How business model innovation can be goosed: increase the likelihood of serendipity

I’m following up on the theme of innovation arising from periodically or systematically rearranging the workplace seating layout (see Embrace randomness). Here’s a snippet from Rachel Feintzeig in a NY Times piece that touched on workplace intermingling at a New York ad agency:

Rachel Feintzeig, The New Science of Who Sits Where at Work

MODCo Media, a New York advertising agency, has tested three different seating arrangements over the past few years. For about six months, the company intermingled its accountants and media buyers, hoping they would begin to absorb each others’ skills through “osmosis” and “overhearing phone calls.”

The experiment ended up saving MODCo “a couple hundred thousand dollars a year,” says CEO Erik Dochtermann, but it turned out badly for the accountants. The media buyers began to understand the financial side of the business so well that MODCo no longer needed a full accounting department. Now, the media buyers “do the accountancy on the fly” and the company’s chief financial officer checks their work, says Mr. Dochtermann.

From my perspective this is a great example of spontaneous desiloing of the business instigated by the chance interactions of the MODCo buyers when placed in proximity to the accountants. The transition of the necessary foundational knowledge about accounting took place without a plan, simply because the buyers were observing experts, and then began to copy them.

But Feintzeig and the MODCo CEO are using the wrong metric to measure the true impact of this business model innovation, which shouldn’t be money, but time. There is no doubt that the new approach — where the buyers record the accounting of their activities — means that the financials are getting closer to real-time. In the older model there was a lag capturing and communicating the financial data, then the effort expended by the accountants and various delays there, and of course some checking by senior finance people.

The likelihood is that the CEO would have been willing to spend serious bank to shorten that cycle, to buy new software to optimize it, etc. But, instead, the business model innovation came serendipitously, by changing the mix of people’s desks. And specifically people that were formerly housed in separate buildings or floors whose work was actually closely linked.

I’ve written recently about the premise of organizing the company’s operations around hiring and retaining the high performers, which Reid Hoffman at Netflix calls increasing the talent density (see What top performers do, and how to do it). This is a parallel idea, which is cross pollinating ideas and knowledge by rotating or randomizing seating, which increases coincidensity: increasing the likelihood of serendipidy.

And the apparent downside — the reduction in accounting staff — is only a downside to the accountants, not to anyone else. The shifting social contract in today’s accelerating economy means that lifetime employment is an antique premise, at best an empty promise. And note as well that the accountants may be just as likely to be picking up the skills of the buyers as the buyers did theirs.

What do Amazon and Netflix have in common?

Amazon and Netflix are competitors, in that Amazon’s streaming video service is directly competing with the Netflix offering, and both companies are now in the business of producing their own original series. And they have both posted good growth, and achieved record stock valuations: Amazon almost hit $1000/share this last week, and Netflix spiked to $390, an all-time high.

Of course Amazon is busy in a dozen or more markets — retailing, cloud computing, Android, Chrome, search, etc. — so it’s perhaps unfair to line the two companies up side by side.

However, in several crucial ways, the companies share some basic operational principles, directly the result of the management thinking of Jeff Bezos and Reed Hastings, Amazon and Netflix’s founders, respectively.

There are several interlocking pieces of the work compact at these companies. I wrote about Reed Hastings ‘talent density’ theory recently (see Countering the traps of complexity and growth by creativity and context: the Netflix model). His notion is that you can stay ahead of the complexity inherent in a business getting larger by increasing the percentage of high performing employees, and working hard to counter complexity without, however, resorting to processes to do so. Hastings believes that encoding operations into processes drives out high performing employees, and should in general be avoided.

In both companies, we see these principles at work:

  1. Only the very very best people are hired (high talent density).
  2. Don’t work to prevent problems (process approach), instead work to fix problems quickly (favor creativity and experimentation over predictability and efficiency).
  3. Leadership’s role is to set context (see How to balance autonomy and heteronomy: Doctrine) not to control decision-making through committees, management sign off, and long-range centralized planning (autonomy over heteronomy).
  4. Loosely coupled operations: minimal cross-functional meetings (see Amazon’s “two pizza” teams keep it fast and loose), organizational trust that others will apply the best tactics to achieve strategic goals, and constant refinement of tactics.

