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Mischief, managed – digital disruptors in need of legacy structures

Magic-Beans“Move fast and break things”. That is the motto of Facebook, and unofficially many of its contemporaries. While much of the most visible impact of new digital organisations has been on how they respond to, engage with and influence user behaviour, just as significant has been the extent to which these organisations have eschewed traditional business models, ways of working and other internal practices. This includes traditional measures of success (hence the above cartoon from The New Yorker), but also of transparency and leadership. Such issues will be the focus of this piece, to compare the old with the new, and where opportunities and challenges can be found.

What makes digital-first organisations different

It’s important to acknowledge the utterly transformative way that digital-first companies do business and create revenue, and how different this is from the way companies operated for the past century. Much of this change can be summed up in the phrase “disruptive innovation”, coined by the great Clayton Christensen way back in 1995. I got to hear from and speak to Clay at a Harvard Business Review event at the end of last year; a clear-thinking, inspiring man. There are few things today that organisations would still find use in from the mid-90s, and yet this theory, paradoxically, holds. The market would certainly seem to bear this concept out. Writing for the Financial Times in April, John Authers noted,

Tech stocks… are leading the market. All the Fang stocks — Facebook, Amazon, Netflix and Google — hit new records this week. Add Apple and Microsoft, and just six tech companies account for 29 per cent of the rise in the S&P 500 since Mr Trump was inaugurated.

The FANG cohort are entirely data-driven organisations that rely on user information (specifically user-volunteered information) to make their money. The more accurately they can design experiences, services and content around their users, the more likely they are to retain them. The greater the retention, the greater the power of network effects and lock-in. (Importantly, their revenue also make any new entrants easily acquirable prey, inhibiting competition). These are Marketing 101 ambitions, but they are being deployed at a level of sophistication the likes of which have never been seen before. Because of this, they are different businesses to those operating in legacy areas. These incumbents are encumbered by many things, including heavily codified regulation. Regulatory bodies have not yet woken up to the way these new companies do business; but it is only a matter of time. Until then though, the common consensus has been that, working in a different way, and without the threat of regulation, means traditional business structures can easily be discarded for the sake of efficiency; dismissed entirely as an analogue throwback.

The dangers of difference

One of the conceits of digital-first organisations is that they tend to be set up in order to democratise the sharing of services or data; disruption through liberalising of a product so that everyone can enjoy something previously limited via enforced scarcity (e.g. cheap travel, cheap accommodation). At the same time, they usually have a highly personality-driven structure, where the original founder is treated with almost Messianic reverence. This despite high-profile revelations of the Emperor having no clothes, such as with Twitter’s Jack Dorsey as well as Google, then Yahoo’s, now who-knows-where Marissa Mayer. She left Yahoo with a $23m severance package as reward for doing absolutely zero to save the organisation. Worse, she may have obstructed justice by waiting years to disclose details of cyberattacks. This was particularly galling for Yahoo’s suitor, Verizon as information came to light in the middle of its proposed purchase of the company (it resulted in a $350m cut to the acquisition price tag). The SEC is investigating. The silence on this matter is staggering, and points to a cultural lack of transparency that is not uncommon in the Valley. A recent Lex column effectively summarised this leader worship as a “most hallowed and dangerous absurdity”.

Uber’s embodiment of the founder-driven fallacy

Ben Horowitz, co-founder of the venture capital group Andreessen Horowitz, once argued that good founders have “a burning, irrepressible desire to build something great” and are more likely than career CEOs to combine moral authority with “total commitment to the long term”. It works in some cases, including at Google and Facebook, but has failed dismally at Uber.

– Financial Times, June 2017

This culture that focuses on the founder has led to a little whitewashing (few would be able to name all of Facebook’s founders, beyond the Zuck) and a lot of eggs in one basket. Snap’s recent IPO is a great example of the overriding faith and trust placed in founders, given that indicated – as the FT calls it – a “21st century governance vacuum“. Governance appears to have been lacking at Uber, as well. The company endured months of salacious rumours and accusations, including candid film of the founder, Travis Kalanick, berating an employee. This all rumbled on without any implications for quite some time. Travis was Travis, and lip service was paid while the search for some profit – Uber is worth more than 80% of the companies on the Fortune 500, yet in the first half of last year alone made more than $1bn in losses – continued.

