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

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.

L.I.A.R.

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

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.

Holding the Middle by Nibbling the Edges

One of the consequences of the e-pill scenario that I painted in my Ephemeralization post is the increased threat to colleges and universities in the “middle.”

Most American colleges and universities lie in the middle between the seventy or so top institutions that are wealthy enough to set their own agendas — even in tough financial times — and the proprietary, for-profit universities whose growth seems to be unperturbed by the financial meltdown of the last couple of years.

For many universities in the middle, online instruction threatens to hollow out their value. This is especially true for those institutions whose courses have been charted to follow the elites. When I raised the possibility of new kinds of technology enabled courses, the reactions were predicable:  lots of reasons that the online experience was vastly inferior to in-person instruction.  If that’s the value that the middle is holding on to, then the rapid embrace of online courses by top institutions is a real threat as larger numbers of the best students enroll in elite online courses and  price-sensitive students continue to choose the customer-friendly, jobs-oriented online programs at proprietary colleges.

Now in today’s The Choice blog at the New York Times, Rachel Gross asks:

“What if you could graduate from an elite university without ever stepping foot on campus — if instead, you had merely to open your laptop?”

The implications are staggering:  no more artificial size limits for entering freshman classes; elite curricula repackaged; focus on market share. Can an elite institution enroll fifty thousand students?  In 2000, executives at Hewlett-Packard asked whether HP could profitably produce and sell a forty-nine dollar printer.  They are really the same question.

In both cases, the answer is yes, but only if you can figure out a way to grab and hold increased market share with increased quality and service. As HP found out, you cannot turn your value proposition upside down by nibbling around the edges.  You have to be prepared to dramatically change your business model.

If Rachel Gross is right, then top-ranked institutions are already making this leap.  No more arguing over the drawbacks of online instruction or snarky comments about the low-brow nature of the  for-profits.  That means some at the top have already figured out new business models. If so, they are not talking about it. Whether it is a razor-and-razor blade platform, a cost-cutting approach to commoditized courseware, or a hybridized delivery model, every advance at the top threatens the stability in the middle.  I don’t think many will survive by nibbling around the edges.

dy, dynac, and Carly Fiorina

I recently heard from Chuck House, co-author with Ray Price of The HP Phenomenon (THPP) about my post The dy Logo.  I had used Chuck’s book as a jumping-off point for a discussion of how difficult it can be to integrate “outsider” cultures, even when the outside ideas have obvious value —  like correctly orienting the logo on a consumer product. It was a riff on WWC that I enjoyed writing.

Chuck’s note was a wonderful read in itself.  He took good-natured issue with some of my characterizations, reinforced other points that we agreed on, and reminded me of a few things that I should have remembered (and were in his book).  I don’t have Chuck’s permission to publish his email in its entirety, so I won’t.  Nevertheless I wanted to share with you a couple of his observations.

First of all, Chuck pointed out that the “dy” logo was actually used at HP in the 1950’s.  From page 64 of THPP:

A spin-out corporation…Dynac allowed a number of HP employees a higher equity stake in their success while giving HP a chance to invest in areas adjacent to its main activities. Dynac’s logo was the HP logo inverted. Later, when it was found that the Dynac name was trademarked, it was renamed Dymec, keeping the same logo.

There are many wonderful things about this story, but I was most fascinated that — even in the 1950’s — corporate leadership would have invented such a thoroughly modern approach to identifying and seeding market adjacencies. Some things were lost over the next couple of decades.  At least, there is no indication that Steve Wozniak’s management was inclined to create a spin-out to  give “HP a chance to invest in areas adjacent to its main activities.”  In any event, most of the HP engineers who argued for keeping the “dy” logo were not even born when Dynac used it, so it is unlikely that their resistance to flipping the shield was a nostalgic bow to a prior golden age.

Chuck went out of his way to reaffirm the comments in his book about Carly Fiorina’s positive  impact on HP.  Despite the obvious oustider-insider clashes, he says that, ” I don’t buy that Carly introduced WWC to HP, or even that she was all that good at it herself…,” but he does think that “…she was the best CEO we’d ever had in a WWC regard by quite a long ways (except Hewlett when he would actually do it…).”

To temper my comments about the narrowness of  THPP’s sources, House described for me the considerable pain and expense that he and Price endured in preparing the research.  Ninety percent of the people interviewed about events in the last fifteen years were what Chuck calls “current participants.” It’s hard to characterize that as the reminiscences of old colleagues. Point taken.

It was interesting to me that Carly opened the HP archives to House and Price.  That access was eventually revoked.  In fact, by 2001, access to the archives had become a sensitive issue with Carly, and she asked me to undertake a review of both the libraries and the archive.  I was not very excited about doing it, and other events quickly had a higher priority.

