~synthesis~

googlets

How do you measure success? How does your employer? Three measures a commercial company might use are revenue, share price and market capitalization. The three are connected, but the first guides the other two.

Initially, revenue or the promise of revenue sets the company's value; if they achieve success and cash flow, the name of the game is growth. Once established, year-on-year improvement becomes that much harder, and share price growth comes with ever increasing market scrutiny.

Few companies achieve a position of market dominance - but those that do face an even steeper slope. The toughest part is the transition from underdog to leader - people will now root for the other guy, governments will keep a closer eye on you, and all the while, you've got to keep up that year-over-year performance (despite a growing denominator) and remain compelling to the markets.

When the company is starting out, there is pressure on the employees to build the product, close the first sale, make payroll, pay off debts, etc. It's a productive pressure, everyone is in it together, and while the risk of failure is ever-present, you knew it would be like this when you joined.

When the company first achieves consistent growth, the pressure changes, it's a much better place to work. Progress is visible and customers are enchanted; sure everyone is working hard, but it doesn't feel like it - there is an energy of vindication, of growth, and of optimism - you've made it over that hump, and things are looking good.

Then seemingly out of the blue, success changes from a happy surprise to an expected duty; people want to see you fail; what was passion is now work; what was energetic is now draining; what was once a team is now a group of competitors fighting over an HR-imposed compensation scheme - some call this maturity, others just say it sucks. At all levels, the company is, well, less happy.

I've read a number of articles (1,2,3) about Google recently, and it feels to me like they're now just about out of the happy phase; their behavior is that of a mature company.

In phase 2, you want to win on your merits; confident about your product, you simply want an even playing field and the opportunity to participate. You know how good you are, and damn it, they just need to see it so that they can catch the fever as well!

In phase 3, growth is harder, more doors are open to you, but winning is tougher, the competition is fiercer, and expectations are much higher; so you grasp at other kinds of straws. You ship products before they're ready, make poor decisions, and use other (not merit-based) means to win.

Google is doing all of these things.

But why?

They are incredibly successful in their core business; they have dominant market share, their margins are unheard of, their reputation is solid, and they still have perhaps the most talented workforce ever assembled.

But their mission has shifted - they've gone from wanting to get better every day to wanting to grow bigger every day. Their success is no longer in their control (you own your improvement, you don't own customer preference), nor is it particularly inspiring.

Why have they allowed themselves to get this way? Is it greed? Ego? The fear of being a one-trick pony?

I think it's all three. Besides recent product mishaps (Wave), complaining publicly when they're at risk of losing deals, the abysmal policy choices (Net Neutrality with Verizon), and even the opening of a think tank (isn't this function the very essence of Google?), I think one of the most telling reasons for their current state is their recently-published code of conduct.

I admit, I started reading it and got bored. This is not the sign of an energetic, passionate company, it smacks of lawyers and HR departments, a company gone "corporate."

ASIDE: The best and most easily remembered set of principles I've ever read (IBM):

Respect for the individual, customer service, excellence.

"Don't be evil" (Google's motto) is an admonishment. When I first heard it, I wondered: "Why? Are you afraid you actually are evil and need to keep reminding yourself not to be?" Why not "Be Great"??

I admire and respect Google, I think they have helped shape a completely new landscape for people and business everywhere. I say this not to kowtow to them, but to recognize that brilliance in some areas does not equal brilliance in all areas. I think Google will continue to be successful, but I believe their leadership is preventing them from achieving quantum success.

Could they have avoided their recent pitfalls? Yes. They should (given their incredibly talented workforce) have realized that growth and winning do not equal success.

Burdening one success with the creation of others is not always the best strategy.

Instead of trying to accumulate all sorts of new products and businesses under one roof, they might have been better off spinning things like Gmail, or Google Apps, or Blogger or YouTube off into little independent Googlets, each free to evolve, grow, and achieve without being beholden to, or held back by the mother ship.

Of course they can "help" each other, and cross-pollinate, but that doesn't require them to be in the same organization. It can be easier for a new entrant to ride the giant's coattails, but that comes with rules and constraints, some of which can prevent sustainability or confine the addressable market. Google's quest to amass size is failing them.

There is strength in being one great thing; there is wisdom in seeking to build other great things; and there is wit in being the one to eventually replace your one great thing.

Google has an amazing talent pool, a powerful market presence, and a big wallet. The Googlets can take advantage of all three from the outside; they can create value and impact, and even help revitalize the workforce.

