Business Reading: Exponential Organizations and The Hard Thing About Hard Things

What’s true in literary fiction is also true for business books, I believe: if readers still say good things about something about a year after it came out, then it’s probably good, and not just the flavor of the month. This summer I read two 2014 titles I had had on my wish list for a while, and figured were ripe enough for picking.

2_d51b386d7c928e25_1280boxExponential Organizations, by Salim Ismail, Yuri van Geest and Michael S. Malone, is a well-researched outline of the key characteristics of a new generation of companies – the Ubers, the AirBnBs, the GitHubs of this world -, and of how they have come to disrupt markets, invent them them, or challenge longstanding business models in the space of just a few short years, by virtue of their exponential growth. These companies, which others often call Unicorns, have been extensively chronicled elsewhere, so the framework that the book lays out to identify them is useful, but not transformative; and the proposed scoring approach to rank Exponential Organizations (to be an Exponential Organization, you have to have a Massive Transformative Purpose plus at least 4 out of a list of 10 attributes that these tend to have in common) may appear a bit formulaic.

ExO AttributesIf one were to nitpick, such concepts as Holacracy – one of the more untraditional organizational philosophies adopted by some of the companies in the sample, covered in the book under the Autonomy attribute – seem to have had a bit of a rough time since the book was written. The authors, to be fair, don’t claim that any of these practices or characteristics would necessarily be needed for you to have an Exponential Organization; and it is perhaps inevitable that the riskiest management innovations are also the ones most at risk of being misunderstood, falling out of fashion, or simply failing. After all, in the words of my favorite business authors Pfeffer and Sutton, you should always “treat your organization as a prototype”.

The more valuable content in Exponential Organizations – at least for the vast majority of potential readers – comes in the second half, where the authors address what to do if you work in a traditional organization, one that thinks of itself as a well-fed turkey and may not realize that Thanksgiving is drawing near. A highlight of the work is in Chapter 8, which describes a few potential avenues to choose from, possibly in combination:

  1. Transform leadership; this includes training your Board of Directors to be aware of exponential technologies and the resulting disruption;
  2. Partner with, invest in, or acquire Exponential Organizations;
  3. Disrupt[X]: create an “edge Exponential Organization” at your boundaries, hire a “black ops” team to hack your business model for you, copy the Google[X] Lab, partner with accelerators, incubators and hackerspaces;
  4. Try “ExO Lite”, applying some of the ten attributes, even if in a diluted form, to your core business processes.

Chapter 10 is also worthwhile, as it tells you what’s in store for you if you are a CEO, CMO, CTO, CIO, CFO, Chief Legal Officer, Chief HR Officer and so on: you want your company to start pursuing this path, but you also need your colleagues to share your vision, and not think that you’ve lost your marbles.

Overall, this book pays homage to the classics in the field (Christensen, Collins), builds on non-traditional thinkers about human affairs (Taleb), adds to the mix a number of recent business concepts (Ries, Hoffman, Thiel) and earns its place on the shelf as a strong contender for a short list of must-read business books today. As a personal note, I am generally a fan of the Singularity University thinking that the book is grounded in, even if some of its more extreme fringes are somewhat crackpot (immortality? please), and technology isn’t yet keeping all of its promises.

After Exponential Organizations, I dove into my second business book for the summer: and I felt I had crashed down from the ethereal halls of academia into the brutal trenches of corporate warfare.

The Hard Thing about Hard ThingsThe book is The Hard Thing About Hard Things, by Ben Horowitz of Andreessen Horowitz fame. It is less a manual about how to build companies (that material is largely adapted from the author’s blog), and more a CEO memoir from Horowitz’s life before becoming a venture capitalist. As business books go, it is gutwrenching. It reminds you that business will be sometimes about things like letting people go when you should not have hired them (or even when you should have); demoting your friend, even if he is your cofounder; or moving ahead when you feel like hiding, throwing up and quitting. In fact, the ability to “focus and make the best move when there are no good moves” is, according to the author, the core skill of a successful CEO. Especially a wartime CEO – and there is no guarantee that a successful peacetime CEO will be able to turn into a wartime CEO when the company goes to war.

