Architecting the resilient enterprise, Part III

So far in this series (Part I, Part II) we have examined four out of the five pillars of engineering the resilient enterprise: the right leadership, the right incentives, the right architecture and the right culture. In the final article we will focus on the most controversial of the building blocks, which is performance management.

Right management approach

Measure, measure, measure

"If you cannot measure it, you cannot manage it"— this is a mantra that is as often heard as it is misunderstood. Misattributed to Drucker and misquoted from Deming, it is a maxim whose misapplication has caused as much harm to businesses as its diametric opposite. The difficulty in measurement lies in two areas: one, not everything that needs attention in organization can be measured, or at least measured meaningfully, and, two, for the right results we need to know what to measure and the right way to measure it.

To address the first point, I will posit that management is the art and science of achieving measurable outcomes in organizations under the normal constraints of business: schedules, budgets, regulation, competition and technology, while leadership is the art of creating the right culture and work environment to enable management to be effective. To put in another way, leadership is the art of influencing the unmeasurable. If we look at it this way, then the above-mentioned quote becomes much less controversial and considerably more useful. We have discussed leadership and culture in a prior article, so here we can focus on performance management. 

Defined as I have done it, management is indeed a discipline driven by measurement and data. The trick is to know what to measure and how to achieve the necessary metrics. There is ample evidence that you tend to get exactly what you measure, so we need to be very careful that we do not create perverse incentives that might be baked into the very metrics we select for scrutiny. Every industry has a well-known set of KPIs, which can be a useful guideline. The trick in adapting the standard KPIs to actionable metrics, as I have mentioned previously, is to war-game the metrics for unintended consequences. The path to finding the right metric and applying the right incentives can oftentimes be anything but a straight line.

Set and evaluate objectives

Although it has of late been trendy to malign management by objectives as a method of performance management, it remains the most effective tool in our kit when properly and thoughtfully applied. Truth be told, there seems to be a cottage industry for debunking well-loved and useful management techniques, but I digress. Objectives can be quantitative, where it makes sense to make them so, or soft when it makes sense otherwise, as long as their fulfillment is not subject to a manager's arbitrary judgment. Once you have determined which KPIs to measure and how their related metrics can be attributed to managers, teams and team members, it becomes possible to establish individual objectives. 

To be effective, objectives must absolutely lie within the realm that the employee can control or directly influence, or else setting such objectives will backfire. They must be sensible — for instance it makes no sense to measure programmers on how many lines of code they produce if this code does not deliver necessary fictionality, or to measure widget makers on their volume when quality is of paramount importance. Furthermore, objectives must encompass outcomes and never methods, in keeping with the Auftragstaktik principle we have expanded on previously, because micromanagement is generally destructive and ultimately ineffective. Their scope should correspond with the scope of responsibly of the employees — for instance, a divisional GM might be tasked with taking her business' market share to the number one or number two position, as Mr. Welch had famously charged his cabinet, while a tech product owner's objective would be much narrower.

Performance against the set objectives should be measured frequently — as frequently as the scope of the objective reasonably allows — and the use of each particular objective should be evaluated often, to make sure that it serves to advance overall long-term shareholder value.

Evaluate continuously 

The inadequacy of the annual performance review as a central tool of management has been recognized for quite some time, and this realization is finally, if tentatively, being translated into action. The fact is that a year as an interval between errors and correctives is far too great to permit effective feedback, thus allowing performance issues far too long to fester. Ideally, instead, we can implement continuous performance management with discrete and frequent measurement of goals and objectives, making underperformance easier to catch and correctives to apply in a more timely manner. If your management by objectives process is well implemented, it will become possible to take steps toward continuous evaluation, at specific MBO level. Under continuous evaluation each objective is evaluated on completion, with more complex activities divided into progress checkpoints by mutual agreement between the manager and team member. Collaborative objective-setting serves to raise morale and increase job satisfaction and objective buy-in by offering team members a sense ownership of their work. Trends in MBO achievements and responsiveness to feedback would be logged and used in determining continuing employee fit and future work assighments.

Once you have ditched the periodic review, you can also get rid of the annual performance-related pay adjustment. The fact of the matter is that most employees are not much motivated by the small adjustment we like to call a merit raise because it soon gets lost in the biweekly paycheck, and the rush, if any, of receiving it is soon forgotten. On the flip side, employees soon learn than a great way to get a raise is to change employers, which serves to distract them from their work and elevate your turnover costs. Instead of feeding this destructive cycle, you might wish to ensure that each competent employee receives market rate pay commensurate with her experience, and that each employee knows that his pay is indeed set to be at market every year — or another interval, depending on how rapidly pay changes in your business. This is hardly a new insight, and a number of well-managed companies have already moved to competitive pay policies, with generally positive results.

Once base pay is set by market metrics, performance excellence can be recognized — depending on what is appropriate to their function — with performance pay schemes, internal or external recognition, thank-you gifts, visible perks and status symbols and — now and then — promotions. That last incentive must be used as carefully as a hand-grenade, however, lest we promote people to the level of their incompetence. Moving individual contributors to management roles in particular can be disastrous unless they are interested in the role, have the aptitude, and receive real training for it. For this reason, well-managed companies have some tome ago began establishing non-management promotion tracks that allow you recognize team-member skills, knowledge and performance without forcing people into roles for which they are not well suited. The flip-side of advancement, is of course managing out those employees whose performance stays below par and shows inadequate improvement — because no matter how careful we are in hiring, none of us are perfect.

