Monthly Archive for June, 2008

Organisations need to be a size 12

Last week at the top 100 web applications launch, Ross Dawson made a brief remark that I feel should not go ignored. He said that technology aside, companies like the ones in the top 100 list have a huge impact on our society; They are redefining our society as a whole, with new ways of doing things such as how organisations are structured. On that same panel Duncan Riley was crying out foul about the problem with Australia is that venture capital money is nothing like how it is in the US (which is offered for riskier ideas, at a quicker turnaround, and with bigger amounts) – but a retort made by Phil Morle brought this common whine in the Australian industry to a different level: “You don’t need to be a billion dollar company to be successful.”

In the context of the discussion, this can be taken in several ways about the state of the venture capital industry and its interaction with Internet start-ups, but take a step out of that mindset and instead explore the opportunity with the point made by Ross. Organisations, like incorporated companies of today, are something we should and can re-examine because a billion dollar company is not what the goal should be. Why? I’ll show you.

(Dis)economies of scale

Economic theory proclaims that the larger a company, the better. In the literature, this is regarded as ‘economies of scale ‘ whereby things become cheaper the bigger firms become. For example, the cost of capital is cheaper for a large a company (for those without a financial background, that simply means things like the interest on a bank loan or how much a shareholder expects as a return in dividends or share-price growth) . Operating costs can also fall, which if you think about how retailers will offer discounts on bulk buys – if you are a bigger company, you buy more and therefore get those deals (as well as have influence to create those deals).

Even if you don’t have an economics background, I am sure you are familiar with the concept given the ‘growth’ obsession we have in our world: bigger is better or more is more. However something we should be equally aware of is the ugly cousin: diseconomies of scale . Even economic theory recognises that you can get to a stage where you are just too big, where in fact each extra increase is no longer creating economies but the opposite. It’s a bit like trying to carry the shopping from your car boot: some people can carry a half dozen bags to save on multiple trips; however there is a point where they are carrying too many bags, and the extra benefit of less trips back to the car is in fact outweighed by the increased risk of dropping the bags and hurting their back.

We live in a world, where the growth obsession of our world fails to recognise the ugly cousin. We constantly hear about growth, but what goes up must come down – we never seem to hear when a company is “big enough”. Building on Ross’s point, maybe the answer to that is not that we need to identify the point on the continuum where the diseconomies kick in; instead, the new opportunities offered by technology can instead determine how we can organise resources with the least amount of size.

I have a client that is regarded as one of the biggest advertising agencies in the world. I’m sure anyone with experience with the internal operation of ad agencies will recall how damn complicated they can be – which I think has to do with the ego prominence of the creative industries. Everyone needs differentiation in those industries (and so, the one company is in fact a group of multiple agencies like their own mini empire or stand alone business unit). The complex organisational structure that my client operates in, made me think this is what modern day socialism is like: create a large organisation that becomes so complex, that no one understands it – and in the process, have multiple over-lapping jobs filling functions that are not needed. Giving people jobs for the sake of it. As a case in point, one of the guys in the finance department told me how there was a girl that no one knew what she did. One day she resigned, and whilst one would expect strain on a group with one less staff member, what actually happened was that no one noticed any difference in the output of the team!

Little did I realise however that soon afterwards as I performed a internal (non-client facing) role that this advertising agency wasn’t unique with its socialism. Aside from the fact I’ve met people at my firm that I still couldn’t tell you what they do, my experiences had me see another bigger negative about a big organisation that can be summed up in one word: people. And just like how people by nature are complicated, so too will my answer as to why.

My firm employs 140,000+ globally and about 5,000 in Australia. Whilst that is a high number, more remarkable is the fact it’s a professional services firm: we are not talking about 140,000 high school drop outs but a well educated work-force. As a consulting firm, client facing staff like myself can be in a group as big as 200 people (in each city). There are effectively another dozen or so people with exactly the same skill set and job role as me, but we are just resources that go out to different clients, so ultimately we are doing the same work. That side of my job at my firm has seen me experience a very efficient, lean machine with the fundamental economic concept of “allocating scarce resources” brutally evident with the language of how we run our projects (I even just called myself a resource above, not a employee). However it’s that internal role which had me see the supporting ecosystem for client-facing groups like mine and which made me realise the weaknesses of a big company. I couldn’t tell you how many of the 140,000 people are supporting the client-facing professionals, but I would hazard a rough guess to be about 20%. The nice way of saying it, is that in Porter’s model , that 20% are the support staff to help execute our primary revenue-generating activities. Another way of putting it: that 20% are the overhead.

