Tuesday, June 16, 2015

Example application of the ADVISE Model (you probably know where this is going)

Back to my General Theory of the Organization, let’s take stock of where we are after a long series of posts:

·        we have proposed a classification of types of organization based on their ends (educational, political, religious and economic)
·        we have defined a number of dimensions that can vary between two extreme values, and determined that ADVISE organizations (Adaptable, Dominant, Voluntary, Isocratic, Simple and Egalitarian) are better than RACKET ones (Rigid, Anomic, Compulsory, Kleptocratic, Enmeshed and Totalitarian)
·        we have developed a model of what elements of organizations (members, roles, dyadic relationship between them, environment in which they operate, resources they consume and goals they pursue) are descriptive enough of their functioning to grant us a deep enough understanding of how they work
·        finally, we identified a number of simple rules that guide the evolution of organization, or explain how they change in time (their ability to achieve their goals gets worse, innovation  partially restores that ability –as long as it really changes some elements of the model, and if not checked by innovation, the ensuing degradation increases the number and intensity of intra-organizational conflict)
Now it is time to see how the model holds up to reality, using it to gain a deeper understanding of the dynamics of a real world organization. I will thus present a case study of an actual company and how it evolved from the 90’s to the 00’s, with some change in the names of the company itself, its subunits and even some of the main characters to protect confidentiality (although many of my readers will recognize the environment immediately) and avoid liability.

Let’s start then by describing a small slice of the history of a multinational company we will call “Amundsen Consulting”, starting in 1995, which later on would change its name to “Emphast” (a vague reminder of its “Emphasis on the Past”). Any resemblance with actual events or organizations is pure coincidence, of course. Finely intended, but coincidental all the same.

In the mid nineties of the past century (eeks! One feels really old using those sentences and realizing he was already in the midst of the action back then) this company was on a roll. They had established an early leadership in a market booming thanks to a number of trends they didn’t originate (cheapening of computing power due to to Moore’s law, deregulation and lowering of international tariffs, lowering of communication and transportation costs, fall of communism that brought hundreds of millions of new consumers for the first time willing to exchange their labor for commodities in market economies, all of which favored bigger and bigger corporations that required central monitoring and control) but of which they would benefit. Starting with brand recognition and a superb commercial channel from the parent company inside which they originated (one of the “big 5” accountancy firms, let us call them “Roald Amundsen”), they also inherited an organizational structure typical from professional services firms of the age based on a pyramidal scheme (in more than one sense) with very few roles. Basically four professional categories: consultant, senior consultant, manager and partner, with the latter (the real owners of the company) sitting at the top and reaping all the benefits. Each national practice being essentially independent from the rest (forming a separate pyramid making their own hiring, promotion and contracting decisions, that paid a certain amount of the locally accrued benefits in exchange for global brand awareness raising activities and common “methodologies” that helped justify billing customers for the hours of “professionals” who were fresh out from college as if they were seasoned experts). That scheme showed itself to be enough to produce annual growths in the order of 20-25% (so the company doubled every 3-4 years, no small feat) and kept the pyramidal scheme (or rather the constellation of pyramidal schemes, as each country and each industry had its own P&L) going nicely, as at its core it required the lower levels working their asses off and generating more value than they kept for themselves (literally, as the rates billed for them were pretty higher than their “loaded cost”), value that in turn was siphoned off by the partners (who could not bill themselves at rates that covered their salaries and benefits, so had to compensate with their subordinate’s rates), who, regardless of how many hours spent in the office (after years of having gone through the motions to earn their badges they normally didn’t have much of a family life or social life outside of their professional acquaintances to fall back on), really didn’t had that much work to do.

So it sounds like the only goals being met (remember that the main goal every member of an economic organization wishes to attain is the maximum improvement of their social status) were the partners’, as any other employee would get a better reward working independently, or in a company where they could keep most of the value they themselves generated. Indeed that was the case, and everybody there understood it quite exactly. Why didn’t they leave en masse, then? Well, many left (the employee turnover on any given year was routinely above 20% of the headcount, and the labor market outside the firm had to badly seize to have to resort to “unplanned attrition” and actually fire people against their wishes), and the ones who stayed did so in the hope of becoming partners one day, and then be able to milk the advantages of the system that so far had been milking them. As in any good ol’ fashioned pyramidal scheme, most were being suckers, as every partner needed on average around 100 employees generating profits for them, which meant at any given time only 1% would make it to partner, and if you accounted for all the ones that left before the possibility came, probably the number of new hires that actually made it to the top was less than 0.2%. Even with that dismal prospects, for most the deal was well worth it, as it provided a good experience, and many a naive freshman started with the idea of doing 2-3 years of consulting work to then jump to a plusher, comfier position in some of the firm’s clients (or in some competitor hungry to replicate the firm’s success with very similar policies).
Be it as it may, with the approach of the new century the motor started to sputter for a number of reasons, in what proves to be a nice illustration of our first law. In the absence of change the ability of “Amundsen Consulting” to fulfill its goals (or the sum of its employees’ goals) grew worse and worse, negatively impacted by a number of developments:

