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.

Thursday, July 31, 2014

The Fine Line Between "Stretch Role" and "Unqualified", Part II: The Growth Mask

When a business or a profession grows faster than the labor market it draws from, it suffers a capability deficiency: there simply aren't enough experienced people to go round. It also suffers a leadership deficiency: there aren't enough people with cross-discipline experience to make competent business decisions. When there are more leadership jobs than there are qualified leaders to fill them, people will be given responsibilities they would not otherwise have. Even though hiring decisions are made independently, macro forces can be responsible for people landing in stretch roles.

Volume Cures All Ills

Growth - be it a function of runaway demand or insatiable investor appetite - increases a business' tolerance for leaders who are coming to terms with their responsibilities. In no small part, this is because the performance of a rapidly growing businesses can be difficult to measure, while its business decisions - most importantly, where they concern cash - are blatantly obvious.

For example, early stage tech businesses tend to lack revenue and profitability but attract increasing numbers of users. They are measured on indicators such as total number of user accounts and number of active users. These are non-financial measures that are calculated differently across firms (e.g., a single person may have multiple accounts, while "active" is a relative term), making comparisons difficult. Because there is little history of tracking these types of metrics in business, it isn't clear how they truly relate to the long-term valuation of a business. Although the performance measures of a growth firm in an emergent industry are a bit foggy, the business decisions are crystal clear. The most important decision - what to do with cash - is cut and dried: plow it back into the business to fuel growth.

By comparison, well established businesses in industries like air travel or retail banking are expected to be predictable. They are meticulously measured on established accounting metrics such as earnings and cash flow, measures that are easy to understand and comparable within and across industries. But their business decisions - again, particularly those to do with cash distribution - are more complex: do we invest in the core for efficiency, diversify for growth, or distribute cash to shareholders? Stakeholders - employees, investors, customers - in a growing business will be tolerant of novice leadership; stakeholders in a mature one will not.

By way of example, social media firms had the benefit of time to adjust their products to be mobile centric rather than desktop centric. Although the chattering classes raised concerns, the total growth of social media prevented a sense of crisis from cratering equity values or inciting mass employee exodus. In contrast, retail firms haven't been so fortunate: ecommerce cannibalizes existing retail sales more than it increase them (to wit: Amazon's growth in retail has come substantially to the detriment of traditional retailers). Retail firms are not seeing their businesses grow rapidly because of technology, they're seeing their businesses change underneath them because of it. These firms don't have an abundance of time because their core businesses are vulnerable to rapid erosion. They are far less tolerant to leaders learning their trade.

Growth Makes Everybody Look Good

Although growth make it safer for people in stretch roles, they also make everybody look good, deservedly or not. The greater the success achieved by multiple businesses in the same sector, the less clear the contribution of the leadership to any firm's success. A rising tide simply lifts all boats. As Jeff Immelt famously quipped about commercial conditions during the 1990s: "A dog could have run a business".

Too often, we never really know the difference between a savvy business leader and person who simply got lucky. Many years ago, I sat on a panel with a renoun dot-com investor who had retained his fortune post-bubble by getting out just in time. Prima facie, he appeared to be the sage of Silicon Valley. On interrogation, it turned out that he'd cashed out several investments to free capital for a new round of leveraged bets on internet businesses, just as the bottom fell out of dot-com equities. He happened to be out of the market at precisely the right moment because he hadn't finished negotiating his new placements. It wasn't deep market insight that enabled him to call the market peak: he intended to be long the entire time, and was short only because dumb luck that had him cash out and head to the sidelines at just the right moment. The only sage advice he was qualified to give was to "be in the right place at the right time".

What If Everybody is Stretching?

In overheated sectors, we can easily end up with leadership teams who are reaching beyond their capability. The more the froth on the business, the more concern there is with fast action and the less concern there is with meaningful qualification of the people running it. We end up with an explosion of title inflation (a rise in the number of people with double-barreled titles beginning with words like "chief", "strategic" or "senior") without the concomitant increase in the number of experienced board members and executives to mentor these freshly minted leaders. It isn't uncommon for a high growth firm to build an entire leadership chain of stretchies - people in the wrong weight class, from the most senior executives right down to management on the line. This renders mentoring relationships irrelevant, and potentially damaging.

Explosive business growth can yield a new class of leaders. But in the absence of a strong foundation, it is just as likely to foment destructive organizational pathologies of paranoia and denial. The pinnacle of organizational absurdity is when employees, clients and investors are told quarter after quarter that every leader is "awesome", yet mysteriously, the overall business performance is disappointing. This isn't a business on the rise, it's a well funded frat party.

Where's your business?