Ahead of the pack

This week has been the first serious week of school (yay!) and thus this post and the future ones will be inspired by the topics that come up at lectures.

One of the coolest things I’ve discovered this week is this book. It discusses the interesting phenomenon that certain organizations, given the same commodities, seem to be able to gain significantly better performance than the others. Toyota uses the same steel and hires from the same communities than others and yet they are way more profitable and their quality is better. Intel uses the same silicone and brains and yet their chips are better. How come?

We are going to spend an entire term looking into this but it resonates strongly with some research I did a while ago on Estonian IT job market. What I found was that 10% of the organizations move 90% of the money and employ vast majority of the people. In a situation where even ten years ago all the companies had pretty much the same starting point, there were no clear winners or losers. I speculated on a potential reason that, I’ve found, the theory seems to support.

And here it comes:

It’s a really simple model. The more spare resources (money, expendable employee-hours, managerial time etc) an organization has, the higher its ability to invest into people – give them training, send them to conferences but also take time to hire and retain high-quality brains. Mind you, that’s an ability, not a direct correlation but at least there is a chance people get a training or have time to read a book. The more is invested into people, the more knowledgeable they are, obviously. The better the average quality of the employees, the better the overall efficiency of the organization: smarter people make less mistakes and have a higher productivity. And, of course, the better the employee efficiency the more spare resources the organization has.

Bear in mind that the cycle also works the other way around. The less resources you have (every waking hour is spent keeping the company afloat) the less you have to invest into people (you just hire the first person remotely capable of doing the job, pay them the least you can and have them work around the clock). The lower the productivity of the team and the less resources you have…

So could it be, that in Estonia, there are two kinds of IT companies? Ones for whom the cycle goes in one direction and those for whom it goes in the other? It seems plausible. What is curious is that it does not take that much. Ten years ago a modest difference in managerial skill could have positioned one company slightly above the line making some resources available and another one slightly below the line. But ten years later, given the relative stability of leadership, one cycle has made one organization dominate the market and has had the other one either sink in oblivion or barely be able to make the ends meet.

The sad part is that it is very hard to make the cycle go the other way around once it has wound itself down. You’d need a lot of managerial skill, you’d need a lot of dedicated work and you’d need a lot of money to invest to make the spare resources available. Why would anyone do this when they can spend the same money to hire more people to a functional company on a positive cycle?

The reason this model is interesting is that it explains some effects that are pretty unpleasant for the entire society. Firstly, in a small economy and in a small market like Estonia, the 10% can only be one or two companies. Which effectively creates a monopoly and that is not good. Secondly, whom do the companies in the 90% hire? The people willing to work long hours for a relatively low salary? The students. The statistics shows that effectively none of them graduate. None. You can draw your own model of how this affectes the sustainability of the academic system and how much public money is wasted on an unfinished education.

There you go. A hypothesis on Estonian IT market in-directly supported by actual research from auto industry. Although its just a theory, its applicability and consequences might be worth your thought.

See you next week and enjoy System Dynamics in action!

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