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.

Friday, June 28, 2013

Debt, Fear & Demographics: The Ingredients of Stagnation

You developed a simple tool for individuals and small groups. You never imagined it would be a runaway hit. Revenue poured in, would-be investors called constantly, The Wall Street Journal ran features on you twice, marketing chiefs from a dozen S&P 100 firms wanted you in workshops to figure out how to "partner", and your founder was presenting keynotes and on panels every few weeks. You were the classic tech success story.

Ideas poured in as fast as the revenue, and some copycat products sprung up. You knew you weren't keeping up, largely because under the hood, the product wasn't very flexible. When you started this thing, the goal was to get product out the door to see if people would like it, not design for every possible need. The R&D team (the original developers - a new team was hired to maintain the existing product) concluded they could build a much better product from scratch having learned so much the first time round. Many more layers of abstraction, more flexible and open architecture, and a DSL for creating plug-in apps to sit on top of what was really more of a Platform than just a Product. The existing software couldn't support that. So you gave them approval to make version 2 a complete rewrite. They went off to a special location, separate from everybody else, to develop The New Platform.

That decision was, in retrospect, what killed the company.

It wasn't so bad that the R&D team took twice as long as they had originally forecast. It's that what they delivered was so commercially bad: bug laden, unstable, unreliable. Customer service complaints skyrocketed & new product sales collapsed. You gradually pulled more and more people into fixing the code; before long, it was an operational black hole of time and effort. When, a year later, the product was stabilized, revenues had fallen by nearly 80%.

That was when the CFO sat down with the CEO, told her that cash reserves were all but depleted, and that operating costs needed to be culled.

* * *

A few months ago, I described zombie businesses as a financial phenomenon wrapped around an operating crisis. First, a financial crisis triggers deep operating cuts that gut a business of its capability. This leaves it operationally inert. Over time, revenues go down as products & services grow stale in the hands of rudderless development and depleted operations staff. At the same time, costs go up as golden handcuffs are slipped on to people to prevent employee defection. Long after the financial crisis, the business may still have a well established set of products, a bit of brand recognition, a blue chip client list and many years of history. But a zombie business is not good investment because the cost to re-humanize it is prohibitive.

That's the financial perspective. The operating crisis at the core of this bears further examination.

Edward Hadas, a columnist at Breakingviews, recently wrote that a stagnant economy has 3 key characteristics: debt, fear, and demographics. Oppressive levels of debt devote money to interest payments, denying new and productive assets of it. Investors, gripped with fear, avoid making high risk investments. And when economies stagnate, people have fewer kids; this depletes the economy of its working age population, which slows growth and dynamism.

These same characteristics apply to a bombed-out tech business. Developers spend time servicing technical debt at the cost of developing new software assets. Executives are afraid to take the risk of new investments and assets get stale. Managers cling to existing employees, who rob the company of growth and dynanism by clinging to existing code, concepts and techniques.

An economic crisis (e.g., the rapid evaporation of liquidity) can usher in a period of economic stagnation (little economic development), but crisis and stagnation are not one and the same. Nor does the prior necessarily lead to the latter. An economic crisis can be cathartic, purging an economy of legacy constraints that serves to initiate a period of investment and development. The same is true of an operational crisis. A sudden loss of capability can trigger a period of stagnation, where what was once creative problem-solving work is reduced to checklists of tasks. Or it can trigger a period of dynamic change, where legacy business and technology constraints are thrown off and the company reinvents itself completely.

It isn't the crisis, but the reaction to it, that matters. The crisis is immediate; the stagnation settles in over a long period of time. The longer it has to settle in, the further assets and skills decay in an environment of timidity, old ideas, and increasing tech debt, the more costly it will be to revive the business.

It is an oversimplification to say that stagnation is a collection of choices people make, and that people are bound by limitations of their own making. Neither an economy nor a business can will itself out of stagnation, and not everybody has the leadership or appetite for risk to make bold decisions in a familiar (if decaying) environment. But how we react to a triggering financial crisis determines the fate of operations. If the reaction is to retrench and preserve, a financially-induced operational crisis will lead to stagnation. If the reaction is to reinvent and rebuild, it will not.