tag:blogger.com,1999:blog-306218752024-03-19T02:47:38.346-05:00The Agile ManagerIT leadership, governance and management @ rosspettit.comRoss Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comBlogger219125tag:blogger.com,1999:blog-30621875.post-37668319006573057182024-02-29T22:06:00.002-06:002024-02-29T22:06:00.134-06:00Patterns of Poor Governance<p>As I mentioned last month, many years ago I was toying around with a governance maturity model. Hold your groans, please. Turns out there are such things. I’m sure they’re valuable. I’m equally sure we don’t need another. But as I wrote last month there seemed to be something in my scribbles. Over time, I’ve come to recognize it not as maturity, but more as different patterns of bad governance.</p>
<p>The worst case is <i>wanton neglect</i>, where people function without any governance whatsoever. The organizational priority is on results (the what) rather than the means (the how). This condition can exist for a number of reasons: because management assumes competency and integrity of employees and contractors; because results are exceedingly good and management does not wish to question them; because management does not know the first thing to look for. Bad things aren’t guaranteed to happen in the absence of governance, but very bad things can indeed (<a href=“https://en.wikipedia.org/wiki/2007_Formula_One_espionage_controversy”>Spygate at McLaren F1</a>; rogue traders at <a href=“https://en.wikipedia.org/wiki/2008_Société_Générale_trading_loss”>Société Générale</a> and <a href=“https://en.wikipedia.org/wiki/2011_UBS_rogue_trader_scandal”>UBS</a>). Worse still, the absence of governance opens the door to moral hazard, where individuals gain from risk borne by others. We see this in IT when a manager receives quid pro quo - anything from a conference pass to a promise of future employment - from a vendor for having signed or influenced the signing of a contract.</p>
<p>Wanton neglect may not be entirely a function of a lack of will, of course: turning a blind eye equals complicity in bad actions when the prevailing culture is “don’t get caught.”</p>
<p>Distinct from wanton neglect is <i>misplaced faith in models</i>, be they plans or rules or guidelines. While the presence of things like plans and guidelines may communicate expectations, they offer no guarantee that reality is consistent with those guidelines. By way of example, IT managers across all industries have a terrible habit of reporting performance consistent with plans: the “<a href=“http://www.rosspettit.com/2008/11/pmo-divide.html”>everything is green for months until suddenly it’s a very deep shade of red</a>” phenomenon. Governance in the form of guidelines is often treated as “recommendations” rather than “expectations” (e.g., “we didn’t do it that way because it seemed like too much work”). A colleague of mine, on reading the previous post in this series, offered up that there is a well established definition of data governance (DAMA). Yes there is. The point is that governance is both a noun and a verb; governance “as defined” and “as practiced” are not guaranteed to be the same thing. Pointing to a model and pointing to the implementation of that model <i>in situ</i> are entirely different things. The key defining characteristic here is that governance goes little beyond having a model communicating expectations for how things get done.</p>
<p>Still another pattern of bad governance is governance theater, where there are governance models and people engaged in oversight, but those people do not know how to effectively interrogate what is actually taking place. In governance theater, some governing body convenes and either has the wool pulled over their eyes or simply lacks the will to thoroughly investigate. In regulated industries, we see this when regulators lack the will to investigate despite strong evidence that something is amiss (Madoff). In corporate governance, this happens when a board relies almost exclusively on data supplied by management (<a href=“https://www.nytimes.com/2004/09/01/business/hollingers-board-most-irresponsible-ever.html”>Hollinger International</a>). In technology, we see this when a “steering committee” fails to obtain data of its own or lacks the experience to ask pertinent questions of management. Governance theater opens the door to regulatory capture, where the regulated (those subject to governance) dictate the terms and conditions of regulation to the regulators. When governance is co-opted, governance is at best a false positive that controls are exercised effectively.</p>
<p>I’m sure there are more patterns of bad governance, and even these patterns can be further decomposed, but these cover the most common cases of bad governance I’ve seen.</p>
<p>Back to the question of governance “maturity”: while there is an implied maturity to these - no controls, aspirational controls, pretend controls - the point is NOT to suggest that there is a progression: i.e., aspirational controls are not a precursor to pretend controls. The point is to identify the characteristics of governance as practiced to get some indication of the path to good governance. Where there is governance theater, the gap is a reform of existing institutions and practices. Misplaced faith requires creation of institutions and practices, entirely new muscle memories for the organization. Each represents a different class of problem.</p>
<p>The actions required to get into a state of good governance are not, however, an indication of the degree of resistance to change. Headstrong management may put up a lot of resistance to reform of existing institutions, while inexperienced management may welcome creation of governance institutions as filling a leadership void. Just because the governance gap is wide does not inherently mean the resistance to change will be as well.</p>
<p>If you’re serious about governance and you’re aware it’s lacking as practiced today, it is useful to know where you’re starting from and what needs to be done. If you do go down that path, always remember that it’s a lot easier for everybody in an organization - from the most senior executive management to the most junior member of the rank and file - to reject governance reform than to come face to face with how bad things might actually be.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-50871087230209829932024-01-31T23:08:00.001-06:002024-01-31T23:08:00.130-06:00Governance Without Benefit<p>I’ve been writing about <a href=”https://leanpub.com/activistinvesting”>IT governance</a> for many years now. At the time I started writing about governance, the subject did not attract much attention in IT, particularly in software development. This was a bit surprising given the poor track record of software delivery: year after year the Standish CHAOS reports drew attention to the fact that the majority of IT software development investments wildly exceeded spend estimates, fell short of functional expectations, were plagued with poor quality, and as a result quite a lot of them were canceled outright. Drawing attention to such poor results gave a boost to the Agile community who were pursuing better engineering and better management practices. Each is clearly important to improving software delivery outcomes, but neither addresses contextual or existential factors to investments in software. To wit: somebody has to hold management accountable for keeping delivery and operations performing within investment parameters and, if it is not, either fix the performance with or without that management or negotiate a change in parameters with investors. Governance, not engineering or management, is what addresses this class of problem.</p>
<p>If IT governance was a fringe activity twenty years ago, it is everywhere today: we have API governance and data governance and AI governance and on and on. Thing is, there is no agreement as to what governance is. Depending on who you ask, governance is “the practice” of defining policies, or it “helps ensure” things are built as expected, or it “promotes” availability, quality and security of things built, or it is the actual management of availability, quality and security. None of these definitions are correct, though. Governance is not just policy definition. Terms like “promote” and “helps ensure” are weasel words that imply “governance” is not a function held accountable for outcomes. And governance intrinsically cannot be management because governance is a set of actions with concomitant accountability that are specifically independent of management.</p>
<p>That governance is still largely a sideline activity in IT is no surprise. For years, ITIL was the go-to standard for IT governance. ITIL defines consistent, repeatable processes rooted in “best practices”. The net effect is that ITIL defines governance as “compliance”. As long as IT staff follow ITIL consistent processes, IT can’t be blamed for any outcome that resulted from its activity: they were, after all, following established “best practices.” As there is not a natural path from self-referential CYA function to essential organizational competency, it is unrealistic to expect that IT governance would have found one by now.</p>
<p>I’ve long preferred applying the definition of corporate governance to IT governance. Corporate <a href=”http://www.rosspettit.com/2013/10/can-we-stop-misusing-word-governance.html”>governance boils down to three activities</a>: set expectations, hire managers to pursue those expectations, and verify results. When expectations aren’t met, management is called to task by the board and obliged to fix things. If expectations aren’t met for a long period of time, the managers hired to deliver them have to go or the expectations have to go. And if expectations aren’t met after that, the board goes. Before it gets to anything so drastic, governance has that third obligation, to “verify results.” Good governance sources data independently of management by looking directly at artifacts and constructing analyses on that data. In this way, good governance has early warning as to whether expectations are in jeopardy or not, and can assess management’s performance independently of management’s self-reporting. Governance is not “defining policies” or “helping to ensure” outcomes; governance is actively involved in scrutinizing and steering and has the authority to act on what it has learned.</p>
<p>Governance is concerned with <a href=”http://www.rosspettit.com/2006/10/governance-gap.html”>two questions</a>: are we getting value for money, and are we receiving things in accordance with expectations. Multiple APIs that do the same thing, duplicative data sources that don’t reconcile, IT investments that steamroll their business cases, all make a mockery of IT governance. We’ve got more IT “governance” than we’ve ever had, yet all too often it just doesn’t do what it’s supposed to do.</p>
<p>I’m picking up the topic of IT governance again because it does not appear to me that the state of IT governance is materially better than it was two decades ago, and this deserves attention. Soon after I started down this path, I thought it would be helpful to have a governance “maturity model.” No, the world does not need another maturity model, let alone one for an activity that is largely invisible and only conspicuous when it fails or simply isn’t present. It doesn’t help that good governance does not guarantee a better outcome, nor that poor governance does not guarantee a bad outcome. Governance is a little too abstract, difficult to describe in simple and concrete terms, and subsequently difficult for people to wrap their heads around. That, in turn, renders any “maturity model” an academic exercise at best.</p>
<p>Still, there is room for something that characterizes all this governance on an IT estate and frames it as an agent for good or bad. That is, in the as practiced state, is governance of this activity (say, API or appdev) materially reducing or increasing exposure to a bad outcome. That’s a start.</p>
<p><center>* * *</center></p>
<p>Dear readers,</p>
<p>I took extended leave from work last year, and decided to also take a break from writing the blog. I’m back.</p>
<p>Also, I do want to apologize that I’ve been unable all of these years to get this site to support https. It’s supposed to be a simple toggle in the Google admin panel to enable https, but for whatever reason it has never worked, which I suspect has to do with the migration of the blog from Blogger into Google. Despite admittedly tepid efforts on my part, I've not found a human who can sort this out at Google. I appreciate your tolerance.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-6367395156580632742023-07-31T22:43:00.001-05:002023-07-31T22:43:00.133-05:00Resistance<p>Organizational change, whether digital transformation or simple process improvement, spawns resistance; this is a natural human reaction. Middle managers are the agents of change, the people through whom change is operationalized. The larger the organization, the larger the ranks of middle management. It has become commonplace among management consultants to target middle management as the cradle of resistance to change. The popular term is “the frozen middle”.</p>
<p>There is no single definition of what a frozen middle is, and in fact there is quite a lot of variation among those definitions. Depending on the source, the frozen middle is:</p>
<ul><li>an entrenched bureaucracy of post-technical people with no marketable skills who only engage in bossing, negotiating, and manipulating organizational politics - <i>change is impossible with the middle managers in situ today</i></li>
<li>an incentives and / or skills deficiency among middle managers - <i>middle managers can be effective change agents, but their management techniques are out of date and their compensation and performance targets are out of alignment with transformation goals</i></li>
<li>a corporate culture problem - </i>it’s safer for middle managers to do nothing than to take risks, so working groups of middle managers respond to change with “why this can’t be done” rather than “how we can do this” </i></li>
<li>not a middle management problem at all, but a leadership problem: poor communication, unrealistic timelines, thin plans - <i>any resistance to change is a direct result of executive action, not middle management</i></li></ul>
<p>The frozen middle is one of these, or several of these, or just to cover all the bases, a little bit of each. Of course, in any given enterprise they’re all true to one extent or another. </p>
<p>Plenty of people have spent plenty of photons on this subject, specifically articulating various techniques for (how clever) “thawing” the frozen middle. Suggestions like “upskilling”, “empowerment”, “champion influencers of change”, “communicate constantly”, and “align incentives” are all great, if more than a little bit naive. Their collective shortcoming is that they deal with the frozen middle as a problem of the mechanics of change. They ignore the organizational dynamics that create resistance to change among middle management in the first place.</p>
<p>Sometimes resistance is a top-down social phenomenon. Consider what happens when an executive management team is grafted onto an organization. That transplanted executive team has an agenda to change, to modernize, to shake up a sleepy business and make it into an industry leader. It isn’t difficult to see this creates tensions between newcomers and long-timers, who see one another as interlopers and underperformers. Nor is it difficult to see how this quickly spirals out of control: executive management that is out of touch with ground truths; middle management that fights the wrong battles. No amount of “upskilling” and “communication” with a side order of “empowerment” is going to fix a dystopian social dynamic like this.</p>
<p>One thing that is interesting is that the advice of the management consultant is to align middle management’s performance metrics and compensation with achievement of the to-be state goals. What the consultants never draw attention to is executive management receiving outsized compensation for as-is state performance; compensation isn’t deferred until the to-be state goals are demonstrably realized. Plenty of management consultants admonish executives for not “leading by example”; I’ve yet to read any member of the chattering classes admonish executive to be “compensated by example”.</p>
<p>There are also bottom-up organizational dynamics at work. “Change fatigue” - apathy resulting from a constant barrage of corporate change initiatives - is treated as a problem created by management that management can solve through listening, engagement, patience and adjustments to plans. “Change skepticism” - doubts expressed by the rank-and-file - is treated as an attitude problem among the rank-and-file that is best dealt with by management through co-opting or crowding out the space for it. That is unfortunate, because it ignores the fact that change skepticism is a practical response: the long timers have seen the change programs come and seen the change programs go. The latest change program is just another that, if history is any guide, isn’t going be any different than the last. Or the dozen that came and went before the last.</p>
