What could be better than listening to the views of a real expert in his field? Probably listening to 2 experts discussing between themselves the topics that they are extremely well familiar with. As founders of Andreessen Horowitz aka a16z, a venture capital fund, Marc Andreessen and Ben Horowitz have accumulated loads of experience in the areas of business building and company management. This time the dialogue is more about the issues that mature companies face rather than about startups.
Here are my 3 takeaways after watching several conversations between Marc and Ben on YouTube:
Lesson #1
It is not surprising that companies make cost-cutting and efficiency improvements only when they are under duress. The public company CEO remuneration is usually tied to the quarterly earnings per share number. This motivates them to focus on empire-building. For companies to continue growing the CEOs have to reach further and further into lower-margin businesses — be it new markets which are less profitable, new product lines with lower profitability, or acquisitions that never generate expected results.
Replacing the earnings per share as the main metric with return on invested capital, or RoIC, would provide a much better incentive system for the companies to get more efficient per every USD spent both in economic up-cycle and down-cycle.
Lesson #2
One of the reasons why companies do too little and too late when optimising their workforce is that they are miscalculating what their “thresholds of badness” really are. Already at the basic level after even a few staff cuts some element of trust between the employees and the management is broken and needs to be rebuilt. At the next level, the company starts to lay off people who internally are considered as exceptionally talented or are just very popular among the staff. And, at the final stage, come mass layoffs after which the company can’t continue functioning properly.
In most cases, the companies miscalculate where the second level is. Usually, they assume that it is significantly lower than it actually is. It explains why the head-count reductions in most cases are lower than the market expects or less effective than the situation requires.
Lesson #3
Most of us are familiar with the Pareto principle which postulates that 80% of your outputs are created by 20% of inputs, 80% of revenues are generated by 20% of employees etc. Ben and Marc refer to another, less known rule — that the square root of your number of employees generates 50% of your revenues.
The square root is a concept with some specific properties. For a 100-person company, this would mean 10 employees, or 10%, while for a business with 10,000 staff, it would be 100, or just 1%. If true, this rule could lead the management to some very disturbing discoveries. Of course, as with most rules of thumb, there is limited hard evidence supporting it.
There were several snippets and quotes worth remembering from the conversation. But, as a final thought this time, here is an interesting story from the past. The first video-conferencing device was built in 1965 but was considered a failure. Quite surprising that the decision to stop further development was made not because of technical reasons. It was just assumed that people would not want to see each other while talking over the phone. It took no less than 50 years to realise that this perception might have been wrong.
For those willing to select top lessons of their own here are the links to both videos — https://www.youtube.com/watch?v=-zzrGs5Z1yk&list=WL&index=3&t=44s and https://www.youtube.com/watch?v=Fw4p85jSfQc&list=WL&index=18.
This note was first published on Medium.com on 19 September 2024/