·         As is wont to happen when a business model consistently delivers high profits year after year, a flood of competitors was crowding the market. From other auditing firms trying to leverage their C-Suite connections as well to cross-sell “consulting services” (whatever those may be, although soon it was clear enough the big bucks where in the installation and maintenance of complex enterprise wide information systems) to technological behemoths trying to extend the scope of their services from merely providing Hardware and Software to adapting it so it became actually useful (a hugely challenging stuff). For a time none of them looked specially threatening, but towards the end of the century there came a third kind of competitor that would prove to be much more disruptive: the “Pure Indian Players”, able to mobilize throngs of computer programmers, fluent in English, to do a work as crappy as the one “Amundsen” had specialized in doing, for a fraction of the price
·         At the same time, the dotcom bust and the slowing of the global economy (dying from a thousand cuts from a number of originally local currency crises that just kept recurring), along with the increasingly crowded market made it more and more difficult to keep the original rate of growth, and even caused it to slow to “single digit” (9% or less –to the point of the business actually contracting in local currency some years)

To top it off, differences of opinion between the executives of “Amundsen” and its parent company led to a formal request for arbitration that kept the minds of the top level of the company away from the market and clients for the better part of two years. The Solomonic decision of the arbitration allowed the company to break free without having to pay crippling penalties, but forced it to change its venerable name (hence “Emphast”), which turned out to be a hidden blessing, when the “Amundsen” of the parent company got intimately bound in the court of public opinion with a series of accounting shenanigans that brought low a number of formerly admired companies in the US.
Interestingly, the company initially pursued a series of mostly unsuccessful strategies to change its fortunes, which all seemed to consist in variations of the same recipe: “reorganize” to better align with the needs and demands of the customers (so what one day was called “business groups” became “growth platforms”, and a part of what was “variable salary” became “eUnits”) without any actual change in the people, the roles and the relationship between them, so regardless of what organizational unit one belonged to, or how his or her role was called he had the same rights, the same obligations and related with the same people as before. Unsurprisingly, its competitive position kept eroding, the oversized salaries kept being trimmed and, most damaging of all, the ultimate reward (becoming partner) kept being pushed farther and farther, as without breakneck growth there was simply not enough business to keep promoting the same amount of people every year. Of course that is not the end of the story, as the partners (at the end of the day the owners of the company), very clever people whatever their other qualities may have been, devised a way to monetize to the hilt all the good will they had spent decades creating (or, in most cases, inheriting from their predecessors): sell the company to the public, so they exchanged the masses expectations of profit (which History shows once and again have no basis in reality whatsoever) for their own, much better informed, knowledge of what they would be able to distribute as liquid profit every year. The company went public in the NYSE in July 2001, and the partners pocketed a nice 1.7 billion USD for floating just a 20% of the company (there were about 2,500 of them at the time, so the average they took in liquid form was 680,000 USD… not bad, but peanuts compared with the 3,400,000 USD per head they retained in their hands, with minimal strings attached, at a valuation slightly above 14 USD per share… it stands today above 95 USD, so make your own calculation of how wealthy they made themselves by that clever move).

Of course, that solved the problem for the existing partners (it has to be said in their favor that they increased their numbers generously the year before the IPO, although each new one received a significantly smaller percentage of the company than the ones appointed on previous years), but was far from solving the concerns of the 99% of the workforce that actually brought home the bacon. Close to 75,000 schlubs (I may know, as I was one of them) that were seeing the chance of ever making it so big evaporate in front of their noses, as they were asked to work as much, and sacrifice as much even as what they would get in exchange was a fraction of what their forebears had got. I’ve already devoted a post to my opinion about the choices I made back then (What an asshole I was...), and I am not complaining; by sheer obstinacy I still made it to what was previously called partnership (in an amazingly watered down version, but you take what you can) before calling it quits in 2010, two years in the financial crisis when in my little corner of the world the company was going to hell in a breadbasket, having to actively fire near 20% of the headcount (no unplanned attrition back then, as the labor market had completely seized). One of the best strokes of luck in my life, as even when in the rest of the world things have pretty much recovered, my old buddies still complain every time we meet of how lousy things are in there, how the morale is low, the raises nothing to write home about, the commitment of the new hires is mediocre, the old hands remaining are not so brilliant and so on and so forth.

