Posts Tagged ‘Bellcore’

Culture, Rose-Colored Glasses, and the Michigan Bottle Scam

June 28, 2011

NEWMAN: Wait a minute. You mean you get five cents here, and ten cents there. You could round up bottles here and run ’em out to Michigan for the difference.

KRAMER: No, it doesn’t work.

NEWMAN: What d’you mean it doesn’t work? You get enough bottles together…

KRAMER: Yeah, you overload your inventory and you blow your margins on gasoline. Trust me, it doesn’t work.

JERRY: (re-entering) Hey, you’re not talking that Michigan deposit bottle scam again, are you?

KRAMER: No, no, I’m off that.

NEWMAN: You tried it?

KRAMER: Oh yeah. Every which way. Couldn’t crunch the numbers. It drove me crazy.

Even Kramer got it. Fundamentals matter, but there is a persistent legend in many engineering organizations that culture trumps the bottom line. It’s a legend that propagates because, as change management consultant Curt Coffman has provocatively noted, “culture eats strategy for lunch” when it comes to execution. What Coffman and others who talk about “soft stuff” don’t tell you is that in the end culture doesn’t matter.

The reality is is this: culture only trumps the bottom line in organizations that are heading in the wrong direction. It’s easy to see why: bad execution can be excused when it is in the service of a higher calling.  Sometimes — the legend goes — cultural purity even demands failure. Briefings that begin with a retrospective tour of a company’s glory days or the exploits of its leaders are not going to end well.  It’s a malady that afflicts start-ups, Fortune 100 companies, universities, and political office holders.

It was a rare meeting at Bellcore or Bell Labs that did not begin with a bow to a century of innovation and accolades. Theirs was a tradition so rich that it was bound to color all projects in perpetuity. I knew a  business development managers who intoned “WE ARE BELLCORE!” at the start of engagements. It always sounded to me like a high school football chant designed to cow the opposition.

The remnants of the Army Signal Corp  research lab at Fort Monmouth New Jersey had long dispersed by the time I interned there in the early 1970’s, but stories of the famous scientists who once stalked the cavernous halls of the enormous hexagonal building near Tinton Falls were retold to each new class of PhDs as if  the great men would be dropping in any moment to don lab coats and resume their experiments.

Start-ups are not immune, either. A few weeks ago, I was nearly ejected from a meeting with a CEO who was raising early stage money for suggesting that the distinguished professors who had founded the company might have had less than complete insight into market realities.

The “We are great because…”  meme  is propagated by leadership at all levels. Even in this age of the decline of the celebrity CEO, countless university and corporate websites are travelogues for executive jaunts to far-flung campuses. Supporters of one prominent Silicon Valley CEO would muse to anyone who cared to listen: “I wonder what it feels like to always be the smartest person in the room?”  The phrase found its way into an industry analysts’ briefing at the very moment that the company’s stock was falling off the edge of a cliff. I watched the faces of the analysts, and it was clear that they were pondering entirely different questions.

I’ve had my share of run-ins with employees who were not at all shy about using vaguely remembered words of long-departed leaders to pit culture against execution. In one instance, a series of patents led to an ingeniously conceived system for streaming audio and video from conference rooms and lecture halls. Unfortunately every cost projection showed that the effort required to install and maintain the equipment swamped any conceivable revenue stream. When I confronted the inventors with the inevitable conclusion, I was excoriated in the most graphic possible terms because I had not taken sufficient account of  the intellectual beauty of the system.  The crowning blow: “Dr. [insert the name of any of my predecessors] would have understood my work!”

On another occasion, I was called upon to invest heavily in a newly conceived and revolutionary mathematical method that would transform not only our  business but scores of related industries.  The inventors’ local managers had been completely sold on the idea and were willing to put a substantial portion of their margins at risk to develop it.

Key to the idea was the notion that every textbook in the field had been written by authors who willfully ignored the power of the new theories. The invention involved an area in which I had done research in the past, but  I couldn’t make much sense of the claims.  I dutifully sent drafts of patent disclosures to experts, but the feedback was discouraging.  The claims in the patent disclosures were either false or so muddled that further analysis was useless.

I pulled the plug. Reaction was swift and heated.  Here’s what it boiled down to: the founders would have had faith in the employees, and I did not. They were right about me, but not about the founders.

It is in the nature of engineering organizations to reconstruct the past to suit the present.  Hewlett-Packard was famous for such rose-colored glasses.  When then-CEO Carly Fiorina combined ninety or so business units — each of them concentrating on a slice of a business that overlapped with a half-dozen others, driving down operating efficiencies and, with them, margins — into a total of six, howls could be hear from every HP lab on the planet.  “Bill and Dave would not have done that to us.” A casualty of Mark Hurd’s rapid moves to salvage the strategic advantages of the two year old Compaq merger by slicing investments that did not have a clear path to revenue was the revered software laboratory at HP Labs.  “Destroying the culture!” cried the masses.

Now I happen to think that both moves were unwise, but not because of any cultural imperative that had been handed down from Bill and Dave. The numbers were seldom that hard to “crunch”.  It always boiled down to fundamentals. Risks were taken, but only when the fundamentals made sense.

It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

“Culture” often reared its head during my tenure at HP — usually as an excuse for ignoring business fundamentals. It was a problem that plagued Joel Birnbaum, my precedessor, Dick Lampman, head of HP labs and others over the years. On those occasions, I was happy to have the words of Bill Hewlett and Dave Packard to fall back on.

I’ll talk about that in my next post.

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Big Animal Pictures

April 4, 2011


I’ve been spending more time with alumni.  Zvi Galil, the new dean of computing at Georgia Tech — my successor — has been on a national tour to get acquainted with recent graduates. I accompany him whenever I can to make introductions and to generally help smooth his transition.  Not that he needs it.  Zvi was dean of engineering at Columbia for many years and knows how to get alumni to talk honestly about their undergraduate experiences. We were having lunch with a group of recent graduates when I heard Zvi ask someone at the end of the table, “What’s the one thing you wish we had taught you?”

The answer came back immediately: “I wish I had learned how to make an effective PowerPoint™ presentation!”  If the answer had been “more math” or “better writing skills” I would have filed it away in my mental catalog of ways to tweak our degree programs. It’s a constant struggle in a requirement-laden technical curriculum — even one as flexible as our Threads program — to get enough liberal arts, basic science, and business credits into a four year program, so I was prepared to hear that these young engineers wanted to know more about American history, geology, or accounting. After all, I am a former dean.  I had heard it all before.

But PowerPoint? Everything came to a stop.  Zvi said, “PowerPoint!” It was an exclamation, not a question.  Here’s how the rest  of the conversation unfolded” “Look, the first thing I had to do was start making budget presentations. I had no idea how to make a winning argument.”  From the across the table: ” Yeah, we learned how to make technical presentations, but nobody warned us that we’d have to make our point to a boss who didn’t care about the technology.”  “It’s even worse where I work,” said a young woman. “Everybody in the room has a great technology to push.  I needed to know how to say why mine should be the winner.”  And so it went.  This was not a PowerPoint discussion.  We were talking about Big Animal Pictures. If you understand Big Animal Pictures, you understand  how to survive when worlds collide.

David Stockman directed Ronald Reagan’s Office of Management and Budget (OMB) from 1981 to 1985.  He was a technician.  A financial engineer. He had a Harvard MBA, and spent the early part of his career on Wall Street with Solomon Brothers and Blackstone. It was a checkered career, and if you take seriously the accounts in his memoir of the Reagan years, he never really understood that he was caught between colliding worlds. Which brings me to Big Animal Pictures.

