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Jul 06 2012
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On mice and success

So this is it. After years of hard work, there is finally some success to speak of. That’s a good thing, right? Well, yes. And no.

Let me elaborate. When you are successful, two things happen. The first is money. The more successful you are the more money there is. Actually, to be more generic, you get more “resources”. For an artist this might mean more freedom to do whatever they want, for a scientist this might mean recognition from peers and for a businessman this usually means money. The second thing that will happen that, all of a sudden, you are sure of your direction. Or more sure in any case. A startup is just a bunch of people with a crazy idea until the idea actually attracts users in the real marketplace. There is no way to be sure an idea will work until it has, well, actually worked.

You’ve got money, you’ve got a confirmation that your initial idea was good, what do you do? Let me tell you, based on personal experience, very few people go “Right, that’s that, then. I did this thing and it was good but now I’m going to take a risk by doing something completely different”. People will retire, oh yes, but majority of organizations and individuals tend to invest into the idea that brought them success. It makes sense, right? You’ve found a goose that lays golden eggs. Take the money from some of them eggs, hire a bunch of guys and go catch a herd of the suckers! You’ve got the recipe of a dish everybody likes, of course you are going to use their cheering as motivation to cook it again!

A well-funded and well-motivated individual focusing on doing something great they have already succeeded at once? Even if they were just lucky the first time around, chances of failure are slim under the circumstances. More success is unavoidable.

The entire model looks like so:

Success leads to money and confirmation which in turn drive down the likelihood of deviating from the set course which brings about focus and more success.

Brilliant, right? Kodak did this for 70+ years. Microsoft has been on this cycle for ages. IBM. GE.

No, not really. What this means is that the flexibility of an organization goes down. In the beginning, yes, its just the desire to choose a different path that goes away but soon the ability gets removed as well. After posting record profits for 10 consecutive quarters, your shareholders will not look kindly upon a CEO that proposes a radical change in direction. At some point an organization becomes so committed and invested in that one direction, even deliberation of change becomes hard. When everyone around is a chemist (or a software engineer, for that matter), who is there to experiment with hardware? Amazingly, Kodak actually managed to launch a digital imaging product as early as 1991 but the spectacular lack of success in the later years confirms the conclusion. The more successful you are the less likely you are to consider a change of direction.

Loss of flexibility is not a bad thing. Just like flying is not a bad thing. Its the hitting the earth part that gets you. When markets change and you don’t, things are not looking up.

Then there is the loss of variety.

Let’s think of Darwin, for a moment. He stipulated survival of the fittest. But what if everyone is equally fit? If you have a herd of mice, only the ones most successful in the given environment will survive and produce offspring. Should the conditions change, the definition of success changes, a different set of traits becomes desirable and the population survives. Given a bunch of genetically identical mice, however (let’s assume no random mutations), all the mice and their offspring are equal. If the environment is favorable, they’ll proliferate. But when the conditions change, they are doomed as there is no alternative set of traits to take over. There is none fitter to survive. The same goes with companies:

Single-mindedness in direction drives down variety in product portfolio (the “+”, as always, does not denote a positive influence but the fact that the variables move in the same direction). That reduces the intensity of evolutionary processes (our mice become more similar). This in turn reduces adaptability and eventually reduces chances of success.

What can we learn from this? Firstly, I think, it is not realistic to expect companies not to follow the cycle described earlier. People are not built that way. They will inevitably continue doing more of what makes them successful. Secondly, it seems that balancing the two cycles each other is a viable option. If the balancing loop kicks in when the success has already worn thin because of management failures or market issues, the company is done for. But if you manage to make sure both loops happen more or less simultaneously, survival is possible. Think of IBM. It was hit hard by changes in how computers are made but still had enough resources left to kick the cycle going backwards (lack of success reduces confirmation of direction which diversifies the portfolio) and to re-invent themselves. Few enough companies have pulled this off to call it a miracle of management.

Sidenote: there is interesting research on the topic of business survival. It seems that the pace of change is accelerating and companies die faster as they are no longer capable of adaptability the environment assumes. There is a good book about the topic as well.

