There are fewer sad things to observe than a once-great firm sliding into mediocrity. You might not be accustomed to hearing the word “sad” and “business” in the same sentence, but I really do find it sad when great startup firms lose their energy and eventually become lumbering giants.
If you’re familiar with the legendary business book by Jim Collins, Good to Great, you already understand the concept of how firms can move from merely being good to becoming great. You might not be as familiar with it, but there is a similar shift that occurs when once great firms become simply … good firms. I call this slide “the Great to Good downward spiral.”
If you’re curious about the factors that cause this tragic downward spiral, or if you feel that your current firm is headed downhill, please read on.
This downward progression or spiral is not simply “sad” to management experts like me but also to the firm’s employees, executives, customers, vendors, and shareholders. Everyone suffers when the initial startup mentality is lost. And to make the situation even worse, once a firm slides into a bureaucracy, it is extremely difficult to turn it around. If you follow business closely, this downward slide is not that unusual.
In my analysis, it has happened to notable firms like Kodak, Xerox, AOL, HP, 3M, and Sears, to name but a few, and more recently to MySpace and Yahoo. Sometimes this downward slide takes a decade or more, but in the case of MySpace and Yahoo, the slide took only a few years. There are many terms for the more desirable “Great” organization. Some use the term “startup mentality” but I prefer to use the terms “startup action oriented,” “a culture of innovation,” or “a performance culture.” The terms for the downside “Good” organization can include an atrophied organization, a risk-adverse organization, a meeting culture, or simply “a bureaucracy.”
Why Address Mark Zuckerberg and Larry Page?
The purpose of this open letter is to make a small contribution that may help ensure that this slide doesn’t happen to numerous other dynamic and innovative firms. I direct it to Google and Facebook, not only because these two great firms have been wildly successful in the marketplace, but also because both of their CEOs have openly expressed concern about the possibility that their firms will become the next corporate dinosaurs. I hope that Mr. Zuckerberg and Mr. Page will forgive my arrogance in writing this unsolicited open letter, but to me the time is right for corporate leaders, management consultants, and academics to come together to examine this “great to good” problem. And eventually, to come up with “a roadmap” that every leader can use to prevent what seems to be an inevitable downward slide that comes with wildly successful growth, going public, and reaching a large employee population.
My analysis indicates that there are three major areas that must be covered in this “growth without bureaucracy roadmap.” The first two are: 1) What factors indicate that this atrophy and slide into bureaucracy is underway?; and, 2) How can these bureaucracy indicators be measured? (Both of these are covered in this article). And the third, What are the most effective approaches and tools that corporate leaders can use to stop or turn around the slide? (It will be covered in Part 2, which will be published next week).
There Are Rare Exceptions to This Downward Spiral
Most firms that enter into this downward spiral never recover their “startup action mentality.” But there is one notable exception, and that is Apple. In the mid-90s, Apple was well on its way toward making the transition from “Great to Good.” Even if Apple’s corporate leaders were aware of the slide, they did not have the tools to stop it. It took an outsider (Steve Jobs returning) to see the atrophy and to reverse the spiral to the point where now Apple is amazingly successful, innovative, it is the world’s richest company (by market cap) and its revenue per employee is well over two million dollars per year. The key questions to be answered are “How did Steve Jobs so quickly identify the causes of this corporate atrophy?” and “Did he identify any universal indicators of atrophy that other CEO’s can also use?” I have applied some of the lessons from the Apple turnaround (based on a case study I did on them in 2011) to the master list of factors that can contribute to corporate atrophy.
Developing a “Bureaucracy Identification Dashboard” — the Top 25 Factors That Indicate That You Are Becoming a Bureaucracy
I have had the opportunity to visit, advise, and closely study many truly great firms (including Google and Facebook), as well as many firms that have become bureaucratic. As a result of this analysis over several decades, I have compiled a list of leading indicators or warning signs (along with ways to measure them). These “slide factors” can indicate whether an organization is beginning or if it is already in a downward spiral. If you would like to assess where you are on the “”Great to Good”” scale, I would suggest that the following top 25 factors (which are separated into five categories) are a good starting point for your “bureaucracy dashboard” or slide assessment checklist.