One particularly harrowing war story is, believe it or not, about the interpretation of accounting principles: revenue recognition is always a big deal for software companies, and a difference in interpretation arose – as Horowitz tells the story – while he was going through the due diligence process to sell Opsware to either BMC or HP in 2007. It turns out that his auditors Ernst & Young had adhered to one interpretation of a contractual clause about software upgrades, while BMC’s auditors – also Ernst & Young – stood for the opposite interpretation, and required either restating revenues (which would have killed the deal) or amending three contracts with large banks in the space of 24 hours. Both bidders were informed of the situation; amazingly, in less than 24 hours, Horowitz and his team pulled off the contract amendments with the clients. Still, BMC pulled back, and the deal was done with HP, where Horowitz then spent the following year as VP and General Manager of Business Technology Optimization for Software.

Even scarier, the following happened to Horowitz as he was leading Loudcloud towards is IPO (in March 2001 – a stressful time if there ever was one for tech startups). Three days into the roadshow, he got a call about his wife from his father-in-law, saying that she had had an allergic reaction to some medicine: “Felicia stopped breathing, but she is not going to die.” When he was able to speak with her on the phone, she told him to continue focusing on the IPO and not come home from the roadshow. The IPO was finally done, Felicia got better, and life went on: but the Loudcloud business was not yet out of the woods, and indeed – in the meantime, Sept. 11 had happened – it was sold to EDS a little over a year after IPOing.

The Hard Thing About Hard Things has a lot of strong and useful nuggets about hiring, training, and building a corporate culture. Even the most uplifting chapters, though, are tinged by some existential bleakness from the trenches that Horowitz has fought in. I recommend this book to everybody whose business is not doing well, and to everybody whose business is doing well, too, because, in the author’s words:

  • Being a good company doesn’t matter when things go well, but it can be the difference between life and death when things go wrong.
  • Things always go wrong.
  • Being a good company is itself an end.

Meet Francesco Marini Clarelli, European Business Angel of the Year

There are business angels in Europe: they are less visible than the Silicon Valley super-angels, but they do invest in early-stage enterprises, they work to make the business environment more open to entrepreneurs, and they believe in the power of entrepreneurship to add dynamism to our tired economies.

On May 12 Francesco Marini Clarelli, an Italian, was honored as Business Angel of the Year by EBAN, the European Association of business angels, seed funds, and other early stage market players. As an angels’ lobby, EBAN has committed to a few notable efforts, such as producing the white paper on Women and European Early Investing and launching a range of initiatives to support women and early stage investing. Italian Angels for Growth, the network that Francesco founded a few years ago in Milan, has been selected by EBAN as a pilot organization in its effort to bring women from 5% to 20% of early stage investors in Europe by 2015.

I have known Francesco for a few years, not just in my role as a mini-angel and member of Italian Angels for Growth, but also as a family friend. He prefers to keep out of the limelight. But in wine connoisseurs’ circles, he is best known for returning to Christie’s a bottle of 1784 Château d’Yquem, which they had mistakenly shipped to Francesco, instead of the 1904 he had bought: still a fantastic vintage, but not as phenomenally rare as the 1784, which may or may not have been a legendary “Jefferson bottle“.

Congratulations, Francesco! I hear you opened the 1904 with some friends a few years ago, but I am sure your cellar offered a choice of other worthwhile bottles to celebrate the EBAN award in style.

iPad 3G review: my first impressions

I haven’t stood in line for concert tickets or anything like that in years. Yet, last Friday, April 30, around 2pm, I got a good book out of my backpack and sat down in the line outside the Apple store at the Stanford Shopping Center, three hours before iPad 3G sales started, to make sure I could buy one. (They are not yet shipped outside America, and preordering one for delivery to a friend’s house in California would have ensured delivery by May 7, with a chance that it would only arrive after my departure – although, eventually, I did read reports of iPads ordered online being delivered as early as the same Friday morning.) The line was full of friendly people, bottles of water were supplied by the cheerful store staff, and the time passed merrily enough. The store closed at 4pm for preparations, and when it reopened at 5, the first customers in the line were welcomed in with a round of applause by the blue-shirted store employees.

