I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Wednesday, August 31, 2022

What Does God Need With a Starship?

Andy Kessler wrote in the WSJ this month about the value of being a contrarian. Contrarians have a reputation for being cynics or curmudgeons because they’re out of step with mainstream thinking. And it’s true that being contrarian solely for the purpose of resisting or denying change is generally not helpful. But contrarian thinking can bring a lot of constructive insight.

For quite a few years now, I’ve written about the value of activist investing, which at its best challenges institutional thinking - and, when necessary, institutional reporting - for the benefit of those invested in the business outcome. Activist investors are contrarian thinkers. An effective activist investor sources their own ground truths, creates their own hypotheses from the data, and advocates for those alternative hypotheses. This is true for public company investors and captive IT investors alike. The activist investor in a public company visits company installations, talks to customers, analyzes the footnotes of SEC filings, and develops hypotheses that management may not see or may be choosing not to report. The activist investor in a captive IT investment does the same things: interviews members of the team, reviews code, and analyzes status reports to develop alternative interpretations about the actual progress of and threats to a program or product. The formula is the same: scrutinize the data you’re provided, get some of your own, recontextualize it, and draw your own conclusions. This is critical thinking technique as we were all taught in high school.

But every silver lining has a cloud. The activist isn’t always right. David Einhorn raised questions derived from ground truths and got it right about Allied Capital, St. Joe Company, and Lehman Brothers, but he got it wrong about Keurig. The value of Mr. Einhorn’s contrarian thinking wasn’t in its accuracy as much as it was in offering a fact-based challenge to management’s narrative. The activist articulates a narrative that reframes a situation and draws attention to a risk or deficiency that others don’t see or that management may be obfuscating. The thought exercise is helpful for all investors to re-evaluate what they believe their risk exposure in that specific position to really be.

And it’s important to note that, like anything else, investor activism can be a charade. The public company investor may simply be generating doubt about a company to bolster a short position that can be quickly liquidated. Similarly, the captive IT steering committee member who is also a vendor rep may simply be fostering fear, uncertainty and doubt to drive more services revenue from an existing customer.

Perhaps most important of all, the activist investor isn’t very popular. Contrarian thinking takes us out of our comfort zone, makes us consider difficult possibilities, forces us to have data to support the thing that we desperately want to be true, and reminds us that we’re not as smart as we want to believe that we are. But more banally, challenging the board and management meeting-in and meeting-out wears on people. Contrarian thinkers are irritating. 'tis best that you enjoy dining alone.

Being a contrarian is not the easiest path to take. John Kay once wrote that regulators, if they are not to be co-opted by the regulated, require "...both an abrasive personality and considerable intellectual curiosity to do the job." Contrarian thinking at its best.

Because sometimes, when everybody is too mesmerized or beat down or overwhelmed, or simply can't be bothered, for the sake of everybody concerned, somebody has to ask: “what does God need with a starship?

Sunday, July 31, 2022


One of the benefits of being an agile organization is the elimination of IT shadows: the functions and activities that crop up in response to the inadequacy of the plans, competency and capacity of captive IT.

IT shadows appear in a lot of different forms. There are shadow IT teams of developers or data engineers that spring up in areas like operations or marketing because the captive IT function is slow, if not outright incapable, of responding to internal customer demand. There are also shadow activities of large software delivery programs. The phases that get added long after delivery starts and well before code enters production because integrating the code produced by dependent teams working independently is far more problematic than anticipated. The extended testing phases - or more accurately, testing phases that extend far longer than anticipated - because of poor functional and technical quality that goes undiscovered during development. The scope taken out of the 1.0 release resulting in additional (and originally unplanned) releases to deliver the initially promised scope - releases that only offer the promise to deliver in the future what was promised in the past, at the cost of innovation in the present.

None of these functions and activities are planned and accounted for before the fact; they manifest themselves as expense bloat on the income statement as no-alternative, business-as-usual management decisions.

The historical response of captive IT to these problems was to pursue greater control: double down on big up-front design to better anticipate what might go wrong so as to prevent problems from emerging in the first place, supplemented with oppressive QA regimes to contain the problems if they did. Unfortunately, all the planning in the world can’t compensate for poor inter-team collaboration, just as all the testing in the world can’t inspect quality into the product.

Agile practices addressed these failures through teams able to solve for end-to-end user needs. The results, as measured and reported by Standish, Forrester, and others, were as consistent as they were compelling: Agile development resulted in far fewer delays, cost overruns, quality problems and investment cancellations than their waterfall counterparts. With enough success stories and experienced practitioners to go round, it’s no surprise that so many captive IT functions embraced Agile.