In conclusion

The five pillars of the resilient enterprise depend on and reinforce one another. When implemented well, they allow companies to avoid most of the hidden rocks littering the shipping lanes of business, and to recover well and quickly from the ones that could not be avoided. We can bring together all the principles in a short do-list, as it follows:

• Hire the right leaders and empower them to carry out their job
• Architect the organization to minimize destructive conflict and place authority and responsibility closest to the market action
• Shape the culture in accordance with the nature of the business, the market and the surrounding milieu 
• Practice management by objectives, whether you use the OKR method or another way, whether you have management set objectives or have them negotiated between managers and team members
• Separate base pay from performance incentives and pay published market base rates
• Design incentives that are effective for target populations: engineers, for example, should get internal recognition, a chance to work on their own projects and speak or publish to the wider world, while salespeople, who tend to thrive on competition and be motivated by cash rewards, should to be offered those
• Tie incentives to measurable objectives which are set and read frequently, and be sure to expect and to reward initiative
• Ditch the annual performance review cycle — it is a waste of time for both manager and staffer — move instead to continuous performance management at all levels in your organization
• Practice continuous improvement — plan, do, study, act

Cross-posted to LinkedIn Pulse

Architecting the resilient enterprise, Part II

In Part I of this series we discussed the leadership and incentives aspects of enterprise resilience. The timing turned out to be propitious — in fact the latest Nobel in Economics was in part awarded based on the work pointing out the importance and the difficulty of creating the right incentive structure. In this article we will zoom in on the leadership aspects creating a resilient enterprise: the right culture and the right enterprise architecture.

Right architecture

In my experience, the resilience of an enterprise is fundamentally rooted in its architecture, which is in turn closely tied with the concept of the right incentive structure. After all, incentivizing employees to take the right action is not very likely to have the desired effect if they are not empowered to do so. As I see it, the three core principles of right architecture are: alignment of authority with responsibility, delegation of authority to the people closest to front line, and maximizing cooperation.

If basing incentives on metrics that are out of employees' control is demoralizing, then holding them responsible for outcomes they had no power to change is even more so. It often takes only a single incident of disciplining an employee for outcomes determined by someone else in the organization to permanently ruin morale for his or her entire team. It behooves CEOs to make sure that each department and each business unit is designed to align authority with responsibility — and not just for line and middle managers, but also for responsible individual contributors.

No illustration of the delegation principle is more striking than the early successes the German army was able to achieve in WWII despite numerical and frequently material inferiority. Its Auftragstaktik doctrine was arguably its most effective weapon until the army was forced to abandon it under pressure from the top, leading to a series of disasters. Fundamentally, Auftragstaktik (literally "mission-type tactics," or Mission Command in US doctrine) means that subordinates at every level are assigned clear objectives, resources and time tables. Tactical leaders are expected to reach their objectives as they see fit, according to circumstances and their ingenuity. There is a direct application of this principle to enterprise architecture, as well as to the management approach which we will discuss in the next article. It is the managers and responsible contributors closest to the point of execution who are best positioned to see emerging problems before they are are developed fully and to take corrective action in good time. Their superiors' task is less to direct them in doing their jobs and more in clearing the way for them to act and securing the right resources when required, not forgetting of course to balance this support with accountability. Front-line people who feel that they are supported by their managers and top executives tend to be not only far happier, more productive and turn over less frequently, but also come up with more effective solutions more often than their counterparts in closely managed environments.

On the larger organizational scale, careful architecture of departments and business units to maximize cooperation and keep competition for resources from becoming destructive allows the resilient enterprise to better to focus its exec team's competitive spirits on external threats. Some conflicts can be engineered out, such as channel conflicts, but others are fuzzier in their nature. Built-in conflicts and divide-and-conquer tactics beloved of so many CEOs tend to destroy value without building anything more tangible than these CEOs' egos. This is not to say that success shouldn't be rewarded — it should, and executives who deliver the best results should get the resources to further their successes — but rewards should be measured, and methods for achieving these results shared among the exec team with collegiality. When executives are freed from competition with their peers for resources, power and access to the CEO, they become more ready to embrace and promulgate a supportive and collegial culture, as we will discuss next.

Right culture

If the art of management is about ensuring that organizations deliver on objectives, then the art of leadership is fostering a culture that makes the art of management effective. Perhaps the most difficult part of leadership is that there are so few real tools to help effect it, even if there are now emerging ways to take the temperature of the organization. Much has been written about corporate cultures: how they can be toxic or empowering, corrupting or uplifting, drive quality or slacking. A great deal of late has been written about fostering cultures of innovation and of productivity. I will not be addressing this well-trodden ground here, nor will get into the pros and cons of cult-like tribal cultures, such as those enjoyed by the likes of Apple, Palantir, or Zappos. Instead I will focus on guidelines for creating a culture of resilience.

It was probably W.E. Deming who first pointed out how corporate culture affects product quality and is in turn affected by he style of management. I will get into how his ideas are applicable for today's enterprise in the next article, but for now I can say that it the right culture that is the factor most responsible for creating enterprise resilience.

In order for aggressive delegation of authority on the Auftragstaktik principle to be made effective, the culture of taking responsibility for outcomes has to be extant. Such a culture must be fostered from the very top, by CEOs who create an environment of trust and collegiality among their immediate reports and see to it this their executives do likewise. The right corporate architecture plays a large role in making this possible — by eliminating high-stakes competition among top executives, which in turn enables them to see one another as resources rather than as rivals. Collegiality and mutual assistance can and should be incentivized for all employees, regardless of position, while empire-building and budding inter-funciton rivalries in turn severely discouraged.