For Chuck’s unvarnished “side-by-side” view of recent HP CEOs — along with a pretty striking analysis of value given versus value received — I will simply point you to his recent blog on the topic.

The Technology Committee

San Jose Mercury News (CA)

December 23, 2001
Section: Business
Edition: Morning Final
Page: 1F

VC LEGEND LEADS CHARGE FOR HP-COMPAQ
WITH TIES TO BOTH COMPANIES, PERKINS HAS UNIQUE PERSPECTIVE
MATT MARSHALL, Mercury News

Thirty-six stories above the placid blue waters framing Alcatraz Island and the Golden Gate Bridge, Thomas Perkins fidgets in his chair. If conversation lulls, his thumbs twiddle impatiently. He is a man driven by ambition. Perkins, 69, has turned his Silicon Valley venture capital firm, Kleiner Perkins Caufield & Byers, into the most successful VC firm in the world. Kleiner Perkins has returned around $20 billion to investors over its 30-year history. But Perkins‘ impatience comes from his latest, unexpected challenge: the bitter battle over the proposed merger of Compaq Computer with Hewlett-Packard. As a board member of Compaq — and former executive at HP, the Palo Alto computer firm where he cut his teeth more than four decades ago — he has become one of the most outspoken backers of the merger. But some HP heirs — sons and daughters of founders William Hewlett and David Packard — have signaled their intent to vote down the deal, saying a merger doesn’t make economic sense. They also say the layoffs likely in a merger threaten to ruin HP‘s vaunted tradition, the so-called HP Way, which they say emphasizes company loyalty…

…A merger will create a mammoth company that can take on giant IBM — and beat it. HP and Compaq, he explains, have better ties with Microsoft and Intel — two other key protagonists in the computer industry drama. Together, he says, the foursome create an industry standard that can easily outdo IBM. ”Microsoft will be the software department, Intel will be the hardware department, and HP–Compaq will be the marketing-customer delivery department,” he says. ”Wouldn’t you go for it?” In part, Perkins is fighting for Compaq. But he also is fighting for his right to interpret the legacy that Packard and Hewlett left for Silicon Valley..

I remember opening the paper a couple of days before Christmas, 2001 and feeling like I had just been kicked in the stomach.  It was not the best time to be an officer of HP. Bill Hewlett’s son and HP board member, Walter, had come out swinging against the HP-Compaq merger, and Carly Fiorina, my boss, was under incredible pressure to sell the deal despite howls from the local press, the Hewlett and Packard families, an active message board for HP employees, and now a fractious board of directors. And there it was in black and white in the morning paper:   Tom Perkins, a Compaq board member and a driving force behind the merger had a plan to turn HP — the company whose logo said “invent” — into the marketing department for Intel and Microsoft.  I had to think hard about how I was going to face my own Technology Council and reassure HP’s 12,000 engineers that — despite what Perkins said in the  interview —  the company was not backing away from its commitment to innovation.

Earlier in the month, Carly had invited us to her house for a very low-key holiday celebration — much more subdued and informal than the elegant holidays parties that were the custom when the company was doing better.  Carly had paid for much of it out of her own pocket.  It  turned out to be a  tense and not not very festive evening.  Carly was running on a few hours of sleep, and the rest of us were trying to tie down the ship’s rigging in the middle of a storm. There was an air of uncertainty. We sat around smaller tables with our spouses as dinner was served.  Carly and her husband Frank were at an adjacent table.   As much to break the tension as anything, the discussion at our table turned into a silly  guessing game over which actors would be cast to play which of us when the HP-Compaq Merger Movie was made (West Wing star Allison Janney was the consensus choice to play Carly).   We must have been loud, because I could see Carly stiffen.  Carly didn’t know who on her own staff she could trust, and it must have sounded like we were tossing off the seriously difficult times that would be coming for HP and its employees.  We weren’t.

I spent virtually all of my time that winter keeping our major technology initiatives on track, promoting strategic product directions with customers, and talking to our engineering teams around the world.  The outcome of the proxy fight was uncertain and there would have been antitrust repercussions if HP and Compaq had gotten too cozy, so Webb McKinney, who was in charge of HP’s side of the integration team and the clean room that allowed the companies to begin planning merger details without violating antitrust laws, kept most of us with day-to-day management  responsibilities in the dark about post-merger plans for technology and products.

Once shareholders approved — by a hair’s breadth — the merger, Perkins was named to the board of the new HP.  Compaq’s  Shane Robison was named to a new position that combined my old CTO role and a Chief Strategy Officer position that had not existed before. I was still concerned about the Perkins comments from his December interview.  My first encounters with the Compaq technologists were not encouraging. I got into a shouting match with one of Robison’s staff members about how much HP should be investing in security for its products.  This was less than a year after the 9/11 attacks, and I had been working closely with CTO’s of other Silicon Valley companies and federal agencies to forge a comprehensive strategy for information and communications security.  The official Compaq position was that this was a problem for Microsoft, not HP, and I was told to keep quiet about it.