But scale posed a challenge. The Agile practices that worked so well in small to midsize programs needed to support very large programs and large enterprise functions. How scale is addressed makes a critical distinction between the truly agile and those that are just trying to be Agile.

Many in the agile community solved for scale by applying the implicit agile value system, incorporating things like autonomous organizations (devolved authority), platforms (extending the product concept into internally-facing product capabilities) and weak ownership of code (removing barriers of code ownership). Unfortunately, all too many went down the path of fusing Agile with Waterfall, assimilating constructive Agile practices like unit testing and continuous build while simultaneously corrupting other practices like Stories (which become technical tasks under another name) and Iterations (which become increments of delivery, not iterations of evolving capability), ultimately subordinating everything under an oppressive regime pursuing adherence to a plan. Yes, oppressive: there are all too many self-proclaimed "Agile product organizations" where the communication flows point in one direction - left to right. These structures don’t just ignore feedback loops, they are designed to repress feedback.

If you’ve ever worked in or even just advocated for the agile organization, this compromise is unconscionable, as agile is fundamentally the pursuit of excellence - in engineering, analysis, quality, and management. Once Agile is hybridized into waterfall, the expectation for Agile isn’t excellence in engineering and management and the like; it is instead a means of increasing the allegenice of both manager and engineer to the plan. Iteration plans are commitments; unit tests are guarantees of quality.

Thus compromised, the outcomes are largely the same as they ever were: shadow activities and functions sprout up to compensate for IT’s shortcomings. The captive IT might be Agile, but it isn’t agile, as evidenced by the length of the shadows they cast throughout the organization.

Thursday, June 30, 2022

The New New New Normal

My blogs in recent months have focused on macroeconomic factors affecting tech, primarily inflation and interest rates and the things driving them: increased labor power, supply shortages, expansion of M2, and unabated demand. The gist of my arguments has been that although the long-term trend still favors tech (tech can reduce energy intensity as a hedge against energy inflation, and reduce labor intensity as a hedge against labor inflation, and so forth), there is no compelling investment thesis at this time, because we’re in a state of both global and local socio-economic transition and there is simply too much uncertainty. Five year return horizons are academic exercises in wishful thinking. Do you know any business leader who, five years ago, predicted with any degree of accuracy the economic conditions we face today and the conditions we experienced on the way to where we are today?

It is interesting how the nature of expected lasting economic change has itself changed in the last 2+ years.

A little over two years ago, there was the initial COVID-induced shock: what does a global pandemic mean to market economies? That was answered quickly, as the wild frenzy of adaptation made clear that supply in most parts of the economy would find a way to adapt, and demand wasn’t abating. Tech especially benefited as it was the enabler of this adaptation. Valuations ran wild as demand and supply quickly recovered from their initial seizures. Tech investments quickly became clear-cut winners.

As events of the pandemic unfolded, the question then became, "how will economies be permanently changed as a result of changes in business, consumer, labor, capital and government behavior?" The longer COVID policies remained in place, the more permanent the adaptations in response to them would become. For example, why live in geographic proximity to a career when one can pursue a career while living in geographic proximity to higher quality of life? Many asked this and similar questions, but not all did; among those that did, not all answered in the same way. This created an inevitable friction in the workforce. Not a year into the pandemic and the battle lines over labor policies were already being drawn between those with an economic interest in the status quo ante calling for a return to office (e.g., large banks) and those looking to benefit from improved access to labor and lower cost base embracing a permanent state of location independence (e.g., AirBNB). Similar fault lines appeared in all sorts of economic activity: how people shop (brick-and-mortar versus online), how people consume first-run entertainment (theaters versus streaming), how people vacation, and on and on. Tech stood to benefit from both lasting pandemic-initiated change (as the enabler of the new) and the friction between the new and reversion to pre-pandemic norms (as the enabler of compromise - that is, hybrid - solutions). Tech investments again were winners, even if the landscape was a bit more polarized and muddled.

Just as the battles to define the soon-to-be-post-COVID normal were gearing up for consumers and businesses and investors, they were eclipsed by more significant changes that make economic calculus impossible.

First, inflation is running amok in the US for the first time in decades. While tame by historic US and global standards, voters in the US have become accustomed to low inflation. High inflation creates political impetus to respond. Policy responses to inflation have not historically been benign: by way of example, the US only brought runaway 1970s inflation (in fact, it was stagflation - high unemployment and high inflation) under control with a hard economic landing in the form of a series of recessions in the late 1970s and early 1980s. With the most recent interest rate hike, recession expectations have increased among economists and business leaders. Mild or severe is beside the point: twelve months ago, while much of the economy recovered and some sectors even prospered, recession was not seen as a near-term threat. It is now. Go-go tech companies have particularly felt the brunt of this, as their investor’s mantra has done an abrupt volte face from "grow" to "conserve cash". Tech went from unquestioned winner to loser just on the merits of policy responses to inflation alone.