Of course hiring people who exhibit the right attitude in the first place makes culture-building a great deal easier, but it is in the remit of the CEO to take the lead by avoiding playing favorites, practicing divide-and-conquer, and being as open in commutations to the enterprise as is legally permissible. It is up to the CEOs to reward team members for showing initiative, taking the lead in resolving issues, and championing and taking up new projects. It is up to the CEOs to foster openness and honesty in speaking truth to power, so that information can flow freely in both directions. It is also up to the CEOs to take responsibility for missteps, because no one will trust a leader who throws his followers under the bus.

None of this is to say that a healthy dose of competition is not a good admixture to the culture pie, but like all seasoning it must be used with a light hand. Stakes in internal competition might involve bragging rights, prizes that recipients would value out of proportion to their cost, and most importantly public appreciation from the highest levels for effort and results alike. Rewards would rarely involve promotions — lest contributors are promoted to the level of their incompetence — and almost never large raises or other stakes outside of the defined incentive plans such as might threaten to undermine collegiality.

Finally, it is important in culture-building to be sure to match the culture to the mission of the enterprise. Especially nowadays, when every business wants to be thought of as a tech company, CEOs would do well to guide their cultures in directions that build long-term shareholder value rather than simply promoting creativity or stoking their own egos.

In the next article we will get into the very controversial topic of the right management style and use of metrics and objectives.

Cross-posted to LinkedIn Pulse

Architecting the resilient enterprise, Part I

My last series of articles (Part I, Part II) demonstrated how difficult it is for CEOs, and even more so for boards, to know everything that happens in the trenches and to forestall negative surprises. The only repeatable way to counter the fog inherent in the management of complex enterprises is to bake in the agility to avoid many of the worst surprises and the resilience to recover from the unavoidable.  In this series I will explore how to build this agility and foster resilience.

With apologies to Gautama, the road to enterprise resilience lies in the noble five-fold path: the right leadership, the right incentives, the right architecture, the right culture, and the right management approach.

Right leadership

There is a Russian proverb that says, roughly "A spoiling fish starts rotting at the head." It is not that a great CEO will always ensure ultimate success, but a rotten CEO will oftentimes bring on disaster. As it happens, however, rotten CEOs are rarely replaced in time. Public company boards are notorious for too often backing management regardless of performance, and even many private owners are all too often reluctant to take this step until the business is in extremis.

While this is good news for incumbent CEOs, it is not necessarily so positive for shareholders, customers or employees. One reason that boards are so reliant on CEOs in place is that they have poor visibility into the enterprise, as I have discussed in a previous article. Yet understand they must, if they are to fulfill their duty of providing governance and oversight. For starters, they should trust top management say-so less and seek to understand what they are not being told, whether deliberately or because of CEOs' blinders. Directors would do well to spend time with middle managers, to mingle with employees, to look beyond slides and presentation numbers, to set measurable objectives and hold management to them.

In the occasion that a CEO is in fact replaced, boards would do well to select wisely and set up the new exec team for success from the beginning. In briefing their search agents, they would do well to mark that flashy stars are rarely top performers, that if a CEO looks too good to be true then she probably is, and that great CEOs don't necessarily come from the same space as the company's own sandbox.

What I said about boards and top managers applies as well to CEOs and their cabinets. A rotten head of marketing or engineering may well doom an otherwise well-managed company, while great ones often pull out some impressive rabbits when the circumstances warrant.

Right incentives

Once right management has been achieved, it is time to pay attention to the incentives it receives. There is a great deal of literature that objects to the use of incentives to maximize performance, and much of it is in fact on point; however, I will posit, if controversially, that all work is performed mainly because of the incentives - even if the incentive is the ability to feed one's family, to make a difference or to satisfy ambition. I will argue that while poorly designed incentives can do much harm, the right incentives are crucial to achieving positive results.

Boards in particular often struggle in designing the right incentive structures for their CEOs because of their limited visibility into the company's inner workings. If their and the management's incentives are not aligned then the CEO will have every reason to obfuscate emerging problems for as long as possible, in hopes that they will in time go away or become irrelevant. Only when the management feels like they are on the same side of the table as the board will they treat the board as their strategic resource and seek to work together to air and resolve emerging problems.

It is a truism in economics that the outcome one incentivizes is one received, and indeed incentives demonstrably matter at all levels in organizations. As important is it is to set the right ones, achieving this nirvana is by no means a simple matter. People are remarkably adept at finding unexpected ways to achieve metrics being measured, no matter legal or ethical considerations, often enough causing in the end considerable harm. CEOs would be well-served to give a great deal of thought to unintended consequences of their incentive plans, to adjust plans regularly, and to keep a sharp lookout for sharp practices - superior performers should be scrutinized closely even as they are being held up for emulation. This scrutiny need not come from the place of overt mistrust - after all, if they are to be emulated then their methods demand thorough understanding.

Just as important is setting the types of incentives that have the power to motivate the target employee population. For an extreme example, incentivizing salespeople purely with recognition and engineers solely with cash can both be counterproductive. Most companies use annual reviews and base pay adjustments as cornerstones of their incentive structures for middle managers and the rank and file, even though their effectiveness in producing desired results is as dismal as the effort to produce reviews often enough brings real work to stand-still. My recommendation for CEOs is to separate pay from incentives and to think of incentives in terms other than necessarily financial. I will explore this concept in greater depth in the a future article.