Imagine my surprise when Perkins and Robison led an effort to form a Technology Committee for the HP board to oversee and track R&D the same way that Audit, Governance, and Compensation Committees oversee financial  and operational matters.  I didn’t always agree with the direction it took, but it seemed to breathe new life into a technology governance process that had been stalled for many months.  Prior to that, HP — like most companies — did not place much visible  faith in its board to integrate technology into corporate governance.   There were a few public boards that had technology committees. They had been prominently featured in the  magazines for directors that wrote about best board practices, but those articles were disappointing:  most existing technology committees were for  informal oversight of technology spending by CIO’s.  What Perkins was  proposing was something different — and so at odds with his public statements about the value of a merged HP and Compaq that it took me a little while to catch on.   The HP Technology Committee would not only monitor  technology developments, it would help educate the board about new trends and directions that would impact board-level decisions and provide informed advice on the technology implications of financial and personnel decisions, including how to maintain a workforce advantage.

A committee like this would have been helpful years before, because HP had a history of plunging into technology investments and acquisitions that, to most technology observers, made little sense.  HP’s  decision in 2000  to purchase a middleware/software company called Bluestone was one such decision.  A distant fourth in a crowded and fragmented marketplace, the idea behind the Bluestone acquisition was based on a faulty reading of HP’s current capabilities in the space, the ability of any small entrant to alter the dynamics of the marketplace and the needs of HP-UX customers who felt themselves always last to the trough when third-party software developers released new products.  After two years of chaos and the dismantling of HP’s web services organizations, Bluestone was dumped at a $400 million  loss.

HP’s decision to sell its considerable VLSI design assets to Intel was also  made for financial reasons, although it was widely known in HP’s technology community  that the success of its 32 and  64 bit  processors, including  Itanium,  depended on custom chipsets that HP had invested  in for many years.  The original architects of Itanium were on my staff,  and it was hard to peel them off the ceiling when the announcement was made, especially since they had virtually no voice in the decision-making process.

Officers were invited to sit in on the  entire HP  board meeting, except for the closing executive sessions.  Even so,  it took me awhile to realize how rare technology discussions actually were. After a particularly fiery Industry Analysts’ Meeting, during which I made a slash-and-burn  presentation on our competitive advantages over Sun Microsystems —  that made the analysts smile but our marketing folks queasy — Carly asked me to reprise the talk for the board.  Patty Dunn (who would later take over as Chairman  in a controversial  tenure after Carly’s dismissal in 2005) and others approached me to say how much they appreciated the competitive information and the willingness to be combative in defense of HP product strategy.  They claimed, incredibly, that it was the first time they had heard this kind of presentation.

The Perkins proposal would have given the board a lens to look at issues like these — necessary in  a company where financial forecasts are only as good as the underlying technology.  HP was not only one  moving in this direction.  Motorola and other technology companies  had — at about the same time — formed Perkins-style Technology Committees.  Ram Charan’s book  Boards That Deliver helps explain why technology companies need to take the Technology Committee seriously, more importantly, how they can help  a board move beyond the role of compliance to a deeper assessment of health and prospects:

Financial health, operating performance and risk each require separate attention.  A company can show good operating performance while financial health…is in decline. Dot-com companies, for example, were notorious for delighting their customers with fantastic (or fantasy) products and services while bleeding cash.  Similarly financial health can appear to be sound when in fact the guts of the business have been severely compromised.  Any risk can be underestimated, especially when it is assessed piecemeal, rather than in totality.

The reason that the Technology Committee is a good idea for  public technology companies is that the worlds of innovation and execution are going to collide, and a board cannot deliver value by simply checking off a box on a governance worksheet.   What do you know, for example, about the real performance of key technology executives  without a deep insight into how they would be evaluated by their peers  and competitors?  How do you know that an acquisition based on a couple of good financial quarters and self-congratulatory product  press releases has no market advantage over an in-house solution?   That’s not the kind of question that due diligence is going to ask. After I left the company, I watched the downsizing of research and heard often from former friends and colleagues who thought one decision or another was wrong-headed, and I often  wondered about how effectiveness the committee actually was.  And then I would see something preserved that made no short-term financial sense, although everyone knew how important the technology would be some day.

When I joined the board of RSA Security, I was definite about my plans.  “Look,” I told CEO Art Coviello, “RSA’s performance is a three-legged stool, and the board needs to be as informed about the technology and markets as it is about finance and operations.” Ram Charan would have said the three legs are Finance, Operating Performance and Risk. I said the risks are Technology, Markets and Organization. Both Art and Chairman Jim Simms were on board, but it was not an easy proposition to sell to the rest of  RSA’s board, although I did.  The RSA Technology Committee had a big impact on board dynamics and ultimately on the long-term health of the company.  It is one of the WWC success stories that I will tell in more detail in a later post.