<p>The problematic bottom up dynamic to be concerned with isn’t skepticism, but passivity. The leader stands in front of a town hall and announces a program of change. Perhaps 25% will say, this is the best thing we’ve ever done. Perhaps another 25% will say, this is the worst thing we’ve ever done. The rest - 50% plus - will ask, “how can I not do this and still get paid?” The skeptic takes the time and trouble to voice their doubts; management can meet them somewhere specific. It is the passengers - the ones who don’t speak up - who represent the threat to change. The management consultants don’t have a lot to say on this subject either, perhaps because there is no clever platitude to cure the apathy that forms what amounts to a frozen foundation.</p>
<p>Is middle management a source of friction in organizational change? Yes, of course it can be. But before addressing that friction as a mechanical problem, think first about the social dynamics that create it. Start with those.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-47842044150002388152023-06-30T21:59:00.001-05:002023-06-30T21:59:00.137-05:00How Agile Management Self Destructs<p>I’ve been writing about Agile Management for over 15 years. Along the way, I’ve written (as have many others) how to get Agile practices into a business, how to scale them, how to overcome obstacles to them, and so forth. I’ve also written about how Agile gets co-opted, and a few months ago I wrote about how Agile erodes through workforce attrition and lowered expectations. I’ve never written about how Agile management can self-destruct.</p>
<p>The first thing to go are results-based requirements. Stories are at the very core of Agile management because they are units of result, not effort. When we manage in units of result, we align investment with delivery: we can mark the underlying software asset to market, we can make objective risk assessment and quantify not only mitigation but the value of mitigation. Agile management traffics in objective facts, not subjective opinion.</p>
<p>The discipline to capture requirements as Stories fades for all kinds of reasons. OKRs become soft measures. “So that” justification become tautologies. Labor specialization means that no developer pair, let alone a single person, can complete a Story. Team boundaries become so narrow they’re solving technical rather than business problems. And, you know what, it takes discipline to write requirements in this way.</p>
<p>Whatever the reason, when requirements no longer have fidelity to an outcome, management is back to measuring effort rather than results. And effort is a lousy proxy for results.</p>
<p>The next thing to go is engineering excellence. Agile management implicitly assumes excellence in engineering: in encapsulation, abstraction, simplicity, build, automated testing, and so forth. Once managers stop showing an active interest in engineering discipline, the symbiotic relationship between development and management is severed. </p>
<p>The erosion of engineering discipline is a function - directly or indirectly - of a lapse of management discipline. Whereas a highly-disciplined team decides where code should reside, an undisciplined team negotiates who has to do what work - or more accurately, which team doesn’t have to do what work. This is how architectures get compromised, code ends up in the wrong place, and abstraction layers create more complexity than simplicity.</p>
<p>The loss of engineering excellence is traumatic to management effectiveness. How something is built is a good indicator of the outcomes we can expect. Is the software brittle in production? Expensive to maintain? Does it take forever to get features released? Management has to reinforce expectations, verify that things are being built in the way they’re expecting them to be built, and make changes if they are not. When excellence in engineering is gone, management is no longer able to direct delivery; it is instead at the mercy of engineering.</p>
<p>The third thing to go is active, collaborative management. I’ve <a href=“http://www.rosspettit.com/2021/08/what-exactly-is-agile-management.html”>previously described what Agile management is and is not</a>, so I’ll not repeat it here. The short version is, Agile management is a very active practice of advancing the understanding of the problem (and solution), protecting the team’s execution, and adjusting the team as a social system for maximum effectiveness. Now, management can check-out and just be scorekeepers even when there is engineering excellence and results-based requirements. But suffice to say, when saddled with crap requirements and becoming a vassal to engineering, management is reduced to the role of passenger. There is no adaptability, no responding to change, beyond adding more tasks to the list as the team surfaces them. Management is reduced to administration.</p>
<p>Agile requires discipline. It also requires tenacity. If management is going to lead, it has to set the expectations for how requirements are defined and how software is created and accept nothing less.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-88251352734272264352023-05-31T23:42:00.005-05:002023-05-31T23:42:00.145-05:00Give us autonomy - but first you've gotta tell us what to do<p>The ultimate state for any team is self-determination: they lead their own discovery of work, self-prioritize that work, self-organize their roles and self-direct the delivery.</p>
<p>Self-determination requires meta awareness. The team knows the problem space - the motivations of different actors (buyers, users, influencers), the guiding policies (regulatory and commercial preference), the tech in place, and so forth. Conversely, they are not whipsawed by external forces. They do not operate at the whim of customers because they evolve their products across the body of need and opportunity. They do not operate at the mercy of regulation because they know the applicable regulation and how it applies to them. They know their integrated technology’s features and foibles and know what to code with and code around. They know where the bodies are buried in their own code. And the members of the team might not be friends or even friendly to one another, but they know that no member of the team will let them down.</p>
<p>In the early 1990s, a Chief Technology officer I knew once replied to a member of his customer community during the Q&A at their annual tech meetup thusly: “there is nothing you can suggest that we’ve not already thought of.” Arrogance incarnate. But he and his entire team knew the product they were trying to build and they product they were not trying to build. They were comfortable with the tech trends they were latching onto and those they were not. They had not only customer intimacy but intimacy with prospective customers. They sold what they made; they did not make what they sold. Best of all, they’re still in business today, over 30 years later. They achieved a state of sustainable economic autonomy.</p>
<p>Freedom is most often associated with financial independence. There is a certain amount of truth to this. Financial independence means you can reach as far as “esteem” in Maslow’s hierarchy without doing much more than lavish spending. Unfortunately, money only buys autonomy for as long as the money lasts. History is littered with case studies where it did not. Sustained economic performance - through business cycles and tech cycles - yields the cash flow that makes self-determination possible. That requires evolution and adaptability, and those are functions of meta awareness.</p>
<p>Which brings us to the software development team that insists on autonomy. The team wants the freedom to tell their paymasters how a problem or opportunity space is defined, what to prioritize, how to staff, how much funding they need, and when to expect solution delivery will begin. That’s a great way to work. And, for decades now, management consultants have advised devolving authority to the people closest to the need or opportunity. But that proximity is only as valuable as the team’s comprehension of the problem space, familiarity with the domain, experience with similar engineering challenges, and the ability to think abstractly and concretely. When a team lacks in these things, devolving authority will simply yield a long and expensive path of discovery while the team acquires this knowledge. The less <i>a priori</i> knowledge the team has, the less structured and more haphazard the learning journey; so when the problem space is complex, this becomes a very long and very expensive discovery path indeed - and one that sometimes never actually succeeds.</p>
<p>Autonomy increasingly became the norm in tech as a result of the shortage of capable tech people, driven by the combination of cheap capital and COVID fueling tech investments. Under those conditions, a long learning journey was the price of admission; meta awareness was no longer a requirement for autonomy. With capital a lot more expensive today, tech spending has cooled and returns on tech investments are under much tighter scrutiny, and the longer the learning journey the less viable the tech investment. This is having the effect of exposing friction between how tech expects to operate and how business buyers expect for it to operate. Business buyers financing tech investments want tighter business cases that define returns and provide controls for capital spend. Tech employees want the space to figure out the domain, increasing expense spend and lengthening the time (and therefore cost) to deliver. With capital now having the upper hand, it is not uncommon for tech to be dichotomously demanding both autonomy and to be told exactly what to do.</p>
<p>While autonomy is the ultimate state of evolution for any team, the prerequisites to achieve it are extraordinarily high. It doesn’t require omnipotence, but it does require sufficient fluency with the tech and the domain to know the question to ask, to make appropriate assumptions, to anticipate the likely risks, and to know the sensible defaults to make in design. Devolved authority is a fantastic way to work, but autonomy must be earned, never granted.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-53297877298969297562023-04-30T22:41:00.001-05:002023-04-30T22:41:00.255-05:00Measured Response<p>Eighteen months ago, I wrote that there is a good case to be made that the <a href=“http://www.rosspettit.com/2021/10/is-tech-cycle-more-important-than-fed.html”>tech cycle is more economically significant than the credit cycle</a>. By way of example, customer-facing tech and corporate collaboration technology contributed far more to robust S&P 500 earnings during the pandemic than the Fed’s bond buying and money supply expansion. Having access to capital is great; it doesn’t do a bit of good unless it can be productively channeled.</p>
<p>Twelve months ago, I wrote a piece titled <a href=“http://www.rosspettit.com/2022/05/the-capital-cycle-strikes-back.html”>The Credit Cycle Strikes Back</a>. This time last year, rising interest rates and inflation reminiscent of the 1970s cast a pall over the tech sector, most obviously with tech firms laying off tens of thousands. Arguably, it cast a pall over the tech cycle in its entirety, from households forced to consolidate their streaming service subscriptions to employers increasingly requiring their workforce to return to office. Winter had come to tech, courtesy the credit cycle.</p>
<p>Silicon Valley Bank collapsed last month. The balance sheet, risk management, and regulatory reasons for its collapse are well documented. The Fed responded to SVB’s collapse by providing unprecedented liquidity in the form of 100% guarantees on money deposited at SVB. The headline rationale for unlimited deposit insurance - economic policy, political exigence - are also well documented elsewhere. Still, it is an economic event worth looking into.</p>
<p>An interesting aspect to the collapse of SVB is the role that social media played in the run on the bank. A <a href=“https://www.wsj.com/articles/silicon-valley-bank-run-twitter-59061759”>recent paper presents</a> prima facie evidence that the run on SVB was exacerbated by Twitter users. In a pre-social media era, SVB’s capital call to plug a risk management lapse may very well have been a business as usual event; that is, at least, what it appears SVB’s investment banking advisors anticipated. Instead, that capital call was a spark that ignited catastrophic capital flight.</p>
<p>If the link between Tweets and capital flight from SVB is real, the Fed’s decision looks less like a backstop for bank failures caused by poor risk management decisions, and more a pledge to contain the impact of a technology cycle phenomenon on the financial system. As the WSJ put it this week, “… Twitter’s role in the saga of Silicon Valley Bank reiterated that the dynamics of financial contagion have been forever changed by social media.” Most banks had paid attention to the fact that Treasurys had declined in value and took appropriate hedge positions to protect their core business of maturity transformation. Based on fundamentals it wasn’t immediately obvious there was a systemic crisis at hand. Yet the rapidity with which SVB had collapsed was unprecedented. The Fed’s response to that rapidity was equivalent to Mario Draghi’s “whatever it takes” moment.</p>
<p>Social media-fueled events aren’t new in the financial system; by way of example: meme stock inflation. And assuming SVB’s collapse truly was a social media phenomenon, the threat was still at human scale: even if those messengers had a more powerful megaphone than the newspaper reporter of yore observing a queue of people outside a bank branch, it was a message propagated, consumed and acted upon by humans. Thing is, the next (or more accurately, the next after the next) threat will be AI driven, the modern equivalent to program trading that contributed to Black Monday in 1987. Imagine a deepfake providing the spark fueling adjustments by like-minded algorithms spanning every asset class imaginable.</p>
<p>As tech has become an increasingly potent economic force, it represents a bigger and bigger challenge to the financial system. To wit: eventually there will be a machine scale threat to the financial system, and human regulators don’t have machine scale. As the saying goes, regulation exists to protect us from the last crisis - as in, regulations are codified well after the fact; the scale mismatch we’re likely to face implies a low tolerance for delay. The last line of defense are kill switches, and given the tightly coupled, interconnected, and digital nature of the modern financial system, orchestrating kill switches presents a machine scale problem itself. The Fed, the Department of the Treasury, the OCC, the FDIC, the European Central Bank, and all the rest need new tools.</p>
<p>Let’s hope they don't build <a href=“https://en.wikipedia.org/wiki/HAL_9000”>HAL</a>.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-36175665373408661832023-03-31T23:55:00.001-05:002023-03-31T23:55:00.148-05:00Competency Lost<i><p>The captive corporate IT department was a relatively early adopter of Agile management practices, largely out of desperation. Years of expensive overshoots, canceled projects, and poor quality solutions gave IT not just a bad reputation, but a confrontational relationship with its host business. The bet on Agile was successful and, within a few years, the IT organization had transformed itself into a strong, reliable partner: transparency into spend, visibility into delivery, high-quality software, value for money. </p>
<p>Somewhere along the way, the “products not projects” mantra took root and, seeing this as a logical evolution, the captive IT function decided to transform itself again. The applications on the tech estate were redefined as products, assigned delivery teams responsible for them with Product Owners in the pivotal position of defining requirements and setting priorities. Product Owners were recruited from the ranks of the existing Business Analysts and Project Managers. Less senior BAs became Product Managers, while those Project Managers who did not become part of the Product organization were either staffed outside of IT or coached out of the accompany. The Program Management Office was disbanded in favor of a Product Portfolio Management Office with a Chief Product Officer (reporting to the CIO) recruited from the business. Iterations were abandoned in favor of Kanban and continuous deployment. Delivery management was devolved, with teams given the freedom to choose their own product and requirements management practices and tools. With capital cheap and cashflows strong, there was little pressure for cost containment across the business, although there was a large appetite for experimentation and exploration.</p>