Finally, it is important to tie incentives to metrics that are in the power of the employees to directly influence. There is nothing so demoralizing as knowing that you will miss your bonus because you have had no opportunity to impact the metric that was incentivized. This is not to say that profit-sharing schemes are to be discouraged, to the contrary, they can be a valuable took to build cultural cohesion - but they should not be confused nor conflated with incentives.

In the next article series we will address the art of leadership in creating the right culture and enterprise architecture. 

Cross-posted to LinkedIn Pulse

The fog of management, Part II

In the last part of this series I have discussed how difficult it can be for managements and boards to detect dangerous developments before they are so far gone that they threaten to become disasters. In this part we can drill into some of the solutions to this common problem.

Marketplace trouble might be the easiest for executives to spot given all the tools we have to monitor the market, provided that we are looking for trouble's signs instead of congratulating ourselves on our own perspicacity. Extending sales cycles for enterprise-oriented companies are a big warning sign, as are flattening conversion rates for freemium product categories. Missing target sales numbers for more than a single period should ring alarm bells. The questions that are always asked when these signs of trouble show up are "why?" and "what could have been done to prevent the sales decline?" Preventing marketplace surprises is a capacious topic, worthy of a book-length treatment at the least. I will highlight a couple of the highest-value strategies which I found to be useful.

First and foremost, it is imperative to make the salesforce your strategic partner in the business. Too many companies have so much confidence in their product vision that they lose track of what their sales prospects are actually demanding. The salesforce is your eyes and ears into the market. Salespeople are the first to hear about problems with your product concept, feature set, competitiveness and pricing. If you fall into the thinking that their job is flogging whatever gets thrown over the wall to them by product teams, then you will be running blind until your sales begin to wither. What might sound to an untrained ear like mere sales-folk whingeing may in fact be actionable information. To maximize your effectiveness in the market, you might want to make sure that you attend lost-sale postmortems, as well as postmortems on sales that were close calls. When salespeople talk - listen, because in the end none of us are wiser than the market.

No less important than the salesforce is your competitive research, and I do not mean comparing spec sheets with those of the competition. It means understanding what your competitors are telling customers about you when you are up against them in a sale. It means getting insight into the competition's product pipeline that they are making public, semi-public, and what they keep internal. Interview their employees for open postings should they apply, have your proxies visit their trade show booths, and don't stint for competitive research consultants - every iota of information about competition is a finger in the levee which is always threatening to break.

Of course much of the demand issues can be prevented given sufficient market validation before the product vision is finalized. Given how quickly product cycles move in today's market, it is no longer possible to take many months to validate specs and feature sets, so we must take advantage of the agile development techniques to get the product in front of customers as early as is practical and iterate rapidly based on feedback. We simply do not have the luxury of waiting for them to come simply because we had built it.

Another area where managements are often blindsided by negative surprises is in product development efforts that suddenly head off into the weeds with blown deadlines and busted budgets in their wake. Again, the topic is too large for a short article to really cover, but I will mention a few signs of trouble that might help you detect this early.

Engineering managers know to break down projects into small and manageable tasks, so they can detect trouble relatively early. Executives, and boards even more so, are often loath to monitor development projects quite so minutely. Engineering managers, for their part, are understandably reluctant to air emerging problems early - mostly because they believe these can be repaired before they become disasters, even though they so often do. A solution I find to be useful is to set up incentives for product managers in such a way that their success depends on engineering results as much as it does on the PMs' own. This tends do a decent job of focusing PMs' minds on monitoring schedules and budgets and discourages them from forming common fronts with developers against the management.

In the next several articles I will discuss how boards and CEOs can architect their enterprises to be resistant to negative surprises and more nimble in navigating through the dangerous waters of their markets.

Cross-posted to LinkedIn Pulse

The fog of management, Part I

There is a common story told by entrepreneurs who have seen their companies explode to the upside. They say that they used to know every employee by name and everything that was going on, but no longer. Now they have to rely on indirect means of getting all the information that they were used to having at their fingertips. Where are we in the product release cycle? What are the risks? Where are we in our pipeline? Which of our customers have been late paying bills? These CEOs used to be able have a handle on the answers, but now they must rely on secondhand reports, making them quite uncomfortable. It can be far from clear how they know what they think they know, and how reliable the information might be.

The situation is even more pronounced at board level. Investors and outside directors are not involved in daily operations. Instead, they parachute in every few weeks to speak to management, who can well deliver a rather self-serving version of reality.

A great apprehension that managements and boards always share is that of the negative surprise. Despite the billions of dollars and countless hours spent each year on business intelligence software, leadership training, performance review processes and status meetings, surprises keep recurring. When they do happen recriminations often start to fly, with managers and directors pointing fingers at whomever they can blame for not doing their job properly in allowing the surprise to happen. The fact is, oftentimes it is indeed the failure of some managers to pay attention or report trouble early that leads to preventable surprises. The question, however, is not in how to find the culprits ex post facto but in how to prevent surprises in the first place. To borrow a simile from sailors, you cannot avoid the underwater rocks if you don't know where they might be hiding.

Few CEOs running companies with over 100 headcount can know everything going on inside the company, much less everything happening out in the marketplace or with every customer and sales process. At board level, the fog gathers that much sooner, often from the earliest beginnings. The deeper the layers of organization between the observer and the front line, the murkier the picture. The reasons for the fog are partly structural and partly psychological. Communications from the CEO are often parsed by managers and staff for narrow advantage, misunderstood or simply blown off as unimportant. Both managers and individual contributors have a very human tendency to hide problems from superiors, hoping that they will get resolved in time or simply to avoid a confrontation. Consequently, communications about priorities both up and down the line can become garbled or ignored entirely. What are CEOs and boards to do to spot emerging trouble before it metastases?