Will your company be the next IBM or Kodak? Think about it while you enjoy System Dynamics in action!

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Jun 22 2012
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Trust issues

Today, let’s talk about trust.

One of the things that goes on in large organizations (yes, I’m building up to something) is these Systems. You know. Systems for Planning, Approval, Control And Reimbursement for Travel, Creation of Vendors, Buying Doughnuts, Going To Vacations, Politely Scratching Your Arse. You know. Yes, of course, when you have 3000 people operating in a complex legal environment, it makes sense to have a piece of software to track their vacation days. Of course it makes sense to have a place where these folks collectively clocking millions of air miles have a place to file their expenses. Sure. But this does not explain the sheer monstrosity and rigidity these Systems tend to develop to. Their sole purpose in the end seems to make the life harder for their users, not easier. How come?

One of strong reasons for this is trust.

Let’s take an example. At a hypothetical organization, there is a simple travel policy. When somebody needs to travel, they drop an e-mail to the travel assistant and cc their direct boss. The former organizes hotels, tickets and what not and the latter approves (denial is a huge exception) the trip. Simple, straightforward and flexible: everybody sees that a guy approaching 7 feet would need to fly business to US west coast and that you should stick around for at least a week while you are there. As the company grows, the system grows as well as two assistants can handle a sizable amount of travel requests and people don’t fly that often. Inevitably, however, there will be this one guy who discovers the pleasures of flying business and the sweet life of California. So he goes there often. Like on a monthly basis. From Europe. Whether he actually needs to or not is besides the point. The point is that the travel budget inevitably goes “clonk” and the person responsible for it goes “Yikes!”. As going “Yikes!” is an unpleasant experience and, after all, she is responsible for the budget. So a rule is established that business travel is only permissible for people at a certain pay grade and/or for durations of x hours and/or specifically approved by the boss.

These rules being in place, people go “Oh, these are the rules? I did not know it was actually OK to fly business!”. And they do because convincing your nice boss is not difficult. You know, there will be a meeting the day I land and I need to look the part. And I am a manager after all, it is allowed to fly business!

This, of course, leads to more budget being spent and more rules put in place. Which in turn leads to people discovering inventive ways to get around the restrictions. For example, it turns out, that if you wait until the very last minute to book your trip, often business class seats are all that are there and you absolutely need to make that meeting, don’t you?

In the end, the list of rules become too complex to follow by any single person and software is put in place. A System. In a short while, the travel costs soar, people swear and curse as it is impossible to plan travel the way they need to and somebody gets paid handsomely to maintain the entire machine.

For the general case, the cycle looks like so:

Decline in trust in people leads to increase in control mechanisms (this is indicated by the “-” sign) which in turn lead to reliance in control mechanisms (“I’m good as long as I’m within the rules…”) which decreases reliance on simple ethics (“… regardless of whether it feels right or not”). The latter, of course, leads to increase unethical behavior that drives down trust in people.

In the end, a huge amount of trust is destroyed and good honest people are taught to weasel and scam. I don’t need to tell you what this does to the intellectual capital of the organization. In the organizational culture framework developed by Desmond Graves and Roger Harrison, this also means the organization drifts towards more centralization and more formalization. Regardless of whether this is a culture that supports the current strategy or not. Which is not good.

What can be done, then? Resist. The fact that somebody has a different understanding of the common value set should not mean that everybody needs to suffer. Just give the offending person a good round of managerial spanking to pull them back in line. Also, it helps to remind people of the shared values. Upon every opportunity. Really. Often. But not too often. The point is that it needs to be absolutely not OK for people to waste company resources. It must be an offense that leads to people not talking to you. Or talking to you about that it is not OK to do stuff you did. Loss of respect. That sort of thing. Simple managerial skill and talking to people goes a long way!

Hope this got you thinking about what goes on in your organization. Have a good weekend and enjoy System Dynamics in action!

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Jun 15 2012
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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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