<p>As job titles with "Product" became increasingly popular, people with work experience in the role became attractive hires - and deep pocketed companies were willing to pay up for that experience. The first wave of Product Owners and Managers were lured away within a couple of years. Their replacements weren't quite as capable: what they possessed in knowledge of the mechanical process of product management they lacked in fundamentals of Agile requirements definition. These new recruits also had an aversion to getting deeply intimate with the domain, preferring to work on "product strategy" rather than the details of product requirements. In practice, product teams were "long lived" in structure only, not in institutional memory and capability that matter most.</p>
<p>It wasn't just the product team that suffered from depletion.</p>
<p>During the project management years of iterative delivery, something was delivered every two weeks by every team. In the product era, the assertion that "we deploy any time and all the time" masked the fact that little of substance ever got deployed. The logs indicated software was getting pushed, but more features remained toggled off than on. Products evolved, but only slowly.</p>
<p>Engineering discipline also waned. In the project management era, technical and functional quality were reported alongside burn-up charts. In the product regime, these all but disappeared. The assumption was, they had solved their quality problems with Agile development practices, quality was an internal concern of the team, and primarily the responsibility of developers.</p>
<p>The hard-learned software delivery management practices simply evaporated. Backlog management, burn-up charts, financial (software investment) analysis and <a href="https://leanpub.com/activistinvesting">Agile governance practices</a> had all been abandoned. Again, with money not being a limiting factor, research and learning were prioritized over financial returns.</p>
<p>There were other changes taking place. The host business had settled into a comfortable, slow-growth phase: provided it threw off enough cash flow to mollify investors, the executive team was under no real pressure. IT had decoupled itself from justifying every dollar of spend based on returns to being a provider of development capacity for an annual rate of spend. The definition of IT success had become self-referential: the number and frequency of product deployments and features developed, with occasional verbatim anecdotes that highlighted positive customer experiences. IT's self-directed OKRs were indicators of activity - increased engagement, less customer friction - but not rooted in business outcomes or business results.</p>
<p>The day came when an ambitious new President / COO won board approval to rationalize the family of legacy of products into a single platform to fuel growth and squeeze out inefficiency. The board signed up provided they stayed within a capital budget, could be in market in less than 18 months, and could fully retire legacy products within 24 months, with bonuses indexed to every month they were early.</p>
<p>About a year in, it became clear delivery was well short of where it needed to be. Assurances that everything was on track were not backed up by facts. Lightweight analysis led to analysis work being borne by developers; lax engineering standards resulted in a codebase that required frequent, near-complete refactoring to respond to change; inconsistency in requirements management meant there was no way to measure progress, or change in scope, or total spend versus results; self-defined measures of success meant teams narrowed the definition of "complete", prioritizing the M at the expense of the V to meet a delivery date.</p></i>
<p>* * *</p>
<p>The sharp rise of interest rates has made capital scarce again. Capital intensive activities like IT are under increased scrutiny. There is less appetite for IT engaging in research and discovery and a much greater emphasis on spend efficiency, delivery consistency, operating transparency and economic outcomes. </p>
<p>The tech organization that was once purpose built for these operating conditions may or may not be prepared to respond to these challenges again. The Agile practices geared for discovery and experimentation are not necessarily the Agile practices geared for consistency and financial management. Pursuing proficiency of new practices may also have come at the cost of proficiency of those previously mastered. Engineering excellence evaporates when it is deemed the exclusive purview of developers. Quality lapses when it is taken for granted. Delivery management skills disappear when tech's feet aren't held to the fire of cost, time and, above all, value. Domain knowledge disappears when it walks out the door; rebuilding it is next to impossible when requirements analysis skills are deprioritized or outright devalued.</p>
<p>The financial crisis of 2008 exposed a lot of companies as <a href="http://www.rosspettit.com/2009/05/are-you-ready-to-restructure.html">structurally misaligned for the new economic reality</a>. As companies restructured in the wake of recession, so did their IT departments. Costly capital has tech in recession today. The longer this condition prevails, the more tech captives and tech companies will need to restructure to align to this new reality.</p>
<p>As most tech organizations have been down this path in recent memory, restructure should be less of a challenge this time. In 2008, the tech playbook for the new reality was emerging and incomplete. The tech organization not only had to master unfamiliar fundamentals like continuous build, unit testing, cloud infrastructure and requirements expressed as Stories, but improvise to fill in the gaps the fundamentals of the time didn't cover, things like vendor management and large program management. Fifteen years on, tech finds itself in similar circumstances. Mastering the playbook this time round is regaining competency lost.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-5109218055402290272023-02-28T23:09:00.000-06:002023-02-28T23:09:00.147-06:00Shadow Work<p>Last month, Rana Foroohar argued in the FT that worker productivity is declining in no small part because of <a href=“https://on.ft.com/3HgX24L”>shadow work</a>. Shadow work is unpaid work done in an economy. Historically, this referred to things like parenting and cleaning the house. The definition has expanded in recent years to include tasks that used to be done by other people that most of us now do for ourselves, largely through self-service technology, like banking and travel booking. There are no objective measures of how much shadow work there is in an economy, but the allegation in the FT article is that it is on the rise, largely because of all the fixing and correcting that the individual now must do on their own behalf.</p>
<p>There is a lot of truth to this. Some of the incremental shadow work is trivial, such as having to update profile information when an employer changes travel app provider. Some is tedious, such as when people must patiently hurdle through the unhelpful layers of primitive chat bots to finally reach a knowledge worker to speak to. Some is time consuming, such as when caught in an irrops travel situation and needing to rebook travel. And some is truly absurd, such as spending months navigating insurance companies and health care providers to get a medical claim paid. Although customer self-service flatters a service provider’s income statement, it wreaks havoc on the customer’s productivity and personal time.</p>
<p>But it is unfair to say that automated customer service has been a boon to business and a burden to the customer. Banking was more laborious and inconvenient for the customer when it could only be performed at a branch on the bank’s time. And it could take several rounds - and days - to get every last detail of one’s travel itinerary right when booking a business trip through a travel agent. Self-service has made things not just better, but far less labor intensive for the ultimate customer.</p>
<p>It is more accurate to say that any increase in shadow work borne by the customer is not really a phenomenon of the shift to customer self-service as much as it lays bare the shortcomings of providers that a large staff of knowledgable customer service agents were able to gloss over.</p>
<p>First, a lot of companies force their customers to do business with them in the way the company operates, not in the way the customer prefers to do business. A retailer that requires its customers to put an order on a specific location rather than algorithmically routing the order for optimal fulfillment to the customer - e.g., for best availability, shortest time to arrival, lowest cost of transportation - forces the customer to navigate the company’s complexity in order to do business. Companies do this kind of thing all the time because they simply can’t imagine any other way of working.</p>
<p>Second, edge cases defy automation. Businesses with exposure to a lot of edge cases or an intolerance to them will shift burden to customers when they arise. The travel industry is highly vulnerable to weather and suffers greatly with extreme weather events. Airline apps have come a long way since they made their debut 15 years ago, but when weather disrupts air travel, the queues at customer service desks and phone lines get congested because there is a limit to the solutions that can be offered through an app.</p>
<p>Third, even the simplest of businesses in the most routine of industries frequently manage customer service as a cost to be avoided, if not outright blocked. A call center that is managed to minimize average call time as opposed to time to resolution is incentivized to direct the caller somewhere else or deflect them entirely rather than resolve the customer problem. No amount of self-service technology will compensate for a company ethos that treats the customer as the problem.</p>
<p>There is no doubt that shadow work has increased, but that increase has less to do with the proliferation of customer self-service and more to do with the limitations of its implementation and the provider’s attitude toward their customer.</p>
<p>Perhaps more important is what a company loses when it reduces the customer service it provides through its people: the inability to immediately respond humanely to a customer in need; the aggregate loss of customer empathy through a loss of contact. This makes it far more difficult for a company to nurture its next generation of knowledge workers to troubleshoot and resolve increasingly complex customer service situations.</p>
<p>But of greater concern is that as useful as automation is from a convenience and scale perspective, its proliferation drives home the point that customers are increasingly something to be harvested, not people with whom to establish relationships. Society loses something when services are proctored at machine rather than human scale. In this light, the erosion of individual productivity is relatively minor.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-16426608294933600642023-01-31T23:00:00.001-06:002023-01-31T23:00:00.151-06:00Relics<p>I recently came across a box of very old technology tucked away in my basement: PDAs, mobile phones, digital cameras and even a couple of old laptops, all over two decades old. It was an interesting find, if slightly disturbing to think this stuff has moved house a couple of times. Before disposing of something, I try to repurpose it if I can. That's hard to do with electronics once they're orphaned by their manufacturers. Still, electronics recycling wasn't as easy to do twenty years ago, so perhaps just as well that I held onto them until long after it was.</p>
<p>In addition to bringing back fond memories, finding this trove got me thinking about about how rapidly mobile computing evolved. In the box from the basement were a couple of PDAs, one each by HP and Compaq; phones by Motorola, Nokia (including a 9210 Communicator) and Ericcson; and a digital video recorder by Canon. The Compaq brand has all but disappeared; the makers of two of the three phones exited the mobile phone business years ago; the Mini-DV technology of the camcorder was obsolete within a few years of its manufacture.</p>
<p>There were also a couple of laptops in the box, one each made by Compaq and Sony. The interesting thing about the laptops is how little the form factor has changed. My first laptop was a Zenith SuperSport 286. The basic design of the laptop computer hasn't changed much since the late 1980s (although mercifully they weigh less than 17 lbs). The Compaq and Sony laptops in that box from the basement are not physically different from the laptops of today: the Sony had a square screen and lots of different ports, where a modern laptop has a rectangular screen and a few USB ports.</p>
<p>The laptop, of course, replaced the luggable computer of the 1970s and early 1980s made by the likes of Osborne and Kaypro and Compaq. The luggable was a statement for the era: what compels a person to haul around disk drives, CPU, keyboard and a small CRT? Maybe it was the free upper-body workout. The laptop was a quantum improvement in mobile computing.</p>
<p>But once that quantum improvement happened, the laptop became decidedly less exciting. As the rate of change of capabilities in the laptop slowed, getting a new laptop became less of an event and more of a pain in the ass. Not to mention that, just like the PDA and phone manufacturers mentioned above, the pioneers and early innovators didn’t survive long enough to reap the full benefits of the space maturing.</p>
<p>And the same phenomenon happened in the PDA/Phone/camera space. The quantum leap was when these converged with the original iPhone. Since then, a new phone has become less and less of an event. Yes, just like laptops, they get incrementally better. Fortunately, migration via cloud makes upgrading less of a pain in the ass.</p>
<p>The transition from exciting to ordinary correlates to the utility value of technology in our lives: in personal productivity, entertainment, and increasingly as the primary (if not only) channel for doing things. There are, of course, several transformative technologies in their nascent stages. Somehow, I don’t think any are spawning the Zenith Data Systems and Compaqs making a future relic that somebody someday will be slightly amused to find in a box in their basement.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-20214360248740227342022-12-31T17:30:00.001-06:002022-12-31T17:30:00.199-06:00Reinvention Risk Trade<p>Southwest Airlines has <a href="https://www.wsj.com/articles/southwest-airlines-melting-down-flights-cancelled-11672257523">made headlines in recent days</a> for all the wrong reasons: bad weather impacted air travel, which required Southwest to adjust plane and crew schedules. Those adjusted schedules were often logistically flawed because the planes and crews matched at a specific place and time didn’t make sense in the real world. Making matters worse, those adjusted schedules had to be re-(and re- and re-)adjusted every time either the weather changed or operations changed (ie., more flight cancellations), and both the weather and operations were changing throughout Southwest's route network. The culprit, according to people at Southwest quoted by the Wall Street Journal, was scheduling technology that could not sufficiently scale and is nearing end-of-life. Whether a problem of rapid growth or neglected investment, everybody seems to agree that Southwest has been living on borrowed time.</p>
<p>The neglect of core technology is an all too common a practice by virtually every company: the technology becomes more complex than its foundational architecture was ever intended to support, the team familiar with the technology erodes through layoff and attrition, and as a result a technology become more vulnerable to failure. But it still works day in and day out, so there is no incentive to invest in repair or replacement.</p>
<p>Unfortunately, vulnerability of an aging technology isn't a financial statement phenomenon; it is at best one risk mentioned among many in the 10-K. However, money spent on the labor to reduce that vulnerability is a financial statement phenomenon. Add to that the opportunity cost: every dollar spent on risk mitigation is a dollar that doesn't go toward a net new investment in the business, or a dollar that can't be returned to investors. While it doesn’t cost anything for a technology to fall into a state of disrepair, it sure costs a lot to rehabilitate it. Conversely, neglect is not only free, it’s cash flow positive: i.e., the company can claim victory for streamlining tech spend.</p>
<p>But as mentioned above, neglect creates business risk. And risk is a peculiar thing.</p>