Slide Indicator Factors Related to Innovation, Collaboration, Speed, and Agility
- The rate of innovation decreases — Continuous innovation and disruptive products are among the most significant differentiators between a startup and a bureaucracy. In order to maintain continuous innovation, there must be innovators in every area of the business, a high ratio of innovators to regular employees, and that ratio must favorably compare to the ratios at competitor firms. If your leaders become overly focused on continuous improvement rather than innovation, the battle to maintain greatness has probably already been lost. In addition, if your leaders rely on slogans to drive innovation (i.e. Invent or Imagination), the odds are that you’re already sliding. Measurement — Measure your average rate of product or process innovation and either compare it to your rate from previous years or compare it to the rates at agile and innovative startups that you admire.
- The rate of collaboration decreases — Innovation results directly from a high level of collaboration. Collaboration is the sharing of ideas and work between not just people in the same business unit or function (i.e. engineers with engineers) but also between technical employees and employees in overhead functions. As organizational size increases, collaboration and cross-functional internal movement naturally drop off, unless there are processes to directly support and manage it. Measurement — You can measure the level of collaboration by looking at the makeup of key teams and measure their percentage of cross-functional membership. Collaboration can also be assessed by tracking communication flows between employees of disparate functions and through employee surveys. Check to see if assessment and reward systems significantly reward cooperation, while punishing bureaucratic behavior.
- A slower organizational learning speed — Rapid learning and the ability to adapt as a result of it may be the most important corporate competency in the future. In startups, everyone is responsible for their own continuous rapid learning, almost all learning is informal, and the small size of the organization allows for the rapid sharing of knowledge, problems, and best practices. In a bureaucracy, most learning is corporate-directed and strategic learning is normally expected to “occur at the top” and then trickle down to lower levels. Innovators, who are fast self-directed learners, quickly get frustrated when the rest of the workforce learn at a much slower rate. Measurement — The speed in which the organization acquires critical knowledge must be measured. Organizations should also measure whether learning speed in the middle of the organization is as fast as it is at the top. And finally, the speed in which problems and best practices are shared throughout the entire organization needs to be measured. For example, if you adopt a new approach in one team and it is highly successful, track the time it takes for 90% of the teams in the organization to hear about it and adopt it.
- A lower speed of change and no sense of urgency — Since innovation is continuous and everything is copied rapidly, speed is a critical factor. Startups simply move faster and have a sense of urgency that is absent in large, lumbering firms. Because innovators have a high sense of urgency, they get frustrated when that sense is not shared throughout your organization. In startups, speed, or rapid action does not only occur in product development but it emanates from every other business and overhead function. Every function, project, and team all strive to match the corporate speed of change. Measurement — Start by measuring the speed and percentage of change of your product offerings. But also measure the percentage that your internal processes improve each year, to assess whether they are matching the speed of improvement in your products and in the marketplace. Overhead functions are notoriously laggards, so their speed of change and the percentage of improvement in their results must also be monitored closely.
- A loss of agility — Agility is the capability of moving quickly into completely new areas. Many very good firms dominate their industry in a single product area, but great firms like Apple and Google are agile enough to move into completely new product areas and to dominate there also. They could be labeled as “agile startups with resources.” While most firms are satisfied to be successful as a “one-trick pony,” moving between industries requires extreme agility and adaptability. Innovators get frustrated when their organization doesn’t have the required agility to move quickly into new areas. Measurement — You can measure agility by the frequency and speed that your company moves into completely new high-margin product areas. The willingness to abandon failed products quickly is also a measure of agility.
Slide Indicator Factors Related to Decision-making
- Slow decision-making — In a fast-changing marketplace, decisions must be made quickly and often with less-than-optimal information (aka based on 80% information). While in direct contrast, bureaucracies often delay decisions until 100% of the required information is available, which obviously slows decision-making. Slow decision-making is also a problem — it slows time-to-market and it frustrates innovators who want fast decisions made on their ideas. Measurement –– Calculate the time that it takes (in months) to make major product or project decisions involving seven-figure expenditures. The time it takes to release weak performers may also indicate the level of atrophy.
