The Hard Thing About Hard Things, page 22
SOLVING THE ACCOUNTABILITY VS. CREATIVITY PARADOX
A software engineer identifies a weakness in your current product architecture that will significantly impair its ability to scale down the road. She figures out that she’ll have to slip the product schedule three months to fix it. Everybody agrees that three months is an acceptable slip to correct the problem. The schedule actually slips nine months, but she was right about the problem. Do you reward her for her creativity and courage or hold her accountable for the slip?
If you become a prosecuting attorney and hold her to the letter of the law on her commitments, you will almost certainly discourage her and everybody else from taking important risks in the future. If you take this stance consistently, don’t be surprised in the future if your people don’t have time to solve hard problems because they will be far too busy covering their butts.
On the other hand, if you don’t hold her accountable for her commitment, then the people who actually do the work to meet their commitments might feel like idiots. Why did I stay up all night making the deadline if the CEO rewards the person who missed her schedule by six months? If your hardest working, most productive employees feel like chumps and you are looking for the culprit, look in the mirror. You have failed to hold people accountable for their actions. Welcome to the Accountability vs. Creativity Paradox.
As we look to solve it, let’s start with the most basic assumption. Do you assume that your employees are by and large creative, intelligent, and motivated? Or do you assume that they are lazy, conniving, and counting the minutes to quitting time? If you believe the latter, then you might as well just give up on creativity and innovation in your organization, because you will not get it. It’s better to believe the former and assume that people have good intentions unless they prove otherwise. Still, you must hold people accountable to avoid the chump factor. How do you think about that?
Let’s look at accountability across the following dimensions: promises, results, and effort.
ACCOUNTABILITY FOR EFFORT
This is the easy one. To be a world-class company, you need world-class effort. If somebody isn’t giving it to you, they must be checked.
ACCOUNTABILITY FOR PROMISES
A lot of good-running organizations have statements like “make a commitment, keep a commitment.” It’s true that if you sign up for something and you don’t do it, you let everyone in the organization down. This type of letdown can be contagious. Holding people accountable for their promises is a critical factor in getting things done. This changes as the degree of difficulty in fulfilling the promise increases. Promising to complete a piece of marketing collateral or send an email is different from promising to meet an engineering schedule that involves solving some fundamentally hard computer science problem. You must hold people accountable for the former; the latter is more complicated and relates to results.
ACCOUNTABILITY FOR RESULTS
This is where things get complicated. If someone fails to deliver the result she promised, as in the opening story, must you hold her accountable? Should you hold her accountable? The answer is that it depends. It depends upon:
Seniority of the employee You should expect experienced people to be able to forecast their results more accurately than junior people.
Degree of difficulty Some things are just plain hard. Making your sales number when your product is inferior to the competition and a recession hits midquarter is hard. Building a platform that automatically and efficiently takes serial programs and parallelizes them, so that they can scale out, is hard. It’s hard to make a good prediction and hard to meet that prediction. When deciding the consequence of missing a result, you must take into account the degree of difficulty.
Amount of stupid risk While you don’t want to punish people for taking good risks, not all risks are good. While there is no reward without risk, there is certainly risk with little or no chance of corresponding reward. Drinking a bottle of Jack Daniel’s then getting behind the wheel of a car is plenty risky, but there’s not much reward if you succeed. If someone missed a result, did she take obviously stupid risks that she just neglected to consider, or were they excellent risks that just did not pan out?
REVISITING THE OPENING PROBLEM
So looking back at the opening problem, here are some things to consider:
1. How senior is she? If she’s your chief architect, you’ll need her to get better at scoping her work or she’s going to trash the organization. If she is more junior, this should be more a teaching moment than a scolding moment.
2. How hard was it? If it was a miracle that you ever made that piece of crap scale, then you shouldn’t yell at her. In fact, you should thank her. If it was a relatively trivial project that just took too long, then you need to address that.
3. Was the original risk the right one to take? Would the product really have run out of scale in the short-to-medium term? If the answer is yes, then whether it took three months or nine months, it was the right risk to take and if faced with the same situation again, you probably should not change any of your actions. You shouldn’t be wringing your hands about that.
FINAL POINT
In the technology business, you rarely know everything up front. The difference between being mediocre and magical is often the difference between letting people take creative risk and holding them too tightly accountable. Accountability is important, but it’s not the only thing that’s important.
THE FREAKY FRIDAY MANAGEMENT TECHNIQUE
Many years ago, I encountered a particularly tricky management situation. Two excellent teams in the company, Customer Support and Sales Engineering, went to war with each other. The sales engineers escalated a series of blistering complaints arguing that the Customer Support team did not respond with urgency, refused to fix issues in the product, and generally inhibited sales and customer satisfaction. Meanwhile, the Customer Support group claimed that the sales engineers submitted bugs without qualification, did not listen to valid suggested fixes, and were alarmists who assigned every issue the top priority. Beyond the actual complaints, the teams genuinely did not like each other. To make matters worse, these groups had to work together constantly in order for the company to function. Both teams boasted superb personnel and outstanding managers, so there was nobody to fire or demote. I could not figure out what to do.