After using the iPad 3G for a few days, I think it’s a winner. (Ha – I know that’s easy to say now, after Apple has sold the first million iPads, although mostly WiFi only, in less than half the time it took to sell the first million iPhones.) I may not be the most sophisticated customer, but still, the device surpassed my expectations. Here are my observations so far.

Form factor. The screen resolution is a pleasure and the size of the device will define a new standard for women’s purses. I carried the device with me all day and, while my bag did feel heavier than usual, I probably won’t carry a laptop anywhere ever again. Buy the Apple iPad case – it folds back to give the device a nice angle for typing or reading when set on a horizontal surface – and beware of neck strain: after the first couple of days, my neck felt odd. The virtual keyboard works better than I expected, and I will probably only take my iMac keyboard along for the ride on trips where I plan to write a lot. I did not have to take the iPad out of my backpack at security controls at San Francisco and Heathrow airports. (I did, however, switch it off in those last 10 to 20 minutes of each flight, when you have to switch off all electronic devices.) But all in all, the only thing the iPad does not do is let me read comfortably in the sun – for the beach, I think it’ll still be e-ink or good old paperbacks for a while.

Content. As a naive European, I was shocked to find out that you can go to Netflix or access the iTunes store in America and – yes! – download movies. Like, good movies. In America, you don’t have to mortify your digital consumption patterns. I purchased Sean Penn’s “Into the Wild”, a movie I’ve wanted to see ever since reading Jon Krakauer’s book, for $9.99. In the Italian iTunes store, the only movie I’ve ever been able to buy in years is the iPhone version of  Alina Marazzi’s excellent documentary “Vogliamo anche le rose” (a bargain at €1.59), which I watched on my way to San Francisco and recommend passionately. It is, however, a bit of an indie production: and we need the majors to get into the game. We need to buy books in iBooks, or something similar, regardless of where we are. We need Hulu to be available worldwide. As Fréderic Filloux wrote: “Release windows, regional rights restrictions no longer make sense […] Most of us are global consumers who want one thing: being able to flash our credit card and buy every single piece of dematerialized cultural or informational good we want.”. We need, in short, content owners to take the lead in reversing the Balkanization of the Internet. Apple, as a gatekeeper, is right there with the content owners and shares their responsibilities.

Language. It’s a pain to type in two languages on the iPad, unless you switch the language settings back and forth all the time, because the English spellchecker is so annoyingly aggressive. Alternatively, set auto-correction to “off”.

Applications. There’s no way around it: the iPad sets a higher bar for apps. When the browser is as good as Safari is on the iPad, apps may become, well, less relevant. On the iPhone, for example, I often use the LinkedIn and Facebook apps, because they do what’s just right for the size of the screen. On the iPad, they look tiny and cramped – and they don’t have an iPad version yet: but is it needed? I’m much more comfortable using the LinkedIn and Facebook sites from the browser. Even Gmail works just fine in Safari. I am starting to believe that applications will evolve – from a way to simplify the user experience by stripping out features to, on the contrary, a way to enrich the experience via immersive environments, exclusive content, or unconventional storytelling.

Browser. I have little to add, other than to say that tabbed browsing is missing. We need it. I hope it comes soon.

Multitasking. Coming soon.

Camera connector. This accessory was not available in either Stanford or San Francisco, and the Apple site currently says it ships in 2-3 weeks. Get it on its way, Apple. We need it.

3G. A must, if you don’t live in a place that’s blanketed with free WiFi (and Italy is, for political reasons, quite the opposite). You may try AT&T’s international roaming in order to be fully functional while you procure your local MicroSIM card, but it’s expensive (I ran through a medium-sized plan in the first 24 hours or so). Also, to buy an international AT&T plan you need to buy a domestic AT&T plan first (the fine print: “If the Domestic iPad Plan expires prior to the completion of the International iPad Plan, all usage, domestic and international, will be deducted from the International iPad Plan until such time as that iPad Plan expires or another Domestic iPad Plan becomes active (i.e. if you cancel your Domestic iPad Plan after ordering an International iPad Plan, U.S. domestic data usage will be counted against your International iPad Plan, until you order another Domestic iPad Plan.)”) Apparently, if the good souls who curated the Wikipedia entry are right, “Unlike the iPhone, which is usually sold locked to specific carriers, the 3G iPad is sold unlocked and can be used with any compatible GSM carrier.” Since roaming works, I trust that I’ll find a “compatible” local network.