The tools in common use all have their benefits and limitations. The old Tom Peters classic of management by walking around, for example, has much to recommend it, even if it is honored more in the breach than the observance. The top manager can sometimes glean information from the rank-and-file in informal conversation that he would have trouble gathering through channels. However, the randomness of such encounters and the natural wariness that employees often have in the presence of the Big Boss all work to undermine its efficacy.

A variation on the random walk around is placement of trusted resources down in the hierarchy who can be relied on to pass on unvarnished information. These people, however, often lose effectiveness when they are inevitably discovered to have the CEO's or owner's ear. Moreover, they tend to amass power out of all proportion to their importance to the organization, to the point that they can undermine and render ineffective their line managers, thus creating chaos and ruining governability.

Hidden rocks can lie in many places. Product development processes get derailed, with budgets and deadlines blown, feature sets drowning in maelstroms of over-engineering and product specs diverging far from market fit. Sales efforts and conversions fall behind projections or event begin shrinking. Scarce talent might start running for the exits, or else cease to be productive. Some of the signs of trouble brewing are easier to spot than others, so that corrective action can be taken relatively early - for example, missed product milestones or subpar revenue. Others show up when it might be too late for easy fixes.

Morale issues are some of the most insidious examples of the latter, and often stem from serious leadership failure. When your top talent is suddenly found to be frantically sending out resumes, and formerly high performers begin slacking, the company may well be in extremis. Morale issues on their own are rarely the cause of problems - more often they are a symptom: a symptom of a failure in the leadership, poor management or even lost competitiveness. Fundamentally, people tend to give up  trying when they cease believing that their efforts make a difference.

A number of technological solutions have emerged to assess morale: tools like social media and Glassdoor monitoring, for example. Anonymous gossip tools can be used to gather actionable intelligence, even as they come and go, as well as monitoring employee LinkedIn accounts for avalanches of job-search related updates. Exit interviews can provide sporadic insights into morale issues, provided that the departing employees are sufficiently angry to burn bridges through excessive frankness. Buyout shops are notorious, before they consummate their deals, for planting "cafeteria ears": spies who gather gossip in company mess halls and nearby bars and coffee houses. They also like to interview ex-employees, from whom they often get more candor than HR staffs can. The issue, however, is that once morale has sagged so low, the problem is probably already out of hand.

I will discuss some solutions to clearing some of the fog in the next article in this series.

Cross-posted to LinkedIn Pulse

Know your knitting

Now that the flood of obituaries for the once-great company with the exclamation point in its name has begun to subside, I would like to reflect on the failed effort to turn around this still-iconic brand.

Yahoo's early dominance came from from a solution that was quickly obsoleted by the fast-growing universe of content on the Internet. Yahoo had pioneered the model of curated content with its original directory. Once Google superseded this use case with its search engine, Yahoo moved its chips to a different curation model - the landing page. The company did try to compete in the search space, and looked for ways to enhance its stickiness with browser button bars, but it was the landing page and Yahoo's proprietary and curated content that became its most important revenue driver. This was the company that Microsoft had once proposed to acquire, and would have acquired at a much inflated valuation if Mr. Yang hadn't suffered a fatal bout with tech ideology. The revenue was real, if declining, until that is the twin social and mobile revolutions made the landing page into a Web-age anachronism. Google marked its passing when it turned off its iGoogle portal back in the hoary past of 2013, but Google had a welter of other ad-bearing content sites to turn to, not least its venerable search engine, while Yahoo had no such luxury.

Enter Marissa Mayer in 2012, not long before iGoogle's at the time much-mourned demise. Coming as she did from the product side of the technology-obsessed Google house, she brought with her a certain kind of hammer and went looking for the right kind of nails to hit. To her, evidently, Yahoo was a tech company with obsolescent tech and products, and she was going to buy new products and develop new technologies to vault the old warhorse back into the vanguard, or kill it trying. To an impartial observer, on the other hand, Yahoo was more of a collection of media properties of which its finance content was by far the most valuable, a large cash hoard from the days before, a stake in Alibaba, and far too many engineers working on inferior me-too products that trailed far behind the competition in revenue and penetration. 

Ms. Meyer took this cash hoard, and taking cue from drunken sailors everywhere began spending it, on acquisitions that had no clear path to integration or to revenue, more acquisitions that agglomerated products with no rhyme or reason and no revenue accretion, and on more technology development in house. It was, apparently, her view that Yahoo's future would depend on technological progression, nevermind that Yahoo's technology had never really been its strong suit. Instead of reinforcing Yahoo's core value-adding business, she went all-in on "innovation," which to her meant insourcing all engineering, while at the same time alienating her best people by ending Yahoo's beloved telecommute culture. 

What apparently Ms. Meyer failed to do was take a critical look at the portfolio of value that Yahoo possessed when she had taken over. Already at the time it was clear that Yahoo's strong suit was not technology at all, but rather media content, particularly in the area of finance. Yahoo pioneered bringing quality financial information to the masses, and until recently was the go-to finance portal for much of the business world that did not feel the need to spring for pricey Bloomberg terminals. 

Bloomberg, meanwhile, had been facing an emerging threat to its core business from new ventures seeking to undermine its pricing structure. This threat was hardly unforeseeable, being that as soon as technology makes low-cost delivery of existing services feasible new entrants always seek to take advantage. Bloomberg has been able to beat back the threat so far, but its would-be rivals are well-funded and have long legs.