<p>There have been dozens of massive macroeconomic risks realized in the past 25 years - acts of terror, acts of war, financial crises, environmental disasters, viral pandemics - that have made a mockery of the most sophisticated of corporate risk models. Yet risk is still no better an investment proposition than it was a quarter of a century ago: investing to be prepared for "black swan" events (i.e., <a href="http://www.rosspettit.com/2010/08/one-way-risk-and-robustness-of-it.html">robustness</a>) is still an uncommon practice (n.b. perhaps inventory build-up and multiple sourcing practices in response to supply chain disruption in recent years will change this, but it remains to be seen how durable this turns out to be). And anyway, dilapidated internal systems are self-inflicted exposures: even if they can talk about such risks publicly, CEOs aren't paid for their acumen at developing and executing remediation strategies. Plus, just about every company will accept exposure to technology risk as business as usual. Business is risk. If a company spent to mitigate every last risk, it would be wildly unprofitable. There's an amount the company budgets annually for maintaining the status quo and every now and again the company will try staffing some up-and-coming manager or hire some hotshot consultants to figure out a way to make things a little less bad. This is great, but it amounts to pennies spent mitigating very large dollar amounts of exposure. In other words, hope is all too often the insurance policy against having a huge hole blown in the income statement by the failure of a high-risk technology.</p>
<p>While risk is generally not an investible proposition for technology (unless business operations are being wildly disrupted because of it, such as is happening to Southwest this week), sometimes there is a golden ticket that promises to make the risk simply go away, such as when a company has a legitimate case to make that it can reposition itself as an ecosystem if only it were built on a cloud-based platform. With consistent cash flows and an existing - and under-leveraged - network of partners, the right leader can motivate investors to pony up to make a wholesale replacement of existing technology. It's a growth story with a side order of risk mitigation through modernization. And with the appropriate supporting data, this is an attractive proposition to risk capital.</p>
<p>Investible, yes, especially since it is more than just an investment that makes the business less bad than it need be. But the headline doesn't tell the whole story. Switching from one technology to another is not a trade of one set of business parameters (the company's current business and operating model) for another (the company's future business and operating model). It is more accurately a trade of risk profiles: exposure to a current technology (the tech and operations supporting current cash flows) versus exposure to aspirational technology (the tech and operations supporting aspirational cash flows).</p>
<p>The magnitude of the technology risk between the two is really no different. It is, optimistically, an exchange of current system sustainability risk for the combination of development risk and future system sustainability risk. System fragility and key person risk may make the status quo highly unattractive, but software development has long track record of cost overruns and failure. In practice, of course, development risk and current system sustainability risk are carried at the same time, and <a href="http://www.rosspettit.com/2020/08/legacy-modernization.html">current system risk may be carried for a very long time</a> if it proves difficult to fully retire some legacy components. The true exposure is therefore far more complex than current versus future technology. In practical terms, this means is that just because “reinventing the business” makes legacy modernization more palatable to investors doesn’t mean it offers the business a safe way out of technology risk.</p>
<p>It bears mentioning that a business electing to mitigate existing technology risk through reinvention is taking on a new set of challenges, especially if that company has not made such an investment in recent years. It must be ready to deal with <a href="http://www.rosspettit.com/2016/02/how-operational-gap-becomes-generation.html">contemporary software delivery</a> patterns and practices that are much different from those of even a decade ago. It must know how to <a href="http://www.rosspettit.com/search?q=replatforming+myths">avoid the common mistakes that plague replatforming initiatives</a>. It must be prepared to deal with <a href="http://www.rosspettit.com/2013/12/the-corrosive-effects-of-complexity.html">knowledge asymmetry</a> vis-a-vis vendor partners. It must know how to set the expectation for <a href="http://www.rosspettit.com/2012/04/shorten-results-cycle-not-reporting.html">transparency in the form of working software</a>, not progress against plans. And it must be prepared to practice an <a href="http://www.rosspettit.com/2015/02/activist-investing-in-strategic-software.html">activist form of governance</a> - not the <a href="http://www.rosspettit.com/2013/10/can-we-stop-misusing-word-governance.html">bullshit spewed by vendors passed off as governance</a> - to make those investments a success.</p>
<p>Reinvention promises freedom from the shackles of the status quo, but while going about that reinvention, exposure to technology risk vastly increases and stays at an elevated level for a long period of time. The future awaits the replatformed business, but do be careful what you get investors to agree to let you sign up to deliver.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-82968995487532661022022-11-30T23:59:00.003-06:002022-12-01T00:12:23.541-06:00You should...<p>Our favorite craft brewer has a tap room. They never have more than a dozen beers on tap. They only serve their own brewed beers, never anything sourced from another producer. They have only marginal amounts of product distribution; for all intents and purposes, they sell only through their tap room. While they’ll fill a growler or crowler, they do not keep inventory in cans, only kegs. They turn over 2/3rds - maybe it’s 3/4ths, maybe it’s 7/8ths - of their taps seasonally, where a season might be as short as a month or as long as half a year, depending on the beer. They have a flat screen but never broadcast sports or politics, only streamed images of nature or trains or the like. They stream their own custom audio playlist to provide ambient noise.</p>
<p>They run the business this way because this is the business they want to run. They have direct access to 99.9% of their customers (not 100% as once it leaves the premises, the contents of a crowler could end up in anybody’s stomach…) They’re not committed to provide beer to other businesses on any kind of a product mix by volume, let alone date delivery schedule. They get to experiment with product, constantly. They don’t make what they sell, they sell what they make.</p>
<p>On any given day in the taproom, a customer will give them advice, a sentence that always begins with the words “you should.” Such as, “you should distribute this and that beer to these bars in Madison and Milwaukee - you’d sell 20x as much as you do in a single tap room.” Or, “you should have a small electric oven and sell food.” Or “you should have dozens of TVs with football and this place would be packed on weekends.”</p>
<p>They are every bit as good at customer interaction as they are with making and serving beer. They listen patiently, smile, and reply with “thank you, we’ll think about that.” </p>
<p><center>* * *</center></p>
<p>The software business has long been intertwined with management consulting to one degree or another. Decades ago, tech automated tasks that changed long standing business processes; management was fascinated as this made businesses more efficient. The dot-com era (followed by mobile, and shortly thereafter by social media) ushered in changes in corporate <— —> customer and —> employee interactions. The contemporary tech landscape (cloud, AI, distributed ledger tech) - and not for the first time in the history of tech - promises to “reinvent the business.” ‘Twas ever thus: tech has long been, and sought out as, a source of business advice.</p>
<p>On the whole, tech is not a source of bad advice. When tech gets close to a problem space, it brings a different and generally value generative solution. Why do that work manually when we can easily automate and orchestrate that? Why have this customer talk to that salesperson when the customer can do that for themselves 99% of the time? Why have people churn through that data when a machine can learn the patterns?</p>
<p>But sometimes, advice from tech is truly value destructive. </p>
<p>I wrote about this some years ago, but standing next to me in the queue for a flight out of Dallas were a couple of logistics consultants <a href="http://www.rosspettit.com/2017/01/where-has-all-business-knowledge-gone.html">lamenting the fact that a client had taken a tech consultancy’s advice</a> and prioritized flexibility over volume in their distribution strategy. It sounds great in a windowless conference room: why let restaurants (who are 80% of the clientele) run out of branzino before the night is over? <b><i>You should</i></b> run a fleet of small delivery trucks to top up their stock of branzino for the night in near real time. Except, the distribution cost for a few branzino to that restaurant - even if we put it in a small truck with a few packages of great northern beans to the restaurant down the street and some basmati to a restaurant a few blocks away - is bloody expensive. The economics of distribution are based on volume, not flexibility. That restaurant will have to put a lot of adjectives in front of the noun to justify the cost of limited-supplied branzino on a Tuesday in November. ’tis far more economically efficient for the waitstaff to push the red snapper when the branzino runs out. </p>
<p>Another time, I was working with a manufacturer of very large equipment. The manufacturer sold through a dealer network. Dealers are given guidance from the manufacturer’s sales forecasting division as to the volume of each type of machine they should expect to sell in the next two years, by quarter. Dealers order machines with that guidance as an input (their balance sheet being another input), and over the course of time dealer orders get routed to a manufacturing plant to the dealer sales lot. The tech people couldn’t grok this. Manufacturing something without a specific end customer? <b><i>You should</i></b> have just-in-time manufacturing, so a customer order goes directly to a manufacturing facility. That way there is no finished goods inventory collecting dust on a dealer lot and the component supply chain can be somehow further optimized. Except, that exposes the manufacturer to demand swings. As it is, the manufacturer has hundreds of dealer P&Ls to which it can export its own P&L. They’ll build give or take 250,000 units of this model, and give or take 160,000 units of that model, and give or take 90,000 units of that other model, and 000,000s of all those other models, year in and year out, with minor modifications in major product cycles in an industry regulated by, among other things, emission standards. That’s a lot of machine volume, especially when there are dozens and dozens of models of tens of thousands of unit volume. The manufacturer has a captive dealer network that will buy 100% of what the manufacturer produces. The dealer network acts as a buffer on the manufacturer’s P&L: while the good years may not be maximally great for the manufacturer, the bad years aren’t too terribly bad, let alone event horizons on the income statement. That, in turn, creates consistency of cash flows for the manufacturer, which investors reward with a high credit rating, which makes debt more easily serviceable, which leaves money to reward equity holders. Just-in-time manufacturing exposes the manufacturer to end-customer market volatility, which would require a substantial change in capital structure, which would penalize both equity and debt holders. Markets go up, but markets also go down: minimizing the downside was of more value than maximizing the upside. Tech has known these swings (anyone remember the home computer revolution?), but the commercial landscape is so destructive, there is a lack of instititional memory. </p>
<p>There was the insurance company implementing a workflow management system for automating policy renewal. Although insurance data is highly structured, there are a lot of rules and conditions on the rules governing renewal, spanning the micro (e.g., geographic location in a city and number of employees) and macro (discounting and payout rules in the event a customer has a property & casualty policy as well as an umbrella policy, as opposed to just a property & casualty policy). There are a lot of policy renewal rules that go very deep into the very edge cases of the edge cases (e.g., a policy that renews on February 29). Well, the boss wants this policy automation thing done quickly, because we have a great story to share with investors that we’ve reduced the labor intensity of policy renewal. Along comes a tech vendor with a compelling suggestion: insurance company, <b><i>you should</i></b> incentivize your process automation vendor by rewarding them for the shortest time to development of each codified rule. (The operative word here is development, which is not the same as production delivery: delivery was deemed out of the control of the development partner.) Except, the contract the insurance company signed indexed cash payable to the vendor for development complete of each rule. Within three months, the vendor had tapped out over 80% of the cash for software development, yet each rule that was dev complete had on average over five severity-1 defects associated with it and was therefore unsuitable for deployment. Worse still, one third of those defects were blocking, meaning there were countless other defects to discover once the blocking defect was removed. </p>
<p>Then there is the purely speculative pontification. I wrote three years ago that <a href="http://www.rosspettit.com/2019/07/late-mover-advantage.html">management consultants love to advise customers to get into the disruption game</a>. Consider what was happening in home meals and transportation and the like 5 years ago: this is coming for your industry, so you better get in the game. To wit: hey financial services firm, <b><i>you should</i></b> invest in developing your own line of disruptive fintech. Except, in practice it turned out to be far more prudent for incumbents to colonize startup firms by placing people on startup firms boards and then co-opt them to the credit cycle through greenmail policies. The latter strategy was a hell of a lot cheaper than the former. And those home-meal- and food-delivery tech firms who were the reference implementation for disruption? They ended up disrupting one another, more than they disrupted the incumbents. Come to think of it, the winning strategy was that of the wise fighting fish in the movie From Russia, With Love: the stupid ones fight; the exhausted winner of that fight is easy prey for the smart fighting fish who sat out the fight and waited patiently. (Note to self: this is <a href="http://www.rosspettit.com/2022/10/strategy.html">two consecutive months</a> that I’ve used FRWL as an analogy, I really need to diversify my analogies. That said, Eric Pohlmann’s voiceover is truly underrated in cinematic history.)</p>
<p>This is, arguably, playing out today as <a href="https://www.wsj.com/articles/investors-are-losing-patience-with-slow-pace-of-driverless-cars-11669576382">auto manufacturers pull back from autonomous vehicle investments</a>. Hey automotive firm, <b><i>you should</i></b> invest in autonomous vehicle delivery because it will totally disrupt the industry. Except, it’s proving to be much further away from reality than thought. It was great as long as delivery expectations were low and valuations were high. It isn’t so lucrative now. </p>
<p>Obviously, all advice has to meet a company where it’s at. Generic assertions of impending tech disruption in a well established industry crater instantly (even faster than crypto during a bank run) when they meet incumbent economic dynamics. People (especially long term employees) resist operational change; debt cycles outright crush those changes. Not meeting a company where it’s at renders the advisor a curious (and at best mildly amusing) pontificator.</p>
<p>At the same time, advice also has to meet the industry that consumer is in where it’s at. That’s not so easy when the advisor can only think transactionally. “Digital disruption” and “omnichannel” are, thankfully, out of favor now. They were ignorant of the industry dynamics at play, as mentioned earlier: co-opt the disruptor to the prevailing industry trends and the aspirant tech cycle is subservient to the credit cycle. It is (if ironically in evolutionary terms) well captured by <a href="https://i.pinimg.com/originals/16/30/d1/1630d15d0a94cbe4b81e4267097f4f21.gif">Opus the penguin’s response to the allegedly inevitable</a>.</p> <p><center>* * *</center></p>