Around this time, I miraculously happened to watch the motion picture classic Freaky Friday, starring the underrated Barbara Harris and the incomparable Jodie Foster. (There is also a high-quality remake starring Jamie Lee Curtis and the troubled but talented Lindsay Lohan.) In the film, mother and daughter grow completely frustrated with each other’s lack of understanding and wish that they could switch places and, through the magic of film, they do.
Through the course of the movie, by being inside each other’s bodies, both characters develop an understanding of the challenges that the other faces. As a result, the two become great friends when they switch back. After watching both the original and the remake, I knew that I had found the answer: I would employ a Freaky Friday management technique.
The very next day I informed the head of Sales Engineering and the head of Customer Support that they would be switching jobs. I explained that, like Jodie Foster and Barbara Harris, they would keep their minds, but get new bodies. Permanently. Their initial reactions were not unlike the remake where Lindsay Lohan and Jamie Lee Curtis both scream in horror.
However, after just one week walking in the other’s moccasins, both executives quickly diagnosed the core issues causing the conflict. They then swiftly acted to implement a simple set of processes that cleared up the combat and got the teams working harmoniously. From that day to the day we sold the company, the Sales Engineering and Customer Support organizations worked better together than any other major groups in the company—all thanks to Freaky Friday, perhaps the most insightful management training film ever made.
STAYING GREAT
As CEO, you know that you cannot build a world-class company unless you maintain a world-class team. But how do you know if an executive is world-class? Beyond that, if she was world-class when you hired her, will she stay world-class? If she doesn’t, will she become world-class again?
These are complex questions and are made more complex by the courting process. Every CEO sets out to hire the very best person in the world and then recruits aggressively to get him. If he says yes, she inevitably thinks she’s hit the jackpot. If I had a tattoo for every time I heard a CEO claim that she’d just hired “the best VP in the industry,” I’d be Lil Wayne.
So we begin with a strong bias that whoever we hired must be world-class even before performing one day of work. To make matters worse, executives who start off world-class often deteriorate over time. If you are a sports fan, you know that world-class athletes don’t stay world-class for long. One day you are Terrell Owens and the next day you are Terrell Owens. While executives don’t age nearly as fast as athletes do, companies, markets, and technologies change a thousand times faster than the game of football. As a result, the executive who is spectacular in this year’s hundred-person startup may be washed-up in next year’s version when the company employs four hundred people and has $100 million in revenue.
THE STANDARD
The first thing to understand is that just because somebody interviewed well and reference-checked great, that does not mean she will perform superbly in your company. There are two kinds of cultures in this world: cultures where what you do matters and cultures where all that matters is who you are. You can be the former or you can suck.
You must hold your people to a high standard, but what is that standard? I discussed this in the section “Old People.” In addition, keep the following in mind:
You did not know everything when you hired her. While it feels awkward, it is perfectly reasonable to change and raise your standards as you learn more about what’s needed and what’s competitive in your industry.
You must get leverage. Early on, it’s natural to spend a great deal of time integrating and orienting an executive. However, if you find yourself as busy as you were with that function before you hired or promoted the executive, then she is below standard.
As CEO, you can do very little employee development. One of the most depressing lessons of my career when I became CEO was that I could not develop the people who reported to me. The demands of the job made it such that the people who reported to me had to be 99 percent ready to perform. Unlike when I ran a function or was a general manager, there was no time to develop raw talent. That can and must be done elsewhere in the company, but not at the executive level. If someone needs lots of training, she is below standard.
It is possible to take the standard setting too far. As I discussed in the section “The Scale Anticipation Fallacy,” it’s neither necessary nor a good idea to evaluate an executive based on what her job will be two years from now. You can cross that bridge when you come to it. Evaluate her on how she performs right here and right now.
ON EXPECTATIONS AND LOYALTY
If you have a great and loyal executive, how do you communicate all this? How do you tell her that despite the massive effort and great job she is doing today, you might fire her next year if she doesn’t keep up with the changes in the business?
When I used to review executives, I would tell them, “You are doing a great job at your current job, but the plan says that we will have twice as many employees next year as we have right now. Therefore, you will have a new and very different job and I will have to reevaluate you on the basis of that job. If it makes you feel better, that rule goes for everyone on the team, including me.”
In providing this kind of direction, it’s important to point out to the executive that when the company doubles in size, she has a new job. This means that doing things that made her successful in her old job will not necessarily translate to success in the new job. In fact, the number-one way that executives fail is by continuing to do their old job rather than moving on to their new job.