Second, war is raging in Europe, and that war has global economic consequences. Both Ukraine and Russia are mass exporters of raw materials such as agricultural products and energy. A number of nations across the globe have prospered in no small part because of their ability to import cheap energy and cheap food, allowing them to concentrate on development of exporting industries of expensive engineering services and expensive manufactured products. Those nations have also had the luxury of time to chart a public policy course for evolving their economies toward things like renewable energy sources without disrupting major sectors of the population with things like unemployment, while domestic social policy has benefited from a "peace dividend" of needing to spend only minimally on defense. The prosperity of many of those countries is now under threat as war forces a re-sourcing of food and energy suppliers and threatens deprioritization of social policies. Worse still, input cost changes threaten the competitiveness of their industrial champions, particularly vis-a-vis companies in nations that can continue to do business with an aggressor state in Europe. The bottom line is, the economic parameters that we’ve taken for granted for decades can no longer factor into return-on-investment models. Tech as an optimizer and enabler of a better future is of secondary importance when countries are scrambling to figure out how to make sure there are abundant, cheap resources for people and production.

Tech went from darling to dreadful rather quickly.

It’s worth bearing in mind that these recent macro pressures could abate, quite suddenly. Recovery from a real economy recession tends to be far faster than recovery from a recession in the financial economy. Such a recovery - notwithstanding the possibility of secular stagnation - would bring the economic conversation back to growth in short order. Additionally, regardless the outcome, should the war in Europe end abruptly, realpolitik dictates a return to business-as-usual, which would mean a quick rehabilitation of Russia from pariah state to global citizen among Western nations. However, the longer these macro conditions last, the more they fog the investment horizon for any business.

Which brings us back to the investing challenge that we have today. In the current environment, an investment in tech is not a bet on how well it will perform under a relatively stable set of parameters such as pursuing stable growth or reducing costs relative to stable demand. A tech investment today is a bet on how well an investment’s means (the mechanisms of delivering that investment) and ends (the outcomes it will achieve) accurately anticipate the state of the world during its delivery and its operation. That’s not simple when so many things are in flux. We’re on our third “new normal” in two years. There is no reason to think a stable new normal is in the offing any time soon.

Tuesday, May 31, 2022

The Credit Cycle Strikes Back

A few months ago, I wrote that the capital cycle has become less important than the tech cycle. I’d first come across this argument in a WSJ article in 2014, and, having lived through too many credit cycles, it took me some time to warm up to it. The COVID-19 pandemic laid this out pretty bare: all the cheap capital in the world provided by the Fed would have done nothing if there wasn’t a means of conducting trade. Long before the pandemic, tech had already made it possible to conduct trade.

Capital has flexed its muscles in recent months, and the results aren’t pretty. The Fed has raised interest rates and made clear its intention to continue to increase them to rein in inflation. The results are what you’d expect: risk capital has retreated and asset values have fallen. Tech, in particular, has taken a beating. Rising inflation was limiting household spending on things like streaming services, abruptly ending their growth stories. Tech-fueled assets like crypto have cratered. Many tech firms are being advised to do an immediate volte-face from “spend in pursuit of growth” to “conserve cash.”

But this doesn’t necessarily mean the credit cycle has re-established superiority over the tech cycle.

Capital is still cheap by historical standards. In real terms, interest rates are still negative for 5 and 10 year horizons. Rates are less negative than they were a year ago, but they’re still negative. Compare that to the relatively robust period of 2005, when real interest rate curves were positive. Less cheap isn’t the same as expensive. Plus, it’s worth pointing out that corporate balance sheets remain flush with cash.

Any credit contraction puts the most fringe (== high risk) of investments at greater risk, e.g., a business that subsidizes every consumption of its product or service is by definition operationally cash flow negative. Cheap capital made it economically viable for a company to try to create or buy a market until such time as they could find new sources of subsidy (i.e., advertisers) or exercise pricing power (start charging for use). If that moment didn’t arrive before credit tightening began, well, time’s up. Same thing applies to asset classes like crypto: when credit tightens, it’s risk off as investors seek safer havens.

The risk to the tech cycle is, how far will the Fed push up interest rates to combat inflation?