Let us imagine, instead of a death spiral for the storied Web pioneer, a counterfactual where a new Yahoo CEO less certain in her preconceptions of what the right strategy for a turnaround should be conceives of a merger of these financial media behemoths. Let us imagine a combined company offering a full suite of services from free to low-cost to mid-market and to the top end, all under one brand and corporate umbrella. It seems to me that such an entity would be very well positioned to defend its place as the top media provider of all things finance for far longer than either company alone.

Not long before its ultimate demise Yahoo's valuation, net of the value of its Alibaba stake and cash, fell to below zero. Ms. Meyer, undeterred, will be landing squarely on her two feet, despite having destroyed what value there had been in the company she had taken over with such fanfare. How much more valuable would have the combined Bloomberg-Yahoo enterprise had been if she had not been blinded by her tech obsession? As we have already learned from JC Penney, all companies - even those in the same business - are not alike, and what works for one business may not work for another for the reason that it may have built its value from different building blocks.

To put it another way, before you can stick to your knitting you need to know what it is. 

Being that nowadays everyone wants to be known as a tech company, no matter what it is they are actually selling - e.g. Uber (taxi service), Instacart (logistics) and Airbnb (hotels services) - it is easy to get distracted with technology at the expense of real core value. The fact is, valuations-driven posturing notwithstanding, few of these companies are actually in the tech business. Tech companies are those that make their revenue from selling tech - something that is relatively rare. Some common misconceptions, for example, are Salesforce and Oracle (which sell applications), Apple (phones), and Google (advertising). Google recognized this when it split up the company into the core business and what is essentially a spec lab. Technology is their enabler, not their business, and we get distracted with all the shiny objects at our peril.

Cross-posted to LinkedIn Pulse

The pending advent of blockchain in FinTech

Blockchain technology has been hogging the hype cycle for a few years now, but despite a great deal of optimism and investment, deployed applications outside of Bitcoin have been rather scarce. Bitcoin might itself continue to exist only on sufferance from the Chinese government, being that its primary use has been to provide one of that country's main stores of excess funds. Bitcoin and other cryptocurrencies have another fundamental problem, but more about that below.

In order for this technology to transition from promising to widely deployed one or more "killer apps" will be required which are capable of obsoleting current practices - always assuming that blockchain reconciliation latency issues will have been resolved in the relatively near future. As I see it, today such applications are primarily in the areas of FinTech and GovTech. As such, the killer app trifecta for blockchain would consist of payments, settlements, and identity verification. Let's discuss each application in its turn.

Payments

Whether or not Bitcoin and other cryptocurrencies ever become established as mainstream payment methods, which in my view is fairly unlikely, it does not mean that blockchain-based payment solutions are dubious undertakings. To the contrary, I firmly believe that reliable, secure payment is a major killer application for this technology.

The main reason I believe that cryptocurrencies are unlikely to gain widespread traction as a medium of exchange has to do with the complex relationship between money and government. Money, as Econ 101 teaches us, has three functions: as a medium of exchange, as a store of value, and as a unit of account. Not so very long ago, all three of these functions were efficiently fulfilled by gold, and to a lesser degree by silver. Metal currency had the advantages of universal adoption, stable exchange rate and low propensity to be subject to monetary shocks. Even when paper money was first adopted as a medium of exchange after the mid-1700s (at least in Europe), it was backed by gold - that is until the crisis that was the Great Depression. Without going into a book-length disquisition on the history of abandoning the gold standard, I can safely say that the key reason was the need of governments to gain control over their collapsing post-war monetary systems. This control is not something that today's governments are likely to be prepared to relinquish, partly for fear that the monetary conditions that birthed the Great Depression might return. Partly also, those governments who now enjoy or seek to establish reserve status for their currencies would be loath to give up the benefits that accrue from it: benefits such as low cost of borrowing and control over quantity of money. Governments of many developing net exporter nations, such as China's, also seek to control cross-border money flows in order to limit capital flight, providing even more incentives for them to keep tight control of their monetary policies. Not least important, governments who lose control over their currencies also lose control of their monetary policies, and with it their economies - as the South European Eurozone members have found out to their ongoing horror.

Today, payment systems tend to be either proprietary walled gardens operated by the likes of Visa and the larger commercial banks, or else low-penetration interoperable solutions advocated by mostly struggling startups. Blockchain technology, being based on an open standard, is capable of bridging such broadly adopted solutions without forcing users to rely on yet-unproven companies as clearinghouses. Furthermore, because blockchain takes the clearinghouse function out of any single vendor's hands, it lowers the costs of linking proprietary payment systems together vs. using available commercial solutions for banks and money managers. Costs can conceivably come down enough to enable the use of blockchain-based payments for even very small transactions. Of course in order for this application to gain acceptance, blockchain performance will have to be improved to the point where billions of transactions can be handled in near-real time.

Settlements

Transaction settlement is another area where blockchain can have a significant impact on the way we do business. Today, transaction settlement friction ranges from having to take e-commerce product delivery on trust after payment has long been processed to complex and pricey escrow services for real property transactions.

Once blockchain technology is developed to the point that offline events can be easily incorporated into the chains, I can see escrow services becoming functionally obsolete, especially if they are coupled with blockchain-based title insurance products, as I will discuss below. 

I can also envision blockchain securities settlements, enabling efficient bond markets that do not rely on primary dealers, market makers or inventories, which could revolutionize the enormous global bond market and cause some large players to lose significant revenue streams.