Stockman was a conservative deficit hawk who thought his job was to restore fiscal sanity.  Reagan had beaten Jimmy Carter in part by painting the Democrats as financially irresponsible.  David Stockman’s job was to fix that, and that meant budget-cutting.  Defense Secretary Caspar Weinberger thought that Reagan had been elected to restore America’s military might. Weinberger’s job was to pump more money into defense budgets.  Stockman and Weinberger were on a collision course, and for a year they traded line-item edits to the federal budget. This was a technical duel. Stockman and Weinberger both had considerable quantitative skills. It was a bureaucratic game that Weinberger had learned to play when he worked for Reagan in California, but there was a deepening recession. In the end, it appeared that DoD would have to make do with the 5% increase that the White House was proposing. It was a spending increase that Stockman believed was unwise and unaffordable.

Weinberger’s proposal was 10%.  Stockman could barely contain himself. It set up a famous duel in the form of a budget briefing with Reagan playing the role of mediator. It was going to be a titanic debate.

Stockman showed up with charts, graphs and projections.  The stuff that the OMB Director is supposed to have at his fingertips. Weinberger came armed with a cartoon, and walked away with his budget request more or less intact.

Weinberger’s presentation was a drawing of three soldiers. On the left was a small, unarmed, cowering soldier — a victim of years of Democratic starvation. The  bespectacled soldier in the middle — who bore a striking resemblance to Stockman — was a little bigger, but carried only a tiny rifle. This was the army that David Stockman wanted to send to battle. The third solder was a  menacing fighting machine, complete with flak jacket and an M-90 machine gun. It was the soldier that Weinberger wanted to fund with his defense budget.  Weinberger won the budget debate with Big Animal Pictures.

Stockman was appalled:

It was so intellectually disreputable, so demeaning, that I could hardly bring myself to believe that a Harvard educated cabinet officer could have brought this to the President of the United States. Did he think the White House was on Sesame Street?

Stockman and many analysts concluded that the episode revealed something deep about Reagan’s intellectual capacity. Maybe so, but I think it revealed more about Weinberger’s insight into what it takes to carry an argument when the opposing sides can each make a strong technical case for the correctness of their position: argue for the importance of the end result, not for the correctness of how you will achieve it. It is a classical colliding worlds strategy.

Michael Dell’s 1987 private placement memorandum for Dell Computer Corporation was a Big Animal Picture. Buying computers was a hassle when Dell started his dormitory-based business in 1984.  By 1987, PC’s Limited had sold $160M worth of computers based on a simple strategy: eliminate the middle man, get rid of inventories, and give customers a hassle-free way to buy inexpensive, powerful IBM-compatible computers.  In the midst of a stock market crash, Michael Dell managed to raise $21M based on a short document that ignored the conventional view that private placement business plans had to be highly technical:

Dell has sold over $160 million of computers and related equipment on an initial investment of $1,000. The Company has been profitable in each quarter of its existence, and sales have increased in each quarter since the Company’s inception.

Tacked onto the memorandum, almost as an afterthought were letters from customers — inquiries from people who were interested in buying computers from Michael Dell and testimonial from owners of his made-to-order PCs who wanted to buy more of them.  It was short (45 pages with the letters attached) and, aside from a few pro-forma financials to explain what would be done with the new money, it was almost entirely devoted to painting a picture of what success looked like to Michael Dell.

A copy of the original Dell memorandum wound up on my desk in late 1998.  At the time, my Bellcore department heads were struggling to define businesses that could either be spun out of the company or funded as internal startups. I was drowning in  highly technical market forecasts and details of patent disclosures. Each new spreadsheet screamed: “Idiot! Just look at this equation.  It’s obvious why our approach is better than everyone else’s.”  One afternoon, in exasperation,  I threw Michael Dell’s private placement memorandum on my conference table and said “Make me a presentation that looks like this.” The room got very quiet as they realized what was going on.  I was asking for Big Animal Pictures.

We started four businesses within 18 months.  Three were spun out  and made a modest amount of money for the company and the founders.  We ran one as an internal start-up. It did not do nearly so well. One of the key factors was that we could not duplicate Michael Dell’s Big Animal Picture.

This is not a lesson that engineers and scientists learn easily. In fact, when presented with overwhelming evidence that business decisions are seldom made on the basis of technical elegance and correctness, engineers retreat to the safer ground staked out by David Stockman: “Do you think we are on Sesame Street?” The answer is “Yes!”  Successful engineers and scientists know all about Big Animal Pictures.

Paul R.  Halmos was one of the great mathematicians of the 20th century. He studied the most abstract topics imaginable. One of his crowning achievements, for example, was to create an entire algebraic theory to describe mathematical logic, which was itself an abstract mathematical theory to explain symbolic logic. Symbolic logic was, in turn, an abstract explanation of the kind logic used by Aristotle, and Aristotle’s logic was the formalization of correct patterns of human  inference. Halmos did not deal in uncomplicated matters.

How did Paul Halmos counsel young mathematicians to present their work in public?

A public lecture should be simple and elementary; it should not be complicated and technical. If you believe you can act on this injunction (“Be Simple”) you can stop reading here, the rest of what I have to say is, in comparison, just a matter of minor detail.

The mistake, Paul Halmos noted in his essay How to talk Mathematics is thinking that a simple lecture talks down to the audience. It does not. Halmos (or PRH as he sometimes called himself) seems to have understood worlds in collision.   Of course, a simple lecture in PRH world might open with the phrase “…as far at Betti numbers go, it is just like what happens when you multiply polynomials,” so it’s a sliding scale.

No matter what you’re doing in the technical world, learning how Big Animal Pictures work is a valuable thing.  I sometimes sit on review panels to decide on research funding.  I recently advised a young scientist to use Big Animal Pictures.  She had five minutes to present her work and I knew that the competition would be strong.  Her first instinct was to jump into the technical meat of her research to give the reviewers a feeling for why her approach was better than other approaches. My advice was to not do that.  I wanted her to literally give a BAP presentation that would inform the panel about the importance of her research and why they should care about it.  I later found out that other colleagues had given her identical advice, which she apparently followed with great success.

And it doesn’t matter which of the colliding worlds you are on.  BAPs are always a good idea. My colleague Wenke Lee was recently called upon to give a presentation on the state of computer security research to a  group of mathematicians.  It was all about how powerful mathematics can be used to exploit security flaws and vulnerabilities. Wenke resisted the temptation to dive into the technical details of botnet attacks.  It is, after all, a subject he knows well and he probably would have had fun demonstrating his prowess. But here is how Wenke began his lecture.

He went on for another twenty minutes, but he really didn’t need to. Everyone got the point in the first thirty seconds.

L.I.A.R.

December 7, 2010

The technical presentations were over and a distinguished panel of inventors had given the audience some take-away messages, when Bob Lucky began his trademarked summary of the 2010 Marconi Prize ceremony. There were already empty seats as some of  the locals started heading for the SRI visitors lot when I was roused from a cookie-induced, end-of-conference stupor.  I had heard someone up front call my name.

Bob announced to everyone who was left in the room, “Rich DeMillo is writing a book on the subject.  Rich, how do you know when innovation has occurred?” There’s a mental “passive-to-active” switch that needs to be tripped in situations like this, so it took me a second or so to respond.  In the meanwhile, I said something witty to fill in the time.  “Thanks a lot, Bob,” as I recall. But it was obvious what the answer should be.

Every speaker had said it, and most of them were Marconi Prize recipients themselves.  I have said it many times here: invention without  impact doesn’t count as innovation. And this was a conference devoted to impact on telecommunications.
  • John Cioffi had described the insight that  inserting modems on both ends of a normal telephone lines allowed you to bypass switches and get direct access to the Internet. It was the key innovation in the development of  DSL .
  • In addition to telling the story of how he and  Whit Diffie invented public key cryptography, Marty Hellman talked about the “Who am I to do this?” moments of self-doubt that all inventors experience.
  • Federico Faggin made it pretty clear that the real invention in creating the first integrated circuit (the Fairchild 3708) with self-aligning silicon gates was not having the idea, but actually making it work.
  • Adobe Systems co-founder John Warnock–who shared the Marconi prize with Charles Geschke, the other Adobe founder–said that it often boils down to one person: “Apple without Jobs cannot innovate,” he said.