I can’t think of any reason that the board of directors of  a public company — especially a technology company — needs seven CFO’s, but that is the profile of far too many companies.  Even  on boards where the majority of the non-management directors are CEO’s, financial expertise overwhelms all other skills, and it is not healthy.  It’s hard to find a technology company that has failed in recent years where the  roots of failure were not widely known on that other planet outside the boardroom.  I emphasize public companies only because they are great targets.  Later stage privately held companies would also be wise to pay attention to board dynamics and find some way get a handle on the company’s technology.

Once I got over the stomach ache that Tom Perkins gave me, I realized why technology had a seat at the table of his boards.   Kleiner-Perkins got to be the world’s greatest venture capital firm by delving deeply into the  technology implications of business decisions.  Engineers have the impression that board rooms are filled with accountants who know very little about the details of the  business but are not shy when it comes to talking about it.  Enter the Technology Committee.

I always liked the scene in Annie Hall where Alvy Singer, the Woody Allen character,   is getting more and more annoyed by a guy standing behind him in a movie theater line who is carrying on about Marshall McCluhan, trying to impress his date:

Man in Theatre Line: It just so happens I teach a class at Columbia called “TV, Media and Culture.” So I think my insights into Mr. McLuhan, well, have a great deal of validity!

Alvy Singer: Oh, do ya? Well, that’s funny, because I happen to have Mr. McLuhan right here, so, so, yeah, just let me… [pulls McLuhan out from behind a nearby poster]… Come over here for a second… tell him!

Marshall McLuhan: I heard what you were saying! You know nothing of my work!…How you got to teach a course in anything is totally amazing!

Alvy Singer: Boy, if life were only like this!

The “dy” Logo

I enjoyed reading  the new book about innovation at Hewlett-Packard  that Chuck House and Raymond Price just published[1]. It’s quirky and curiously researched, but, most of all, I was happy to read their account of Carly Fiorina’s tenure as CEO at HP.  History was in need of some fact-based revision.   If ever worlds collided, it was at HP when Carleton S.  Fiorina took over the reins after a stunning rise through the executive ranks at ATT/Lucent.  Chuck  points out that, although Carly was not well-liked by her employees (even her direct reports, many  of whom  ultimately undermined her), she sowed the seeds for Mark Hurd’s success.

The executive suite at HP Headquarters on Page Mill Road in Palo Alto was in those days a row of large cubicles, and, in keeping with  the HP culture, there were no doors and no outer offices.   Everyone’s office  — including Carly’s — was really just a cubicle. Carly insisted that I have two offices: one in HP Labs adjacent to the museum-like offices of Bill Hewlett and Dave Packard — these were not cubicles but were real offices,  impeccably maintained in their original 1960’s orange-and-brown Madmen decor —   and the other next to hers overlooking  a Japanese garden.    Carly’s executive council met nearly every week in a nearby conference room whose glass wall looked out over the same garden.

Several   council members had offices elsewhere, but those of us who had direct access were within a thirty-foot radius of her office.  These were the Gold Badge days at HP when a favored few retirees were granted the privilege of unrestricted, lifetime access to any building and any office suite in the company. The daily comings and goings telegraphed events that would not be visible outside the CEO’s office for days or weeks, even among business heads who had broad authority over multi-billion dollar enterprises.  This turned out to be an important vantage point from which to view sand being  thrown in the gears during HP’s acquisition of Compaq, but I will save these stories for later posts.

Chuck House had been gone from HP for some time when Carly arrived, so his account is based on interviews with a relatively narrow slice of insiders who were his colleagues — an impressive number of people, to be sure, but in a company with 80,000 employees not enough for a definitive portrait.  But House has never been shy about charging ahead when the terrain looks interesting, a personality trait that once earned him a medal from Dave Packard for “Extraordinary Contempt and Defiance Beyond the Call of Duty.”  It was awarded to commemorate a mutinous tour of customer sites to demonstrate a new display monitor after HP management in Colorado Springs had decided to shut it down.   Nevertheless, House’s account gets many things right.  One of the things he misses was what Fiorina brought to HP:  a WWC focus on the customer that was foreign to HP’s engineering culture before her arrival.

House and Price defer to old-guard HP employees in characterizing Carly as a marketer, a fiction that was rooted more in style than in substance.  Fiorina was unnervingly accurate in her assessment of general  market trends,  like the importance of the internet to HP’s mainline businesses,  but, in fact, she was a consummate saleswoman.   What she brought to the table was not the “let’s-see -what -they-think-about-this” arrogance of corporate marketing organizations,  it was the ability to listen to customers, sift through encyclopedic  knowledge of internal plans and projects, and  envision a solution.  Sometimes a  solution was forthcoming.  Sometimes it took a little while longer than customers were willing to wait.  But sometimes solutions were sabotaged.   To have an HP outsider from the East Coast — a telephone equipment salesman, not an engineer — propose a solution to customer problems was an unpardonable sin to some.   It was a WWC culture class that she was slow to recognize.