Size does matter. A business has a right size; it takes a real leader to understand that and to stay true to it. The stock market has never been a good judge of greatness and achievement; it knows so little about you or your business - why allow them to prescribe your path to happiness?

collar blues

Arbitrage is defined as "attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms."

A simple example is the buying of a currency in one market and selling it in another for a slightly higher price; success is knowing the prices in various markets and having buyers and sellers therein. Arbitrage thrived when communication was limited and it was difficult to know what each market was doing. As time and space have shrunk, arbitrage has had to evolve.

As one form of arbitrage was threatened, others grew. It began with the ability to safely and economically ship goods across oceans, combined with countries with predictable governments, cheaper workers, and easy access to ports - thus was formed outsourcing 1.0 - manufacturing. Improved telecommunications then lead to outsourcing 2.0 - services, which prevailed in countries with forward-thinking governments and cheaper, better-educated workers.

We all know that countries with lower costs of living were able to provide help desks, call centers, etc. to countries with higher costs, and both sides won. Western companies lowered expenses, reduced payrolls, and returned more to their shareholders, and "Eastern" companies created markets, employed people, raised local standards of living and returned more to their shareholders.

But... The East is able to provide these services to the West because they have a large, well-educated (better-educated, really) workforce who is used to getting paid much less than their Western counterparts. As communication opened up the possibility of outsourcing, it also opened the East to the salaries and lifestyles of the West, and as their "tide" of awareness and achievement lifted, so did their "boat" of expectations.

Thus people costs in the East are rising, margins are falling, and with the recent recession, the people costs in the West are falling and margins are rising. I'm not saying that the arbitrage opportunity is lost; I'm just saying the margins are shrinking, and growth in BPO (Business Process Outsourcing) is slowing.

I was having lunch with Pierre de Vries a few days ago, and among other things, our conversation went to a question that has been bugging me of late - whether a more educated society is more advantaged [more on this in future posts], and whether "white-collar" jobs add more value than "blue-collar" jobs.

Before we get to that, I'm sure you've noticed a trend over the last couple of generations. It used to be that goods manufactured in the East were of inferior quality, and their only buyers were those with no other choice. That changed very quickly - today goods made in Japan or Korea are considered to be of better quality and reliability vs. what you get in the West. The same thing happened with BPO - initially, you hated it when the call was answered by someone with an Indian accent because you weren't getting the same experience as with a Western call center; but now, their ability and capability have improved to the point where it's not as big an issue, and eventually, the outsourced call center will be preferred to the Western one.

As we have gotten used to the idea of some business processes provisioned "over there," the East is looking for new sources of growth - about 5-7 years ago, medical services began to be outsourced; today outsourced legal services are the new vogue; this in addition to successful outsourcing of software engineering, accounting/tax preparation, and design services to name but three. Outsourcing 3.0 is pure white-collar, and the acceptance of these services by the West is less and less an issue, which opens the door to even more white-collar provisioning.

A commodity is created "when a product becomes indistinguishable from others like it and consumers buy on price alone." From clothing to appliances to cars to help desks to accountants to radiologists to lawyers to ophthalmologists to... you?

When something becomes a commodity, the cost per unit drops, and the price per unit drops - that good or service is valued less, and those that do it are therefore valued less.

Doctors, lawyers, accountants.. What is more precious today? Having someone do your taxes, or knowing a really good, trusted contractor who will help make sure your house stays standing and in good repair? What is more valuable? The car or a great, trusted mechanic?

A successful economy requires sustained value creation combined with growth in unit value. If the worth of the thing being created is declining, the economy declines. A successful economy also requires that most of its constituents (citizens) be sources of value and not merely consumers of social services. For generations we've been led to believe that a doctor was "better" than a plumber. Our parents may even have discouraged us from pursuing these "lesser" vocations in favor of the "desk" job.

Can you have a purely white-collar economy? No. Consumers consume things - those things need to be created and provisioned. Let's go a bit further - you only have to start with lawyers to see that many white-collar jobs are actually self-fulfilling prophecies. As they become commodities, their value will diminish, and (hopefully), their role in society will diminish (speaking specifically of lawyers and tax accountants :-)).

There's a theory that white-collar jobs have more "leverage" than blue-collar jobs - that they earn more, create move value, etc. Doesn't that also mean that disproportionately more white-collar jobs implies greater unemployment?

Might we see less and less white collar jobs in the West and more and more blue-collar jobs over the coming generation? Is it likely that we will want to outsource white-collar jobs???