<p>One thing about being in the advisory space is that at a micro level, just about every firm has something - many somethings - unique to offer. (The caveat “just about” is intentional: it’s just about, but not all: as Mojo Nixon pointed out, <a href="https://youtu.be/mpb4ZAAP6Z4">Elvis is everywhere, but not in everyone</a>.) “You should” advice that does not reflect that uniqueness - the expression of the company itself - is bound to fall flat. Yes, macro trends matter, but start with the business itself. If the people in that business know who they are and who they are not, you’ve got a great place to start. And if they don’t, the most Hyde Park Corner prophet of “disruption” isn’t going to hold an audience for long.</p>
<p><center>* * *</center></p>
<p>In the interest of full disclosure, we have, as you might well expect, been sources of what we deem brilliant “you should” advice to the aforementioned craft brewer. <b><i>You should:</i></b></p>
<ol><li>Have a beer that incorporates cough syrup as an ingredient, a beer version of a <a href="https://youtu.be/lcay7sx4_fI">Flaming Moe</a>.</li>
<li>Let me put my head underneath the taps like <a href="https://youtu.be/eelRNVgYzDs">Barney Gumble when Moe isn’t around</a>.</li>
<li>Have drone delivery of your beer. Because drones.</li>
<li>Have a trap door you can open that drops egregious “you should” pontificators into a pool of hungry alligators.</li></ol>
<p>We’ve been assured that the proprietors are giving serious thought to every one of these.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-46538651457028658602022-10-31T23:58:00.010-05:002022-11-02T23:29:56.258-05:00Strategy<p>A few months ago I was asked to review a product strategy a team had put together. I had to give them the unfortunate feedback that what they had created was a document with a lot of words, but those words did not articulate a strategy.</p>
<p>There is a formula for articulating strategy. In his book <a href="https://www.amazon.com/Good-Strategy-Bad-Difference-Matters/dp/0307886239">Good Strategy, Bad Strategy</a>, Richard Rumelt puts forward the three essential elements of a strategy. It must:<p>
<ol>
<li>Identify a need or opportunity (the why)</li>
<li>Offer a guiding policy for responding to the need or opportunity (the what)</li>
<li>Define concrete actions for executing the policy (the how)</li>
</ol>
<p>There’s more to it, of course. The need or opportunity has to be well structured and specific. The guiding policy must be focused on the leverage that a company can uniquely bring to bear (this is effectively the who that a company is) as well as anticipate the reaction of other market participants. The actions must be, well, actionable.</p>
<p>What we see too often passed off as strategy are goals (“grow the business by xx% in the next y years” is a goal, not a strategy); vision statements (“we want to be the premier provider of aquatic taxidermy products” is a lofty if vain ambition); or statements that are effectively guiding policies (“to be the one stop shop for all of our customer’s aquatic taxidermy needs”) without the need (why) articulated or actions (how) defined.</p>
<p>I’ve seen the aftermath of a number of failed strategic planning initiatives. Each time, the initiatives failed to articulate at least two, and sometimes all three, of the aforementioned elements that compose a strategy. The postmortems to understand why these initiatives failed exposed a few consistent patterns.</p>
<p>One pattern is that the people involved in the strategic thinking did not truly come to grips with what is actually going on in a company’s environment. To understand “what’s going on” requires collating the relevant facts (internal and external) into a cohesive analysis. That, in turn, requires a great deal of situational awareness: an honest assessment of a company’s capabilities, a high degree of customer empathy, and a fair bit of macroeconomic understanding. It also requires a sense of timeliness: not too immediate so as to be just a tactical assessment (your competitors are easier to do business with through digital channels than you are), not too far in the future to be purely speculative (ambient computing). All too often, the definition of the opportunity is derived - in many cases, copied verbatim - from some other source, such as an analyst report, somebody else’s PowerPoint making the rounds inside the company, the company’s most recent annual report. Or it is a truism (the world of aquatic taxidermy is going digital). Or worse still, it is a tautology (customers will buy aquatic taxidermy products through digital channels and from physical store locations from specialist retailers and general merchandisers).</p>
<p>Defining the opportunity through a thorough understanding what’s going on is hard. It’s also awkward, an exercise of the blindfolded people describing the pachyderm. And that’s ok. It takes several iterations, it requires diversity of participants, and while there will be many moments when the activity feels like churn (and not the kind of churn that yields butter or ice cream), it is worth the investment of time. The “what’s going on” is, arguably, the most important thing in formulating a strategy. If the “what’s going on” is wrong, the opportunity isn’t clear, and as a result the most eloquent guiding policy and the most definitive of actions will not solve the right problem. By way of analogy, directional North stars are great, but in the field we still largely navigate by compass. A compass is low tech. It works throgh attraction to a magnetic field that serves as a close enough proxy to true north, which we correct with <a href=“https://en.wikipedia.org/wiki/Magnetic_declination”>declination</a>. As Dr. John Kay showed, the most successful companies <a href="http://www.rosspettit.com/2019/11/muddling-through.html">navigate by muddling through</a>.</p>
<p>Another pattern: whereas the would-be strategic thinkers spend comparatively little time defining the opportunity, they are obsessed with formulating the equivalent of the guiding policies. Some of this is likely a function of professional programming: if, for the totality of your career, the boss has supplied you with the reason why you do the things that you do, it isn’t natural to start a new initiative by asking “why”. Just the opposite. But the biggest reason for focusing on the guiding policies is that the strategic thinkers believe they are being paid to come up with clever statements of what a company should do. No surprise that strategic planning exercises tend to produce a lot of “what to do” options, which they present as a portfolio of strategic opportunities. Yes, the portfolio passes the volume test applied to any strategic planning initiative: too few slides suggests the team just faffed about for several weeks. So what we get is a shotgun blast of strategy: dozens of “what to do” options, only some (not many, let alone all) of which are complimentary to one another. Plenty of things to try, but they’re just that: things to try. They don’t converge at cohesive interim states where the company is poised to engage in a next level of exploitation of an opportunity or need, exploitation that is amplified through development of the unique capabilities the company brought to the table in the first place. This is not a strategy as much as it is a task list of very coarsely grained things to maybe do, at some point, and see what happens.</p>
<p>The fear of not having a sufficient quantity of clever “whats” is understandable, but misplaced. ‘Tis better to have a few very powerful statements of “why” that tell the executive leadership team and the board very concrete things they do not know about their company or market, with very strong statements of “what” to do about them.</p>
<p>The third pattern contributing to strategic planning failure is the aversion to defining the concrete actions necessary to operationalize a strategy. As damaging as getting the why wrong is to the validity of the what, glossing over or ignoring the how renders a guiding policy into a fairy tale. Figuring out the how is, for a lot of people, the least attractive part of strategy formulation: it requires coming face to face with the organizational headwinds such as the learned helplessness, the dearth of domain knowledge, the resistance to change that characterize legacy organizations. Operationalization - especially in an environment with decades old legacy systems compounded on top of one another - is where great ideas go to die: we could never do that here, you don’t know the history, it doesn’t work like that, and so forth. Yet a strategy without a clear path of execution is just a theory. No company has the luxury of not starting from where it is today. Strategy has to meet a company where it is at. This isn't big up-front design; it's just the first iteration of the end-to-end to establish that execution is in fact plausible, supplemented with a now / next / later to define a plausible path of evolution.</p>
<p>The aversion to defining execution of a proposed strategy stems from at least two sources. One is the tedium of deep diving into operational systems to figure out what is possible and what is not, and to then delve into the details to turn tables to interrogate in detail the things we can do, changing the question from "why we can't" into “why we can”. But the more compelling reason that strategic thinkers avoid detailing execution that I’ve observed is the fear that a single ground truth could undo the brilliance of a strategy. Strategy is immutably perfect in the vacuum of a windowless conference room. It doesn’t do so well once it makes first contact with reality. And that is the real world problem to the person academically defining strategy in the absence of execution: when given a choice, a company will always choose as Ernst Stavro Blofeld did in the movie version of <a href="https://en.wikipedia.org/wiki/From_Russia_with_Love_(film)">From Russia With Love</a>: although Kronsteen’s plan may very well have been perfect, it was Klebb who, despite execution failure (engineered through improvisation by James Bond), was the only person who could achieve the intended objective. Strategy doesn't achieve outcomes. Delivery does.</p>
<p>I’ve worked with a number of people who insist they no longer wish to work in execution or delivery roles, only strategy. Living in an abstract world detached from operational constraints is great, but abstract worlds don’t generate cash flow for operating companies. The division of strategy and delivery is a professional paradox: if you do not wish to work in delivery, by definition you cannot work in strategy.</p>
<p>Strategy is genuinely hard. It isn’t hard because it bridges the gap between what a company is today and what it hopes to be in the future (the what). It’s hard because good strategy clearly defines what a company is and is not today (the who), what the opportunities are and are not for it in the future (the why), and the actionable steps it can take to making that future a reality (the how), orchestrated via compelling guiding policies (the what).</p>
<p>Successful business execution is difficult. Successful business strategy is even more difficult. If you want to work in strategy, you better know what it is you're signing up for.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-16438804154542127552022-09-30T22:46:00.001-05:002022-09-30T22:46:00.226-05:00Management is Getting Things Done Through People<p>Last year, I wrote that <a href="http://www.rosspettit.com/2021/08/what-exactly-is-agile-management.html">one of the core capabilities of an Agile manager</a> is to "create and adapt the mechanical processes and social systems through which the team gets things done." I went on to describe a little bit of what allows the Agile manager to succeed at this; it merits a bit more commentary.</p>
<p>The mechanical processes a team performs matter because orchestrating the right activities in the right sequence at the right times are essential to exploring a problem space and evolving solutions. The Agile toolkit is well established and doesn't merit detailing here, but it is worth pointing out there are a lot of different techniques, activities, and ceremonies (and a multitude of variations therein) that the Agile manager can reach for; the Agile manager must be sufficiently fluent in the mechanics to know which are appropriate, and which are not, for the circumstances. Yes, process matters.</p>
<p>But the mechanical processes themselves aren't enough: the manager has to create the right social system in which people can participate effectively. That's much harder than executing to a script prescribed by a mechanical process because the manager has to understand the skills and aptitudes, strengths and weaknesses, competencies and limitations of the people within the team.</p>
<p>Sometimes people are exactly as advertised: a subject matter expert, a department director, a knowledge worker. And sometimes they're not. This person isn't an expert in supply chain, familiar with the abstract patterns and business processes of supply chain management, with first hand experience in a variety of implementations; they actually only have experience in how this one company manages its supply chain, and only in how it operates, not how it was designed in the first place. That department director is director in title only, because they've delegated all responsibility to subordinates and require decisions they are required to make to be framed as single-alternative choices. And that knowledge worker is really only fluent in which buttons to press at which part of a process and how to fix common exceptions, but has no idea why they do what they do.</p>
<p>To create functional social systems, the Agile manager must be able to meet the people in their team where those people are at. That means some degree of fluency in the subject matter for which an expert has been staffed, some degree of familiarity with the types of decisions the department director makes, some recognition of the wisdom a seasoned knowledge worker possesses. In last year's post, I suggested this is a function of both EQ and professional experience. EQ is key to awareness, but not technical understanding. Professional experience can be the source of techncial understanding, but is limited because no manager has experience with every domain and every context they're asked to manage.</p>
<p>What the manager does not know through experience the manager must try to learn through theory by conducting independent research and investigation into the respective domains to understand the context of the various participants. The important thing for the manager isn't to become a domain expert, but to be sufficiently fluent in the terminology to use and the questions to ask to assess, engage and manage people of various backgrounds and various capability levels.</p>
<p>Finding the right level of fidelity with which to engage members of the team is a critical component of social system formation. To wit: asking people without first hand knowledge of “what good looks like” in supply chain management to design a next generation process will design a "faster horses" solution that is, at best, less bad than what the company has today. Suppose the manager is able to recognize this deficiency; that recognition is fantastic, but it doesn't give the manager license to tell the team to down tools until the SME who isn't quite a SME is replaced. The fact is, no team is perfect, and the manager has to work with the people they’re staffed with. If a genuine SME can’t be sourced full time, it is incumbent on the manager to (a) create a social system within which the not-quite-a-SME is able to contribute to the best that their knowledge allows them to so that the team can make meaningful progress; and (b) in recognition of the not-quite-a-SME's limitiations, to see that the team validates proposed solutions and models against established industry models (that the manager may very well have to self-source), potentially supplemented with slivers of time from experts from analyst organizations or specialists (that may have to be sourced from the manager's network).</p>
<p>How the manager deals with circumstances like this is the difference between a person mindlessly executing a mechanical process and a person steering a team toward an outcome. The prior is an executor; the latter is a manager.</p>
<p>Sometimes, of course, it just isn't there to be done. About a decade ago, I was part of a technology team partnering with a financial services data business to replatform its operations and core systems. Before the first day was out, it was patently obvious the SMEs and knowledge workers could regurgitate the keys they pressed in the monthly process they followed, but had no understanding of why they did the things they did, nor could they articulate the value of the data they provided to the services their customers consumed that data for. Unsurprisingly, the management - none of whom had first hand knowledge of the business itself, having been installed following the acquisition of the company by private equity - refused to accept our day one conclusion. So on day two we performed workshops that laid bare the knowledge deficit. We abandoned the inception because the people they had brought simply lacked the wisdom that comes with knowledge, and no amount of sourced content and slivers of expert time could compensate: we concluded we weren’t even going to get a faster horses solution out of that group. Can't get blood from a stone, so there's no point continuing to squeeze.</p>