In sum, I am impressed with the iPad. I think it is about 70% consumption device (that’s why content availability will be so important) and 30% communication and creation device. Or 70% lean-back, 30% lean-forward. It’s the first in a product line that will surely keep evolving and mutating, and that will go far. I only wonder what the next few years will bring.

A letter from the President of Stanford University

Today I received an extraordinary message in my email inbox: “A Message from Stanford’s President”.

John Hennessy, President of Stanford University, has taken the initiative to write to the broader Stanford community, including students’ families and Stanford alumni, to acknowledge that Stanford too is impacted by the state of the financial markets, and explain the implications of the dramatic shift in the economic environment for the University.

Please read the letter (I believe President Hennessy won’t mind my sharing it with you). I was deeply moved as I read it. This is a man who felt that it was his responsibility to reach out and explain these things to us; and it is clear that he put a lot of thought into how to say them. The letter is clear, to the point, empathic, forward-thinking, and deeply human. It makes me trust his leadership. It makes me proud to be a Stanford alumna.

Stanford University
Dear Alumni, Parents and Friends:

Many of you have contacted me over the past few months with questions about the recent shifts in the economy and how the University is affected. I would like to update you on our response to these challenges.

Financial Aid Commitments Still Secure
The questions came to me even before the academic year was under way, from parents moving their sons and daughters into their residences this past fall: Given the state of the economy, would the University be able to meet its commitments to financial aid? Would we be able to help in situations where decreased home equity might preclude a loan they were counting on to help pay tuition? How would we deal with job losses by a family member? Our response: We will stand by our commitments and, yes, we will reconsider the financial aid needs of any family negatively impacted by the economic downturn.

The questions continued through Reunion Homecoming Weekend as the Dow Jones average dropped approximately 25 percent further. How was the University’s endowment affected? What would this mean for financial aid, for operations and for the capital facilities projects already under way?

The Tightest Financial Outlook in Decades
Let’s start with the endowment. We weathered the period through early summer comparatively well, achieving an overall return of 6.2 percent for the year ending June 30, 2008. Since then, the endowment has declined steeply, although somewhat less precipitously than the market indices. In addition, sponsored research, our second largest revenue source, has been declining in real terms over the past several years, and given the challenges in the federal budget is unlikely to improve quickly. Tuition, our third major source of revenue, cannot be raised significantly out of fairness to our students and their families. All of these factors contribute to the tightest financial outlook we have seen in decades.

Fortunately, Stanford entered this period in a relatively healthy financial position, bolstered by several years of revenue increases, generous gifts from alumni, parents and friends, and remarkable growth in the endowment, which for the first time ever became the University’s largest source of revenue.

To manage our finances going forward, we anticipate reducing the $800 million general funds budget – which pays for most of our faculty and staff salaries, central administrative operations and non-research expenses – by 10 to 12 percent over the next few years. Declining federal research dollars could double the total revenue loss across the University. We cannot achieve these reductions without some significant and permanent cutbacks.

Cutting Costs Wisely
As we implement these budget cuts, we will do so with several principles in mind. First, we will focus on preserving the investments we have made in our faculty over the past decade. Likewise, we will maintain our commitment to both undergraduate and graduate students. The excellence of the University depends on its people, and we will do our best to maintain the quality of our faculty, staff and students as we make adjustments.

Second, we will review our capital projects. We are in the midst of a major capital program that includes some vital construction projects. Halting projects in mid-construction, even temporarily, would cost us more money in the long run. But not all our projects will be built according to the original schedule. We will reexamine projects that incur significant amounts of debt.