The extreme conclusion (of course this won't happen) would be that America (for example) becomes the agriculture and manufacturing capital of the world, and India and China become the white-collar services capitals. Each consumes the other's products, and needs the other to survive, but power resides in control of scarcity, which will depend on what is more commoditizable. Now this can't happen because it's not practical for someone in Beijing to wait for a plumber from Buffalo. But you get the picture.

I believe our value mechanism needs to shift to the point where we recognize what so many already know - white or blue, economic success resides in the scarcity of what you do, and not whether you need to clean your fingernails at the end of the day.

unjust disparity

Bob Herbert wrote A Sin and a Shame in the NY Times, where he argues that over the last several years, corporations have used the "desperate times call for desperate measures" sentiment to lay people off, even when their economic situation didn't really require that dramatic a reduction in workforce.

The "surviving" employees feel they have to double down and work much, much harder to keep their jobs. The result is even more profitable corporations (profits up $572 billion, payrolls down $122 billion), whose cash positions have improved (now $1.84 trillion, a 27% increase from 2007) dramatically, and an employee base stressed to the limit.

Here's the real killer - from Q4-2007 to Q4-2009, real GDP fell by 2.5% while payroll fell by 6%. This is big.

Two questions:

1. Why is this bad? Is it wrong for corporations to be as lean as possible, to have their employees be as productive as possible, and of course to be as profitable as possible? Isn't this how we judge corporate performance?
   
2. How will this end? Will they relent, reduce profitability, hire back, and expect less? Will people grow to love the idea of being this productive and want to keep it going? Is people's ability to contribute at such a high level sustainable?

Nowhere are desperate times more felt than in the home. It's not as difficult for a company to lay someone off as it is for that person to actually be laid off. For the company it's simply a numeric exercise; for the employee it's about a roof over their head and food on the table. So how do the employees react?

Things don't suddenly hit the fan; there is a lead up that gets to the point when people, despite the risk, say "Enough." It is at this point that revolutions are born, that causes are formed, that the Man is made to pucker.

As the unjust disparity grows, the people's desire to hold on to the status quo shrinks to the point where what was once unthinkable becomes thinkable.

Unjust disparity is the gap between being controlled and being in control. [I just made this up, and I'm sure there are other more "official" terms for it, but this is mine. So there. :-)]

This is not about wealth vs. not-wealth - there is tolerance for this, especially now (with sports and music) that so many once-poor people have struck gold. It's about hitting some kind of personal limit. This is about a more fundamental, and intentionally-created inequity. I'm reminded of the first time I heard Meat Loaf sing I'd Do Anything For Love (But I Won't Do That) (my emphasis); coming from a man who called himself "Meat Loaf," that seemed like quite the repugnant thing.

To the two questions above, corporations must be successful it's what their shareholders expect; the issue is their ability to sustain it. What the leadership does to achieve that is the that that will damage organizations that choose corporate bulimia (purging employees) as an effective strategy.

Of course there are moments in business when extreme effort is required, but they are moments, not months, and they are not sustainable. Greed combined with corporate myopia will take the productivity peak achieved in crunch time and turn it into the worst kind of backlash. There is a progression:

1. Those that can't handle the stress begin to fall over or leave
2. Those that can handle the stress, but have a sense of moral purpose and the knowledge that they are employable (even in tough times) begin to leave
3. Future stars that are now forced to pick up the slack of the current top talent (#2)'s departure begin to leave (this is disaster)
4. It goes on...

Smart organizations are actively recruiting disaffected #2s, and one of their selling points is that they won't do that. They are also networking with #3s, knowing that they are much more fickle and open to change. This is not good for those that did do that.

Organizations where HR/Legal/PR rule, where there is a feeling of soullessness, and where management has no empathy or visceral understanding of how the employees feel, will suffer. Their management is so reliant on reports and analysis and McKinsey-type presentations, that they view their people as things, and have little or no sense of what's really going on, be it within their walls, or in the minds of their customers. Good leaders don't allow knowledge to be filtered; they most certainly want to be connected to their people and their customers. Those that claim that it's not possible to manage without the filters are the ones the Board needs to replace.

The unjust disparity is never more clear than when we choose the company over the individual. You can't sustain success when it comes before those that create it.

local heroes?