Supply chains are still constrained and labor markets are still tight. Demand is outstripping supply, and that’s driving up the prices of what is available. Raising rates is a tool for reducing demand, specifically reducing credit-based purchases. Higher interest rates won’t put more products on the shelves or more candidates in the labor pool. If demand doesn’t abate - mind you, this is still an economy coming out of its pandemic-level limitations - inflationary pressures will continue, and the Fed has made clear they’ll keep increasing rates until inflation cools off. With other shocks lurking - a war in Europe, the threat of food shortages, the threat of rolling electricity blackouts - inflation could remain at elevated levels while capital becomes increasingly expensive. Of course, sustained elevated interest rates would have negative consequences for bond markets, real estate, durable goods, and so on. The higher the rates and the longer they last, the harder the economic landing.

That said, tech is the driver of labor productivity, product reach and distribution, and a key source of corporate innovation. The credit cycle would have to reach Greenspan-era interest rates before there would be a material impact on the tech cycle. And even then, it’s worth remembering that the personal computer revolution took root during a period of high interest rates. Labor productivity improvement was so great compared to the hardware and software costs, interest rates had no discernible effect.

The credit cycle is certainly making itself felt in a big way. But it’s more accurate to say for now that capital sneezed and tech caught a cold.

Saturday, April 30, 2022

Has Labor Peaked?

I wrote some time ago that labor is enjoying a moment. New working habits developed out of need during the pandemic that in many ways increased quality of life for knowledge workers. Meanwhile, an expansion of job openings and a contraction in the labor participation rate created a supply-demand imbalance that favored labor.

There appears to be confusion of late as to how to read labor market dynamics. With fresh unionization wins and increased corporate commitment to location independent working, is labor power increasing? Or with a declining economy and more people returning to the workplace (as evidenced by increases in the labor participation rate) is labor power near its peak?

The question, has labor peaked?, intimates a return to the mean, specifically that labor power will revert to where it was pre-pandemic (i.e., “workers won’t continue to enjoy so much bargaining power.”) The argument goes that fewer people have left the workforce than have quit jobs for better ones; that hiring rates have increased along with exits; that the labor participation rate has ticked up slightly; that labor productivity has increased (thus lessening the need for labor); and that demand is cooling (per Q1 GDP numbers). Toss in 1970s sized inflation compelling retirees to return to the workforce and there’s an argument to be made that labor’s advantages will be short lived.

But this argument is purely economic, focusing on scarcity in the labor market that has created wage pressure. For one thing, it ignores potential structural economic changes yet to play out, such as the decoupling of supply chains in the wake of new geopolitical realities. For another, it ignores real structural changes in the labor market itself, things like labor demographics (migrations from high-tax to low-tax states), increased workplace control by the individual laborer (less direct supervision when working from home), and improvements in work/life balance.

The question, has labor peaked?, becomes relevant only when there is an outright contraction in the job market. For now, the better question to ask is how durable are the changes in the relationship between employers and employees? It isn’t so much whether labor has the upper hand as much as labor has more negotiating levers than it did just a few years ago. The fact that there hasn’t been a mad rush to return to pre-pandemic labor patterns suggests employers are responding to structural changes in labor market dynamics.

Trying to call a peak in labor power is a task wide of the mark. And for now, the more important question still seems some way off from being settled.

Thursday, March 31, 2022

Crowding Out

Tech has had a pretty easy ride for the last twenty years. It only took a couple of years for tech to recover from the 2001 dot-com crash. In the wake of the 2008 financial crisis, companies contracted their labor forces and locked in productivity gains with new tech. Mobile went big in 2009, forcing companies to invest. Then came data and AI, followed by cloud, followed by more data and AI. The rising tide has lifted a lot of tech boats, from infrastructure to SaaS to service providers.

The ride could get a little bumpy. Five forces have emerged that threaten to change the corporate investment profile in tech.

  1. Labor power: workers have power like they've not had since before the striking air traffic control workers were fired in the early 80s, from unions winning COLAs in their labor agreements to the number of people leaving their jobs and in many cases, leaving the workforce entirely. Labor is getting expensive.
  2. Interest rates: debt that rolls over will pay out a few more basis points in interest rates than the debt it replaces. Debt finance will become more expensive.
  3. Energy inflation: energy prices collapsed before the pandemic, only for supply to contract as energy consumption declined with the pandemic. It takes longer for production to resume than it does to shut it off. True, energy is less a factor on most company income statements than it was fifty years ago, but logistics and distribution firms - the companies that get raw materials to producers and physical products to markets - will feel the pinch.
  4. Supply chain problems: still with us, and not going away any time soon. Sanctions against Russia and deteriorating relations with China will at best add to the uncertainty, at worst create more substantive disruption. By way of example, the nickel market has had a rough ride. And there has been increasing speculation in the WSJ and FT of food shortages in parts of the world. As companies stockpile (inventory management priorities have shifted from “just in time” to “just in case”) and reshore supply chains, supply chain costs will rise. Supply will continue to be inconsistent at best, inflationary at worst.
  5. Increase in M2: adding fuel to all of these is a rise in M2 money supply. More money chasing fewer items drives up prices.