However, this post is not about my own little (and mostly inconsequential) story, but about the application of the ADVISE model to this “hypothetical” company. We mentioned that it attempted some “false” organizational change that never got it anywhere, just swapping labels, but without really affecting how people worked, what they did and who they did it with. However, that is only part of the story, as after the arbitration there was a change of guard (George “Shah-him” was replaced by Joe “Backhand” let’s say) that enabled a more inclusive management style, which in turn allowed the company to tackle more vigorously the more problematic aspects of their operating structure. The new executive team promptly realized their main problem was their cost structure, that had become totally non-competitive for the kind of work that brought in 80% of the revenues (development of very complex information systems for big corporations), and moved aggressively to address that issue, creating new business units based on not so brilliant (downright cheap) programmers, working for a substantially lower salary with no perspective whatsoever of ever getting to partner before the Sun turned into a supernova and obliterated Earth (well, sometimes the company was not very straightforward about this and tried to fool those poor souls with some semblance of hope that some day they would be able to ascend to heaven too). They also stole a page from their harshest competitor’s playbook, setting development centers in India itself (and other low salary countries with an educational base to churn out high numbers of programmers with basic English proficiency, like the Philippines) that have kept growing to the extent that “Emphast” today employs more people in India (80,000 and counting) than what they had spread all over the world (“110 offices in 46 countries” if I recall correctly) when they went public.

Has that substantial  shift (always underplayed in their internal communications, as they do not want their Indian partners to do to them what they did to “Roald Amundsen”’’s partners almost two decades ago) entirely reversed the entropy and the inability to deliver the social status (high salaries and a great brand recognition, although their parents still have not figured out what on hell they do day in and day out to receive those, other than “works with computers”) their employees aim at? Not that much. Some countries have fared better than others, but most had to adapt to the reality of not being an “old school” professional services firm any more, where a hectic (slavish) first half of your career would be amply compensated by more relaxed and enjoyable second half. That means that what they can demand their young guns is not as much as what they used to, and that some really big deals that partially relied in squeezing that kind of commitment and oomph from everybody have inevitably gone sour (UK’s NHS would be the poster child here). In graphic form, this is how the old “Amundsen Consulting” of 1995 compares with the “Emphast” of 2010 (as any good anthropologist, I only describe what I could experience firsthand, I leave the analysis of the last five years to better placed observers):

Few of my old colleagues would argue that the organization has grown:

·         less adaptable, although it can always shed non performing units, having so many of them, with size comes a bigger inertia, and it is more and more difficult to turn things around… although it is trying to establish a presence in the digital media market, where it has none, it remains to be seen to what extent it can incorporate in its very marked corporate culture the acquisitions it is making all over the place
·         less dominant, as the rewards it offers to its employees have become less dazzling they are devoting less time in the office doing their masters bidding    
·         less voluntary, as a result of a job market outside the firm that is as little inviting in most of the world as it had ever been in the best decades, more and more people were staying out of fear of not finding anything remotely attractive elsewhere, rather than because they really liked what they were doing or their professional prospects in there
·         (even) less isocratic, as the partnership (where at least every partner had a vote) has been replaced by a diffuse structure where decisions are made at the top by a clique that represents a smaller percentage of the firm
·         Less simple, as the number of roles has multiplied. Not only has the number of intermediate levels increased (something that started in the late nineties with the addition of the categories of senior manager and associate partner), but the number of career path and specialist positions has also vastly increased, as befits an organization of humungous size and variety
·         Less egalitarian, as the introduction of new professional categories (low paid programmers) with less potential for advancement open to them led to a more unequal distribution of the benefits, and the growth in size and (in the good years) in total profit has been very much concentrated for its distribution at the top
All of it pretty standard fare, and what the three laws predicted would happen to a company in such situation. So the application of my model allows me to quantify what I already knew from deep in my gut: my old company has become less of a place where you would ADVISE your friends to accept a job offer, and more of a RACKET where the bosses excel at deceiving the rest of the employees in making them believe they have a most brilliant future only to more intensively benefit from the huge sacrifices they demand from them. I’ll end somewhat qualifying such statement so I’m not accused of just being bitter and throwing shit on my old comrades out of spite and resentment (not that I would care, I give exactly zero fucks about what anybody may accuse me of). I do believe it applies to this company what has been frequently said of democracy: it is the worst possible place to work, with the exception of all the others that are actually out there. If the preceding argument seems to isolate it as an especially evil or inhumane place it is because I have not compared it with any of the many other companies I know of, which are considerably more rackety, even less respectful of their employees  and even less conductive to them achieving their goals (at an acceptable price). 

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