It had also been a day of sharing stories about Guglielmo Marconi. According to Warnock, Marconi could not stand John Ambrose Fleming, the inventor of the vacuum tube diode, whom Marconi had hired to design Marconi Company’s power plant.  In fact, Marconi was trying to  figure out a way to fire Fleming.  Marconi’s grandson, journalist Michael Braga, was there as well,  so there were also intimate and sometimes surprising family stories.

But everyone had said that you can tell when innovation has happened by its effect on people. In the world of industrial innovation, the impact that matters is economic, so I shot back to Lucky, “Wealth creation!” It was something I believed in deeply and I knew Bob felt the same way. I had worked directly for him at Bellcore.  In Bellcore’s research labs just publishing another journal paper didn’t count for much: everyone was held accountable for translating their ideas into inventions that would matter to the company, its customers, or their customers.

Lucky has a way of nodding when he is processing information, but it’s not necessarily because he is agreeing with you.  Sometimes it takes a little while to find out what his verdict really is. After few seconds of nodding he repeated: “wealth creation.”  I had given the right answer. I really had not intended that to be the closing line of the meeting, but it was. It was true, but it wasn’t the most creative insight of the day. Almost immediately, I thought of a much better answer to Bob’s question, but it was too late.  The SRI auditorium was emptying out.  The moment had passed.

Here’s what I really should have said:

You’ll  know that you have innovated when there are LIARS!

It was a term that John Cioffi had thrown into the discussion at the start of the day.  A L.I.A.R. is a Large Institutional Autocratic Resister.  John had said that you knew when an innovation was real when LIARs said it was their idea. Faggin had said that bringing something important into the world generates resistance.  You have to plan for it in advance. Hellman had talked about the wisdom of foolishness.

Fiber optics pioneer and winner of the 2008 prize, David Payne, said two things that were especially insightful.

  • If you innovate, someone will make a lot of money and someone will lose a lot of money
  • Innovation thrives on being different.  A manager wants efficiency and conformity

In fact, everyone had talked about the biggest impediment to innovation: large established organizations.  John Warnock and his colleagues at Xerox PARC had been charged with creating the office of the future.  They succeeded beyond anyone’s wildest dreams.  PARC created color displays, mice, networks, word processors and email. But Xerox was obsessed with the quality of the printed page, so LIARs dug in their heels. They would not adopt PostScript until all Xerox printers could use it, for example.  In other words, it was never going to be adopted.

LIARs are everywhere.  It’s even worse in academia. A couple of years ago, I was an ed-tech panelist at a large trade show when a vendor of software for higher education told me that in his industry university faculty members are called CAVEmen: “Colleagues Against Virtually Everything.” I wasn’t quite sure how to take that.

Pat Crecine died a few years ago. He was the innovative Georgia Tech president who was instrumental in bringing the 1996 Olympic Games to Atlanta. Crecine recognized the future impact of computing on science, engineering, and technology and created the College of Computing where I was employed as dean from 2002 to 2009. When it was created in 1990 it was only the second such school in the world.

Crecine reshaped Georgia Tech and the LIARS had to lay low while he did it.  He was just too effective at changing large institutions. But it caught up with him. He was unceremoniously booted out a few years later.  It was a devastating personal blow to Crecine, and I don’t think he ever really recovered. At his memorial, former Atlanta Mayor and U.N. Ambassador Andrew Young said of Pat: “He was always right, and he always got everyone mad.”

A few weeks ago, I reminded Andrew Young of this remark, and he said that it was a role that Martin Luther King had given him.  He was supposed to be the irritant that kept them focused on a change agenda.

He said also that it was Jimmy Carter’s concept that political innovation is the result of three ten-day cycles.  First, everyone who is going to have to give something up, gets their forces aligned to kill a new idea, predicting that it would mean the end of civilization as we know it.  That lasts about ten days.

For the next ten days they grudgingly disect the plan, acknowledging that parts of it  actually make things better but that overall it will be a disaster.

The final ten days is spent taking as much credit as posssible for the plan, with a special effort to make it clear that the original idea was something completely different and remains truly awful.

I had drinks in Menlo Park  with Chuck House a few days before Thanksgiving, and we eventually got around to trading stories about Hewlett-Packard innovators we had known and worked with. Chuck is working on a case study of an intense, disruptive,  strategic refocusing of the company that occurred when it was about one tenth its current size.  I said I didn’t think it would be possible today, that there is very likely a law that limits innovation of that kind.

I brought up the idea of  LIARs and he started laughing immediately. Stamping out LIARs was one of the reason Dave Packard and Bill Hewlett tried to keep business units small: the biggest impediment to innovation is large established organizations.

The Internal Start Up: Heading for the Exit

November 17, 2010

It’s not only the clash of investment cultures that tends to doom internal start ups. At least that’s what I told the Bellcore and SAIC CEOs at the post-mortem for the internal division that we had tried to run as a venture-backed business.

It’s also what I said to Bob — who you will recall — wanted to incubate an internal venture inside his Fortune 10 company that would match in excitement and star power the coolest gang of Sand Hill Road funded misfits. He would have to be willing to sacrifice a boatload of management principles that had served him well in his career. I didn’t think he would do that.

Like a generous parent, Bob was in a position to give the new kids everything they needed for success: mentoring, time to succeed, and ample resources. What he did not have was a clear idea of which exit to take. Bob’s idea of a venture failed the value test.  A new venture succeeds when the right leadership team focuses on a market need with staged funding.  The idea was doomed as soon as Bob said,“Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.

The moment someone in a large company forms a thought like this, the options for maximizing the value of the investment are narrowed to one.  The only exit is one in  which access to internal resources can be used to shoehorn a fit into existing businesses. I had seen the danger of this kind of investment strategy at other companies, and the results were not encouraging. This thinking had infected our Bellcore start-up, but I have been in the executive suites of a dozen West Coast technology companies when the discussion turned to how the value of an internal start up was going to be captured by an existing business line.  It always turned out the same:  because there were no choices to a successful exit, backers literally threw money at the new company. They were thinking way down the line about how to succeed.

There are other options, but they do not necessarily align well with Bob’s goal of internal commercialization:

  1. Sell the technology: it’s always possible that the upside does not justify continued investment.  But if you’ve made a large up front commitment–as opposed to small increments that are tied to market tests– it is hard to execute this option and capture value.
  2. Licensing: the main reason for choosing  licensing as an exit is that there are differing value expectations in the marketplace.  The technology may be used in many different applications by many different players, for example.  You can maintain a central IP position and benefit from this diversity.
  3. Resell your R&D effort: if the technology is a critical product component, there may be other vendors who would like to benefit from your near-term “deliverables.” An R&D contract gives up a little IP in the short run, but you not only recover your development costs, you also continue to expand what you know about the technology and its applications. This is such an interesting–and seldom used–exit strategy that it deserves a post all by itself.  Watch for it!
  4. Sell the right to market or form a joint venture to market and sell: this is a range of exit possibilities that allow you to keep the option of bringing the technology in-house at some later point.  Of course, the attractive thing about such partnerships is that they generate revenue while spreading the risk around several players.
  5. Spin-out/IPO: the obvious counterpoint to the internal start up is to kick the baby bird out of the nest to see if he can fly on his own. I don’t know why our Bellcore start up was not conceived from day one as a spin out.  Bellcore, after all, had a history of spinning out companies to commercialize research technologies.  Some of those companies (Telelogue for voice menus, Elity for CM analytics, and a host of companies for communication network traffic monitoring and tools) were quickly picked up by angel and venture investors who went on to ride the businesses to their own successful exits.

