by Gene Kim
As they walk outside, he says, “Sarah convinced Bob and the rest of the board to freeze all expenses, effective immediately. And Steve just found out that they’re denying the $5 million he was going to allocate to the innovation efforts.”
Bill shakes his head. “That Sarah is something, isn’t she?”
“I have learned so much from her. She’s an incredible expert in merchandising, but she’s never led software projects,” Maggie says. “She creates high expectations for everybody, which is great, but she definitely has some blind spots when it comes to managing people and teams … she’s not exactly a nurturing type.”
“No, I suppose I don’t,” Bill says, grimacing. “I have a really bad feeling about this meeting.”
When they walk into the grand conference room, Maxine immediately knows something is wrong. Steve and Dick are here, as well as Chris. But surprisingly, so are Kirsten and, very ominously, Laura Beck, the VP of HR.
Having the head of HR in a meeting is never a good thing, Maxine thinks. To her surprise, she spots Erik standing at the back of the room, looking at the historical pictures hanging on the wall. He gives her a quick wave.
At least Sarah is nowhere to be seen, Maxine thinks.
“Grab a seat, everyone,” Steve says, looking up from a printed spreadsheet, a grim expression on his face. “You probably heard that Sarah successfully convinced the board that we shouldn’t increase our costs until after we release earnings.
“Unfortunately, that’s not all the bad news,” he says. “Last night, the board instructed me to reduce costs across the entire company by three percent. Sarah and our new board director, Alan, have convinced everyone that the success of the Black Friday promotions have unlocked huge new efficiencies; therefore, we don’t need as many people.”
Maxine hears gasps from around the room. She feels like she’s going to throw up. Or cry. Or both.
I cannot believe this is happening, Maxine thinks. I feel like I’m partially responsible. After all, I had a lot to do with making the Unicorn Project so successful and planting the seeds of the Innovation effort.
And somehow, those successful efforts that she is so proud of are now going to cause a bunch of innocent people to lose their jobs. Dammit, Sarah, she thinks.
“Sorry, folks. I know this is surprising news, given the increased revenue from Unicorn. I really thought we had more time with the board,” Steve says.
“You’ve probably already done the math,” he continues. “To hit this goal, we’re going to have to reduce headcount across the company by about 150 employees. And to fund the innovation efforts from internal operations, we’re going to have to find an additional $5 million of costs to cut or reduce headcount by another forty people.”
Maxine hears more gasps around the table as the casualties keep mounting. She can’t breathe, and she feels her eyes tearing up.
She looks at Laura, the VP of HR. So this is going to be one of those meetings. Now that the reduction targets have been set, everyone will first defend their turf, trying to maintain their slice of the pie. Once the allocations have been agreed to, everyone will come up with a list of names of people to eliminate. Then they’ll have to decide whether Sally is more important than Sam, or vice versa.
Maxine is filled with dread. Looking around the table she says, “These are real people. People with families who depend on them. These are people who will be walked out the door with all of their things. One after another, everyone will watch people leave, dreading that their name will be called next, wondering when the managers will finally be done piling up the bodies. Only then will Steve’s scheduled email go out to the entire company, announcing that the purge is over, including saccharine remarks of optimism and, of course, asking everyone to do more with less.”
Everyone drops their heads. Suddenly, Maxine doesn’t want anything to do with any of this. She wishes things could go back to the way they were. She wishes she had never joined the Rebellion. She only wanted to get the builds going, to help make developers productive. She had never imagined that it would be the Rebellion that would be helping decide who would get to stay and who must leave.
If I had known that joining the Rebellion would lead to all this, she thinks, looking around, I would have kept my head down, stayed in my lane, not rocked the boat, just like Chris told me to.
“I really thought they’d give us until at least January,” Dick says, shaking his head. “The purpose of this meeting is to prepare a plan to submit to the board that takes down operating expenses by $15 million. And if we want to fund the innovation efforts, we need to take costs down by $20 million.
“Steve and I have already met with the heads of each business, and we’ve asked them to put together a plan to cut their part of the $20 million target,” he says. “Which is why you’re all in the room. We need you all to come up with a plan to eliminate $2 million from the IT organization—that’s about fifteen people across all of your groups.”
Maxine does the math. That’s more than four percent of all the technologists in the company. “No! This is horrible. We can’t fund the Innovation effort given all this. It’s just not worth letting all those people go,” Maxine says. She sees everyone turn toward her, some with expressions of hardened weariness and some with sympathy, as if she were a child who just discovered Santa didn’t actually exist.
“Maxine, around this table we’re all too used to doing layoffs,” Bill says. “I’m guessing that all of us believe that our most important work today is finding a way to fund the Innovation effort. Otherwise, everything you’ve done and achieved will go to waste. We’ll just be choosing a slightly slower death. If we don’t invest in doing new things, we’ll still end up where we started: outgunned and outmaneuvered in the marketplace.”
Chris turns to Maxine. “Bill is right. It’s the right thing to do.”
Maxine just shakes her head, still aghast at the human toll.