<p>Trust the process? Sure. But any process is only as effective as the people participating in it, and participation is a function of the underlying social system of the team. Creating an effective social system is at the heart of the definition of what management is: getting things done through people.</p>
<p>Taking people at face value based on their title is an abrogation of management's responsibility. There are no free rides in management, be it project, program, product, department, division, or executive. You have to know your people; to know your people you have to meet them where they’re at; to meet them where they’re at you have to understand their context; to understand their context you have to have some familiarity with their domain. The manager who fails to do these things is not a manager, they’re an individual contributor with a highfalutin' title.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-27681951479455847082022-08-31T20:24:00.001-05:002022-08-31T20:24:00.201-05:00What Does God Need With a Starship?<p>Andy Kessler wrote in the WSJ this month about <a href="https://www.wsj.com/articles/live-the-contrarian-way-zuckerberg-musk-complacency-skepticism-investing-expectations-debate-thinking-thought-11661651369">the value of being a contrarian</a>. 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.</p>
<p>For quite a few years now, I’ve <a href="https://leanpub.com/activistinvesting">written about the value of activist investing</a>, 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.</p>
<p>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 <a href="https://foolingsomepeople.com/">Allied Capital</a>, <a href="https://www.marketfolly.com/2010/10/why-david-einhorn-is-short-st-joe-joe.html">St. Joe Company</a>, 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.</p>
<p>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.</p>
<p>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.</p>
<p>Being a contrarian is not the easiest path to take. John Kay <a href="https://www.johnkay.com/2010/11/03/better-a-distant-judge-than-a-pliant-regulator/">once wrote that regulators</a>, 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.</p>
<p>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: “<a href="https://youtu.be/xnxvKJAv5Ik">what does God need with a starship?</a>”</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-18358851165049345952022-07-31T19:00:00.001-05:002022-07-31T19:00:00.191-05:00Shadows<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-33829746432265289742022-06-30T20:46:00.005-05:002022-06-30T20:46:00.188-05:00The New New New Normal<p>My blogs in recent months have focused on macroeconomic factors affecting tech, primarily inflation and interest rates and <a href="http://www.rosspettit.com/2022/03/crowding-out.html">the things driving them</a>: increased labor power, supply shortages, expansion of M2, and unabated demand. The gist of my arguments has been that <a href="http://www.rosspettit.com/2022/05/the-capital-cycle-strikes-back.html">although the long-term trend still favors tech</a> (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?</p>
<p>It is interesting how the nature of expected lasting economic change has itself changed in the last 2+ years.</p>
<p>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.</p>
<p>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, <i>why live in geographic proximity to a career when <a href="https://www.wsj.com/articles/rural-counties-are-booming-pandemic-back-to-office-work-from-home-11656423785">one can pursue a career while living in geographic proximity to higher quality of life?</a></i> 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 <i>status quo ante</i> 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.</p>
<p>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.</p>
<p>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, <a href="https://www.wsj.com/articles/recession-probability-soars-as-inflation-worsens-11655631002">recession expectations have increased</a> 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 <a href="https://www.wsj.com/articles/silicon-valley-investors-give-startups-survival-advice-for-downturn-11653822000">an abrupt volte face from "grow" to "conserve cash"</a>. Tech went from unquestioned winner to loser just on the merits of policy responses to inflation alone.</p>
<p>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 <a href="https://www.wsj.com/articles/war-weather-endanger-global-food-supplies-farm-leaders-say-11656430431">agricultural products</a> and energy. A number of nations across the globe have prospered in no small part because of their ability to <a href="https://www.wsj.com/articles/germanys-economic-miracle-ebbs-olaf-scholz-g7-world-leaders-security-rearm-foreign-policy-11656361529">import cheap energy and cheap food, allowing them to concentrate on development of exporting industries</a> 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 <a href="https://www.wsj.com/articles/for-india-and-japans-green-ambitions-the-heat-is-on-11656495770">deprioritization of social policies</a>. 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.</p>
<p>Tech went from darling to dreadful rather quickly.</p>
<p>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, <a href="https://en.wikipedia.org/wiki/Realpolitik"><i>realpolitik</i></a> 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.</p>
<p>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.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-1630095412101421962022-05-31T22:03:00.002-05:002022-05-31T23:30:10.816-05:00The Credit Cycle Strikes Back<p>A few months ago, I wrote that <a href="http://www.rosspettit.com/2021/10/is-tech-cycle-more-important-than-fed.html">the capital cycle has become less important than the tech cycle</a>. 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.</p>
<p>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 <a href="https://www.wsj.com/articles/crash-of-terrausd-shakes-crypto-there-was-a-run-on-the-bank-11652371839">crypto have cratered</a>. Many tech firms are <a href="https://www.wsj.com/articles/silicon-valley-investors-give-startups-survival-advice-for-downturn-11653822000">being advised to do an immediate volte-face</a> from “spend in pursuit of growth” to “conserve cash.”</p>
<p>But this doesn’t necessarily mean the credit cycle has re-established superiority over the tech cycle.</p>
<p>Capital is still cheap by historical standards. In real terms, <a href="https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value=2022">interest rates are still negative</a> 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 <a href="https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value=2005">2005</a>, when real interest rate curves were positive. Less cheap isn’t the same as expensive. Plus, it’s worth pointing out that <a href="https://insight.kellogg.northwestern.edu/article/companies-hoarding-cash">corporate balance sheets remain flush with cash</a>.</p>
<p>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 <a href="https://www.investopedia.com/terms/r/risk-on-risk-off.asp">risk off</a> as investors seek safer havens.</p>
<p>The risk to the tech cycle is, how far will the Fed push up interest rates to combat inflation?</p>
<p>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 <a href="https://www.wsj.com/articles/fed-official-supports-raising-interest-rates-at-fast-clip-for-several-meetings-11653922800">Fed has made clear they’ll keep increasing rates</a> until inflation cools off. With other shocks lurking - a war in Europe, the threat of food shortages, the threat of <a href="https://www.nerc.com/news/Headlines%20DL/May%2018%202022%20SRA%20Announcement.pdf">rolling electricity blackouts</a> - 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.</p>
<p>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.</p>
<p>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.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-38677979864303452582022-04-30T22:11:00.001-05:002022-04-30T22:11:00.196-05:00Has Labor Peaked?<p>I wrote some time ago that <a href="http://www.rosspettit.com/2021/06/labors-new-deal.html">labor is enjoying a moment</a>. 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.</p>
<p>There appears to be confusion of late as to how to read labor market dynamics. With fresh unionization wins and <a href="https://www.wsj.com/articles/airbnb-adopts-work-from-anywhere-approach-including-overseas-11651192240">increased corporate commitment to location independent working</a>, 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?</p>
<p>The question, <i>has labor peaked?</i>, intimates a return to the mean, specifically that <a href="https://www.wsj.com/articles/workers-are-at-a-marketplace-advantage-but-it-wont-last-employers-labor-workforce-wages-inflation-consumer-demand-11651098621">labor power will revert to where it was pre-pandemic</a> (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 <a href="https://www.wsj.com/articles/us-economy-gdp-growth-q1-11651108351?tesla=y&ace_config=%7B%22wsj%22%3A%7B%22djcmp%22%3A%7B%22propertyHref%22%3A%22https%3A%2F%2Fwsj.ios.app%22%7D%7D%7D&ns=prod%2Faccounts-wsj&wsj_native_webview=ipad">Q1 GDP numbers</a>). 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.</p>
<p>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.</p>
<p>The question, <i>has labor peaked?</i>, becomes relevant only when there is an outright contraction in the job market. For now, the better question to ask is <i>how durable are the changes in the relationship between employers and employees?</i> 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.</p>
<p>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.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-58516371468735599022022-03-31T22:41:00.001-05:002022-03-31T22:41:00.199-05:00Crowding Out<p>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.</p>
<p>The ride could get a little bumpy. Five forces have emerged that threaten to change the corporate investment profile in tech.</p>
<ol><li><b>Labor power:</b> workers have power <a href="http://www.rosspettit.com/2021/06/labors-new-deal.html">like they've not had since before the striking air traffic control workers</a> 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. <a href="https://www.wsj.com/articles/it-will-take-a-while-for-hiring-to-get-ground-down-11648570639">Labor is getting expensive.</a></li>
<li><b>Interest rates:</b> 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.</li>
<li><b>Energy inflation:</b> 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.</li>
<li><b>Supply chain problems:</b> 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 <a href="https://www.theglobeandmail.com/business/article-nickel-prices-leap-to-a-record-over-global-supply-fears-and-short/">nickel market</a> has had a rough ride. And there has been increasing speculation in the WSJ and <a href="https://www.ft.com/content/ad225932-5600-432f-b8bf-e31b8050c73a">FT of food shortages</a> 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.</li>
<li><b>Increase in M2:</b> adding fuel to all of these is a rise in M2 money supply. More money chasing fewer items drives up prices.</li></ol>
<p>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.</p>
<p>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 <a href="https://www.bls.gov/news.release/realer.nr0.htm">negative growth again</a>, 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.</p>
<p>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.</p>Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-80625340203911608042022-02-28T21:02:00.001-06:002022-02-28T21:02:00.199-06:00Shortage<p>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.</p>
<p>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.</p>
<p>Supply shortages twined with excess capital have created inflation like <a href="https://www.wsj.com/articles/feds-preferred-inflation-measure-reaches-fastest-pace-since-1983-11645799601">we’ve not seen in nearly 40 years</a>.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>Among the labor markets suffering a supply shortage is K-12 education. Education has <a href="https://www.wsj.com/articles/teachers-are-quitting-and-companies-are-hot-to-hire-them-11643634181">become a less attractive occupation since the pandemic</a>. A highly educated cohort disgruntled with work is an attractive recruiting pool for all kinds of employers.</p>
<p>The exodus of people from the teaching profession has created <a href="https://www.wsj.com/articles/schools-struggle-to-find-substitute-teachers-as-omicron-surges-11642242606?mod=article_inline">a shortage of teachers</a>. 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.</p>
<p>I’ve written before that <a href="http://www.rosspettit.com/2017/11/looking-for-disruption-dont-look-to.html">technology is generally not a disruptive agent</a>. 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.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-80303934855408056552022-01-31T22:50:00.000-06:002022-01-31T22:50:00.219-06:00How City Hall Can Fight City Hall<p>I live in a rural area. There isn’t a whole lot of agriculture or heavy industry, but there are a lot of inland lakes and national and state forest acreage. No surprise that one of the principal industries here is tourism. It’s a year-round industry as the area supports fishing and hunting, silent and motorized water- and winter-sports, youth summer camps and RV parks. A great many of the local businesses cater to tourists, from bait shops to bars, resorts to equipment rental, boat docks and off-season boat storage.</p>
<p>Like any community, there is tension. One source of tension has to do with how the land is used. There are those who advocate for more motorized activities (e.g., open more roads to ATV / UTVs) and those who advocate for less (e.g., more no wake zones on lakes). To some extent, the motorized v non-motorized debate is a proxy fight for the tourism industry. It is believed that opening more roads for ATV usage will bring more people into town centers where they’ll spend money, at the cost of noise pollution. Similarly, it is believed that creating more no wake zones will reduce shoreline erosion beneficial to homeowner and habitat alike, at the cost of vacationer experience. The extent to which the tourist is accommodated is, like any economic issue, very complex: the year-round resident who is dependent directly or indirectly on tourism has different goals from those of the year-round resident who is not dependent on tourism, or the non-residents with a second home here, or the tourists who visit here for a myriad of reasons. While an economic phenomenon, it is inherently political, and there are no easy answers.</p>
<p>Unsurprisingly, some flashpoints have emerged. One, specifically regarding land usage, has to do with income properties. From roughly 2008 until 2019 or so, real estate in this area was inexpensive, a long-lived aftereffect of the 2008 financial crisis (fewer buyers) as well as changes in where and how people vacationed (fewer tourists). COVID-19 changed this. With international borders closed and vacation options limited, people vacationed where they had once spent their summers. Some stayed permanently. The property market went from stone cold to red hot in a matter of months as people gobbled up properties as first and second homes as a means of social distancing while working or vacationing.</p>
<p>COVID-19 also put a premium on rental properties. This created an acute supply shortage. Low interest rates and cash accumulated by households made for a lot of willing property investors. Quite a few bought properties, hired tradespeople to fix them up (or fixed them up themselves), and listed them on vacation rental property sites.</p>
<p>The trouble is, while the properties may have been improved, many didn’t get the building inspections required for an income property, nor the permits required to rent out the properties.</p>
<p>The zoning commission for at least one county here is treating this as a compliance problem, which of course it is. They’ve done an analysis (more about that in a bit) and concluded there are hundreds, possibly thousands of properties that are out of compliance. They have also concluded that the task of (a) ascertaining whether they are in fact out of compliance and (b) bringing them into compliance will be time consuming and difficult.</p>
<p>A different way of looking at this is as a fraud problem. Property owners without permits are defrauding the county (out of tax revenues) and their customers (that the property is up to building code, health & safety code, and the like).</p>