She was widely criticized for her lack of operational experience, but  the truth is that Carly delegated operational authority too widely and to managers with suspect motives (including past and future pretenders to the throne).  As a newcomer,  I tended to apologize for injecting long-range thoughts into the very operational discussions of the Executive Council, until one day Carly stopped me and said: “You don’t have to apologize for that.  It’s true that we’ll never get to the long-term without taking care of the short-term, but it’s the long-term that makes the short-term worth doing at all.”

Council chemistry changed in the months before the Compaq merger. Vyomesh Joshi took over as head of the imaging and printing business unit.  V.J. is not only a brilliant executive, he is a skilled engineer, whose technical  insights  were mainly responsible for transforming ink jet printing.

The other major additions were Pradeep Jotwani and Iain Morris.  Pradeep had control of worldwide consumer  sales.  He was fond of  long discourses —  sometimes literary, sometimes merely speculative — but their effect was always to slow down a speeding train and turn the discussion in a direction that was more productive.  Iain is a big, brash, Harley-riding  Scott  who Carly recruited from Motorola to carve out emerging businesses  like handheld computers and  entertainment.  Carly quickly transferred   the personal computer businesses to Iain from Duane Zitzner’s  computer business unit where they had languished as unprofitable also-rans.  Morris knew hardware, software and manufacturing from his days at Motorola, and he was also a great salesman.

At one of his first Council meetings, Iain walked in with an HP laptop and stopped everyone cold when he opened it up and bellowed: “What’s wrong here?”  When you  looked at an open HP laptop from the back, the “hp” logo was upside down. It read “dy”, and of course,  that was the way most people saw the laptop:  open and  from the back, inverted logo.  If anyone before had noticed this, it never made it to the upper reaches of management.  The order went out immediately to invert the logo and all of the millions of HP laptops produced since that time now display the logo right side up,  so that it reads “hp”.  It upset some of the industrial designers who argued that laptops were closed a lot of the time and that the orientation of the logo doesn’t matter when a laptop is closed.  It took a salesman’s eye to recognize that it was stupid to have millions customers staring at a “dy”  laptop.

This episode followed on the heels of two other quick-shifts.  One involved HP’s always painful  Federal sales performance.  I will talk about this more fully in a later post.  The other involved architectural consistency,  a concept that bridged customer issues and product design.

Shortly after VJ took over the imaging and printing business, he held an advanced projects review for me in San Diego.  I was struck but the ubiquity of infrared (IR) connectivity ports on HP printers and cameras, and mentioned it to VJ.  He had many compelling reasons for insisting on IR, but complained that Zitzner’s PC division had recently removed IR ports from HP laptops.

To Duane’s immense displeasure, I called  a meeting with some of his design engineers, ostensibly to review the component cost envelope for laptops.  At the end of the meeting, when everyone was worn out,  I asked about IR, and they had a string of good reasons to throw it out.  When I pointed out that HP printers, cameras, and PC’s no longer worked together, they just sat there blinking at me.  Carly overruled engineering objections and IR ports made  a miraculous (albeit short-lived) reappearance in HP laptops.

It would  not be apparent outside the CEO suite for months, but architectural consistency was a technology theme that would drive many R&D investment decisions, both near-term and long-term.   In an effort to jump-start a consumer-facing initiative, Carly had approached Sony about sharing some key technologies.  One of Sony’s success stories was the introduction of memory stick technology into a broad range of Sony products from hundred-dollar consumer entertainment devices to studio-quality video cameras that cost a half million dollars or more.  My counterpart at Sony was a CTO named Mario Tokoro, a computer scientist and engineer who had spent time at the famous computer science department at Carnegie-Mellon University.  Mario had been instrumental in arranging for memory stick technology across a staggering array of Sony’s consumer and business products. The idea of arranging product strategies around this kind of architectural unity would have sped up HP’s brief surge in Internet and Web technologies.  It was an idea that was undone by colliding worlds on a much different scale.

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[1] Charles H. House and Raymond L. Price, The HP Phenomenon: Innovation and Business Transformation, Stanford Business Books, 2009

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

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 10^th 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.

15^th 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.

Guess Who’s Coming to Dinner

In the irreverent, satirical movie Brain Candy the scientist who is responsible for the eponymous drug that takes the world by storm and briefly turns an ailing pharmaceutical company into a global powerhouse is invited along with his team to the CEO’s house for a celebration.  While his nerdy team members are left at a dismal affair of chicken salad and soggy potato chips, the scientist is escorted to the real party, a sophisticated Bacchanalia complete with caviar, Champagne, celebrities, super models,and swimming pools.  Few Champagne-and-caviar parties in today’s corporate climate, but there is still a sense that when dinner is served for top decision-makers, R&D does not have a seat at the table or is – at best – a distraction.  R&D is a somewhat curious, uncomfortable, and frequently unwelcome guest.