All of these except for interest rate rises have been with us for months, and we’ve lived with supply chain problems for well over a year now. These factors haven’t had much of an impact on corporate investment so far, largely because companies have successfully passed rising costs onto their customers. Even if real net income has contracted, nominal has not, so buybacks and dividends haven’t been crowded out by rising expenses.

But the economy remains in transition. Many companies are starting to see revenues fall from their pandemic highs. While rising interest rates may cool corporate spending, it has to cool a great deal to temper a labor market defined more by an absence of workers than an abundance of jobs. With real wages showing negative growth again, it will become more difficult for companies to pass along rising costs. Rising resistance to price increses will, in turn, put pressure on corporate income statements.

Of course, this could be the best opportunity for a company to invest in structural change to reduce labor and energy intensity, as well as to invest for greater vertical integration to have more control over upstream supply, with an eye toward ultimately changing its capital mix to favor equity over debt once that transformation is complete. That’s a big commitment to make in a period of uncertainty. Whereas COVID presented a do-or-die proposition to many companies, there is no cut-and-dried transformational investment thesis in this environment.

Monday, February 28, 2022


Silicon chips are in short supply, ports are congested, and as a result new cars are expensive. The shortage of new cars has more people buying used, and as a result, used cars are fetching ridiculously high prices as well. The same phenomenon of supply shortages and logistics bottlenecks have been playing out across lots of basics, manufacturing and agricultural industries for months now.

At the same time, we have M2 money supply like we’ve never seen. All that cash is pursuing few investment opportunities, which bids them up. Excess liquidity seeking returns has inflated assets from designer watches to corporate equity.

Supply shortages twined with excess capital have created inflation like we’ve not seen in nearly 40 years.

Included among the supply shortages is labor. The headline numbers in the labor market have been the number of people leaving the workforce and the labor participation rate: fewer people of eligible age are working than before the pandemic, and many have simply checked out of the labor market forever, electing to live off savings rather than income. This means those who are working can command higher wages. In the absence of productivity gains, higher wages contribute to the inflationary cycle, because producers have to pass the costs onto consumers. Inflationary cycles can be difficult to stop once they start.

But labor market tightness can do something else: it can be the genesis of innovation. When a business cannot source the labor it needs to operate, it innovates in operations to reduce labor intensity. By way of example, businesses contracted their labor forces (including the ranks of their core knowledge workers) in the wake of the 2008 financial crisis. While this reduced corporate labor spend, it put remaining workers under strain. Soon after the reductions-in-force, companies invested in technology to lock in productivity gains of that reduced force. Capitalizing those tech assets reduced their impact on the income statement while those investments were being made. Once recovery began and revenues rose, that tech kept costs contained, resulting in better cash flow from operations after the financial crisis than before.

We are potentially in an inverse of the same labor dynamics. Whereas in 2008 the corporate innovation cycle was driven by corporate downsizing of the labor force, today it is driven by the labor market downsizing itself. And just as in 2008, when it was a secular problem (finance had an abundance of labor, while tech did not), it is secular again today.

Among the labor markets suffering a supply shortage is K-12 education. Education has become a less attractive occupation since the pandemic. A highly educated cohort disgruntled with work is an attractive recruiting pool for all kinds of employers.

The exodus of people from the teaching profession has created a shortage of teachers. The K-12 operating model is based on physical classroom attendance of teacher and student at increasingly high leverage ratios - 20, 30, 35 students to one teacher. This model becomes vulnerable with a scarcity of teachers. Classroom dynamics - not to mention physical facilities - don’t scale beyond 35 or 40 K-12 students in a single classroom. If there are fewer people willing to teach in the traditional paradigm, then the teaching profession will be under pressure to change its paradigm in one way or another.

I’ve written before that technology is generally not a disruptive agent. Technology that is present when socioeconomic change is happening is simply in the right place at the right time. Where there are acute labor shortages today - public safety, education, restaurant dining - the socioeconomic change is certainly afoot. What isn’t obvious is whether the right tech is present to capitalize on it.