Why Bob was determined to retain ownership in an incubated business says as much about internal corporate culture and priorities as Bob’s own approach to innovation. What seems to be missing when managers fixate on internal startups is the recognition that there are other worlds involved in the success of a new business, and they often  have very different rules.The internal start up is an opportunity for worlds to interact rather than collide. Here is the value chain that Bob had to work with:

  • Creative engineering: internal R&D interacts with a larger, external innovation community.  It  is very good at coming up with gap-filling concepts that need to be externally validated
  • Venture funding: is useful for establising performance metrics based on value and focusing funding to meet performance goals based on those metrics
  • Corporate resources: the company itself is in the driver’s seat.  It sets out the strategy for value capture and makes the option calls that start chains of transactions that are key to success. And by the way, the creative engineers call it home.

This all started because Bob was worrying that normal, internal product R&D would not lead to  “breakthrough product ideas that do not align well with their core business.”  It is a common problem, but there are three fatal errors that doom most attempts to solve it. Here’s how to avoid those errors.

First, don’t set the new venture up for failure by limiting the end game to only those ideas that align well with the core business.  That was what got you in trouble in the first place, and can be avoided by considering up front the full range of exit options.

Second, don’t pretend that you are a venture fund.  The fundamental belief systems are different, and it is simply not possible for a large corporation–one that has to worry about quarterly results and long-term growth–to capture value in the same way that a VC does.

Finally, recognize the role that interacting worlds will play in the success of your venture.  External innovation networks, market-validating communities and the relatively heavier weight corporate resources and processes have a tendency to collide, when what is really needed is a strategy for working together.

Investor vs. Investor

September 29, 2010

Internal start-ups have all of the usual new business challenges.  They need products, customers, and a profitable way of getting customers to pay for the products.  But above all, they need cash, because even the best strategy will crash and burn if money runs out too soon.

[Production note: at this point investors should enter, corporate investors stage left, venture capitalists stage right]. They speak the same language and are genuinely interested in incubating  great new businesses, but don’t let that fool you.  They are from different worlds.

promised to talk about some of the things that doomed the Bellcore internal start-up which I briefly led.  There is no way of  knowing whether a VC-funded company would have fared any better. In fact, one of the companies that we might have merged with was a venture-funded operation that lasted only a few months longer than we did.  Nevertheless, we did learn a lesson or two about corporate sponsorship of start-ups:

Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

Let me set the stage a bit.  In 1999, Bellcore (now Telcordia Technologies) was a small company (revenue creeping up on two billion dollars) that was trying to ride the internet wave, but it had inherited a corporate style from its previous owners that was, well, hierarchical.  Big deals dominated the business mix, and internal investment decisions were obsessively analytical.

Bellcore’s new owner was SAIC, a big company serving a hierarchical marketplace that was paradoxically entrepreneurial. Bob Beyster, SAIC’s founder, had insisted on a flat corporate structure in which managers were encouraged to develop independent business.  When my little start-up failed, I  made my wrap-up presentation to the CEOs of both companies.  One of them tended to believe that Bellcore’s internal investment machinery was the right way to grow a new business.  Here’s how it went.

  1. We spent a lot of  money on extensive analytics to gauge market potential.  It was how the investment decisions for Bellcore’s big operations support systems were made and every new round of funding was based on a rosy prediction of a complex market study. In reality, market behavior was unpredictable.  We should have evolved our concepts in the market.
  2. Except for the few top  technologists that I could steal from my own research staff, corporate investors would not permit top talent to be redirected from existing projects — where the  big customers were —  to this risky venture with uncertain prospects. Once both scale and success were clear, we could recruit internally, but until then, we had to rely on good-natured volunteers to help us out.  The only thing we could do was hire externally, but there was little upside to attract the kind of business team that we needed.  A VC sponsor would have known that new ventures do not succeed without a highly talented team.
  3. Speaking of success: the corporate sponsors were only interested if the likelihood of success was high, so we spent a lot of time on the success factors that would be convincing to them.  An angel investor or a VC would have known that, since the likelihood of success of a given venture is quite low, it is better to fail earlier rather than later.
  4. Corporate culture was a culture of ownership, so many business planning meeting focused on patents and intellectual property rights that would build walls around the business.  It was an unfortunate mindset.  This was a time of open standards and sharing, but shared ownership was not part of the equation for our start-up.
  5. Internal sponsors wanted to see scale.  Niche markets were simply not interesting. The business had to embrace all of telecommunications, so part of the operating strategy was to place many product bets simultaneously, a disastrous choice given the meager resources for product development and the lack of real experience on the part of our business development team.  A VC would have told us that a narrow, easily explainable, product focus was key to success.
  6. The corporate sponsors were all senior Bellcore executives, and they were focused on building the core businesses.  They believed that value creation had to be demonstrated by earnings. A VC would have told them that the market recognizes value well before earnings are even possible — it’s the single most obvious characteristic of early-stage investors to constantly seek those kinds of  market signals.

There were ways through this thicket.  That is one of the lessons for corporate leaders who want to launch internal start-ups: avoid colliding worlds by choosing the right corporate role.  Corporate sponsors need to be responsive to the needs of the new venture, but proactive support is just one more opportunity to infect the start-up an alien culture.  An internal start-up needs to be managed, but managing for value makes much more sense than managing to artificial revenue and earnings targets. And freaking out over the possibility of failure is also not helpful.  New business creation is a portfolio game, and any corporation that does not take a portfolio approach is betting against high odds.

An overlay to the story of every internal start-up is corporate machinery.  The milestones that mark the calendar for corporate sponsors are timed to fit the needs of much larger — and more visible — core businesses.  No billion dollar company can afford make its processes dependent on external business and market events.  But that is exactly what a start-up needs to do.  So, even if the new venture survives the Investor vs. Investor duel, it needs protection from the calendar, the  topic for my next post.

The Internal Start-up

September 22, 2010

Dilbert.com

I had a conversation the other day with a senior executive — let’s call him Bob —  of a Fortune 10 company about their “internal start-up” culture. It seems that they are looking for breakthrough product ideas that do not align well with their core business.  The solution seems obvious: let’s create the same kind of  exciting, market-driven environment that you would find in a start-up!

Everything sounded fine for a few minutes.  They thought that the most creative people in the organization needed to have elbow room that would be difficult to achieve in the risk-averse culture of a hundred billion dollar company.  So how did they plan to achieve that?

  • Freedom to break some rules:  the start-up can use its own  product roadmaps and sales strategies
  • Freedom from process-driven corporate calendars and budgets: the leadership of the start-up is not bound by the revenue and earnings goals of their parent
  • Freedom to take risks: they have permission to fail

It didn’t take long for the discussion to go seriously off track.  When I started in with questions about how they were going to actually pull this off, Bob said: “Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.” I had seen this movie before.  It’s called When Worlds Collide. When I suggested that Bob lives on a different world and would make a terrible venture capitalist, things got a little heated. As I recall it, Bob said, “In your ear!” A surefire way to put a fine point on your argument.

Bob lives on a planet where the scale of his business creates a climate for successful development of new products that can be sold to familiar customers using existing channels and tried-and-true processes.  Above all, in Bob’s world, it is possible to make big bets. The examples are impressive. Everything from HP’s inkjet printing to the Boeing 777. Unfortunately for Bob and his start-up, none of those things matter.  The start-up lives in a world of new markets, which means new customers, new channels and new processes.

Even though Bob has all the talent he needs for market success,  the likelihood of failure is high. The Newton and the Factory of the Future did not fail because  because Apple and GE could not innovate.  They failed in large measure because corporations foster a system of beliefs that is fundamentally incompatible with  taking capabilities to new markets. When I asked Bob  how the start-up employees were going to be recruiteed and rewarded, whether they had a safety net for returning to the company in case of failure, and how many simultaneous bets he was willing to place, the answers were not encouraging.

