlying phenomena is a delay between sales recognition and correlated expense recognition. While project based activities (building construction, weapons system development, motion picture production) can be actualized at the project level, general business expenses are not tracked in a way that supports analyzing the relationship between expenses occurred and actual related sales.
When sales drives the business, when expenses are driven by operational needs and with an inherent purchasing cycle time, there is a lag between sales and expenses required to support same. In rapid growth scenarios this is exacerbated. This resultant artificially large margin is then used as justification for future financial commitments in the name of growth: capital purchase/improvements and senior staff. When sales growth levels off, either though increased competition or market saturation, these fixed costs are out of balance with steady state revenue, resulting in the hasty and therefore error prone process of shedding of excess resources. Since, by this point in time, the knowledge of how to run efficiently has long ago been lost, the cuts merely force a downsizing in capacity and a death spiral often results.
An illustrative example would be small bodega/coffee shop that has a long line of customers out the door each morning. The owner has an opportunity to expand into the adjacent space and goes ahead based on his current margin numbers. The flaw in the thinking is that the current margin numbers don’t accurately reflect the expenses needed to support the current volume much less any expansion. There is “unaccounted” floorspace in the form of those standing outside on the sidewalk which distorts any ‘revenue per square foot’ estimates. Staffing is underestimated in that the current staff is working at an unsustainable “120%” but an incremental hire raises salary and benefits fixed costs. Finally, customers are finding what they need within the current inventory, so adding inventory to partially fill the expanded space will raise carrying costs without corresponding increase in sales.
The expansion based on the uncorrelated numbers exacerbates the error and the owner finds himself saddled with increased fixed costs in terms of leasehold, labor and inventory carrying costs that are out of balance with the sales from the customers he expanded to serve. He is now less able to absorb market fluctuations and may well be operating at a net loss.
Nine women can’t have a baby in one month. At some point, simply scaling the number of bodies, no matter how highly skilled, does not provide incremental gains. Often, the results are a decrease in productivity as well as customer satisfaction and employee morale. Growth eventually requires division of labor and the requisite increase in overhead that management and administration impose. An illustrative example is rowing a boat.
A single person in a rowing shell has the potential to maximize command and control as well power to weight ratio and thereby overall performance; albeit for a limited payload. To get more power you add a rower, taking a small hit in command and control performance as the movements of two individuals must be closely coordinated else the addition is counterproductive. Adding more rowers you need to add a coxswain (sometimes with 4 rowers, always with 8). This person provides necessary command and control which this many rowers cannot accomplish by themselves and still maintain maximum power. Of course, adding the coxswain adds weight without contributing directly to power and is, therefore, “overhead”. Thus, you cannot increment your crew to 8 without adding overhead. Continuing this example to a rowing galleon, adding a captain, dedicated helmsman, supervisors (the guys with the whips) and support staff (water boys); on to adding sails and eventually engines (with requisite specialized crew members) and you can see where this is all going: division of labor, dedicated management structure, increased overhead. Of course, this is not limited to “rowing a boat”, but rather an illustration of the physical and psychological aspect of organizing humans towards a unified objective.
Note that the “manager as direct labor” role is diminished very early on – as early as 8 rowers w/coxswain and totally absent by galleon stage. Perhaps there’s a reason the military is so often the template for managing large complex operations. When something screws up, good guys die – it’s a hell of an incentive.
Growing businesses pass transition points which must be adapted to. The risk is in using steady state metrics to assess a dynamic process. Increased market share should be an indication of a need to reassess business operating models. Margin, during periods of rapid growth, should be viewed with skepticism, and efforts should be made to accurately correlate current sales with anticipated expenses. Management systems need to implement division of labor with dedicated administration and leadership. At some point in time, in all businesses, in all industries, changes must be made to the structure, content and nature of operations with an implied increase in overhead. How much increase in overhead is a function of efficiency, but undue restraint on overhead reduces efficacy and the long term viability of the business.