Don't be yet another Kim Jong-Il of the business world

Posted by Pelle September 11th, 2008 1 comments edit

Kim Jong-Il the glorious leader of North Korea has long been the laughing stock of most of the world except of course the poor millions of North Koreans who happen to be stuck under his rule.

So why is it that most medium to large companies blindly follow his doctrine? Why are so many startups sliding down the path of becoming North Korea.

You may be thinking now that Pelle has finally lost it. Well bear with me to the end of this, I hope it will make sense.

The visionary leader

A traditional large company has a fearless visionary leader in control of everything. A large company typically has many different product and service lines often in a whole range of different industries. Yet the fearless leader has the majestic vision and good heart that he can see and make correct decisions about all.

The Bureaucracy

Obviously a strong fearless leader has a strong hierarchy of civil servants to make sure his vision and wise thoughts are carried out. In a dictatorship this is the bureaucracy. In a large company these are the layers of middle management and non core infrastructure such as HR, accounting, fancy staff restaurants and security.

Any good dictator has a strong defence. Traditionally companies have handled defence through corporate counsel and security staff.

Nowadays IT is an important part of this. Ensuring that outsiders can’t breach the electronic borders known as the firewall.

Unfortunately it is also very common that these same staff are spending lots of resource making sure people inside the firewall aren’t accessing things out side the network that don’t follow the vision of the visionary leader. After all he does know best and doesn’t want you to harm yourself by that dangerous foreign land called facebook.

North Korea has very strict limits on the amount of visitors (and what kind of visitors can enter the country). God help the poor soul who actually might want to move there. Visionary leaders normally have parts of their bureaucracy known as Department of Immigration/Homeland Security/Control of Foreigners enforce strict limits on this.

The visionary leaders in large companies normally have similar departments although they are known as Human Resources. These often have strict application procedures and the power to deport citizen’s who erroneously aren’t following the vision of the leader.

Planned economies don’t scale

I’m sure we can find and laugh at many such similarities. However where the real and worst similarity is is the fact that no planned economy has ever worked outside of various small communities with a limited scope.

Tribal societies can work quite well with a chief. Most tribal societies are pretty small and everyone know each other, you aren’t going to fuck over the other people in the village as you’ve known them all your life.

Furthermore there tend to be very little diversity of activities within the community. As a leader you can probably grasp when it’s time to plant the rice or go hunting. No need to understand thousands of different separate industries and activities.

When you start introducing more than a small group of economic activities it is pretty much impossible for a leader or even a council such as a Polit Bureau or a Board of Directors to have sufficient insight and wide enough vision to manage it successfully.

The solution utilized by Kim Jong Il and most large corporations it to delegate the planning through the hierarchy. The only problem here is that the business model of people within the bureaucracy is never what ever the business model of the country/company is. Rather it is to move up the hierarchy. It should be noted that I define the bureaucracy as the layers between the visionary leader and the productive citizens/employees.

As a rule of thumb you could say that if there is corporate politics in your country/company you are screwed. Politics happen when unproductive layers (battling middle managers) or slices of the company (like IT, HR, Legal) need to prove their worth and protect their job.

Hack’s for scaling without Kim Jong-Il

For a company to be able to smart and agile you need to have it small enough that either the visionary leader quite literally can keep track of and understand all issues (such as which javascript library to use or pros/cons between say Engineyard and Amazon EC2) or have direct constant access to and respect for those who do.

Now you may be under pressure to grow from investors, this is fine and to be understood. Growth is great and should definitely be encouraged, however growth should be managed and controlled. This is the real job of the visionary leader. For example I can’t stress enough how important it is to keep focus on your business and not spreading into unrelated areas. Can you say Yahoo?

Other important thing for managing growth. Outsource every god damn thing that isn’t directly focused on your core business. Even if it is cheaper to have your inhouse HR, CFO, IT department and wacky staff restaurant outsource it.

Having these non productive departments lead to politics. It is difficult to avoid though as these become team members. While it may be fun being visionary about the wonders of token ring network layouts and the productivity enhancing features of tapas day, the vision should be on the business and the productive team members.

So wait a minute, how do you explain China/Google?

While both are definitely large plan economies they have been successful at creating a creative free enterprise culture within. China by copying Hong Kong into a growing number of enterprise zones, Google by using 20% time.

I think 20% time is probably by far the most important innovation keeping Google afloat with new product development. It’s kind of like telling all your employees that for one day a week they are their own visionary leader.

This way Google have avoided the trap of most large plan economies. “We need to be in the portal/mail/social networking/video space” or Mao’s catastrophic Great leap forward.