I immediately did a deep dive into my archives, hoping to find traces of a long-forgotten venture that I helped steer into the ground.  In the late 1990s Bellcore was poised to enter the online services business, hoping to attract newer, smaller customers than the seven  Regional Bell Operating Companies who accounted for most of the company’s revenue.  This was a time when Bellcore’s Applied Research group was generating a blizzard of patents in e-commerce and software, technology that I have talked about before. We were as smart and nimble as any West Coast start-up, and best of all we had the cash to fund a new venture, the talent to staff it, and the power of an existing sales team to go after those new customers. I was asked to lead the new company.  We would be funded just like a VC-backed start-up…

When the dust settled and I reported lessons learned to the Bellcore’s CEO Richard Smith and later to Bob Beyster, CEO of SAIC,  Bellcore’s parent company, the first thing I said was that there had been no structural reason for failure.  A team from McKinsey had already given us the range of possibilities. We could have set up an independent business unit or spun 0ut a company in which we retained minority ownership.  Setting up a new incubator would have required more time than we thought we had, and, in any event,  Applied Research was already in the incubation business. We had chosen to bypass corporate reporting structure and create a company-within-a-company with direct oversight by a CEO who was committed to our success.  It was exactly the Hughes DirecTV model.

There are three reasons that internal start-ups like ours tend to fail.  Bob was not in the mood to listen because he is banking on success, but the topic comes up in every large enterprise, so I thought it might be a good time to repeat the conclusions here:

  1. Failure is common: Building new business is a portfolio game in which 90% of the returns come from 15% of the investments.  It is fundamentally unlike product development. A “big bet” strategy only succeeds when there is high degree of confidence in your ability to sort out winners and losers.  In a new market, that just never happens.
  2. Market-driven milestones drive success in new ventures.  An internal start-up — even one with strong support at the top — cannot divorce itself from processes that are timed to fit corporate needs.
  3. Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

I want to spend the next several days elaborating on these ideas.  I hope Bob is reading.

A CTO’s List of New Year’s Resolutions

December 30, 2009

Dilbert.com

There are many ways for Chief Technology Officers to be undone.   Appropriately enough  — in light of  Friday’s  college football bowl fest —  being an effective CTO is  like being a college football coach.  You don’t actually do the blocking and tackling yourself, but you’ll fail if the fundamentals are not done right —  even if your game plan is perfectly constructed.  I will have more to say in an upcoming  post about game plans, but today I want  to recognize the arrival of the  New Year with a short note about the fundamentals.

George Heilmeier, former DARPA Director, Bellcore CEO, and the inspiration for my” Guess Who’s Coming to Dinner?” series[1][2][3] was a mentor to me and to many other  technology leaders .  One day I asked him for a bit of career advice, and he hauled out a Heilmeier list — twelve  rules for CTO’s to follow if they have any hope of navigating the many dangers of the colliding worlds of innovation and execution.  I quickly found out that, true to form,  George had reduced best practices to a few rules of the road because dozens of others had asked for the same advice.  They are fascinating and valuable bits of advice, and they range in scope from broad business fundamentals to technology and culture.   I haven’t come across anyone who thinks that they are not important lessons — not to tuck away for future use, but to internalize and use as a platform for technology management in any setting.  It was December , so I turned George’s list into New Year’s resolutions.

  1. For each “client” establish/conceive a list of technologies and initiatives that drive his business and a list of technologies and initiatives that could change his business.
  2. Use the Catechism to get people to focus on the real “care-abouts” when making investment decisions and establishing priorities.
  3. Establish the physical, economic, and manufacturing limits of the technologies and capabilities that drive the business today.
  4. Establish a good working relationship with your peers
  5. Establish what [insert name(s) of  your CEO and Chairman] real priorities are.
  6. Establish the metrics for success in their eyes.
  7. Don’t shy away from doing some near term problem solving.  It builds credibility and respect.
  8. Never have your peers or clients come to your office for meetings with you.  Go to theirs.
  9. Any display of arrogance will cost you. Don’t do it.
  10. Compile a list of “innovations yet to be made”
  11. Make sure that each program or initiative is output oriented not activity oriented.
  12. Learn the [insert your company name here] culture.  It is unique.

Have a happy and safe New Year, and, by all means, don’t get caught when worlds collide.


[1] https://richde.wordpress.com/2009/09/22/guess-whos-coming-to-dinner/

[2] http://wwc.demillo.com/2009/10/11/guess-whos-coming-to-dinner-part-2/

[3] http://wwc.demillo.com/2009/10/19/guess-whos-coming-to-dinner-part-3/

The Saga of Eric the Red and the Anthropology of Innovation: A Parable

December 28, 2009
Eiríks saga rauða (Saga of Eric the Red) Icelandic manuscript (17th century)

Eiríks saga rauða (Saga of Eric the Red) Icelandic manuscript (17th century)

In Murder, Starvation and Catastrophe, I drew a line to connect the historical behavior of doomed societies with the business performance of large enterprises.  One of the most compelling of Jared Diamond’s stories is the saga of Eric the Red, the 10th Century Viking who founded Greenland.  The preposterously named colony was eventually home to 10,000 Norse settlers who were perhaps fooled by the name into thinking they were heading off to some sort of North Sea resort for Vikings. The story of Eric the Red is a parable for how the human factor in WWC  promotes or stifles innovation.

Eric was a scoundrel.  A suspected murderer, he fled Norway for Iceland around 980 AD.  It was a short, but violent, stay.  He was ejected from Iceland, and, sailing west, discovered an island of fjords, glaciers and grasslands. He returned to Iceland long enough to kill a few people and recruit an expedition of 25 ships to build a settlement on Greenland. Despite their violent beginnings,  the Greenland settlers established a farming economy and a humane society, including a government that provided for the poor in times of scarce crop production.  The Viking settlers had sporadic wars with the Inuit natives, but apparently flourished for hundreds of years until sometime in the early 1400’s when they just disappeared.

It was one of the great anthropological mysteries of all time:   how could fierce competitors — apparently successful  in a new environment that was not much different than the one they left behind – suddenly fail so catastrophically that their entire society was wiped out in only a few years? When archaeologists excavated the Greenland settlements, they found the usual trash of human civilization:  tools, debris, the remains of livestock,  and garbage from cooking.  But they found no fish bones.  The Norse Greenlanders were expert seafarers who lived in the world’s richest fishing waters and inexplicably starved to death because they did not eat fish.

The Vikings brought with them the culture and preferences from home. They brought food:  pigs, cows, goats,  and sheep.  The Norse knew how to grow crops in cold climates, so they planted crops like barley, oats, wheat, rye, cabbage, onions and peas. They hunted seal for food and  traded  walrus ivory with Europe  for material not available on the island.

By 1400,  demand for ivory, polar bears, and other luxuries from Greenland fell. Black Plague had wiped out nearly half of Europe’s population.  The Crusades opened new sources of ivory and spices to the now smaller market in Europe. The early 1400’s also marked the beginning of the Little Ice Age, blocking natural water inlets and delaying the arrival of migratory seals.  Deforestation left Greenlanders short on lumber, fuel, and iron.  Climate change and poor crop rotation led to crop failure, so the settlers consumed pigs, cows, and sheep to the point of extinction.

They had cultural inhibitions.  They did not eat their pets, for example.  They could have learned to hunt fish from and traded with the Inuits, but the Norse regarded the natives as pagans. Greenlanders were Norse, and they thought of themselves as dairy farmers.  When Eric the Red founded Greenland, it was uncharacteristically temperate —  a special time when their cultural preferences led to success.  They relied on past behavior and — when the climate changed, relations with friends and enemies faltered, and their environment was damaged —  they starved to death.