There are obvious signals when the worlds of technology innovation and business execution are on collision courses.  There are early warnings that reverberate through organizations, but they tend to go unnoticed because corporations make  it  easy to set up effective filters.  Warnings can show up in the very language that R&D management uses to talk about the rest of the company.  In “Are R&D Customers Always Wrong?” I quote former GM research chief Robert Frosch talking about the

…ocean of corporate problems

as if they were the problems of some alien world into which the GM R&D Center had been dropped.  In “Well, what kind of fraud is it?” Edward clearly lived in a different world, and the many “Loose Cannons” who I still hear from were never able to bridge the gulf.  Everyone seems to be a helpless observer to a catastrophe over which they have no control.

My experience is that senior executives, starting in the boardroom, can too easily focus on events that are rushing at them — too fast for effective reaction — ignoring the events that are still far enough away to anticipate.   There is, for example, an overwhelming feeling  that, since the time of a chief executive  is so precious, every step should be taken to avoid diluting the CEO’s time with minutiae.  To be perfectly honest, technologists tend to do that – passion for a technology project can fill a briefing with flourishes that are meant to be savored and admired by peers, not convey actionable information to decision-makers.  But that doesn’t excuse what in my view has become the regrettable practice in large companies of filling virtually all executive time with managing cash, debt, and other financial indicators of performance.

Financial performance in a technology company rests on other factors, too. Market disruptors, for example, are rarely predicted by financial analysis.  Even annual strategic planning and investment is a barren exercise without the participation of an educated team to make sense of the alternatives.  In an industry with many acquisition targets the ones that should occupy the attention of senior management are not necessarily the ones that have the strongest near-term business cases because those may not be the ones that advance long term goals.  Intel chairman Andy Grove once said that a Board’s responsibility is to

…insure that company success is longer than the CEO, market opportunity, or product cycle.

I will have more to say in later posts about the collision between decisions that really advance long term goals and those that are simply chosen from a list of predetermined alternatives.  What starts in the boardroom is inevitably replicated at other levels.  To deal with all of the important factors that determine success of a technology company  technology leaders must have a seat at the table.  Avoid collisions by inviting them to dinner.

I’ve worked with many senior executives who have set a technology place at the table with oftentimes-spectacular results, but today I want to focus on my Bellcore mentor CEO George Heilmeier, winner of the 2005 Kyoto Prize for his invention of the liquid crystal display.  George, along with Bellcore research chief Bob Lucky and head of the software business Sanjiv Ahuja led the remarkable transformation of Bellcore from an inward looking R&D consortium to the profitable stand-alone supplier of telecom software and services that was divested by the Bell Operating Companies and acquired by systems integrator SAIC in 1997.   Bellcore generated enough cash in the first quarter after being acquired to pay back the entire purchase price. George took particular delight in his mentor role.  Even during his busiest days at Bellcore, he would wander into my office, put his feet up on the coffee table, and ask what was going on in the labs, a conversation that often went on long into the evening.

One of George’s most enduring contributions to the R&D culture at Bellcore (and, as I later found out, to Texas Instruments, Compaq, and DARPA) was the Catechism.  I tried many times to get him to call it something else because I really believed that some in our multicultural environment would be offended by the term, but he always ignored my suggestion and in the end nobody seemed to mind very much.  The Catechism was George’s way of framing every strategic discussion, but he took particular care to make sure it was used to manage technology.  I later found out that others, including former Intel research head David Tennenhouse, who had also been swept into George’s wide path, had also carried the Catechism tradition forward.  According to the Catechism every strategic proposal in the company had to answer the following six questions:

1. What are you trying to do? (No Jargon)
2. How is it done today and what are the limitations of current practice?
3. What is new in your approach and why do you think it will succeed?
4. Assuming success, what does in mean to customers and the company?  This is the quantitative value proposition.
5. What are the risks and the risk reduction plan?
6. How long will it take?  How much will it cost? What are the mid term and final exams?

At Bellcore, George personally ran a Quarterly CEO Technology Council Review, where R&D managers from around the company would present their best ideas – always using the Catechism — for innovations to heads of the strategic business units, sales, and marketing.  Sometimes to the consternation of both the CFO and  the head of sales, George would reward skunk works projects that had terrific answers with additional resources to continue their work.  I wondered many times about the metaphor mixing in Question Six, but again it didn’t seem to both others.  There was no complicated process.  If you answered the questions well and the value proposition made sense, you got enough to get you going.  If the project was a little further along, you needed business unit heads to also buy in, and so on until it made sense to tie cost and revenue goals to the project. By that time the balance of the authority for the project was in a product group so the Technology Council could disengage. Amazing ideas came out of this process including the word’s first e-commerce products and an amazing quality transformation among the company’s more than 6,000 software engineers.