<p>Fraud management consists of three types of activity: prevention, detection, and investigation. Let’s start with detection. The county entered into an arrangement with a software company that analyzes rental property sites and county tax filings to identify (that is, detect) which properties are out of compliance (committing fraud). According to their analysis, there are somewhere between 700 and 2,000 potential income properties in the county without the appropriate inspections and permits.</p>
<p>This brings us to investigation. Two thousand properties potentially out of compliance may not sound like a lot, but it is when there are only a few building inspectors who work for the county. Plus, many of the property owners receiving citations in the mail are disputing them in court, delaying resolution and tying up an already limited staff of inspectors. This doesn’t just point out the problem of labor intensity of inspections as much as it makes clear how the scale of the problem has changed: something that had for decades been a problem at a human scale is now at machine scale. While scaling the detection of the problem was relatively easy, scaling the inspection will not. Sure, a small fleet of drones could probably assist with investigation and alleviate some of the labor intensity, but that would require the county to spend money on both labor and tech for a limited solution with no guarantee of results.</p>
<p>Which leads us to prevention, the third activity of fraud. The best way to make the investigation activity manageable is to prevent it from getting out of control in the first place. Yes, the numbers suggest it is already excessive, but the amount of undeveloped land in this area up for sale suggests there is room for more property development. Plus, per our earlier definition, fraud is committed with every rental of an out-of-compliance property, so in theory the intent would be to prevent the next rental of an out-of-compliance property.</p>
<p>Practically speaking, there is very little a single county or even a handful of counties with small tax bases can do to prevent fraud like this. Prevention will probably require state-level-legislation, and by several states. There have been similar actions taken by state governments. For example, in the past five years most states have enacted marketplace facilitator laws to make it easier for the multitude of state, county and municipal level departments-of-revenue to collect sales taxes from online marketplace retailers: instead of needing to collect from the individual merchants, the marketplace facilitator is responsible for collecting and remitting sales taxes. States could similarly enact legislation obligating property rental booking services to require listing owners to register valid permits at risk of penalty for non-compliance, and report rental data to counties where properties are rented. The onus would then arguably be on the vacation property listing sites to confirm merchant compliance, which would be checked via periodic audit similar to a sales tax audit of an online marketplace. There would still be leakage (there will always be) but not likely as much as there is today.</p>
<p>“You can’t fight city hall” has a different meaning today. Half a century ago, it meant the individual couldn’t expect to win a fight with a government bureaucracy. Today, a county bureaucracy can’t expect to win a fight against the modern day equivalent (socioeconomic trends of cheap capital and changing vacation patterns amplified by tech). But one thing has not changed: the underdog can only win by redefining the problem, and collaborating with many others to change the rules of the game.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-76996584299455326892021-12-31T19:23:00.000-06:002021-12-31T19:23:00.193-06:00What does it let us do that we couldn't do before?<p>In the past year, activist investors have pushed for retailers like Macy’s and Kohl’s to separate their eCommerce operations into separate listed entities. The argument goes that eCommerce retail growth is rapidly outpacing bricks-and-mortar business growth, and saddling a high-growth business to an ex-growth legacy company depresses enterprise value. Separating them into two listed entities liberates the trapped value and allows investors to benefit: the eCommerce business for growth, the bricks-and-mortar business for its stable (if declining) cash flows, real estate holdings and intellectual property (e.g., brand) value.</p>
<p>Not so fast. There are counter-arguments to making this separation, and not just that a growing eCommerce division covers up for a struggling traditional retail operation.</p>
<p>Principal among the arguments for keeping the business whole is that even with - and perhaps especially because of - COVID, there’s a strong argument that the omnichannel strategy is the strongest hand to play. Omnichannel requires a seamless customer experience that independent eCommerce and physical store legal entities will struggle to curate. It stands to reason that what is good for the brick and mortar business is not necessarily the same as what is good for the eCommerce business, and vice-versa. Having eCommerce and brick-and-mortar working independently - if not at cross-purposes - will do little to harmonize the customer experience, not helpful at a time when doing so is deemed essential to survival.</p>
<p>An extension of this argument is that an omnichannel strategy doesn’t distinguish among channels, so separating the two - and thereby creating a distinction between them - is solely an act of financial engineering. Assessed as a financial act, the obvious question is, who wins? The consultants, attorneys and banks that collect fee income from the separation are clear beneficiaries: they’ll collect their fees regardless the outcome. Investors may or may not win out, as bond and equity prices in both legal entities may plummet after their separation, but at the start they will have no less value than they do today plus upside exposure through clearer value realization paths. Unfortunately, it’s hard to imagine how the pre-separation business itself gains from the separation: does it stand to reason that even more formalized organizational silos, redundant corporate overhead functions, and executives with polarized incentives are customer-value generative outcomes?</p>
<p>This flare-up in retail is interesting because it is the latest incarnation of a long-lived phenomenon of companies touting a change in their capital structure as a strategic initiative. I first <a href="http://www.rosspettit.com/2013/03/the-return-of-financial-engineering-and.html">wrote about this almost nine years ago</a>. At the time, activist investors were attacking tech firms to create new classes of preferred shares or issue new bonds solely for the purpose of extracting cash flows from operations for the benefit of investors. But it wasn’t just an outside-in phenomenon of investors pressing tech firms: Michael Dell had at that time proposed to take Dell private, which did soon thereafter. With only <a href="https://www.ft.com/content/d91a528a-6ee1-11e2-8189-00144feab49a">wolly words to describe the justification for going private</a>, it raised the question, what can Dell do as a private company that it cannot do as a public one?</p>
<p>The current kerfuffle in retail allows us to ask this question more broadly. Changing capital structure is no different from any other use of corporate cash, be it distribution of dividends, to <a href="http://www.rosspettit.com/2020/08/legacy-modernization.html">replatforming operations</a>, to simply <a href="http://www.rosspettit.com/2019/03/sometimes-strategy-is-buoy-credit-rating.html">strengthening the credit rating</a>. Those bankers, lawyers and consultants don’t come cheap. The question is, what does it let the business do that it couldn’t do before?</p>
<p>With the benefit of hindsight, we know that Dell the publicly listed company became Dell the private equity fund. Among its acquisitions was EMC, and in particular EMC’s stake in VMWare, a position so lucrative that when Dell went public again in 2018 <a href="https://www.ft.com/content/6de48be8-a276-4356-9361-404b7f3b95b8">the implied value of the business excluding that holding was effectively nil</a>. Dell the public company could have acquired EMC; publicly listed tech companies make acquisitions all of the time. What going private let the business do that it couldn’t do before was to concentrate ownership, and subsequently the returns from those acquisitions, in fewer people’s hands.</p>
<p>In the retail sector, the answer is not necessarily so cynical. Saks made the split into separate bricks & mortar and eCommerce legal entities earlier this year. In the words of the eCommece CEO, as <a href="https://www.wsj.com/articles/should-retailers-split-e-commerce-from-stores-a-high-level-debate-11640779202">quoted in the WSJ this week</a>, both businesses benefit overall because they don’t have the same dollars chasing conflicting investment opportunities exclusively in an IRL and online realm, the eCommerce business has expanded its eCommerce offerings and reach, the brick and mortar business has better integration with eCommerce than it did before, and eCommerce now has an employer profile attractive to tech sector workers. In short, to destroy a longstanding phrase, by being two entities, the Saks eCommerce CEO argues that the sum of the parts is greater than the whole could ever have been. The CEO argues that the separation lets Saks do something - probably many somethings - it could not do before.</p>
<p>This, in turn, begs the question why.</p>
<p>There’s a quote attributed (quite probably erroneously) to the late Sir Frank Williams of the eponymous Williams Formula 1 team. When asked whether he approved of a proposed change to the race car, the legend is that his only response was, “does it make the car go faster?” It’s a deceptively simple question, one that I long misunderstood, because I <a href="http://www.rosspettit.com/2006/12/it-might-make-car-go-faster-but-does.html">took it at face value</a>. Engineers can do any number of things to make a car go faster that also make the car less reliable, less stable, incompatible with sporting regulations, and so forth. While the question “does it make the car go faster” appears a simple up-or-down question, it actually questions the reasons behind the proposed change. How does it make the car go faster? Why hasn’t anybody thought to do this before? In answering those questions, we find out if the proposed change is clever, or too clever by half.</p>
<p>And that’s the question facing traditional retail. A commercial restructuring that alleges it creates value for the business (that is, not just investors) flies in the face of conventional wisdom. Sometimes that conventional wisdom is correct: Dell shareholders who accepted something less than $14 / share in 2013 lost out on a quadrupling of the enterprise value over an 8 year span (and no the <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview">S&P 500 didn’t perform quite that well</a> over that same timeframe). But then, as John Kenneth Galbraith pointed out, conventional wisdom is valued because it is convenient, comfortable and comforting - not because it is necessarily right. Perhaps Saks and parent HBC are onto something more than just financial engineering, if in fact separating eCommerce from bricks & mortar let them do something they could not do before.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-89613176161611754072021-11-30T22:16:00.001-06:002021-11-30T22:16:00.218-06:00Do we need IT Departments?<p>The WSJ carried a guest analysis piece on Monday proclaiming <a href="https://www.wsj.com/articles/get-rid-of-the-it-department-11637605133">the need to eliminate the IT department</a>. While meant to be an attention-grabbing headline, it is not a new proposition.</p>
<p>Twenty years ago, the argument for eliminating the IT function went like this: while IT was once a differentiator that drove internal efficiency, it was clearly evolving into utility services that could be easily contracted. And certainly, even in the early 2000s, the evidence of this trend was already clear: a great many functions (think eMail and instant messaging solutions) and a great many services (think software development and helpdesk roles) could be fully outsourced. Expansive IT organizations are unnecessary if tech is codified, standardized and operationalized to a point of being easily metered, priced and purchased by hourly unit of usage. </p>
<p>While <a href="https://en.wikipedia.org/wiki/Nicholas_G._Carr">the proponents of disbanding IT</a> got it right that today’s differentiating tech is destined to become tomorrow’s utility, they missed the fact that tomorrow will bring another differentiating tech that must be mastered and internalized before it matures and is utilified. Proponents of eliminating the IT function also ignored the fact that metered services - particularly human services - have to be kept on a short leash lest spend get out of hand. That requires hands-on familiarity with the function or the service being consumed, not just familiarity with contract administration.</p>
<p>The belief that enterprise IT departments should be disbanded is back again. This time around, the core of the argument is that a silo’d IT organization is an anachronism in an era when all businesses are not just consumers of tech but must become digital businesses. There is merit in this. Enterprise IT is an organization-within-an-organization that imperfectly mirrors its host businesses. IT adds bureaucracy and overhead; hires for jobs devoid of the host business’ context; and by definition foments an arms-length relationship between “the business” and “IT” that stymies collaboration and cooperation and, subsequently, solution cohesiveness. Not a strong value prop there by today’s standards.</p>
<p>Today, [insert-your-favorite-service-name-here]-aaS has accelerated the utilifcation of IT even further than most could imagine two decades ago. And, or at least so the argument goes, modern no-code / low-code programming environments obviate the need for corporate IT functions to hire or contract for traditional language software developers. Higher-level languages that non-software engineers can create solutions with reduces the traditional friction among people in traditional roles of “business” and “IT”.</p>
<p>Best of all, there is a reference implementation for disbanding centralized IT: the modern digital-first firm. While a digital-first firm may have a centralized techops function to set policies, procure and administrate utility services, it is the product teams that are hybrids of business and tech knowledge workers create digital solutions that run the business.</p>
<p>If you had the luxury of starting a large enterprise from scratch in Q4 2021, you would have small centralized teams to create and evolve platform capabilities and standards from cloud infrastructure to UX design standards, while independent product teams staffed with hybrid business and technology knowledge workers to build solutions upon the platform. The no-code / low-code tech notwithstanding (these tend to yield more organizational sclerosis and less sustainable innovation, but that’s a post for another day), this is a destination state many of us in the tech industry have advocated for years.</p>
<p>So why not model legacy enterprise IT this way?</p>
<p>Why not? Because enterprise IT isn’t the problem. I wrote above that enterprise IT is an imperfect mirror of its host organization. However, the converse is not also true: the host business is <i>not</i> an imperfect mirror of its enterprise IT function. In the same way, enterprise IT is a reflection of an enterprise problem; the enterprise problem is <i>not</i> a reflection of an IT problem.</p>
<p>Companies large and small have been reducing equity financing in favor of debt for over a decade-and-a-half now. A company with <a href="http://www.rosspettit.com/2015/07/capital-structures-and-organizational.html">a highly-leveraged capital structure</a> runs operations to maximize cash flow. That makes the debt easily serviceable (high debt rating == low coupon), which, in turn, creates cash that can be returned to equity holders in the form of buybacks and dividends. Maximizing cash flows from operations is not the goal of an organization <a href="https://dannorth.net/2016/07/04/how-to-train-your-agile/">designed for continuous learning</a>, one that moves quickly, makes mistakes quickly, and adapts quickly. Maximizing cash flow is the goal of an organization designed for highly efficient, repetitive execution.</p>
<p>The "product operating model" of comingled business and tech knowledge workers requires <a href="http://www.rosspettit.com/2018/03/organizing-for-innovation-part-i.html">devolved authority</a>. Devolved authority is contrary to the <a href="http://www.rosspettit.com/2013/09/the-management-revolution-that-never.html">decades-long corporate trend</a> of increased monitoring and centralized control to create <a href="http://www.rosspettit.com/2011/07/annual-budgeting-and-agile-it-part-i.html">predictability</a>, and <a href="http://www.rosspettit.com/2013/03/the-return-of-financial-engineering-and.html">consolidated ownership to concentrate returns</a>. Devolved decision-making is anathema to just about every large corporate.</p>
