Tuesday, January 15, 2008

'In search of mediocracy' - The falling off a log theory of business

When I was at business school my classmates and I read lots of good stuff about how to run a good company. Books like ‘In Search of Excellence’ and ‘Built to Last’. But I remember some of my classmates asking: ‘Why aren’t the companies I’ve worked for like these?’ To most, if not all, my classmates these books described something that was not the case.

That was five years ago. Since then I have met many people, few if any of them have worked for ‘Excellent’ companies.

Indeed most of the people I meet (particularly in software development) tell me crazy things that have happened at their companies. Decisions to close down offices just before a contract is won. Objective setting sessions were the objectives set are meaningless. Management which does the opposite of what they know is best.

One company I worked with in the last five years came closer to ‘excellence’ than any other company I know. Still, it got into trouble and has had three rounds of downsizing in the last two years. From what I hear things are pretty crazy now. Apparently in the last round they paid off four engineers, soon discovered they needed them, tried to hire them back, HR got involved and slowed the whole thing down during which time three of them got new jobs.

Another company I worked with was perpetually shooting themselves in the foot. So much so that they even let go the one person go who could make sense of the development team. Just this week I learned the same company which is letting one of their key managers go.

I end up hoping the end comes soon but these companies survive. The books say they should go out of business but they don’t.

So it is that I find myself asking ‘where are the excellent companies?’ And I feel pain when someone else tells me another story of the stupid things their employer is doing.

I’ve come up with a theory which explains it. I apply it only to the software industry because this is what I know but I suspect it might be more universal. It goes like this...

Like having a baby there is no law against starting a company. Actually there are a few laws, and in some countries it can be hard, but in most Western countries, provided you do not have a criminal record you have a right to start a company. In the UK it can take less than a day to form a company.

Most of these companies will go out of business in under a year. If I remember the statistics less than 10% survive year 1.

This 10% have done something right. Maybe they hired the right people, maybe there were in the right place at the right time. Maybe their competition was more of a mess than they were. Perhaps they really did have ‘first mover advantage.’ In other words, many of these companies survive purely on luck. They got something right. That doesn’t guarantee they got anything else right.

Some of these companies will go out of business in the years that follow but the longer a company remains in business the greater its chances of surviving even longer.

Over time these companies will gain some customers. Now customers can be surprisingly resilient, not because they are ‘loyal’ but because switching costs are great and because they have to decide to go elsewhere. Remember, these companies may be dysfunctional themselves so changing isn’t easy.

When you have a few customers, particularly big ones, you can make the money go a long way. Software companies which pull in their wings and go into maintenance mode can shed most of their staff and still stay in business for years. In fact, I would argue that almost any company you think is about to fail can last another year.

Notice there is nothing here which says the company will be ‘excellent’, or even that it will do what the management text books say. All I’m saying is that crazy mixed up companies can survive for a long time when they shouldn’t. Many of these companies have little right to exist by business school standards but they do.

As a consequence many, if not most, companies are, to some degree dysfunctional. Many people work for these companies. Many people are abused by these companies. And these companies are enough to put you off companies altogether.

I call this my ‘Falling off a Log Theory of Companies’: Starting a company is as easy as falling off a log. Most companies which come into being will fail quickly, the majority of those fail will be to some degree dysfunctional but will survive. Consequently most of the people I know will work for dysfunctional companies.

I think this theory applies especially to software companies for two reasons. Firstly there are still many many opportunities in software to be found and exploited, i.e. you can still get lucky. Secondly, the IT industry, and those who fund it, are massively optimistic. We accept failure too easily.

A few months ago I explained this theory to someone not in software. He said he’d seen the theory in action too. He also suggested the book these companies need is not ‘In Search of Excellence’ but ‘In Search of Mediocracy.’

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