15th Century Greenland has something in common with IBM  in 1980:  a belief that historically successful behavior will succeed in the future. The Norse preference for pigs and cows required them to dedicate more time and grazing land to those animals than to the heartier goats and sheep.  Their Euro-centrism prevented them from learning from and adopting the eating habits of “pagan savages.” The thinking appears to be that their lifestyle was successful in Norway, so there’s no reason it shouldn’t be successful in Greenland. On the other hand the Norse settlers were not great innovators.

Thomas Watson Sr, understood the role that innovation would play in the company’s future. He opened IBM’s  first dedicated research center next to Columbia University in 1945 and the results were immediate, spectacular innovations including time sharing and  magnetic core memories.  Thomas Watson, thinking it was too risky to continue having its research done in the relative open environment of a joint university lab, and using Bell Labs as a model, established dedicated corporate research labs in New York and Zurich. This ushered in a golden age for IBM.  By any measure of success—sales, market cap, profits, patents, R&D budget—IBM,  and  in many ways,  defined the industry.

Then came the 1980’s and its disruptive changes to the computer industry. These  changes were not kind to IBM and in 1992 the company reported the single largest annual loss in U.S. corporate history to that point: $4.96 billion after taxes.

How did this happen?  Unlike the Greenlanders’ demise, this one isn’t a great mystery.  The Watsons believed fervently that doing the things that had made IBM a great corporation would make it successful in the future.  IBM knew how to profitably sell computers and to whom.  After all, they defined the industry.  There is a widely known internal 5-year forecast of worldwide PC sales that shows shipments peaking  at less than 80,000 units in 1983 before settling into a comfortable rate of 40,000 per year by 1987.  Less than 250,000 over the five year period.  5% to business customers who would continue to rely on IBM mainframes.  In fact, over a million PC’s were sold by 1985.  The industry was in the midst of explosive change and not only did IBM did not recognize it but they believed that past success was a predictor of future success.

But by 1982 it was all over. If IBM had recognized the value of the PC, they would have kept it proprietary and the computer industry would have developed very differently.  Without its IBM  licensing deal, Microsoft would have withered early.  Intel would be a niche player.

IBM, Xerox,  AT&T, and Nortel were all  innovative companies.  They hired the best and brightest – and there was low employer mobility since after all how many places were there for a computer science PhD to work?  The IBM Research Lab in Yorktown Heights developed and incubated products in the historically successful vertical way.  The barriers to entry for IBM’s  competitors (especially the small ones like Compaq and DEC) were huge. How could a small competitor build a direct sales network to rival the famed Xerox sales force?  What did an academic startup like Cisco,  aimed at the tiny data network market, have to do with the output Bell Labs or the market clout of Nortel?

This is how innovation looked at the end of the last century. It is too easy to draw conclusions about why old models stumble.  An apparently obvious lesson from the story of Erick the Red is that  the Little Ice Age caused the Vikings to die off in Greenland. Current conventional wisdom is that the technology giants stumbled  because they were too old or rigid or bloated to compete smaller, nimbler competitors who were themselves innovating although in very different ways.  Actually neither is really true.

It is simply built into the fabric of innovation that the marketplace is an environment – you have to adapt to it to survive.  If people want low-cost computers then drive cost out of the manufacturing process and learn to prosper on thinner margins. There are occasionally companies that try to change the environment.  Hewlett-Packard grew for 60 years on a simple business model:  innovate to create a product category and ride market growth until the margins shrink.  Then exit.  The ink jet printer is such a product — and there is much discussion in HP about exit strategies for ink jet printing. So was the hand-held calculator.  Most companies cannot imitate those successes. HP eventually faltered when it tried large scale environmental engineering with its failed acquisition of PWC and the gut-wrenching merger with Compaq.

So, if adjusting to the environment is the answer, why didn’t the Greenlanders just start eating fish?  The Greenlanders damaged their environment through poor livestock selection, clear-cutting forests and poor crop-rotation. There was significant climate change brought on by the Little Ice Age. The Inuit qualify as hostile neighbors.  They had friendly trade partners for many years, but eventually lost them.  But above all,  the Norse Greenlanders’ response to these factors was culturally based.  They didn’t eat fish  because it was not viewed as a reasonable option in their culture.

Innovation is frittered away because it is not viewed as a reasonable option in a company’s culture.  The structure of leadership accounts for a lot in determining the role that culture plays.   Distant, authoritarian, decision-making tends to rely excessively on the past as a predictor of the future.  Microsoft’s Steve Ballmer said as much  in a 2008 speech at the Stanford Graduate School of Business:

One of the biggest mistakes I’ve made over time…is not wanting to nurture innovations where I either didn’t get the business model or we didn’t have it.

Examples abound. The HP Jornada™ pocket PC could play MP3 music files before the  iPod™  hit the market.  But there was no HP music store. Running an online music store was not an HP competency.  There is a certain — sometimes irrational —  optimism that past success engenders in leaders at the precipice.  When Mike Zafirovsky took over as CEO of Nortel Networks in late 2005, it was a company on the brink of failure.  Massive layoffs had decimated the iconic Canadian company.  In early 2006, I was escorted for the last time through its cavernous Toronto facility — a building laid out as a city with streets and parks — just before it was shut down.  All you could hear was the click of heels reverberating down the empty faux boulevards. Mike Zafirovsky wanted to communicate his energy and sense of the future to the demoralized employees who remained.  His first email  in December 2005 to Nortel employees defined the tone of his administration and sent the company down a path that emphasized execution of a plan that emphasized ideas that had worked before:

To Nortel employees,

Last Friday night, as I was flying back from a very productive trip to Europe following several customer and employee visits, I came across a newspaper article entitled “Optimism Puts Rose-Colored Tint in Glasses of Top Execs.” Included in the article were quotes like:

“99% of CEOs thought they could lead their companies from crisis;”
“Optimism is all about possibilities, change, hope…without those qualities, how can any leader succeed?;” and,
· “By definition, leaders are slightly delusional.”

My first reaction was to take exception to the word “slightly” . . . .

Seriously, the question of our confidence in ourselves—and as members of Team Nortel—is something I will begin discussing today and a topic I will continue to raise in the coming weeks and months. Confidence in ourselves and each other will be critical factors in how far and how fast we take this 110-year-old company..

I discussed with you in a previous letter our plans for the BIG initiative (Business Transformation, Integrity Renewal and Growth Imperatives), our new leadership values, and our focus on people that will be rolled out as part of Session I in the first quarter. In my first few weeks, I have also spent time evaluating our relative strengths and weaknesses and pinpointing areas for improvement.

My strong take-aways and beliefs are that our positives are significant and difficult to replicate. At the same time, our challenges are also significant but, I would argue, very fixable. I don’t believe I am looking through rose-colored glasses, but rather have adopted what I describe as an attitude of “forceful optimism.” This is a mindset, a belief and an attitude that I expect from everyone at Nortel—a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.

Forceful optimism is one of the 30 action attributes supporting our recently-defined Nortel leadership values. And as promised in my last letter to you, I worked with select members of the Leadership Edge program and cabinet members to finalize these attributes before year-end.
[…]

As a positive heads-up to the many people who were hoping to be on the Business Transformation teams, we will be kicking off the Six Sigma Quality Program in the first quarter, and there will be opportunities for involvement and leadership. We will be looking for Six Sigma champions and master black belt, black belt, and green-belt candidates (much more on this early next year).

The combination of the Business Transformation initiative and the Six Sigma Quality Program will improve the basic equation of our business, including higher customer satisfaction, simplified processes, lower cost-of-rework, fewer quality issues and lower costs for our products and business structure. And we’ll see teamwork inside the company improving as a result. We will continue the focus on forceful optimism, leadership and our people agenda by launching our Session I program in the first quarter. The programs and initiatives we deliver as part of Session I will ensure we are building strong leadership capability and bench strength across Nortel.