<p>Framing this as an “IT phenomenon” is the tail wagging the dog. As I wrote above, enterprise IT is an imperfect reflection of its host organization. Enterprise IT is a matrix-within-a-matrix, with some parts roughly aligned with business functions (teams that support specific P&Ls, others that support business shared services such as marketing), while other IT teams are themselves shared services across the enterprise (in effect, shared services across shared services). Leading enterprise change through the IT organization <a href="http://www.rosspettit.com/2018/02/innovation-versus-control.html">is futile</a>. Even if you can overcome the IT headwinds - <a href="http://www.rosspettit.com/2007/09/investing-in-strategic-capability.html">staffing lowest-cost commodity labor rather than sourcing highest-value capability</a>, <a href="http://www.rosspettit.com/2010/07/separating-utility-from-value-add.html">utility and differentiating tech</a> under the same hierarchy - you still have to overcome the business headwinds of heavy-handed corporate cultures ("we never making mistakes"); studying mistakes and errors for market signals indicating change rather than repressing them as exceptions to be repressed; and capital structures that stifle rather than finance innovation. Changing IT is not inherently a spark of change for its host business, if for no other reason than no matter how much arm waving IT does, IT in the contemporary enterprise is a tax on the business, a commitment of cash flows that the CEO would prefer not to have to make.</p>
<p>To portray enterprise IT as an anachronism is accurate, if not a brilliant or unique insight. To portray enterprise IT as the root of the problem is naive.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-36128585106248180512021-10-31T15:11:00.001-05:002021-10-31T15:11:00.193-05:00Is the Tech Cycle More Important than the Fed Cycle?<p>In 2014, Andy Kessler wrote an intriguing op-ed in the WSJ, positing that beginning in the last half of the 20th century, <a href="https://www.andykessler.com/andy_kessler/2014/10/wsj-the-fourth-major-era-of-computing-kicks-in.html">the tech cycle had replaced the Fed cycle</a> as the engine responsible for economic growth.</p>
<p>His argument went like this. Historically, the economy ran in 4 year cycles. Initially, cheap capital stimulated business investment and employment, which spurred spending, but increased spending eventually brought inflation. Inflation meant prices of goods rose and eventually tempered demand; lower demand meant inventories climbed, causing companies to slow the rate of production. Lower production forced companies to lay off workers, while the Fed raised interest rates to tame inflation which culled business investment. As inventories depleted and inflation abated, the cycle started all over again. Many interpreted this as the Fed cycle of interest rate adjustments. As it was once said, the Fed brings the punchbowl to the party before the guests arrive, and takes it away once the party heats up.</p>
<p>Seven years ago, Mr. Kessler pointed out that economic cycles are much longer today than they once were and attributed this to the tech cycle. His basic argument was that each new generation of tech - in his narrative (a) mainframes, (b) personal computers, (c) early internet, (d) mobile / cloud - had a greater influence on the longevity and vitality of economic performance than anything that the Fed did. The technology enabled changes in business models that made them less susceptible to traditional forces. His case study was that supply chain integration meant less inventory buildup, which meant less volatility, and subsequently longer cycles.</p>
<p>It’s a very intriguing proposition. I’ve wrestled with this from a few different perspectives. Yes, undoubtedly, new generations of tech have changed business models, making companies less vulnerable to the broader business (and subsequently capital) cycle. Technology has also increased worker productivity, which reduces labor intensity, which means less labor volatility when things slow down. Yet at the same time, quite a few tech firms have shown themselves to be vulnerable to the business cycle. To wit: the Fed cycle matters a great deal to <a href="https://www.bloomberg.com/news/articles/2016-03-14/more-trouble-in-bonds-backed-by-peer-to-peer-loans">tech firms dependent on benign credit conditions</a>. Tech has no special immunity that way.</p>
<p>The traditional economist in me has two problems with Mr. Kessler’s argument. First, the “tech disruptor” mantra ignores <a href="https://www.thoughtworks.com/en-us/insights/blog/fintech-threat-financial-orthodoxy">financial orthodoxy</a> - not to mention the over-abundance of other would-be disruptors - at its peril. It tends to be a self-referential argument that “tech is disruptive and is therefore ascendent.” Which is true, until the tech in question runs out of money or ends up in <a href="http://www.rosspettit.com/2019/07/late-mover-advantage.html">a bizarre stasis where a bunch of tech disruptors with overvalued equity deadlocked in internecine warfare</a>, each simply waiting for all the others to run out of cash before they do. Second, <a href="https://en.wikipedia.org/wiki/Kondratiev_wave">long wave theory</a> tends to read like narrative fallacity, something that <a href="https://www.fooledbyrandomness.com/">Nassim Taleb</a> specifically warned about. Nikolai Kondratiev was clearly onto something, but how much of a long-wave cycle is cherry-picking data points to fit a narrative rather than the data itself exposing the narrative?</p>
<p>That said, capital makes itself irrelevant when it is so cheap and so abundant for so long, as it has been for decades now. The traditional economist in me is an idiot for clinging to a set of parameters that have made themselves irrelevant to a broader set of trends.</p>
<p>That’s a long preamble to say that Mr. Kessler’s 2014 argument has contemporary relevance in light of economic performance during the COVID-19 pandemic.</p>
<p>The Federal Reserve’s response to the pandemic in 2020 was to apply the playbook it developed in response to the 2008 financial crisis: (a) expand the balance sheet through bond buying (this <a href="https://www.federalreserve.gov/releases/h41/20200423/">Fed page</a> is representative of the period, look at the second and third columns); and (b) <a href="https://fred.stlouisfed.org/series/M2SL">increase the money supply</a>. Theoretically, cheap capital would mean that businesses and consumers would have no reason <i>not</i> to invest and spend.</p>
<p>But those businesses and consumers couldn’t invest or spend if they didn’t have the means of investing or spending. Traditional ways of working were analog, requiring people to conduct business in person. Fortunately, the technologies had long existed for commercial activity to continue despite people being unable to leave their homes. The existence of those technologies wasn’t just serendipitous: the fact that productivity tools enabling a remote, geographically distributed labor force to work collaboratively existed at all fits Mr. Kessler’s point that the tech cycle had far greater influence on economic performance during the pandemic than anything the Fed did. While some sectors of the economy did fall off a cliff (e.g., air travel, hospitality), most carried on. And despite the fact that the pandemic has been going on for nearly 21 months now, <a href="https://www.nasdaq.com/articles/nasdaq-sp-500-reach-record-closing-highs-on-upbeat-earnings-news-2021-10-28">S&P 500 earnings are very strong</a>. Without the technology the entire economy would have fallen off a cliff no matter how much money the Fed printed.</p>
<p>The pandemic also exposed winners and losers. Not created, exposed. Pre-pandemic, the tide in customer interaction, whether B2C or B2B, was already moving toward digital channels. The companies caught without viable digital channels were losers during the pandemic. The justification for digital channel development during the pandemic - and true right up to today - has less to do with beating the hurdle rate for investing capital, and more to do with simply staying in business. Sure, the decision to invest is easier to make when interest rates are meaningless, but it isn’t interest rates that make the investment in digital channels compelling. Survival makes them compelling.</p>
<p>The concern today - October of 2021 - is whether or not the Fed cycle has finally become inflationary. I write “finally” because Fed policy targets 2% personal consumption expenditure inflation, and PCE inflation has by and large fallen short of that target since 2008. In recent months, inflation has not only topped that 2% target but <a href="https://fred.stlouisfed.org/series/DPCCRV1Q225SBEA">run a few laps round it</a>. In the traditional Fed cycle, the measured policy response would be to raise interest rates, which will cool economic activity and bring an end to the cycle.</p>
<p>But how will this play out?</p>
<p>Let’s look at the drivers. Inflation, twined with a <a href="https://fred.stlouisfed.org/series/CIVPART">labor participation rate plumbing depths not seen since the early 1970s</a>, is creating pressure for real wage increases. After decades of losing, labor is having a moment (link to blog). Unionized workforces are on strike. Amazon may have to increase warehouse labor comp.</p>
<p>Historically, the Fed response would be to increase interest rates aggressively to tame inflation. Yet <a href="https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2021">markets are still pricing the Fed funds rate to rise only to about 1.20% by 2026</a>. That might seem a huge jump from the 0.06% the Fed funds rate stands at today, but by <a href="https://fred.stlouisfed.org/series/fedfunds">historical standards</a> 1.18% is ridiculously cheap capital, not the kind of rate that discourages spending. That means markets expect capital to be cheap (and therefore abundant) for the foreseeable future.</p>
<p>As labor costs rise, companies will look for ways to increase labor productivity so they can reduce labor intensity of operations. Labor productivity comes from increased tech density. Drones, robots, distributed ledger technology, vehicle electrification, and many more technologies will be the drivers of that labor productivity. If capital is cheap, the hurdle rate is low for productivity-enhancing investments. And even if the Fed upped interest rates much higher to tame inflation, <a href="https://www.reuters.com/business/finance/investors-look-near-2-trillion-corporate-cash-hoard-buoy-stocks-2021-07-21/">corporate balance sheets are awash in cash</a>. A lot of companies simply don’t need to raise capital to finance new investments.</p>
<p>Inflation may persist into 2022, and even beyond. But Mr. Kessler got it right in 2014: it won’t be the Fed that determines how the economy performs in this cycle, it will be tech.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.comtag:blogger.com,1999:blog-30621875.post-12332842696980137022021-09-30T23:31:00.006-05:002021-10-01T10:37:49.686-05:00The Manager-Leader versus the Manager-Administrator<p>We saw <a href="http://agilemanager.blogspot.com/2021/08/what-exactly-is-agile-management.html">last month</a> that just because somebody is the manager of an Agile team does not make that person an Agile manager. The Agile manager does specific things: advances the understanding of the domain, has a symbiotic relationship with the do-ers, creates and adjusts the processes and social systems, and protects the team’s execution. By virtue of doing these things, the Agile manager is a leader, whereas the traditional manager is just an administrator.</p>
<p>I have been fortunate to watch the rise of Agile competencies over the last two decades. I have been less fortunate to watch Agile management competencies erode as Agile has spread in popularity. Although there are undoubtedly numerous reasons why, one immediately stands out: while the value system that underlies the behaviors described in the previous post is highly compatible with the creative company mindset, it is highly incompatible with the <a href="http://www.rosspettit.com/2018/10/everyone-beginner.html">operating company mindset</a>.</p>
<p>The creative company - e.g., a studio that yields original work, anything from entertainments to custom software assets - benefits from how much it exposes itself to environmental uncertainty and how effectively it internalizes relevant learnings from it to create a successful, if unique and one-off, solution. In contrast, the operating company - a firm that mass produces products or provides mass volumes of labor to deliver solutions - benefits from environmental certainty that allow it to apply patterns that create consistency enabling repeatable solutions at scale. The greater the consistency, the greater the automation, the lower the labor proficiency level required, the lower the cost of execution, the higher the margin and cash flow. Whereas the creative studio model thrives on chaos, the operating company thrives on consistency.</p>
<p>This is a tectonic fault line in the application of Agile management practices. When Agile is brought to bear in an operating company context with an overriding mission to provide consistency of outcomes, the value system that fosters the management behaviors that get things done through people in the face of a volatile set of circumstances is simply ignored. The words remain - adaptive planning, continuous feedback, and the like - but the values that give rise to them in the first place simply dissipate.</p>
<p>The presence of Agile terminology twined with the absence of the Agile value system gives license to people in management roles to do pretty much anything under the aegis of “being agile”. Take “adaptive planning”. In practice, “adaptive” is used to mean anything on a spectrum from no management and no plan (“we’ll figure it out as we go, on somebody else’s dime”) to dictatorial management-by-plan (“the team is free to meet the commitments they make during the planning exercise.”) Planning itself is an exercise in plausible deniability for managers: if the do-ers create the plan, management is the act of holding people accountable for the plan they came up with, not for the continuous adjustment of the plan or refinement of the business outcomes in the face of what is learned through execution. And reporting against a plan is somewhat perversely passed off as “governance”, itself an <a href="http://www.rosspettit.com/2013/10/can-we-stop-misusing-word-governance.html">overloaded term with no actual meaning</a> beyond “fancy word for management reporting.”</p>
<p>The net result is that managers of Agile teams have found ways to make themselves passengers in Agile teams because they only do administrative, communication, and reporting tasks. Former IBM CEO Lou Gerstner referred to these kinds of managers as “presiders”. Mr. Gerstner deemed presiders to be useless. Do-ers in Agile teams deem presides to be useless as well.</p>
<p>I wrote a decade ago that <a href="http://www.rosspettit.com/2011/09/annual-budgeting-and-agile-it-part-ii.html">Agile gets corrupted when it goes corporate</a>. That phenomenon is not unique to Agile, of course. By way of example, look at cloud computing: who knew that “migrating to the cloud” was as simple as moving a data center from owned on-prem to leased in somebody else’s facility? Yes, people still pass this off as “cloud migration”. Enterprise scale, enterprise politics and enterprise vendors have a tendency to dilute concepts - cloud, Agile, you name it - to a point of rendering them inert. ‘Twas ever thus.</p>
<p>Yet while Agile concepts are bound to be co-opted, this does not have to be the case for Agile execution. Managers can choose to be drivers of outcomes rather than plans, work with the team rather than outside of it, create social systems rather than schedule meetings, and protect the team’s execution from external forces rather than allowing them to steamroll the team. These, among other things too numerous to list here, define excellence in management.</p>
<p>Pursuing excellence is a choice that always rests with practitioners. There is a reason why the administrative burden of Agile has always been defined as “lightweight”, and isn’t to ease the workload of managers: it is to give managers the bandwidth to take a leadership role in a peer relationship with engineers, designers, analysts, and all the other do-ers in a team. That door is always open to managers in an Agile team, but the decision to walk through it or not rests with the individual manager.</p>
<p>Choose wisely.</p>
Ross Pettithttp://www.blogger.com/profile/15010068376528802078noreply@blogger.com