The key to development of this application is the ability for blockchain to extend beyond pure-paper transactions such as securities trades by incorporating transparent tools for attaching and extracting hashes for offline events. Ironically, the larger transactions that today require sophisticated escrow and interbank settlement services would likely be easier to implement than a humble delivery verification for goods ordered online by virtue of them being fewer in number and harder to misplace.

Identity

The area where FinTech and GovTech can both benefit from adopting blockchain is in establishing positive identity of persons and capital goods alike. In theory, positive identification can be useful for even small items, down to the size of a container or a package, if performance for verification can ever be made sufficient to handle such large numbers of simultaneous transactions. However, even for such items as cars and real property the benefits can be enormous. The promise is so great that it has even become an election talking point.

Fundamentally, today our tools for establishing positive identity and ownership chains are, to say the least, quite poor. Government IDs such as passports, social security cards and driver's licenses are often enough forged, necessitating secondary ID checks like finger-printing that are costly, time-consuming and intrusive. Car theft has been on the decline in recent years, but should it mount a return, police ability to identify parts from broken-up cars would be as limited as it had been in the pre-LoJack dark ages. For real estate especially, each transaction requires title search and insurance services that add a significant percentage to transaction costs and often take weeks to finish.

Blockchain holds the promise of providing positive ID and ownership-chain tracing with much lower intrusiveness and at a very low cost and changing a good part of the familiar business landscape in the process. Such businesses as CarFax and whole industries like title insurance and customs/freight tracking would become threatened with existential crises, while our beloved trips through passport control and to the DMV might never be the same again. In order for this nirvana to become manifest, standards would have to be adopted for transparent, easy to use tools for indelibly attaching hashes to real-world objects.

Bottom line

It can be difficult to become used to so much disruption of so many industries in such a short time. It also can be easy to be over-optimistic about the better-hyped technologies that might never see wide adoption. No technology can hope to win in the long run absent a killer app that renders its use worth the new-tech risk because it lowers costs, improves ease of use, or even creates an entirely new use category. Blockchain is now at that precipice: ready to enter prime time, provided that it develops the extensions and standards permitting its killer apps to begin emerging. I will be waiting.

Cross-posted to LinkedIn

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9 fun ways to screw up a CEO transition

Perhaps you are a buyout shop or a VC partner, or maybe you chaired the CEO search committee for your board - chances are that the reason you decided to bring on new blood at the top is that the company was not performing to potential. Maybe the old CEO had the wrong chops for the new stage of company development, or perhaps the market shifted under him - whatever the reason was, the deal is done and your new guy starts next Monday. There are so many ways you can help this person fail! Let's go through a few, shall we?

Photo: Reuters

1. Fail to set out clear expectations 

It really would be all too easy if you just told your newly minted CEO that your problem is eroding margins, or stalled  revenue, or unexpected marketshare loss to competition. Of course, you do plan to measure your new person on the one key metric that concerns you, but why tell him? He is a smart guy, so of course he'll figure it out on his own. Let's just give him some guff about growth, customer satisfaction or staff retention. Won't it be fun to watch him race down the wrong track out of the gate? And sure, what we really want is to sell this loser business the second that the numbers will permit it, but why tell the CEO? We will just fire him when he fails to make the business sellable. His exit package will be a small price to pay for all the fun.

2. Set out wrong incentives

The company has been bleeding staff, its Glassdoor rating is beneath the floor, no one wants to come to work for it, execs are leaving, and the real reason we fired the last CEO is that his style was so toxic that it jeopardized everything we had invested in this business. So now, let's write the new girl's package so that we pay her inventive comp on maximizing sales and margin! Won't it be fun when she tightens up the screws to meet what she thinks (haha!) are our expectations? Why, we can just watch the stream of staffers running for the exits turn into a flood! Of course, it will be the stupid CEO's fault for not realizing that we really want is for her to lose her bonus and instead fix the toxic culture before worrying about the returns. She'll take one for the team, won't she?

3. Circumscribe the CEO's authority

Sure, we just went though months of hellish effort to find just the right person to take up the reins of this benighted business. We think that she's the best that we could find, but naturally, no matter what she thinks, we know that we know better, don't we? Let's make her jump through fifty hoops before we approve new policies, strategic changes, staffing shakeups, reorganizations! Let's make her justify each step and then drag our feet or else just fail altogether to approve them! It will be such fun to watch her squirm! Better still, let's just set out some sacred cows that the new girl just cannot touch: the culture of the company is sacred! (but the company can't seem to get product out the door); the C-suite cannot be changed in any way! (after all, we picked them to be our people, nevermind that they undermine the CEO in every way they can). We can have such laughs while the new girl is tearing her hair out! When the damn business fails, it will be her fault, won't it?

4. Undermine, undermine, undermine!

While we are on the subject, we can use the excuse that we need to know what's going on in the trenches to ignore the hierarchy and just assign work, priorities and schedules direct to middle managers. Won't the CEO be so mad when she finds out? We can bad-mouth her to staffers, because it will be such fun to watch her lose whatever respect she'd had and with it all ability to manage! Why should she know what her people are actually doing - we know better and our desires are so much more important than whatever a mere CEO might be thinking! We can sow mistrust by interrogating the mid-level staff - after all, they know what's really going on, much better than the CEO can, right?