So that sets the context for the way that business gets done, but what about the compact with these high performing workers? And how does ‘advancing your career’ play out in organizations like this, where the goal is to continuously increase the talent density? The answer: It’s slow.

Brad Stone explored the Amazon side of this in Why It’s So Difficult to Climb Amazon’s Corporate Ladder, writing about his book The Everything Store: Jeff Bezos and the Age of Amazon,

[…] in my interviews with rank and file employees, one common complaint I heard is that positive feedback from superiors is rare and promotions even rarer. This, it turns out, is probably by design. Amazon Chief Executive Officer Jeff Bezos seems to believe his managers must raise the performance bar with every hire and promotion and that only exceptional talent should progress within the organization. As he has done in so many other ways, Bezos has codified his beliefs within his company in the form of a custom called the OLR, for organization and leadership review.

OLRs are a set of biannual meetings at Amazon at which senior leaders in each department gather to debate the strengths and weaknesses of their subordinates, to approve promotions and, in some cases, target the worst performers for dismissal. An internal company presentation posted on the Web describes the custom.

“OLRs give us the opportunity to identify our future leaders and prepare them for their next challenging role,” it reads. “Our Least Effective 10% of employees will be targeted for appropriate action to keep Amazon’s performance bar high.”

This system acts as a dramatic check on advancement, since other senior managers can block the advancement of employees, and they each have only so much pull to get candidates recognized as among the very very best. In principle, these companies are focuses on key metrics that represent results against objective goals. In practice, detractors suggest that there is a lot of politicking involved at Amazon, and not just objective assessment of how super the superstars are. The key point is that the pressure to resist advancement is strong.

Netflix positions its thinking in different terms, focusing on doing whatever is needed to hold onto the very very best employees. They pay top salaries, and instead of allocating raises across the board — 4% for all people in a team, for example — managers are more likely to concentrate on doing what it takes to keep the best performers. In effect, this leads to the same outcome as Amazon’s, which is that people either a/ are advanced because they are part of the exceedingly small percentage of the very very very best who look like a superstar in a company of stars, or b/ accept their relatively slow penetration into the company’s inner circles, or c/ leave to pursue opportunities elsewhere.

Netflix also makes it a matter of policy that they “want people to manage their own career growth, and not rely on a corporation for “planning” their careers.” Note that the ‘corporation’ in that sentence means Netflix. This benign neglect is a sign of laissez-faire management, which works only in the context of a culture dominated by the best and brightest, a culture of high talent density. This new covenant — which I wrote about in Dig Your Own Hole, Sharpen Your Own Shovel — leaves it to the individual to plan and execute professional development, but in a company like Netflix, where the vacation policy allows generous vacation time, people actually have the slack that is needed to ‘sharpen their shovel’.

This culture bears similarities to management and strategy consulting and law firms, which historically practiced an up-or-out model of professional career, and a path toward partnership or senior roles. In less hierarchical, modern companies the ‘up’ might refer to a leadership role on a new initiative rather than making partner, but the result is similar.

I believe that this will become recognized as the defining organizational cultural model of our time, the way that the man in the gray flannel suit defined post-WWII American business. The laissez-faire work compact works well in our time and circumstances, so long as the company is populated by stars, and complexity held down systemically.

The economy and society are changing too fast for process-based efficiencies to succeed, as a general rule. Success is increasingly tied to innovation, creativity, and agility. That puts pressure on leaders to select those people with the greatest levels of those characteristics, and to minimize impediments to them applying those skills. So the role of leadership is attracting stars, advancing only the superest superstars, and meanwhile characterizing the company’s goals clearly and embedding that into cultural context, or doctrine. This is the fast-and-loose form factor of work, which puts a high premium on individual and group autonomy over explicit consensus.