Lastly, and arguably most important for the long-term health of the business, here are my thoughts on customers and the Growth Imperatives, which you will be hearing much more on throughout 2006. I am meeting and speaking with an increasing number of our customers (e.g. the four largest European customers last week) and our go-to-market and product management teams, and I can’t wait to attend our global sales conferences in January. In my straightforward view, good, profitable growth is to a business as air and water are to flowers. We have much to build on and also much work to do, including how we develop meaningful value propositions for our customers. To this end, I am excited to report that we will be introducing our new business mission at the sales meetings. It will guide much of our behavior externally and internally, and keep the focus where it belongs—on our customers.

Let me wrap it up by saying how privileged and proud I am to be leading Nortel and to be working with all of you. I wish you and your loved ones a relaxing holiday and warm wishes for a healthy, happy, and prosperous 2006.

Thank you for all you are doing for Nortel.

Mike Z

Mike Zafirovsky is a capable senior executive, an alumnus of Jack Welch’s CEO boot camp at GE.  He was part of a long string of strong leaders that Nortel recruited to put the company back on track.   He could not have anticipated the Little Ice Age of late 2008, but by New Year 2006, Nortel was already hurtling toward disaster.  Its stock was delisted and the company was shrinking.   I asked Mike about industry changes, but he did not react.  There was no sense of urgency at Nortel. There was a sense that the telecom equipment market was not an environment at all and that what really mattered was the company’s belief that its current direction would take them back from the edge: “a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.”

In January 2009, Nortel filed for protection from its creditors. Its main businesses are being sold. When that is complete,  it will cease operations. Zafirovsky stepped down as CEO in late 2009.

One of my first projects at Bellcore  was to redefine its core software business for the emerging ISP and Cable markets.  The climate was changing in the early 90’s.  Bellcore sold  operations support systems – a sort of ERP for telcos.  A typical sale was in the $25-30M range and $100M deals were not unheard of. So we rolled up all the functions that we could think of – customer acquisition, provisioning, engineering, support – and came up with a product that we thought we could sell for $15M.  When we showed the requirements to cable operators, they just shrugged.  They were using Excel spreadsheets which cost them essentially nothing.  Today, Bellcore — operating under the name Telcordia — leads in none of the operations support or business support markets that defined its core business in the 1990’s and is not even in the top ten in cable and ISP markets.  What they really wanted help with were the services that they could sell to their customers.  One of those services was search.  Another was customer aggregation.  Both were areas in which Bellcore had fundamental patents.  One for the “seed” that underlies virtually all search engines today.  The other for “recommender” technology that underlies all social networking. The search technology was given away to Excite.  The recommender technology was assigned to MIT’s Media Lab and eventually became part of Amazon’s recommendation engine.  We were not in the lightweight database business – although there were many smaller competitors who were.  We were not in the search engine or social networking  businesses, although we had friendly relations with companies that were and had many university collaborations.  We were in the software business.

Great Meeting, Bob

November 9, 2009

It’s come up a few times  in  recent weeks.  Here’s the scenario:  I am meeting with Bob,  the CEO of a start-up who’s just returned from a two-week sales tour — three Fortune 100 companies, three mid-tier suppliers, two government agencies, another early-stage technology company, and a university research center.

“How did it go, Bob?

“Great, every meeting was a home run.  They liked the product.  They liked the technology.  They really liked the company.”

“How many orders did you sign?”

“None, yet.  But they all asked me to come back.  Except for the university guys, and they wanted copies of my presentation. Lots of excitement about this stuff!”

If you’re in the innovation business, the last thing you want to hear — even if you make the improbable assumption that everyone was telling the truth — after a meeting that doesn’t close a sale is “Great meeting, Bob!” It’s a sure sign of impending catastrophe as worlds collide.  I’ve talked in other posts about conflicting agendas and how the need for technical recognition can shape an innovator’s view of what is actually taking place. The great meeting phenomenon goes beyond that.

I was in the lobby of Netscape Communications a few days after its 1995 IPO, waiting for a former colleague who had promised to set up a series of technology exchange meetings between Bellcore and Netscape.   Bellcore  had just filed patent applications for two server technologies that we knew would be important to Netscape, and we were hoping to license them.  One was for buying and placing ads on web pages, and the other was for video streaming.  I had been in meetings like this before, and it was good to know that there would be a couple of familiar faces on the other side of the table.  So I sat there watching visitors file in and out.  There were a couple of guys dressed in three-piece suits, clearly bankers.  There was a Hollywood type with massive  gold chains around his neck — he and his two handlers had just rolled out of a black Town Car.  There were two kids in the corner —  complete with sandals and dirty tee shirts  — who looked like they had just crawled out of a basement.  Lots of khaki’s and blazers and  Madras shirts with pocket protectors.  I remember trying to guess who they were there to see and what they wanted from Netscape.  Except for the guys in the suits, who were quickly escorted  past security, we were all ushered in turn to small  conference rooms off the lobby. I realized in a moment of panic that I had no idea what Netscape wanted.

The meeting was awful.  The Netscape executive I really wanted to see was off doing other things (something about buying an Irish castle).  My contact was selling, not buying.   After about fifteen minutes of nervous chit-chat we agreed to keep in touch.  But not before I asked about the strange collection of visitors in the lobby.  “I’ve been in lots of technology companies,” I said, “and I’ve never seen anything like it.  I see why the financial people are here, but what do you think is going on with the others?”  What he said stunned me, and as soon as I left the building I wrote it down.  “We don’t know,” he said. ” The guys in suits are from a Russian software company, and we get a lot people who just want to stop in. It’s chaos.”

I’ll tell you in a later post what happened to our technologies, but Netscape did not figure prominently into Bellcore’s future.  They were not excited.  They told me almost nothing about their business.  They did not want to know about ours. It was not a great meeting.  It was the best thing that could have happened to us.  I want to use Bob’s great meetings to explain why.

The University Meeting

Let’s first dispense with the university meeting.  Universities are in the great meetings business.  Professors give great talks.  They are great listeners.  All it takes for a  great university meeting is a great story told well.  There are some possible positive outcomes.  For example, Bob could have heard about a new invention that would help the business, but that would have involved the university selling to Bob.

The Government Meeting

Government agencies do in fact buy from small companies, so it’s not hard to imagine a meeting with a good outcome.  It depends on who is in the room.  A meeting of technologists is all about learning what Bob knows, and they are inclined to lavish praise on anything they can use to sell ideas and programs internally.  That’s literally what they have to spend.  The outcome of almost every other meeting with a government customer is irrelevant to closing orders.  Bob may hear about proposal opportunities or new programs that the company is qualified for, but government employees never show up pen in hand ready to write a check.

The Meeting with Another Early Stage Company

If a meeting concludes without an order being signed, it’s because they are the C-O-M-P-E-T-I-T-I-O-N. They are thrilled to hear what you’re doing.

The Meeting with a Bigger Company

Big company meetings are the most dangerous. Almost everyone is interested in what Bob knows.  Engineers run internal projects and Bob is the ideal guy to help educate them.  Marketing casts a wide net looking for trends and intelligence. Who better to help them out than the head of a company that has just acquired investors and is thinking day and night about what new customers want?  General management doesn’t have time to spend on a meeting (Irish castles, remember?) and mid-level managers, who are not inclined to spend money, know that, if you keep coming back, they are buying time in a possibly interesting market.  Bob could have snagged a meeting with someone who manages vendors, and it might have led to a sale, but it would not have been great.

What I said to Bob was “Great meetings lead nowhere.”  Every one of Bob’s  meetings was designed to transfer value away from his company.  Everyone he met with was so thrilled with this that they told him how much they liked him.  He educated companies with greater resources and provided fodder for PowerPoint™ presentations by technology managers.  All for the price of a sandwich and a bag of chips.  And they were willing to do it again.

My Netscape meeting was awful, but I learned that

  1. We were a small slice of a value chain that we didn’t understand;
  2. Innovation bubbled all around Netscape, and they did not need to get on a plane to New Jersey to get access to it;
  3. The market looked as chaotic to Netscape as it did to me.