- Error rates become too low — Although intuitively, low error rates seem like a positive thing, in some cases they are indication of a downward slide. This is because innovators, pioneers, and leaders must move fast in order to be first into any area. Because of this rapid movement and accelerated decision-making, it is not surprising that they make many errors. Leaders in great firms accept the fact that speed results in a higher beta error rate, provided that the organization learns quickly after each mistake. This “learning through errors” excites innovators but it is in direct contrast to what bureaucracies do, which is strive for minimal errors. Failure rates that are “too low” probably mean that you are not first into the marketplace; it might unintentionally slow your learning, and could be an indication that your firm is risk adverse. Measurement — Set a beta product failure target minimum, compare it to your competitors, and later measure how much rapid learning occurs after each failure.
- Not tracking decision-making effectiveness and accountability — In small startups, everyone knows who made major decisions, and the consequences of those decisions are usually obvious. However, with rapid headcount growth, decision-makers will be continually moving between assignments, departments, and roles. If no one tracks the effectiveness of each leader’s decisions over a period of time (and everyone forgets who made the decision), you will never be able to assess whether they are effective decision-makers. Without long-term accountability for each decision, leaders can get sloppy in their decision-making. The same problem can occur with ad hoc teams that eventually dissolve. If team leaders are not being made accountable for the results for at least a year after the team disbands, you do not have clear accountability. Measurement — Identify if there is a process for accountability and tracking decision-making effectiveness over time, and if so, use it for assessing what percentage of an individual manager’s decisions turn out to be correct.
- A low percentage of data supported decisions — With the growing use of metrics and mathematical analysis, there is a more accurate alternative to intuitive decision-making. Because of their past successes, bureaucracies often overly rely on intuition (sometimes out of arrogance) to make people management and other soft decisions. This “soft” decision-making process frustrates innovators, who are usually data driven. Most decisions at great firms are “data supported,” which means that many actions are driven by mathematical algorithms created from data on past successes and failures. Measurement — Start by identifying the percentage of major decisions that are data supported. Also count the number of algorithms in use in key “soft” areas like hiring, retention, branding, and leadership, because this can give you a quick indication as to what extent that your management decision-making is overly intuitive.
- The growth of consensus decision-making — Becoming dominant in the marketplace requires a high level of risk-taking and fast decision-making. Consensus decision-making is common in bureaucracies. Even though it has some value, the overuse of the process can severely limit risk-taking and frustrate innovators. Waiting for a consensus to be reached in a highly political organization frustrates innovators because it can dramatically slow decision-making. Measurement — Measure the speed and the percentage of decisions that are made with a consensus. Then assess the degree of risk resulting from this type of decision-making. Both of these factors can be indicators of your level of atrophy.
Slide Indicator Factors Related to Management and Organizational Structure
- Increasing layers of management — Startups are effective, in part, because they have many leaders but relatively few managers. Bureaucracies frequently create numerous layers between innovative employees and executives. More layers of management hinder communications and slow decision-making. Innovators hate having to go through multilayers of bureaucracy in order to get information or an approval. Measurement — You can measure the number of layers of management by counting them on an organizational chart. A high ratio of managers to employees may also be an indicator of a bureaucracy.
- Becoming headquarters-centric — Sustained business growth over time eventually requires expansion and globalization. Even after this expansion, bureaucracies remain “headquarters centric,” which means that almost all ideas emanate from headquarters and all major decisions are made “at corporate.” Having to work in or visit “corporate” in order to get an idea approve greatly frustrates your remotely located innovators. Measurement — By measuring the number of implemented ideas and the number of products developed outside of headquarters along with the percentage of major decisions that are made “by headquarters staff,” you can determine whether you are excessively headquarters centric.
- The use of power over influence — In startups, individuals with the most knowledge and the best ideas informally “influence” others to act. Using influence increases the likelihood that all employees will understand and have “buy-in” to major decisions. In a bureaucracy, position power and authority dominate, so managers frequently “order” subordinates to act. Because innovators seldom have or even want formal authority, in a bureaucracy they have difficulty getting their ideas approved. Measurement — Measuring the ratio of decisions that are made based on influence versus power can give you a heads-up indication that your organization is becoming a bureaucracy. Employee surveys and interviews can give you an idea as to whether influence or power is the dominant approach used by individual managers.