Steve looks at Maxine. “Yes, protecting the Innovation effort is our most important task. If I didn’t believe this, I would have just threatened to resign. After all, they can cut costs without me. But this work is so important that we must do everything we can to make sure the Innovation group gets its chance.”
This all makes Maxine feel even worse.
“But why? Why is this Innovation effort so important to you?” Maxine finally asks Steve.
Steve looks thoughtful for a moment. “What Erik said last week was right. As a company, we must show that we have a viable growth thesis and that we can create value in ways besides just cutting costs. By the book, there’s two extremes for how to run companies, which affects how you plan and how the investment community perceives you. On one extreme, you have Alan and Sarah’s way of creating value, which is just by cutting costs. You squeeze every bit of margin you can out of the operation. Some companies thrive at this, and some manage to malinger for decades, but most eventually fade and disappear,” Steve explains.
“But when you’re in this mode, you’re often just playing financial engineering games,” Steve says, gesturing at Dick. “In order to stem our losses, we’ve had to do a couple of asset sales to generate cash. But this can be like selling the furniture to pay the mortgage bill. Eventually, you run out of things to sell and you can no longer fund daily operations, which means more layoffs.
“On the other end of the spectrum, you can choose to build the company for growth. Like I said, if you’re not growing, you’re slowly dying. The Unicorn Project has proven to all of us that we can actually grow: by creating new offerings that customers want, by taking market share away from our competitors, by doing things that great companies do,” Steve says with a thin smile. “And when we grow revenue, we eventually grow profits too. And we earn the ability to innovate and place more bets in the marketplace, which accelerates growth and ensures our relevance in the future.
“Investors reward growth,” he says. “Already our stock price is up, and we haven’t even reported earning
s yet. Analysts are starting to raise their price targets. This means Wall Street is rewarding us with higher multiple on revenue. A couple of months ago, we were valued at less than 1.0x trailing revenue, which is almost an insult, because they’re expecting us to shrink. When we announce the results of this quarter, hopefully they’ll start valuing us as they would any healthy retailer. And in time, they may value us much higher, as someone who is defining and leading, and maybe even disrupting our market.
“Bill is absolutely right, Maxine,” he says. “The easier thing to do is to just do what the board says. But the right thing to do is ensure that the Innovation program has its shot. It sucks, but as leaders there should be no doubt that cutting deeper is the right thing to do, because it creates a potential path to long-term growth.”
Maxine still feels sick as the managers start to negotiate which departments will eliminate eighteen positions. They debate whether they will eliminate a few experienced engineers or, for the same price, a larger number of junior engineers. Axe the managers or individual contributors. Eliminate employees or contractors.
When she can’t take it anymore, Maxine excuses herself to take a walk, just to get out of the room.
When she gets back a half-hour later, she sees that Chris has agreed to RIF (reductions in force) two Dev and five QA positions, most likely underperforming engineers and several managers. Bill must RIF seven positions, targeting the helpdesk, server, and network administration positions, as well a manager. Maxine hopes that Derek will survive this, not to mention her old MRP team.
Surprisingly, Kirsten has put on the table seven project managers, noting that the Rebellion has changed the way teams work. “Long term, we don’t want to manage our dependencies, we want to eliminate them,” she says. “That’s the system of work and the company architecture we need to create, which means fewer project managers. Maxine has shown repeatedly how this can be done. And we have so much further to go.”
On the one hand, Maxine is impressed by the professionalism being displayed by everyone in the room. But hearing some of the names being proposed for the RIF and being held up as the reason to let go more of Kirsten’s team, Maxine feels like she’s going to throw up again.
“You’ll probably have to cut even deeper than you think,” Erik says from across the table, speaking for the first time since the meeting started. Maxine had nearly forgotten he was there.
“Oh, great,” Bill says.
“Last time we met, I mentioned Sensei Geoffrey Moore’s Three Horizons, but I didn’t have time to explain his concept of Core versus Context, which are what the Four Zones are about,” Erik says. “Sensei Moore observed that many businesses understand the Three Horizons but are still unable to properly invest in the next generation of innovation. In other words, they underinvest in Core, because they are being controlled by Context.
“Cores are the central competencies of the organization. These are things that customers are willing to pay for and what investors reward,” he says. “Context is everything else. It’s the cafeterias, shuttles between buildings, and the thousands of things companies must do to operate. They’re often mission-critical, such as HR, payroll, and email. But our customers do not pay us for the great payroll services we provide to our employees.
“Not properly managing Context is what Sensei Moore called the killing ground of great companies. Companies who become too burdened by Context are unable to properly invest in Core. There is a strategy for transforming a company, but it also takes ruthless focus and tenacity.”
Erik looks at Bill and Steve. “You know that technology must become a core competency of this company and, indeed, that the future of Parts Unlimited depends upon it. But how much of the $80 million of your technology spending is Core, actively building competitive advantage, and how much of it is Context, which is important and maybe even mission-critical, but still needs to be standardized, managed down, and maybe even outsourced entirely?”