Overhead matters for two reasons in this discussion: it slows down an organisation (ie, decisions) and it can definie its existence (ie, costs). Each of these points are worth looking at separately.

lego men

“Frustration” defined: the sum of all people you need to work with to get something done in the last month

People and decisions

That internal role I discussed above, was about implementing a new technology at my firm. I could write a book about the experience, but suffice to say I can recall one incident which is a perfect reflection of something I learned about getting something done in a big company.

This particular technology allows you to add extensions that can drastically alter the functionality of the product. These ‘plugins’ are remarkably simple – we are talking about uploading a single file that is perhaps 50kb (smaller than a typical word document) – and once uploaded via an admin interface it can be activated for immediate effect (with documentation fully provided on the web). Indeed, in the early days of the technology’s roll out, I would often add new plugins as I felt the need arose, but that quickly ended when I was forced to concede that’s not the right way to do things (as it’s not my job). So therefore, if I ever wanted a plugin, I would have to e-mail the IT guys, who would then review it, test it, and then upload it. This is fair enough because adding a plugin could destabilise the system losing valuable data.

I might also add whenever I sent those e-mails after I no longer installed those plugins myself, I would follow up a few weeks later only to find no one had got around to doing it.

Why the significance of this story? Something that I could do in 30 seconds instead takes weeks because I work in a large organisation. For example:

– write an e-mail asking for the request explaining why: 30 minutes

– following up on the status of my request: 60 minutes of e-mails, listening to justifications for inaction, etc

– escalating to a superior when I felt things were taking too long: 60 minutes of meetings and e-mails, as I stressed the importance of a particular plugin for the productivity of one of our pilot groups

…And that’s in raw effort. That’s not accounting for the time stretch of a few weeks (actualy months in one of the cases).

Even though I had the skills, understanding, access, and ability to do this – I couldn’t due to lines in the sand of what I was allowed to do. And because I couldn’t, what would take 30 seconds for a small start-up using the same product, it would in fact take me hours upon weeks to get another few people whose “job” it is to do it.

This example is more humourous than harmful, but when it comes to large organisations, it’s a perfect characterisation of how things get done. I can assure you, all big companies work like this – by definition, a company that is Sarbanes Oxley compliant has so many segregation of duties it will make you cry with laughter. If I shared with you some other stories, that laughter will turn to shock, when you come to the truth of how companies actually operate.

People and cost

At another one of my clients, they have been undergoing some massive growth over the last few years, with a large organisational re-shuffling as this rapidly growing company took shape. A guy I’ve got to know that’s been there a while (and which I might add, we have no idea what’s he actually does as a job despite his title) told me something quite funny. His observations over the years, is that as a company increases in size, so does a corresponding increase in headcount irrespective of any other factor. By example, he explained that lets say a new person is appointed to lead a new team – they now require a personal assistant. And that new team now needs a dedicated IT guy. And then an HR representative. And the list goes on – rather then a company consolidating on its size (ie, merging job roles to avoid duplicity), what he thinks is that as the company has grown over the years, there is always a corresponding increase in head count regardless without any obvious reason why. It’s almost like a natural externality of growth is headcount.

Payroll is a significant cost for any company which can be up to 80% of the total expense of an organisation (my former headmaster told me that, that being a knowledge intensive organisation: a school). So as my above discussion highlights, I obviously find it amazing how such a significant cost is not controlled because management don’t actually understand what staff they have (and as an aside, current enterprise social networking technologies specifically target the real need of documenting what expertise a company’s staff actually has because no one knows). Whilst this may seem like an important point from a controlling costs point of view, I wish to raise it’s actually a hell of a lot more significant.

Let’s say a company needs one million dollars a week to pay for things like wages, electricity, office rent etc. In other words, a company needs sales of minimum $1million a week purely to stay alive – to pay for the stuff that in theory is meant to help it make money in the first place. This is without regard to meeting profit targets as expected by a company’s owners and other such factors. If that company can’t cover that $1million, it is technically insolvent. Meaning, jail time for the directors and senior management for running such a company.