- Political roadblocks increase — The best decisions are data-supported decisions. Startups are not immune from politics, but in a bureaucracy, a larger percentage of decisions are based on politics, influence, and self-interest. That leads to the creation of functional silos, mini-fiefdoms, turf wars and roadblocks (i.e. you need my approval or you must do it my way). A lack of integration and coordination slows problem solving and approvals. All of these together frustrate innovators (who tend not to be political) because political roadblocks slow decision-making and they reduce agility. Measurement — Measuring whether your processes are “boundaryless,” the percentage of decisions that are made based on data, measuring the time it takes to get all approvals and the number of approvals required for a seven-figure project, are all indicators as to whether you are becoming bureaucratic.
- Equality over differentiation — Because most startups are by definition, in small organizations everyone knows who the major innovators and the drivers behind the organization’s success are. As a result, employees who make major contributions are treated differently. Bonuses and the distribution of stock options are clearly distributed unevenly, based on performance and impact. Unfortunately as organizations get large, rather than differentiation, there is a tendency to treat everyone equally, in order to minimize complaints and lawsuits. When you shift from a performance culture to a culture of “equal treatment,” you remove many of the incentives that drive long work hours, risk-taking, and innovation. Measurement — Measuring the differential in pay, rewards, stock options, and recognition between top performers and average performers can help you determine if you are becoming a bureaucracy.
- The growth of overhead functions — Startups can only afford to have a small percentage of their workforce working in overhead functions. In contrast, bureaucracies often have a high percentage of overhead employees. Overhead employees are not inherently evil, but they do create more than their fair share of roadblocks. Overhead functions like accounting, purchasing, finance, legal, PR, and HR are the worst offenders in creating excessive rules, policies, and approvals. The cautious slow steps of overhead employees also frustrate risk-taking innovators. Measurement — By measuring the percentage of all employees that work in overhead functions and the percentage of the total budget that goes to these functions, you can get a good indication of the size of your most bureaucratic functions. A simple survey of line managers might also indicate whether your overhead functions are fully supportive of line functions or whether they are barrier creators.
- Rapid hiring can lead to low workforce productivity — Success in the marketplace requires that your organization must grow rapidly in size and capability. That means that unless you have a strong employer brand and a robust recruiting program (which most startups do not) your managers will frequently demand “get me anyone.” So unless you have strict quality of hire standards (like at Google and Facebook), you might end up hiring a large number of average to low-quality new employees. A large percentage of weak-performing employees will frustrate your innovators (who must work alongside them), they will slow up projects and reduce the overall productivity of your workforce. Measurement — Measuring the on-the-job performance of new hires after six months and the productivity of the overall workforce (i.e. labor costs versus the value of your total outputs) together will give you an indication of how effective your large-scale hiring has been.
- Becoming a meeting culture — A “meeting culture” is another name for a bureaucracy. Requiring and scheduling an excessive number of meetings delays decision-making. In addition, having to “involve” everyone in these meetings may mean that far too many individuals hold the power to kill an idea. And nothing frustrates innovators more than excessive meetings. Measurement — Measuring the number of meetings that are required in order to get a seven-figure project approved can give you a good indication of the onset of atrophy. Surveying innovators to find out what frustrates them can also identify whether excessive meetings are a problem.
- Emphasis on years of service — There is no simpler way to assess whether your organization is on a downward spiral then by an over-emphasis on seniority and length of service. Rewarding years of service and rewarding trying and effort over producing results will also frustrate your innovators. Measurement — If you use seniority for assignments and promotions, or if you offer years of service pins, your demise has already begun. In addition, if your organization either dwells on its history, has a corporate historian, or has a large corporate history display, you have already lost the battle to avoid becoming a bureaucracy.
Slide Indicator Factors Related to Openness and Transparency
- A loss of transparency and openness — In a startup, there is very little effort to keep secrets from your employees. This openness and transparency might actually be a major motivator, because every employee is “in on” everything that’s happening. However, when firms get larger and more geographically spread out, not only is it harder to share information but there is a tendency to become more secretive and less transparent. In addition, when corporate strategic goals and plans are not readily accessible to employees, it is unlikely that they will be able to focus their efforts on the targeted areas. Measurement — You can measure this transparency by the percentage of corporate information that is readily available to the average employee or by counting the number of security levels that restrict access to important corporate information.
- Failing to solicit and accept criticism — Employees at startups are frequently highly critical individuals who have little hesitation about speaking up when they see a potential problem. As the bureaucratic structure grows, there is often a tendency for the growth of “yes men” and a reduction in open criticism. Measurement — You can begin to measure this decrease in open criticism by tracking the number of open employee forums that are held, the number of questions allowed, and the percentage of critical questions during them. You can also count the number of anonymous feedback processes and surveys that are used, because if you have constructive confrontation and no fear of retribution for criticism, you simply wouldn’t need them.
