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.

Friday, April 15, 2011

Corporates and Start-Ups: Casual Friends, not Soul Mates

An executive of a corporate behemoth wants to shake up a troubled division. Being both impatient and aggressive, the executive hires somebody with a few start-ups under their belt - or acquires that person's current business - with the intent of having them take over the troubled unit to deliver start-up-like results.

While it looks like a way to inject new strands into the corporate DNA, it may do little more than play kick the can the can on the problem. It might also inflict further damage on their troubled business.

Start-up entrepreneurs do well in the early stages of a corporate turnaround situation: it's not difficult to get some sparks of life from a situation left for dead. A remit to "fix the department" gives license to change relatively obvious things that had left previous leaders immobilized.

Unfortunately, the rate of miracles declines after the first few months and with it the lustre of the miracle worker. The easy changes are made all too quickly. It isn't long before all remaining options require heavy lifting. And heavy they are: untangling a large, messy business requires broad, systemic, fundamental change.

This brings the parachuted entrepreneur face-to-face with their commitment to their adopted team: they didn't hire the people, they had no say in the technology, they're unable to innovate (drowning in problems as they are), they're immersed in corporate overhead they consider a nuisance, and they get nothing but resistance and obstinance from their peers. The mission turns out to be different than it first appeared to be: success requires them to be change leaders, not just execution leaders. This is not what they signed up for: they were told to infect the corporate DNA, yet now they face infection themselves.

This is a big commitment wall to climb.

Some choose to climb it, trading small start-up for large firm. It has been my privilege to know and work with several people who have successfully made this change - with some later reverting to their start-up roots. But for many start-up entrepreneurs the thought of settling in for a long-haul turnaround in a large corporate is not terribly appealing. The most self-aware redefine their mission to make the situation less bad, which is not the same as making it brilliant. They'll steer it through rehab, bringing it to the threshold of the long path of becoming a better corporate citizen, bowing out to let other, more corporate types, take it from there. In effect, an uncommitted person will make the business less unattractive, and flip it to somebody else.

The worst case scenario is when an uncommitted entrepreneur doubles down on trying to make the corporate into a start-up, focusing on immediate outcomes at the exclusion of everything else. This leads to long-term damage because systemic problems are starved for investment, displaced by tactical spend in the mad pursuit of getting something - anything - done. After a few months, people lose the appetite to fix the root problems, having gorged at the feast of the proximate problems and finding themselves out of money, out of energy, out of faith, or out of time. They finish a few sprints, but get nowhere near the finish line of the marathon.

This happens because the things that work in a small start-up tend not to have profound success - and in fact, can backfire badly - in large corporates. Start-ups are guided by a few principles, corporates by voluminous rules. Start-ups are able to rapidly evolve; large corporates move more slowly and deliberately. Start-ups have the luxury of being able to focus on how they start: because of their dynamic nature they may re-start a dozen different things a dozen times each before they finish one thing. A large corporate does not have this luxury: it has too many people, too much specialization, too many geographies, too much low-bandwidth communication. To succeed at anything, the large corporate must concentrate fully on how they finish.

Small start-ups are great at creating things with only intellectual brilliance, time, and a few packages of crisps. But accustomed as they are to shoestring budgets, they rarely manage excessive investment wisely because few can conceive the strategic. Modifying a line from The Simpsons: "the start-up with money is a bit like the mule with the spinning wheel: nobody knows how he got it and dang if he knows how to use it." Survivor bias (firms such as Facebook) leads us to erroneously believe in outsized probability of start-up success. Flashes of tactical brilliance can produce some one-hit wonders (remember when flying toaster screen savers for Windows 3.1 were all the rage?) But the fact is that the start-up that matures into an independent, sustainable success is the exception, not the rule. As a friend of mine who has been CFO for several tech start-ups once pointed out, his prior companies went from being voluminous independent websites to a few bullet points on the website of their acquirer. Start-ups can generate enormous potential, but generally that potential is realized by others.

Pharmaceuticals are a case-in-point. Big pharma firms have large scale manufacturing, distribution, marketing and sales. As the pipeline of blockbuster drugs have dried up, they've dismantled their captive R&D while simultaneously entering high-volume generics. They haven't given up on R&D, they've outsourced it to small start-ups: when a start-up pharma produces a promising drug, big pharma firms enter a bidding war to buy it. Although the winner might over-pay for a specific firm, they'll spend less on R&D as they don't subsidize the failures. Big provides the scale, little provides the creativity, each in their respective corners.

This is not to suggest that corporate bloat is acceptable, that small start-ups are poor businesses, or that start-up entrepreneurs never succeed in corporate environments. It is to say that corporates and start-ups make good casual friends who can share the odd sweaty evening together, but should suppress any thoughts of marriage. The honeymoon ends quickly, the arguments are legion, divorce comes all too soon and the rate is all too high, and their offspring are more likely to have the corporate's obesity twined with the start-up's ADHD.

But what if you're an executive in a large corporate with an under-performing division that begs for an entrepreneurial spark? Recruit a courageous leader with an entrepreneurial streak, someone with the temperament to orchestrate comprehensive restructure while fostering innovation and inspiring people to act, with the self-awareness to realize that the mission is one of change leadership, not simply execution brilliance. Lou Gerstner did it at IBM 20 years ago. Perhaps Stephen Elop will do it at Nokia.

You may very well find that person in a start-up. Just remember that you're hiring the person, not the environment from whence they come.