George Heilmeier’s Catechism was the inspiration for my Loose Cannon escalation process at HP.  HP was about 50 times larger than Bellcore so the idea of a quarterly CEO review was not feasible.  However my Technology Council was a direct pathway to the Executive Council so the effect was the same.

I sat down with George last spring for a wide-ranging conversation.  Much of what he had to say about both the Catechism and seats at the table has also appeared elsewhere – most notably in his five public speeches in conjunction with the Kyoto Prize.[1] The work that won him the Kytoto Prize was done in the 1960’s at RCA’s Sarnoff Laboratories in Princeton, where he had recently completed his PhD.   This included the discovery of electro-optic effects in certain kinds of liquid crystals that would be used to build  the first liquid crystal displays.   George always claims that he just “stumbled upon it” but he quotes Vladimir Zworykin, a television pioneer  with commenting:

“Stumbled, perhaps, but to stumble you must be moving.”

Heilmeier became disillusioned with the slow pace of change at RCA and left to spend a year as a White House Fellow, an assignment that turned into an appointment as Special Assistant to Secretary of Defense James Schlesinger and later to his appointment as head of DARPA.  Schlesinger and other White House mentors gave George a seat in senior policy discussions from the earliest day, and his growing comfort with proximity to important decision-making shaped his outlook on the value of a seat at the table. Two lessons stuck with him.  First was the negative power of vested interests:  in times of change those with the most to lose will fight tooth and nail to undermine it and those with the most to gain do not yet realize how much they have to gain.   Second was the negative aspect of “technology transfer”.  George was never a fan of throwing technology “over the transom”.  His commitment to providing an equal voice for innovation grew out of his experience that it was much better to form what he calls an “interdisciplinary team” with representation from R&D, product engineering and manufacturing  (he still believes that marketing is best done organically with all members of the team interacting with customers).   The leadership and balance of this team shifts as time goes on.  This is the dinner table.

In my next post, I’ll give you an example of these principles in action: a transformational event that could only have been successful with a seat at the table and that would have been killed by a distant CEO, undiluted with the minutiae of technological disruption.

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[1] A Moveable Feast: Kyoto Prize Lecture (SD Version), 2005

Loose Cannons, Volume 1

This is my all-time favorite Dilbert cartoon. Anyone who has ever worked in a large corporation like Hewlett-Packard understands immediately what’s going on here.  I always used it in CTO coffee talks when I wanted to show our engineers that I was really one of them — that I  wasn’t from another world (although I  suspected that many of them were already convinced that I was the pointy-haired boss and some thought I was Blob).  After a few hours, like clockwork, the email would start pouring into my inbox.  The subject line was always something like: “From a Loose Cannon.”

Some of the messages were very strange and a few (like the ones talking about contacting aliens from space) were downright disturbing, but most of them were respectful notes to let me know of  legitimate ideas that hadn’t made it through internal management gates.  I knew the engineering managers well.  They were smart and careful and for the most part they were very successful.  I didn’t want to second-guess their investment decisions, but I started wondering whether another sort of investment analysis would give a different answer, because these were obviously colliding worlds.

I was not popular with some of HP’s general managers because I had invented a new sort of escalation path for engineers, inviting ideas that had already been turned down at some point in the management chain.  I created a Technology Council consisting of the CTO’s of each of the major business units, the Director and Chief Scientist from HP Labs and some  HP Fellows to help with technology strategy and road-mapping, so it made a great deal of sense to use this team to take one more look at some of the Loose Cannon Ideas.

One of the Loose Cannons proposed using HP’s Jornada Pocket PC “to control my TV and VCR or other IR devices – that way you could store stuff in there and program those things simply and easily.” Another L-C wanted to create a document management system for the “growing home genealogist market”.

The company already had a rich history of encouraging risk-taking by its technical staff, but at HP business objectives were never far from sight.  There was a 60-year history of combining risk with rational investment.  It was a strategy that worked well.  It was lightweight, and I think that’s why cool new products and sometimes whole new product categories continued to flow out of R&D activities.  I am not only talking about the research labs. At that time there were over  12,000 engineers, many of whom had advanced degrees and were rewarded for patents, publications and other creative work; there was incredible bench strength. I will have more to say in later posts about how this process of identifying and nurturing creative ideas was carried out, but today I want to concentrate on the very specific calculation that virtually all R&D managers in the company learned.  I think that the legendary Joel Birnbaum was responsible for it, but my friend Stan Williams, who for many years now has guided HP’s nanotechnology and quantum computing research nailed the analysis in a dramatic way[1]:

…Why don’t we put together a program to become the world’s best center in quantum computation?