But, what about being loyal to the team that got you here? If your current executive team helped you grow your company tenfold, how can you dismiss them when they fall behind in running the behemoth they created? The answer is that your loyalty must go to your employees—the people who report to your executives. Your engineers, marketing people, salespeople, and finance and HR people who are doing the work. You owe them a world-class management team. That’s the priority.
SHOULD YOU SELL YOUR COMPANY?
One of the most difficult decisions that a CEO ever makes is whether to sell her company. Logically, determining whether selling a company will be better in the long term than continuing to run it stand-alone involves a huge number of factors, most of which are speculative or unknown. And if you are the founder, the logical part is the easy part.
The task would be far simpler if there were no emotion involved. But selling your company is always emotional and deeply personal.
TYPES OF ACQUISITIONS
For the purpose of this discussion, it is useful to think about technology acquisitions in three categories:
1. Talent and/or technology, when a company is acquired purely for its technology and/or its people. These kinds of deals typically range between $5 million and $50 million.
2. Product, when a company is acquired for its product, but not its business. The acquirer plans to sell the product roughly as it is, but will do so primarily with its own sales and marketing capability. These kinds of deals typically range between $25 million and $250 million.
3. Business, when a company is acquired for its actual business (revenue and earnings). The acquirer values the entire operation (product, sales, and marketing), not just the people, technology, or products. These deals are typically valued (at least in part) by their financial metrics and can be extremely large (such as Microsoft’s $30 billion–plus offer for Yahoo).
My take on the subject is most applicable to business acquisitions, with some relevance to product acquisitions, and will be fairly useless if you are selling people and/or technology.
THE LOGICAL
When analyzing whether you should sell your company, a good basic rule of thumb is if (a) you are very early on in a very large market and (b) you have a good chance of being number one in that market, then you should remain stand-alone. The reason is that nobody will be able to afford to pay what you are worth, because nobody can give you that much forward credit. For an easy-to-understand example, consider Google. When they were very early, they reportedly received multiple acquisition offers for more than $1 billion. These were considered very rich offers at the time and they amounted to a gigantic multiple. However, given the size of the ultimate market, it did not make sense for Google to sell. In fact, it didn’t make sense for Google to sell to any suitor at any price that the buyer could have paid. Why? Because the market that Google was pursuing was actually bigger than the markets that all of the potential buyers owned and Google had built a nearly invincible product lead that enabled them to be number one.
Contrast this situation with Pointcast. Pointcast was one of the first Internet applications to catch fire. They were the buzz of Silicon Valley and the technology industry in general. They received billion-dollar acquisition offers that they passed on. Then, due to flaws in their product architecture, their customers started to turn off their application. Overnight, their market collapsed and never returned. They were ultimately sold for a relatively tiny amount.
So, the judgment that you have to make is (a) is this market really much bigger (more than an order of magnitude) than has been exploited to date? and (b) are we going to be number one? If the answer to either (a) or (b) is no, then you should consider selling. If the answers to both are yes, then selling would mean selling yourself and your employees short.
Unfortunately, these questions are not as simple to answer as I’ve made them out to be. In order to get the answer right, you also have to answer the question “What is the market, really, and who are the competitors going to be?” Was Google in the search market or the portal market? In retrospect, they were in the search market, but most people thought they were in the portal market at the time. Yahoo was a tough competitor in the portal market, but not so much in the search market. If Google had really been in the portal market, then selling might have been a good idea. Pointcast thought that their market was much larger than it turned out to be. Interestingly, Pointcast’s own product execution (or lack thereof) caused their market to shrink.
Let’s look at the case of Opsware. Why did I sell Opsware? Another good question is why didn’t I sell Opsware until I did?
At Opsware, we started in the server automation market. When we received our first inquiries and offers for the server automation company, we had fewer than fifty customers. I believed that there were at least ten thousand target customers and that we had a decent shot at being number one. In addition, although I knew the market would be redefined, I thought that we could expand to networks and storage (data center automation) faster than the competition and win that market as well. Therefore, assuming 30 percent market share, somebody would have had to pay sixty times what we were worth in forward credit to buy out our potential. You won’t be surprised to find that nobody was willing to pay that.
Once we grew to several hundred customers and expanded into data center automation, we were still number one and were more valuable stand-alone than any of the prior acquisition offers. At that point both Opsware and our main competitor, BladeLogic, had developed into full-fledged companies (worldwide sales forces, built-out professional services, etc.). This was significant, because it meant that a large company could buy one of us and potentially execute successfully (big enterprise companies can’t generally succeed with small acquisitions, because too much of the important intellectual property is the sales methodology, and big companies can’t build that).