5. Expect a miracle, or two

Our new guy walks on water - of course he does, he told us so when were were courting him. So, it follow that we just ask him to conjure rabbits out of hats! So what if this company makes its money from, say, services - let's turn it into a software company! Of course we won't give it any more resources for the transition, we will ignore the business DNA, will underfund development and go-to-market efforts just enough that they cannot succeed, but we will measure the CEO on making this transition happen! Who cares if the real business of this enterprise suffers while we are chasing rainbows? We will just punish the new guy when results slip, that's all!

6. Block, prevent, ignore, expect results

Our new guy came with such great ideas! Too bad we aren't actually ready to let him do what we hired him to do, are we? Let's block every initiative that he promotes, ignore his insights, prevent changes - we do know better, don't we? But why would we reduce our expectation of results? Isn't that what we hired this guy to do? Where are our new sales numbers? Where is the expanded margin? Where is our exit, for Pete's sake?

7. Set up an adversarial board relationship

This CEO guy is our enemy, isn't that right? It's open season on him at every board meeting! So he wants to confer with us on strategy? Confide about something troubling him? Hold a strategic conversation instead of blowing smoke up our collective ass? These are just weapons we can use against him to advance our own agenda, which is so more important. He's not one of us, he won't be on our side! Let's keep from him what really matters - then we lead him by the nose and relish his discomfiture!

8. Fail to prepare ground

Ok, so we didn't want the old loser CEO to know we are looking to replace him. This means that no one in the C-suite can know either! We can't trust the bastards to keep their mouths shut, can we? We'll just surprise them when a new CEO shows up one day! Ok, so the CFO and the HR peon get to know - it cannot be avoided - but no one else! Won't it be fun to watch them scramble for the exits when the extent of the enterprise's troubles is made so evident?

9. Hire the wrong person as CEO

Ok, so despite our best efforts, this enterprise was underperforming before we hired the new guy. Who cares why this happened? It must have been the fault of the incompetents with whom we are surrounded. Why would we worry about ancient history? Thew new guy will fix everything! So what if the company's sales and marketing have been abysmal? We can hire an engineering leader to set it right! So what if the business can't pay its bills or collect receivables? A sales guy is the right new CEO!

Do you think there are more and better ways to screw up a CEO transition? I would love to hear your tales from the trenches.

Cross-posted to LinkedIn Pulse

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Public vs. private board oversight: policing those naughty corporate executives

Justin Fox has recently fired off another broadside in the war that has been raging among certain circles, decrying iniquities visited by incentive-based CEO compensation schemes on those deemed to be stakeholders: shareholders, employees, customers, even society at large, natch. Many commenters have noted the many perceived injustices that result from high CEO compensation, while others pointed out issues inherent in corporate governance because of the principle-agency problem. Fox in effect throws in the towel by claiming that boards have no capacity to control executive behavior and, furthermore, implying that whatever function they exert is nothing more than a fig leaf to conceal management self-interest.

Before we rush off to cry defeat in the face of all these contradictions, however, it would behoove us to reflect upon a few basic principles of business. First, and I know that this is controversial, but it is nonetheless a fact, almost by definition: there are no stakeholders in a corporation - only shareholders. Now, before you stop reading here and go searching for your pitchfork, consider instead that maximizing value to the shareholders is rarely possible amid employee misery, customer dissatisfaction or great social outrage. Once we, reluctantly, accept that maximizing shareholder value is a corporation's sole function, we can remove our blinkers to begin examining how boards can ensure its success.

It is undeniable that many public (and some private) corporation boards have failed to protect shareholders from the conflicts of interest inherent in agency relationships that they have with CEOs. However, it would behoove us to reflect that private-equity portfolio-company boards have quite well demonstrated a high degree of effectiveness in harnessing managements to benefit their owners.

The most important question that this dichotomy implies is: why have public corporation boards proved to be so much less effective in representing shareholder interests. The answer is, self-evidently, that buyout shops appoint directors whose incentives are solely tied to the value of the companies. By contrast, public company directors are hired not by the mass of shareholders, periodic proxy votes notwithstanding, but rather by the managements, to whom directors owe their allegiance, seats and compensation, so reinforcing the conflict of interest between owner and agent.

Conflicts of interest are, of course, not limited to the relationships among shareholders, managements and boards, but let us restrict ourselves to a manageable scope of topic. Of the remedies proposed to the conflict such as tying CEO compensation to return on equity or capital in preference to share value, restricting executive pay to arbitrary metrics, or corporate social responsibility initiatives, none have a realistic hope of effecting changes beyond just optics for the simple reason that it is the very boards whose allegiances are already so compromised who would be tasked to implement them.

More realistically than expecting boards to act against their own interests, we should instead be seeking to change their behavior by altering incentives. I hereby challenge both large shareholders and business regulators to consider how pubic boards might be made to function more like their private cousins.

Unfortunately, developments have rather been in the direction opposite to that of interests of shareholders. Anti-takeover devices that protect managements from corporate raiders who might otherwise take advantage of their folly have been allowed to stand. Rather than offering relief through rule-making or through legislation to reverse some of these management protections, instead we see a doubling down on protections for incumbents. Proxy vote rules continue to be governed almost entirely through bylaws, empowering managements at the expense of owners. Activist hedge funds have had some success in getting some companies to alter their strategies, but just as often they have failed.

As things stand today, it is really only up to the large shareholders to pool enough of their votes to install boards that protect their interests in preference to those of the managements and to lobby for rule-making for legislation to take shareholder interests more seriously. Let us then hope that we will enjoy the fruits of their labors in our lifetimes.

Cross-posted to LinkedIn Pulse

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