The US Department of Defense can't account for $8.7 billion out of the $9.1 billion intended to help rebuild Iraq. Bell, California city officials were forced to cut their salaries by 90% because they were found out (the worst offenders were the city manager ($787,000/yr) + assistant city manager ($376,000) + chief of police ($457,000/yr) were all forced to resign). Also in California, while spending for K-12 education rose 22% over five years (from $45.6 to $55.6 billion), actual classroom spending fell from 59% to 57.8% of the budget, and 38,000 school teachers have lost their jobs; California has a $20 billion deficit. Where is the money going?

There is profound inefficiency in the American education system - California alone has over 1,000 school districts. First - why are so many districts required? Surely one is enough? With 1,000 separate district organizations (each of which has an average $55m budget), surely there is waste, fraud and excess staffing? With 1,000 districts, surely a percentage of them have leaders that are abusing the system, and siphoning money away from students and teachers? With 1,000 districts, surely there would have been a way to fire 38,000 bureaucrats, retain 38,000 teachers, and give tens of thousands of students a better education?

"They" say that we should keep the Federal government small, and leave as much work as possible to the states and below. Most politicians will argue that this is the key to success, but where's the proof?

While local government is theoretically more in tune with local needs, the price you pay is significant. By definition, a decentralized model with redundancy at every level is actually more government not less. Look around the world today and you see a dearth of great leaders and great managers. The more distributed government is the more leaders and managers and honest people it needs; and let's face it, there just aren't enough of those to go around. The result - bad management, shortsighted thinking, poor budgeting, massive inefficiencies, wasted money, wasted time, wasted lives, wasted air...

When the system is this fragmented, it is also impossible to ensure accountability - imagine how big, how pervasive and how resistant to "influence" the oversight organization would have to be to police the whole country's fiefdoms? The theory that local elections serve as the "cops" is laughable - just look at the "wonderful people" that keep getting reelected in local and regional (and federal I suppose) elections). It's too easy to hide, and people are too disengaged to pay attention. In the end, elections are not the best way to do anything other than win a popularity or fear-based contest.

The 8.7 billion dollar throwaway by the DOD means this isn't just a local problem; there are massive failures at the Federal level as well (this is but one).

Is there a way to prevent fraud and abuse and just plain stupidity? No - being unscrupulous is part of human nature (or better said, trying to get away with something you know to be wrong is human nature); and you only have to look at the Darwin awards to know that there are a whole lot of less-than-bright people that grace this planet, and many of those seem to be drawn to politics.

The arguments against federalizing everything are many - too much distance from people and local issues, too much bureaucracy, too much excess spending, and my favorite with budgets that big, any screw-up is sure to just as gigantic (at least locally it's only hundreds of thousands of dollars or millions, and not billions).

I don't buy that. Saying that this alternative sucks less so let's do it is not the way government should work, and it's certainly not the way citizens should be served.

My first instinct was to say we should accredit government workers - they must be trained and pass an exam to be judged "Competent to Spend the People's Money" (or CSPM ;-)). But that's a non-starter - just look at the fact that 90+% of politicians are lawyers (who had to graduate from university and pass the Bar), and how incompetent they are.

I wrote something a few months ago that I think might have merit - I was talking about how we incent or mandate a balanced budget:

Quid pro quo. If we're punishing Congress for excessive spending, we should also reward them for good behavior. Every year that there is a budget surplus, all Federal employees will receive a bonus of X% (1 or 2%?) of the total surplus, divided equally (same percentage of salary). When they've also retired the gross deficit, the percentage should double. There should be no cap on this - the better they do, the better they do.

But how do we prevent fraud? Two things - first, if everyone's pay is dependent on a more efficient system, maybe that creates an incentive to play better. Second, if the number of agencies is reduced profoundly (reducing the 14,866 school districts to 50 + 1 (for Washington DC) for example), then maybe it's possible for the GAO to police all of them? And what if the GAO is also similarly incented to find bad behavior and eliminate it? For example - one incentive I might consider for the GAO is they're penalized if a behavior is reported in one year, and remains just as bad in the next, and they're rewarded if it improves (their bonus pool could increase by a percentage of the improvement).

It should be noted that there are a ton of federal organizations that do have a local presence, and are able to tune their efforts according to local needs - it's just a matter of policy.

The three steps to reduce bad behavior - consolidate so that fewer more qualified people are doing the work; create a pay structure that rewards fiscal responsibility and improved service for the citizens; and motivate the oversight organization so that it wins if the citizens win.

Sadly - the easier way to do it - trust the citizens to vote well - hasn't worked...