Third, through support from The Stanford Challenge we have launched a variety of efforts to address the most challenging problems facing humankind: sustaining our planet for future generations, enhancing peace and stability around the world, exploring the potential of stem cells for autoimmune diseases, improving K-12 education in the United States, and finding new ways to generate energy that will not increase greenhouse gases. These are critical initiatives, and while we must adapt our efforts to present circumstances, we will not shy away from our long-term responsibility to lead in finding solutions for these problems.

Trust in Our Stanford Community
We know we are not alone in dealing with this financial shockwave; some of you will experience situations far more difficult than we see on our campus. My sincere wish is that those whose lives have been disrupted will find firmer footing in coming months. In any crisis, we look to the people and places whose connections sustain and strengthen us. I hope that your place in the Stanford community provides such nourishment for you.

As always, I am happy to hear from you. Send your comment, suggestion or question to me at president@stanford.edu or to Howard E. Wolf, ’80, vice president for alumni affairs and president of Stanford Alumni Association, at alumnipresident@stanford.edu.

Sincerely,
John L. Hennesy signature
John L. Hennessy
President

The troubles of rich families: two books

No, I don’t mean the rich and famous. Those, I think we hear enough about.

I am talking about the very comfortably well-off but not famous, those suburban families with teenage kids and maybe a dog, whose swimming pool you envy when they invite you to a barbecue in their beautiful garden, and whose occasional excesses or lapses of taste (in cars, in jewelry, whatever) you occasionally criticize but feel inclined to forgive after all, because didn’t they work so very hard for this all?

Janelle Brown’s first book, All We Ever Wanted Was Everything, peels back the curtains from the windows of one such family in Silicon Valley, whose veneer of happiness finally breaks down on the day of a successful pharmaceutical IPO. It is an addictive story, told perhaps with more sympathy for the women in the family, whose lives are all differently screwed up, and who nevertheless, at the end, seem able to build an uneasy alliance to rescue each other from the failure that each of them is so desperately ashamed of.

Brown’s book is a very accomplished first novel: I found it hard to put down and I think it will linger in my memory far beyond the summer.

It also reminded me of another book with Tom Wolfesque echoes I read a few years ago, Human Capital by Stephen Amidon. Set in Connecticut (the East Coast’s moral equivalent of Silicon Valley), it follows a real estate agent, a hedge fund manager and their respective families throughout the summer of 2001. What has stayed with me about this book is the striking depiction of the pressure on American teenagers from well-off families: pressure to be social, to be popular among friends, to succeed academically, to start building their resumes through “leadership experiences” in sports and extracurricular activities. It is a theme that surfaces in Brown’s book as well, and both highlight the wrong choices any teenager is tempted to make when under so much pressure.

I wake up every day one day older, but happy that I have long left my teeenage misery behind. When I read books like these, I am reminded to gloat and revel in the wisdom of my mature years.

Microsoft-Yahoo: An offer you can’t refuse

So Godfather Ballmer has stepped in and put on the Yahoo! doorstep a $44.6bn offer, half in cash and half in Microsoft shares.

That’s a 62% premium to yesterday’s share price. In Hollywood-speak, that’s an offer you can’t refuse.

I am also somewhat impressed by the following sentence in Steve Ballmer’s letter to the board of Yahoo!, outlining the synergies from the proposed combination and going into the proposed process for getting the deal done:

In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.

Which is, of course, exactly what they did. For some reason, this communication strategy seems to me like a sure winner.

Hard Facts, Dangerous Half-Truths and Total Nonsense: You’ve got to love Pfeffer and Sutton

Being a Stanford graduate, I was already partial to the authors, two Stanford professors, before even starting to read Hard Facts, Dangerous Half-Truths and Total Nonsense: Profiting from Evidence-Based Management. With a title like that? and that cover design? (oh my god, those people at HBS Press have got themselves a mean publishing machine).