Netflix and Amazon are two companies that embody these principles, and will be leading indicators not only in the stock market, but in the marketplace of ideas surrounding the dramatic changes we are going through in the postnormal workplace.

Countering the traps of complexity and growth by creativity and context: the Netflix model

Reed Hastings, the CEO of Netflix, has a presentation at Slideshare called Netflix Culture: Freedom and Responsibility. I am not going to recap it completely — although it does make for interesting reflection — but I do want to pull a few critical concepts from it, because I think that Netflix has adopted a great many characteristics of the new fast-and-loose form factor of work I have been writing about the past few years.

The presentation starts with a discussion of the sort of principles that form a cultural foundation for the business — perhaps I will revisit them in a later post — but I will extract just the concept of being responsible in a context that provides a great deal of autonomy.

from the presentation:

Responsible people thrive on freedom, and are worthy of freedom.

Our model is to increase employee freedom as we grow, rather than limit it, to continue to attract and nourish innovative people, so we have a better chance of sustained success.

Hastings makes the case that most companies curtail freedom as they get bigger, because with growth comes complexity. And one counter to complexity — that worked in the industrial, slow-and-tight business context of the 20th century — was to codify processes to stop the chaos that comes with complexity. The increase in process controls and the reduction of freedom drives the best performing employees out.

Screenshot 2013-10-15 06.53.58

 

Process-driven companies do well when efficiency is the fulcrum for competitiveness. But in times of fast change and a market full of innovators, that execution approach is all bad.

This turns out to be one of three bad options:

  1. Become process-bound.
  2. Stay creative by staying small, but therefore limit your impact and reach.
  3. Avoid rules, and suffer chaos.

But he says there is a fourth way:

Avoid chaos as you grow with ever more high performance people — not with rules:

  • The you can continue to mostly run informally with self-discipline, and avoid chaos
  • The ‘run informally’ part is what enables and attracts creativity

Screenshot 2013-10-15 06.55.31

I love the concept introduced here: increasing talent density faster than complexity is riding the wave and staying ahead of chaos. Both trend lines can be managed: at the top, finding and producing high performance, creative, responsible people, and below, intentionally taking steps to retard the rise of complexity.

In this latter case complexity can be held back: a company can opt to focus on a few big products instead of many small ones, or avoid ‘efficiencies’ that lead to rigidity (process-bound, gain). Or, as I discussed in several other posts, the firm can intentionally accept lower cross-communication and collaboration, which requires deep consensus building. Instead, a fast-and-loose independence is viewed as central to the freedoms demanded by high performance staff.

So Hastings believes that if you have the right people, you can remain loosely coupled and stay ahead of the chaos arising from complexities. Instead of control (processes again) directing people what to do, you need to set context:

Screenshot 2013-10-15 07.03.10

 

 

So it seems that Netflix has turned the corner into the fast-and-loose world of work, adopting a cooperative ethos in which the work of leadership is setting context, and working to remove the obstacles — like reducing complexity — so that the great people who thrive in a laissez-faire cultural milieu can accomplish great things. At Netflix a mistake made by a project team or an individual is more likely to be bad context setting by management than anything else. And — explicit in the principles that shape the company’s credo — is the notion that it is better to respond quickly to glitches arising from a mismatch between context and action than to create a culture in which people are not experimenting.

Bottom Line

There are some aspects of Netflix culture that I accept only grudgingly — like the companies apparent unwillingness to work explicitly on career planning — but given the fact that they have squeezed out all the chicken shit left over from the 20th century social, that is a lot easier to take. For example, Netflix has no vacation policy, meaning that people can take as much vacation as they need, so long as work is getting done and projects are moving along. And their expense policy is five words:

Act in Netflix’s best interest.

I intend to make a visit to Netflix, and hopefully talk to Hastings and others to get a better sense of how this all works in practice.