So if a company has these commitments, it ties their hand. They suddenly become very risk-averse; where experimenting with a better way of doing something may threaten their ability of making that $1 million a week. Couple that with the fact that most organisation’s single biggest expense is payroll, with lists of employees that no one person exactly knows what they are doing, and it makes you wonder. Companies effectively exist to cover their expenses, but if they actually dug down, they’d realise those expenses may not even be something that require. In effect, a company’s entire strategy and positioning in the market (ie, prices that take into account enough to cover overhead) may be dictated by something that might not be needed. A big company exists purely to feed the beast, making decisions that may not be what a company should be making if it didn’t have to worry about its overhead.

small is the new big

Small is the new big

The power of 12

Going back to how technology is enabling us new ways of organising, if the only reason why a company needs to get big so it can get economies of scale, why don’t we flip it? We no longer live in the industrial era where economies of scale are the goal. Instead, the biggest cost we have now is time; if the expertise is in the people we employ, we need to scale operations so as to give them money and working conditions that suit their lives. This isn’t relevant only for professional services, but for any web service – the fact you provide a service and not a manufactured good means its driven by people not metals.

Of course, a company’s strategy can either be cost-competitive (like Dell) or differentiation (like Apple). But this doesn’t negate the fact, that a company should only have costs that directly add value for the customer (which is why we have innovations like activity-based costings which allocate overhead directly to customer activities, but that’s another story). Given that people are the biggest expense in companies now, we need to question, do we really need that many people to provide that value?

I have a rule I follow in life which has grown out of my experience with how things go wrong: complexity. The more factors, the more likely something is going to fail. For example, if you are driving to a wedding – the more traffic lights, the more likely it is going to slow you down. The longer you have to drive, the more likely you will get involved in a car accident. If you need to drop something off on the way to the wedding venue, if you need to make two separate stop-offs, the more likely you will be late as opposed to one drop off (regardless of the distance, but based purely on unforeseen variables). So basically, you need to minimise the ‘nodes’ in the line. Even when things look they are fine, the more variables to success, the increased risk of something happening that will distract that goal.

However, I am willing to concede, you can’t be a minimalist for everything, which is why I am settling for the number 12 – keep your variables, especially people, to a maximum of 12. Aside from religious connotations which makes the number so omnipresent in our lives, the reason I like it is for the same reason it’s the base number of measurement systems used through history , like the still dominant imperial measurement system. That reason being, it’s one of the most versatile numbers. Versatility and agility to the market is what success is now; not economies of scale.

If designing an organisation, you want a core team of 12 people. Those 12 people together, should be able to do everything that needs to be done to meet the needs of the customer. And if the organisation needs to scale for whatever reason, then those 12 people should have specific functions that they own. The number 12 is magical, because for the same reason it was used in the measurement systems in the past, it is so versatile: you can re-group your 12 people into even teams of two, three, four or six. Don’t underestimate the impact team dynamics like that can have – or using a term that Mick Liubinskas says as often as a nun does her Hail Mary: it emphasises the importance of “focus”, in an agile way that can easily adapt to situations. Yet at the same time, you will find with 12 you can get almost anything done if you truly have a talented team. Still don’t get 12?

The number twelve, a highly composite , is the smallest number with four non-trivial factors (2, 3, 4, 6), and the smallest to include as factors all four numbers (1 to 4) within the subitizing range. As a result of this increased factorability of the radix and its divisibility by a wide range of the most elemental numbers (whereas ten has only two non-trivial factors: 2 and 5, with neither 3 nor 4), duodecimal representations fit more easily than decimal ones into many common patterns

Source: Wikipedia

There are dozens and dozens (whoops, was that 12?) of companies that are small but successful . Challenge yourself: does world domination really equate to a 15,000 person workforce? Focus on getting 12 highly capable people, and you will avoid entering the trap of the big companies today that are slaves to their own existence. We have technology today that could design a radically different organisation in 2010 completely foreign to how traditional business operates. If you explore what smart people have said to complement what Ross originally meant by his comment, you now might also realise that those top 100 web applications represent more than meets the eye.

It’s the experience that matters

One of the great things about working on the DataPortability Project, is the exposure to some amazing thinking. Today alone, I stumped on this great piece questioning the point of a music label (via Crosbie Fitch ). Separately, I also came across this interesting bit of thinking about imagining what a world would look like without copyright . Those pieces helped give me more solid arguments with something that’s been on my mind a lot. That being, consumers don’t pay for content’s representation per se. Instead, they pay for the associated experience.