Wait. It only gets better. If nothing else, read this book for a benchmark of academic freedom. Few among the Stanford Business School faculty enjoy more of an icon-like status than lecturer – and entrepreneurial legend – Andy Grove. So, in opening the book with an argument about the lack of evidence that stock options enhance organizational performance, they deliver a quick jab to Grove:

“When Andy Grove, former Intel chairman and CEO, got prostate cancer, he assiduously tracked down all the data he could comparing treatment options and their risks and benefits, gathering the best available evidence to guide his medical decisions. That’s what we would expect from a well-trained engineer and scientist. Grove, however, like many of his Silicon Valley friends, continues to insist on the benefits of [stock] options and doesn’t cite evidence for his views – even though with other business decisions, Grove sticks closely to the facts.”

Similar barbs are reserved, later in the book, for Robert Burgelman, whose claim that “strategy is destiny” they quickly proceed to undermine – with a close reading of the Intel story, which Burgelman and Grove have co-taught to generations of students: the key strategic decision in Intel’s story was, apparently, an outsourcing decision made by IBM, which Intel was smart to capitalize on, but which Intel did not influence or even foresee as the lucky break that would build the semiconductor giant. If you ask me, that’s pretty much like pulling the rug from under Burgelman’s feet. Yet, their whole critique seems to be in good faith, extremely civilized, and driven by the authors’ genuine truth-seeking efforts rather than by personal animosity. And I just think that’s very cool.

If you like challenging conventional wisdom, this is a book full of delights and an arsenal of tools for attacking nonsense in your corporate environment whenever you see it:

“Take the case of a senior exceutive from Florida Power and Light, who told us, while attending a Stanfrod executive program, that his compensation was based on the profitability of the utility. The utility’s profitability, since in the short run most of its costs and rates were fixed, depended mostly on the amount of electricity sold, and the amount of electricity sold depended mostly on the temperature. The hotter the summer in Florida, the more power was sold, and the more profitable was the utility. That summer was a particularly hot one in Florida, so the executive got a big boost in pay during the month that he spent at the Stanford Executive Program in california. This executive noted that this incentive system made no sense — unless you believed he could control the weather in Florida”.

The authors handle some big hairy questions (Is work fundamentally different from the rest of life, and should it be? Do the best organizations have the best people? Are great leaders in control of their companies?) In most cases, they don’t have the answers, but they show you under what conditions an answer might be fit for a given situation, and how devilishly difficult it is to get to the answer if you don’t specify those conditions. So, suppose your company spends a lot of time and effort developing and administering a performance management system that ranks people’s performance on a curve or forced ranking, encouraging you as a manager to “use the full curve” in grading your employees, and rewards better performers with monetary bonuses (ever been in one of those companies? :-)). After reviewing decades of experimental research and field studies, Pfeffer and Sutton conclude: “Individual incentives and highly differentiated reward and recognition distributions make more sense when performance can be objectively assessed and when performance is mostly the result of individual effort rather than the product of interdependent activity”. Examples of such jobs are jockeying, cutting trees, and installing windshields. “Similarly, the evidence suggests that more dispersed financial rewards increase the performance (particularly of the highest performers) when tasks entail little or no interdependence and outcomes are clear.” Examples: driving trucks and picking oranges. When was the last time you had a job like that? You probably experienced a fair bit of interdependence even while editing your high school yearbook, didn’t you? “Yet when work settings require even modest interdependence and cooperation, as most do, dispersed rewards have consistently negative consequences on organizations… The negative effect of pay disparity was especially pronounced for high-technology firms, because those firms had the greatest need for collaboration and teamwork.”

Pfeffer and Sutton claim as their practical inspiration Dr. David Sackett’s evidence-based medicine movement: hell, if it works for medicine, let’s try to see if it works for business, too. In the bigger scheme of things (on strategy, organizational change, and leadership), their conclusions remind me of Eric Beinhocker’s The Origin of Wealth, a more theoretical work about contemporary economics which nevertheless seems to me to hint at some of the same truths. And at the end of the day, it’s not about truths, which change anyway: it’s about the method of looking at the facts, applying your brains, and leaving behind those beliefs that happen to be unsupported by evidence. If we all could inject some more of this wisdom into our organizations, we’d probably have earned our salary, and our bonus too.