A great meeting with Netscape would have felt good.  They could have said how important we were to their success or how much the Bellcore patent portfolio meant to them.  I could have come away feeling that the 1995 golden child had the market all figured out.   I could have been enticed to go back for a second or a third meeting.  None of those things happened.  Instead, Bellcore started its own e-commerce company and for a brief while was a smaller, dimmer but still exciting star.  The star eventually fizzled, but that is a different colliding worlds story.

I was once on the board of a start-up with new technology for analyzing transactions to determine probable future customer behavior.  It was in  the earliest days of CRM and almost no enterprise-ready products had hit the market.  Every  financial services company had internal projects in this area and wanted to have a meeting to hear what was up.  I made introductions within my own company, although I told the CEO to not waste his time, because we were engaged in ten simultaneous discussions with large software companies.  Every six weeks the board heard about a string of successful meetings — great meetings.  A lot of them were great, but not one led to a dollar of revenue.  The company was eventually sold at  a huge discount to a  much larger company where there had been a great meeting years before.  How much better off  everyone would  have been if, instead of a great meeting, there had been a little blood on the boardroom floor.

Beware Sharp Edges!

October 23, 2009

BewareSharpEdges

I am sometimes chastised for saying it out loud, but engineers have a hard time with context.  Every physics homework problem that advises, “ignore the effects of gravity and friction” adds another brick to the wall that separates solutions to technical problems from solutions that are meaningful to customers.  I am not making a value judgment.  In fact, we would never make technical progress at all if every possible real-world variable had to be taken into account at the outset of a project.  An engineer once worked for me who insisted on starting every engagement with “What do we mean by reliability?”  before listing all of the possible ways that a system – any system, not necessarily just the one we were supposed to be talking about – could be unreliable.  None of those discussions ever came to a satisfactory conclusion.

However, as we saw in “Well, what kind of fraud is it?“, worlds collide when there is confusion about context. The collisions are damaging to business and sometimes it is impossible to recover from them.  It may be a technical feat to hone the edges of a warning sign to lethal sharpness, but it is not the purpose the sign.

Corporate culture can make it hard to blend context, and it is especially hard for companies with strong engineering roots to draw the line between valued technical advice and technical value that can be delivered to customers.  There was an internal joke at HP:

How can you tell where the sales meeting is?  Look for a dozen white Ford Tauruses in the  visitor parking lot.

The typical HP company car was a white Taurus, and it was common to hold customer meetings in which HP engineers outnumbered customers by five to one or more.

There is one sure-fire way you can tell that engineering culture is driving the business operations to a destructive collision.  I call it the catalog rule.  Imagine a sales meeting with N salesmen and M customer representatives.  One of the salesmen should be able to arrive with all of the sales material and, regardless of how large N is, there should be only M sales packets on the table — one for each of customers.  It happens so often that there are M times N catalogs on the the table that you sometimes scarcely notice it.  A customer wants to buy a solution to a complex problem. At the first customer engagement, glossy specifications for all of the carefully engineered component parts are dumped on the table.  This is the point in the meeting where the customer is supposed to have a flash of insight, leap to his feet and start congratulating the engineers.  In the real world, however, the reaction is a little different.   Very few customers want to be their own system integrators. My former Telcordia Applied Research colleague Dennis Egan puts it this way: “Our engineers just want to see their stuff used.”  It seems like a simple thing to ask for, but sometimes this urge for appreciation trumps all other concerns.   In particular, it can confuse the true business context, although you might have to look hard to find it.

It wasn’t that long ago that choosing a data communications service was a confusing and expensive task.  Many telecom customers chose the safe path and called their traditional voice telephony service providers, although it was frequently a big mistake to do that.  Data services in 1995 were a jumble of  software and hardware standards,  confusing pricing models, and regulatory inconsistencies.  A phone call to Bell Atlantic in 1995 inquiring about ISDN service inevitably led to questions that few commercial customers and almost no residential customers could answer.  The question “How far are you from the Central Office?” would usually be met with: “What’s a Central Office?” Because maps and engineering diagrams were frequently inconsistent, an ISDN customer would sit patiently through explanations of loads and coils and why the service probably would not perform as advertised anyway.  A thick reference book titled Engineering and Operations in the Bell System, published by Bell Labs, was given to every engineer in the company. Later, after the 1984 divestiture of the regional phone companies put the physical plant in the hands of seven independent regional operators, Bellcore maintained Engineering and Operations as the network engineering manual for all telephone infrastructure in the country.  By the time DSL service became widely available in 1997, Engineering and Operations specified a work flow diagram for providing DLS service to a single customer with steps that could only be completed after a hundred other independent steps all were completed.

These were the early days of e-commerce, and a clever group of entrepreneurs formed a company with the wonderful name Simplexity to simplify the life of telecom customers in the new age of data.  They had been buoyed by Michael Dell’s brilliantly simple business plan for the company that was to be Dell Computer™:  four pages that said in plain language that it was a hassle to buy computers and that virtually every potential buyer would choose to make a single phone call directly to a manufacturer if it would cut the hassle.  Buying data service was a hassle, too.  Simplexity’s founders reasoned that the 1997 equivalent of Dell’s single phone call for telecom services was this simple website:

Simplexityloginscreen

By negotiating with service providers for a percentage of all subscription fees – a process that was well understood in the industry because resellers of voice and data services were common – Simplexity was able to project a steady growth in revenue as data customers chose the Dell direct-sales shopping model.  Their first few customers apparently verified the market hypothesis, and Simplexity was one of the start-up successes of 1997, raising substantial venture funding and positioning itself for a successful IPO.

The engineering was flawless.  Simplexity’s Virginia-based development lab looked a lot like silicon valley start ups: an open floor plan with ping pong tables, bean bag chairs and board games scattered everywhere.  Java programmers seemingly fresh out of high school chattered excitedly about the next generation of services that would be marketed through Simplexity.com.

Then Simplexity’s revenue growth stalled.  The large number of smaller contracts that investors had anticipated did not follow the small number of large, early contracts.  In fact, new revenue began to decline even as data services began to explode.  Surprisingly, reseller revenue continued to rise as new customers shopped around and additional data service contracts were added to existing customer accounts in record numbers.  Simplexity began cutting its technical staff and adding traditional sales staff to compete head-to-head with the resellers.  This undercut the cost savings as Simplexity found itself paying more in commissions to order-book-carrying salesmen.  By early 2000, Simplexity had run out of cash, and, shortly after that, the company ceased operations.

In my discussions with company executives it was clear that they understood only too late that Michael Dell’s model did not work in telecom.  Customers had been purchasing voice and data services from human salesmen for years and the inherent inefficiency in doing that was more than offset by the personal relationships that drove sales.  A website – no matter how efficient – could not replace the long-standing social ties between buyers and sellers.  Simplexity was a great technology in a marketplace that did not need it.   The Dell model was a red herring.  Dell worked in the PC marketplace because there was no longstanding and trusted way of buying computers that had to be displaced.

Why didn’t Simplexity’s market research expose such a basic flaw in their business model?  I attended Simplexity’s early customer briefings – meetings for engineers aimed at selling their technical advantages.  They went out of their way to avoid positioning themselves as just another vendor.  Meanwhile their bricks-and-mortar competitors were fighting it out over who would get the next order.  It was “just another vendor” who got the order.

This is the message that I give to new start ups:  if it’s a choice between an exciting technology meeting and a boring sales meeting at which you are just another vendor, choose boring.   Your customer may not understand it, but if your product is really that good it will outshine the competition anyway.   And, if you are in a vendor meeting, chances are someone  is interested in buying.   It may be more exciting to warn everyone about your sign’s incredibly sharp edges, but that’s not the real reason it’s there.

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