The answer is that even in the research labs we have to be ‘cold blooded’ businessmen…The first question is this: what is going to be the total world market for the technology?…The answer is, looking 15 years ahead, $1 trillion per year…we then have to ask what fraction of the market will belong to quantum computation…Now, how much could HP capture if it went after it very aggressively…[then] the question is if we could sell that 15 years from now that is the appropriate level of investment for that income stream?

Stan then incorporated development costs, risks and barriers and the time value of money to conclude:

…even when addressing a significant share of a $100 billion market that is 15 years in the future, the amount of money we should be spending now is about a million dollars per year.  In an industrial laboratory environment that’s about three researchers with their associated overhead costs.

Every engineering manager in the company knew how to play this calculation in reverse:  if we fund one full time engineer to pursue a new, untested idea, what is the possible income stream we would see from that research 3, 5, 8, or 15 years from now?  Many – maybe most – of the technical staff understood it, too. And yet, there were these L-C ideas that just never seemed to go away. A generation earlier Dick Hackborn had been a management champion for inkjet printing, a crazy, complicated way of spraying colored water on paper, that even today accounts for most of HP’s financial success. As far as I know Dick was not in the decision chain for printing solutions, but he was a very influential guy and his sponsorship swayed many opinions at the topmost levels of management.

So what was the Technology Council’s role in all of this?  The company was much bigger, and a consequence of size is a decreased reliance on individual opinion and an increased reliance on quantitative processes.  As a result new ideas needed to be accompanied by a business case analysis that supplied both the decision model and the critical financial and market parameters. The difficulty was that business managers were making decisions mainly about their markets and their risks which affects the starting point for Stan’s calculation and may dramatically underestimate the role that organizational barriers play in estimating the total risk.  The Technology Council was in a position to combine information from a number of business units and recalculate the business case.

Here’s one example. HP was at that time organized into four large business units:  one for personal computers, one for services, one for large servers, and another for printing.  The software in HP’s most expensive servers was a version of the original Unix developed at Bell Labs in the 1970’s called HP-UX.  It was one of the most important profit drivers for HP’s high performance business systems but it was under pressure from the high volume Microsoft-based market on one side and other Unix variants such as Linux, Solaris, and AIX on the so-called “value” side of the server market. The Printing Group also was in the software business, designing drivers and user interfaces for printers and scanners that were attached to personal computers and workgroup servers.  The focus of printing software was on the large and very profitable market for Microsoft-based PC’s, workstations, and servers.  By comparison, relatively few of the much more expensive HP-UX systems were sold.  The Printing Group did the Williams calculation and concluded that investing in software for HP-UX was not warranted.  The Server Group meanwhile was being starved for printing solutions.  Customers were asking for it.  Lack of HP-UX printing support meant lost sales, but HP-UX software developers would have needed engineering support from their colleagues in the Printing Group in order to make any headway.  Printing did not see enough downstream revenue to justify such an investment.

A Loose Cannon proposed that my office should fund a cross-business initiative in HP-UX printing solutions.  When the Technology Council looked at the opportunities that were being lost, it was clear that even a modest investment would pay off in the very near term.  Although we didn’t realize it at the time, it turned out that HP’s investment in Linux would quickly  take hold in the marketplace, so the investment in HP-UX printing had a big impact on that market as well.

There were worlds smashing into each other all over the place in those days, and there were two organizational decisions that made a difference.  The first was Carly Fiorina’s decision to make the CTO a member of  the company’s Executive Council – the half-dozen executives who ran the company.  This added a technology voice to the most significant decisions made at HP. Having a seat at the table is important when worlds collide, and I will give many examples of this in later posts. The second was the decision to charter the senior technologists in the company to spend an entire day every quarter looking beyond their own business plans for new technologies and products that would have been dropped or gone unnoticed because they had not survived Stan Williams’ cold blooded calculation within a business silo.

Many other developments grew out of these Loose Cannon discussions including HP’s aggressive entry into open source software, supercomputing, and commercial printing.  Successfully bringing Loose Cannons into the fold really requires you to squarely face  two important issues.  The first concerns the role that organizational barriers play in affecting overall technology strategies, The second is why technologists don’t more often have a meaningful seat at the table in executive suites and boardrooms. More on how to deal with these issues later, but I will give you a hint right now: there are no clean solutions because worlds are in collision.

I arrived at HP long after Steve Wozniak sent his letter asking for permission to commercialize “hobbyist” computers (see my last post Proposition 13 and Innovation).  If  he and I had overlapped I wonder if he would have been one of my Loose Cannons and whether his letter would have been needed.

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[1] “Nanocircuitry, Defect Tolerance and Quantum Computing: Architectural and Manufacturing Considerations” by R. Stanley Williams in Quantum Computing and Communications edited by Michael Brooks, Springer 1999.