With the digital age, we have seen an uprooting of these traditional industries that operate in the content industries as we have seen with the recording & publishing industries. Our traditional approaches to managing content are being challenged, because we (or rather, they) grew complacent on the technological limitations of content distribution. However, now that we have a new type of technology to distribute content (due to computing, the Internet and the web), we are seeing greater potential for content to be consumed – and it’s also exposing something we have forgotten. The digital revolution is changing business practices but it highlights the true nature of content: it’s about the experience.

To illustrate what I mean, let’s define content as being products like music and books.

When you buy a album, you are not buying it for the physical CD or the plastic casing. The reason you are buying it, is so you can get access to the music. This access entitles you to experiencing the music. On a similar note, when you go to a concert to hear a band, you are not paying to stand in a concert hall. You are paying for the experience of hearing the music live, which also incorporates the associated experience of being a part of a crowd. Both those experiences trigger an emotional reaction – which can be positive or negative, but regardless, is what makes us feel alive. Humans pay for music, because the emotions being triggered by that content, helps them feel like humans.

beyonce

Beyonce’s movements: something you pay to experience

With books, what you are purchasing is knowledge. The paper that you read the novel on, which although can sometimes been done up nicely, isn’t why you buy it. What you are buying, is an experience to consume that knowledge. Some books offer intellectual stimulation; other books offer excitement through a riveting storyline. Regardless, the experience of the book reading is what you are purchasing.

It’s about the experience, stupid
Talking about cultural artifacts like music and books is one thing. But there is no reason why we can’t consider this with information in a generic sense – as the initial data is simply a stage earlier in the value chain . In the context of my personal data, this is something that I have generated. Nothing really special about it. But it becomes special, when a web application can do interesting things with that data. That meaning, when a application can process my data in such a way that gives me a new experience.

For example, there are certain Facebook applications that reveal some interesting information about my friends, by generating insight. Knowing that 58% of my friends are male is useful when I’m considering a party (more beer and Beam; less wine and champagne). Knowing that some of my friends are traveling or living in a certain country, is useful because it gives me awareness that I can meet up with them. By Facebook allowing applications to process my data in the context of my friends, the information they can generate is a lot more valuable if Facebook locked this down. The experience of having access to this information, is not as emotionally driven as a Jane Austen book; but the experience of insight is still something I get out of it.

The ability to offer a unique experience to a consumer, is what is key to any information-based products. Triggering emotions is a powerful thing about humanity, and a consumer when consuming information is looking to get an experience which in reality can only be captured in their memory. Of course, content in the form of entertainment is more about the emotion, whilst news is more about the access , but that doesn’t take away from the inherent characteristics of information.

Recognising that information-products are an experience, should give a better understanding about what we do with them. For example, writing this blog I don’t get any monetary benefit from it. However, the more people that want to copy my "original work", the better. Whilst that may sound contrary to smart business sense, it’s because I recognise the benefit I get from blogging is reputation (well one of them at least). And despite the fact people can ‘steal’ my content, doesn’t mean they can steal my brain. As a content creator, I am being rewarded with the associated benefits of a good reputation, despite the fact I cannot assert ownership over my words.

permission

"If you put that picture on the Internet I’ll call my lawyer"

So why do we obsess over control?
If you are a web application, a book author, or a musician – the way you make money isn’t through the information you generate. Instead, what you are being rewarded with is with a brand; a relationship with your consumer of trust; or just simply attention. Open source developers can appear to be like some hippies helping the world. But look closely at how they make a living, and it’s on the associated expertise that has been recognised onto them through their brand, which allows them to charge for consulting.

If you operate in the information industry, the way you make money is on the experience you create for the consumer – and by generating that experience, you can then create a monetary stream off it. For example, a band that no one knows about has no demand for their music. A cult following, because people get obsessed over their songs played freely everywhere, allows them to make buckets of money on merchandise and concerts. Twitter is a web application, that when I first heard about it, I would never have used it. Now that I use it, I am willing to pay for certain benefits that make my experience more enjoyable (ie, profiling of tweets, etc). Twitter has an opportunity to make money because I value the experience they offer me, and I’m willing to pay to make it a better experience.

In the information business, experience is ultimately your product. Ignore that, and you will be making decisions that at best, will amount to a huge amount of opportunity cost. Here’s hoping that as we move forward with DataPortability, the thinking of businesses can change. Locking down data is not how you make money; it’s the compelling experience you offer your consumers that is the true source of competitive advantage and ultimately, revenues.