Of course Google still has to centrally plan which of the maybe 100 internal social network projects they want to push, but they are able pick one that is already under development and under the leadership of a visionary guy/gal. But picking a well designed visionary project is a lot less risky than designing one by central committee.

Another important thing is openness. China was one of the most closed societies in the world and in some areas they still are. However China learnt that to utilize their number one resource (their vast population) they needed to focus on the globalizing world. As the world globalizes and the world wide economies grow China is their to sell them clothes, shoes and computers.

China’s manufacturing infrastructure has become the base for the unprecedented global economic growth in the past 20 years and the foundation for startups in just about every country in the world (except maybe North Korea).

Google have followed essentially the same approach as China. They realized that their strength was in their vast server capacity they developed for their core search business. It is therefore in Google’s best interest to push the open web and create infrastructure that others can build on. AdSense, OpenSocial and AppEngine are all examples of this.

Of course some countries/companies set up Economic Free Zones in an attempt to copy the more successful countries/companies. An example was Digital’s AltaVista division (where I used to work) and Yahoo’s Brickhouse. However if they aren’t respected by the mother ship and corporate politics cause them to be ignored, they can’t work in the long run.

I should also say that rumors are from googlers that Google may be heading down the path of Yahoo into corporate political hell. It definitely would take a mighty visionary leader to avoid this happening in such a large company, thankfully they have 2. But then so did Yahoo.

Don’t get pushed down the slippery slope

As a startup today you are hopefully on top of your innovative product/service. If you don’t run a tight whip with regards to this focus it is very easy fall into the traps that will send you straight to North Korea.

Many entrepreneurs for example are very young and have no experience in the day to day running of businesses. They therefore often take advise from people older than themselves. You probably wouldn’t take programming advise from a Cobol programmer in building your hot Rails app, but people follow dated advise from the 60s about their business.

The slippery slope goes something like:

  1. Get an office
  2. Buy and configure your own servers
  3. Hire an office manager
  4. Hire an HR person
  5. Hire a finance person
  6. Hire an IT person as the HR and finance person can’t install Office and the programmers are too busy

By now whether you believe me or not have 5 different fiefdoms to require vision and resources. As the company grows these fiefdoms become empires to be protected at all cost.

The server guy has all the reasons in the world why you can’t move to EC2 or AppEngine. So you won’t get that flexibility. The developer’s can’t pick a new language or database as these don’t follow our standards.

The HR department starts implementing policies that she brought with her from her old job.

In general once you have these fiefdoms installed it is very hard for an inexperienced visionary leader to control and manage them.

The fact is that most startups go through this process, because that’s what all the other startups do, without really questioning the need for it.

All of the above points can and should be outsourced relatively cheaply. Let the HR people innovate and be visionary themselves in their own HR startup (the movie industry uses these almost exclusively eg IndiePayroll ).

EngineYard or Amazon provide very good and very different outsourced hosting.

While you can outsource IT. I think that everyone who works in a tech startup should be able to manage their own computer (or at least a MacBook).

I know people have strong opinions about offices. However there are other options besides the obvious such as working out of the visionary leaders SOMA loft or everyone working from home. Most cities now have great CoWorking spaces, coffee shops and even Regus is a good yet expensive alternative.

VC’s and other Grown ups

VC’s and other advisors (such as Mom and Dad) can also be particularly bad at pushing you down the way it’s always been done. They will often push you down the above steps, because thats what you need to scale. Sometimes they will be very insistent on this and you won’t really have a choice. You might end up thinking, they know better than me or this isn’t a battle I’m willing to fight.

There are many risks involved in taking funding, but one of the worst is loosing control. Most people imagine this loss of control as being booted from the CEO spot, but you are way more likely to loose control to a VC financed bureaucracy.

It is important if you have a philosophy on this that you make sure the VC’s understand that being lean and agile is an important part of your strategy and that this isn’t negotiable.

Finding the right size

Popular perception holds that companies must always be growing or they’re dying. There’s either up or down, win or lose, success or failure. I think that’s a harmful dichotomy that leads to the death of perfectly viable companies in their quest for constant growth. DHH

Startups are all about growth. However there may come a time, when you are so successful at what you do that the only way to grow is sideways into other areas. No matter how tempting this is and how good it appears that Google are at it, I think it is a mistake.

Better yet would be to grow by investing in other startups or even encouraging your best employees to go on “80% time” in return for a 20% stake of his dream. This would let you essentially scale into new areas without removing the focus from your business.

Find out more

37Signals seems to follow this philosophy. David gave a talk at Startup Camp where he talked about several strategies that they have taken in not becoming North Korea.

A great slightly academic discussion about the problems with central planning within companies can be found at the EconTalk Podcast: Munger on the Nature of the Firm

Posted September 11th, 2008 under:
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