Uber’s cultural problems eventually reached such levels (from myriad allegations of sexual harassment, to a lawsuit over self-driving technology versus Google, to revelations about ‘Greyball’, software it used to mislead regulators), that Kalanick was initially forced to take a leave of absence. But as mentioned earlier, these organisations are personality-driven; the rot was not confined to one person. This became apparent when David Bonderman had to resign from Uber’s board having made a ludicrously sexist comment directed at none other than his colleague Arianna Huffington, that illustrated the company’s startlingly old-school, recidivist outlook. This at a meeting where the company’s culture was being reviewed and the message to be delivered was of turning a corner.

A report issued by the company on a turnaround recommended reducing Kalanick’s responsibilities and hiring a COO. The company has been without one since March. It is also without a CMO, CFO, head of engineering, general counsel and now, CEO. Many issues raise themselves as a start-up grows from being a small organisation to a large one. So it is with Uber – one engineer described it as “an organisation in complete, unrelenting chaos” – as it will be with other firms to come. There is only a belated recognition that structures had to be put in place, the same types of structures that the organisations they were disrupting have in place. The FT writes,

“Lack of oversight and poor governance was a key theme running through the findings of the report… Their 47 recommendations reveal gaping holes in Uber’s governance structures and human resources practices.”

These types of institutional practices are difficult to enforce in the Valley. That is precisely because their connotations are of the monolithic corporate mega-firms that employees and founders of these companies are often consciously fighting against. Much of their raison d’être springs from an idealistic desire to change the world, and methodologically to do so by running roughshod over traditional work practices. This has its significant benefits (if only in terms of revenue), but from an employee experience it is looking like an increasingly questionable approach. Hadi Partovi, an Uber investor and tech entrepreneur told the FT, “This is a company where there has been no line that you wouldn’t cross if it got in the way of success”. Much of this planned oversight would have been anathema to Kalanick, which ultimately is why the decision for him to leave was unavoidable. Uber now plans to refresh its values, install an independent board chairman, conduct senior management performance reviews and adopt a zero-tolerance policy toward harassment.

Legacy lessons from an incumbent conglomerate

Many of the recommendations in the report issued to Uber would be recognised by anyone working in a more traditional work setting (as a former management consultant, they certainly ring a bell to me). While the philosophical objection to such things has already been noted, the notion of a framework to police behaviour, it must also be recognised, is a concept that will be alien to most anyone working in the Valley. Vivek Wadhwa, a fellow at the Rock Center of Corporate Governance, clarified, “The spoiled brats of Silicon Valley don’t know the basics. It is a revelation for Silicon Valley: ‘duh, you have to have HR people, you can’t sleep with each other… you have to be respectful’.”

Meanwhile, another CEO stepped down recently in more forgiving circumstances, recently but which still prompted unfavourable comparisons; Jeff Immelt of General Electric. As detailed in a stimulating piece last month in The New York Times, Immelt has had a difficult time of it. Firstly, he succeeded in his role a man who was generally thought to be a visionary CEO; Jack Welch. Fortune magazine in 1999 described him as the best manager of the 20th century. So no pressure for Immelt there, then. Secondly, Immelt became Chairman and CEO four days before the 9/11 attacks, and also had the 2008 financial crisis in his tenure. Lastly, since taking over, the nature of companies, as this article has attempted to make clear, has changed radically. Powerful conglomerates no longer rule the waves.

Immelt has, perhaps belatedly, been committed to downsizing the sprawling offering of GE in order to make it more specialised. Moreover, the humility of Immelt is a million miles from the audacity, bragaddacio and egotism of Kalanick, acknowledging, “This is not a game of perfection, it’s a game of progress.”

So while the FANGs of the world are undoubtedly changing the landscape of business [not to mention human interaction and behaviours], they also need to recognise that not all legacy structures and processes are to be consigned to the dustbin of management history, simply because they work in a legacy industry sector. Indeed, more responsibility diverted from the founder, greater accountability and transparency, and a more structured employee experience might lead to greater returns, higher employee retention rates and perhaps even mitigate regulatory scrutiny down the line. The opportunity is there for those sensible enough to grasp it.

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