Slide Indicator Factors Related to the Corporate Culture
- Using the corporate culture to slow change — Both startups and well-established firms focus on their corporate culture, which is a “shared mindset” among all employees. One of the primary differences between the way that the two approach culture is that at a bureaucracy, many use the culture as a “weapon” to block change. Because it is so vaguely defined, defenders of the status quo learn to say “that violates our culture” to derail new approaches. Rather than being invisible and unmeasured, the culture should be viewed as a living thing that adapts with the environment. Having an unchangeable culture frustrates innovators and pioneers, who dislike anything that restricts rapid change. A strong culture is reinforced on a daily basis by what your organization funds, rewards, recognizes, punishes, measures, and what executives continually talk about. Measurement — If no one is monitoring your corporate culture, you are already in trouble. To find out if your employees understand what it expects, you should periodically survey a sample of your employees to see if they can list the desired values and results that make up the culture. You can also give them a problem and assess whether they “act within the cultural limits” when they solve it. Finally, periodically assess funding, reward, recognition, and promotion processes and criteria to assess whether they fully support your cultural expectations.
- Large-scale hiring and acquisitions dilute the culture — Hiring a large number of employees is necessary as your market share expands. Unless they are recent grads, your new hires will come from other firms. Which means that they will bring with them their old cultural habits and behaviors. Unless you have great assimilation processes or a strong cultural fit assessment during hiring (i.e. like Zappos and Southwest), this volume of new hires will dilute your culture, as will a high turnover rate among leaders. Many startups also seek to augment their product line through acquisitions. The downside of large-scale acquisitions is that you will get an instant infusion of employees who are accustomed to operating in a different culture. Taken together, these individuals will dilute your culture. Measurement — Put together a process for measuring if a sample of new hires or employees acquired through an acquisition actually act in line with your corporate values/culture after six months on the job. Another assessment alternative is to give them a cultural problem to solve. Together these measures can indicate the extent that new employees have been successfully acculturated.
- “We are different” mentality and groupthink — When I visit “once-great” firms and I present a new idea that is used at Google or Facebook, the universal answer that I hear from the employees is some variation of, “thanks, but we can’t use that because we are different.” When an organization really believes that it is different they generally only compare themselves to themselves and in addition, they will frequently use a “not invented here” attitude. And as a result, they will never be able to quickly borrow the successful practices of other firms. In my experience, these firms may be different, but in most cases, they are not “better different.” Adopting this “we are different mentality” also encourages a form of groupthink, where employees dramatically discount the competencies and capabilities of their competitors, even though they have no evidence to support that level of disdain. Measurement — Simply measure the number or percentage of external business practices and ideas that are adopted without major delays or modifications.
- Employer brand arrogance — Firms that have become famous and recognized for being highly desirable when they were startups often maintain the belief over the years that they are still regarded as a “best place to work.” This causes them to lose interest in maintaining their brand as a great employer. And because they often don’t measure their employer brand image or win “Best Place to Work” awards, this results in a dramatic lowering of the quality of applicants that apply. Measurement — Periodically measure your positive employer brand strength through Internet searches and vendors like Universum, in order to see how strong yours is, compared to your competitors. Periodically visit sites like glassdoor.com to assess your negative employer brand image and ask new hires how they assessed it.
Final Thoughts
I’ve had many opportunities to visit once-great firms like Yahoo and AOL, as well as still-great firms like Google and Facebook. And I often joke that even if I was blindfolded, I could tell you which type of firm I was in. The difference in the energy, the noise, and the collaboration can often be felt. Obviously I don’t advocate this as a measure of atrophy. Instead, I have found that there are at least 25 real and measurable differences between larger organizations that maintain their “startup action mentality” and once great firms that have become massive bureaucracies.
Next week: Part II — Action steps that executives can take to avoid or turnaround a “Great to Good” slide
There are fewer sad things to observe than a once-great firm sliding into mediocrity. You might not be accustomed to hearing the word “sad” and “business” in the same sentence, but I really do find it sad when great startup firms lose their energy and eventually become lumbering giants.