Bill bristles, turning red. Up until now, he always appeared remarkably stoic and reserved, but apparently Erik had touched a nerve. “You’re talking about outsourcing? After all we’ve been through, Erik, haven’t we already agreed that outsourcing IT has caused many of the problems we’re currently cleaning up?”
“Hardly!” Erik scoffs. “You’ve all proven that you can jeopardize the First, Second, and Third Ideals plenty without outsourcing. Instead, think of the Fifth Ideal, of being truly customer-centric instead of being silo-centric. As Sensei Moore asks, of the applications and services that you manage, which of them are customers willing to pay you for? Which ones truly enhance competitive advantage? And which can you rely on vendors for?
“A hundred years ago, most large factories had a CPO—a chief power officer—who ran the electricity generation processes. It was one of the most important roles in manufacturing, because no electricity, no production. It was a Core process,” he says. “But that role has disappeared entirely. Electricity has become infrastructure that you buy from a utility company. It is interchangeable, and you choose suppliers primarily on price. There is rarely a competitive advantage to generating your own power. It is now merely Context, no longer Core. You don’t want to be the organization that has a large staff providing internal power generation.
“As Sensei Clay Christiansen once stated, one keeps what is ‘not good enough’ and outsources what is ‘more than good enough,’” he says. “Why did you choose to outsource your cafeteria point-of-sale system?”
Bill looks thoughtful, scratching his chin. “I had my team work with John, the CISO, to figure out which applications stored PII or credit card data. That’s like toxic waste. We shouldn’t waste time or energy protecting it; we get rid of it. We looked for those applications, and where we could, we retired them. And if we couldn’t, we looked for an external vendor who could run it for us as a service.”
“Precisely,” Erik says, standing up. “I challenge you and the technology team to think deeply about the Fifth Ideal and identify areas of Context that you can unload, freeing yourself from decades of technical debt, things that have been shackling you for years or maybe even decades. Imagine what you can get done without all those things dragging you down. Even though it may be more painful in the short term, you will find some unexpected and critical dividends long term.
“Steve, lucky for you, according to Sensei Moore, the person best suited to manage Context is someone just like Bill and Maxine,” Erik says. “This is never easy. You need someone who truly understands the business, someone hard-nosed who can drive standardization across the company, who truly has the best interests of the entire organization at heart, and who knows what technology can and can’t do.
“Imagine a world where you can make decades of technical debt disappear …” he says. “Where you rid yourself of bad automation built on top of bad business processes. Imagine what it could feel like to deliberately and carefully choose what to leave behind and where you could spend your time and energy instead. Dick knows that simplicity enables effectiveness, and that complexity conspires against it. How much of getting business done here is impeded by your internal systems and processes?”
This makes Maxine pause. The notion of simplifying the business and technical landscape of the company is breathtaking. She loves working on complex business problems, but it would be so much better and easier if they weren’t obstructed by the decades of senseless complexity and accumulated neglect.
“Lastly, to everyone else, especially Steve,” he continues, “think carefully about how each and every position you eliminate might disrupt flow, especially when you don’t have locality in decision-making, as embodied by the First Ideal. For instance, what happens when you get rid of managers when you already have situations like the Square happening all the time?
“Those middle managers are your interface between strategy and execution,” he says. “They are your prioritizers and your traffic cops. We all have this ideal of small teams working independently,
but who manages the teams of teams? It’s your middle managers. Some call them derisively the ‘frozen middle,’ but you’ll find that properly developing this layer of people is critical to execute strategy.
“I wish you the best of luck,” Erik says, turning to leave. “And hang in there, Maxine. If you choose wisely, better days are most assuredly ahead of you, however dismal it may appear now.”
Everyone remains silent on the walk back to Building 5. Finally, Maxine says to Bill, “You don’t talk much, do you?”
“Sometimes,” he says with a tight-lipped smile.
“Uh, what do you think of that last meeting?” she asks, the question that’s likely on everyone’s mind.
Bill stops to look at Maxine for a moment. “It sucked ass. On the one hand, it looks so much like the same drill that everyone in Ops deals with all the time. Do more with less. Outsource this. Outsource that. In the past, this has led to some incredibly unwise decisions, and people like us are left cleaning up the mess afterward for years. And when everyone’s realized that we crapped the bed, we often have to bring everything back in-house. There’s nothing fun about that.
“But this time it could be different,” he says, resuming his fast-paced walk. “Steve and Erik are absolutely right. We must find a way to protect the Innovation efforts. That is the key to our long-term future. For the first time in my career, I think we can change the way we manage technology and do it right, with the support of the highest levels of the company.
“But this is not going to be easy,” he says. “I like what Erik said about Context and Core. There are services we should get out of the business of operating. One of the places I’m thinking about is my old mid-range group. We’ve created the Galapagos Islands of technologies, which served us well for decades, but we’ve drifted so far from where the entire industry has gone that we haven’t been able to benefit from all the things the industry vendors have created. Maybe it’s time to build a bridge back to the mainland … or maybe vacate the island completely.”