Performance Management: Part 1

This is the first case study in my series on performance management; I’ve connected with colleagues across the landscape of operating and technology businesses to identify best practices in company alignment–setting the right goals and empowering smart people to build successful ventures. Read the full introduction here.

Know Thyself: Are you a Technology Business or Not?

Goal-tracking frameworks like OKRs can be powerful tools, but only when they are wielded appropriately. One of the key differentiators in whether and how tools like OKRs will drive business value is if they are applied at a technology-oriented business or an operational business. 

A technology business focuses primarily on developing new products and services, with a significant emphasis on software and/or hardware innovation to deliver differentiated value to customers. Top tech companies include Apple Inc, Alphabet Inc, Microsoft, Dell Technologies, and Samsung. 

An operating company may need a lot of technology to run its business, but at its core, it’s about delivering goods and/or services that customers need, often by moving atoms rather than bits, and building value by charging more than it costs to create, sell and deliver their products. Operating companies can be metrics-driven and valuable–Amazon’s core business of selling products on amazon.com is a $1.3T retail operating business if valued at 2x its online sales, which were $690B in 2022–but in general they focus less on disruptive innovation and more on incremental improvements in execution. 

Before corralling a bunch of creative knowledge workers and having them set and track their own goals, it’s important to clarify the company’s identity: is the company creating value through its technology, or through its operations?

“Know Thyself!”

“No, you know THYself!”

E-Commerce for the Masses is Still Operations-Intensive

Company Referenced: Groupon, Inc | NASDAQ: GRPN | Market Cap: $148M | Peak Market Cap: $16.5B, Nov 2011

A colleague recalled his experience at Groupon, an operations-driven company from the Web 2.0 era. He joined during their "rocketship days" pre-IPO, building infrastructure for the scale of its global operations and supporting the platform through its pivot to Groupon Goods. At that time, Groupon was the fastest-growing company ever; its infrastructure had been built for a certain level of scale, but midway through his time there, it met and wildly surpassed that scale.

Groupon’s pitch was bringing technology and e-commerce capabilities to the local commerce world, which was a $4T opportunity in the US alone. The company certainly needed some technology to facilitate this, but its major investments were in marketing to bring in new marketplace demand (customers) and supply (vendors–think of the small-town yoga studio offering a $120 monthly membership for $50 on the site; the revenue then might be split ~$25 to Groupon and ~$25 to the yoga studio). 

Groupon focused its investments and metrics on driving sales, with technology as a secondary area of investment. The company tried to outsource as much infrastructure support as possible, using consultants and agencies to build or configure things so they could capitalize the build rather than expensing it. The main infrastructure relied heavily on vendor-supported software platforms such as Salesforce, where all the individual vendors were stored and every variation of coupon price and term was organized in an unwieldy database. 

While there were certainly some frustrations around the platform’s stability and the level of friction in getting new problems solved through technology, it was probably the right decision for Groupon's capital allocations. The company was 99% operational, so it was prudent to invest in the levers for growth, which were the salespeople reaching out to local commerce vendors and potential customers, rather than tech infrastructure.
That experience is a counterpoint to a firm like Google, which tries to keep a focus on first principles: before figuring out how to align and motivate employees, a company must first understand what type of company it is. If yours is an operating company, your quarterly or annual goal-setting process should closely match the financial objectives of the company – grow the business by increasing revenue from X to Y; improve profitability by lowering our division’s Cost of Goods Sold by ZZ% in the year ahead. Once you understand what business you’re in, set goals that motivate your team to build a better version of your product that will appeal to new customers and/or drive more revenue and profit from the customers you already have.

Contrast with Google’s Portfolio Approach

Company Referenced: Alphabet Inc | NASDAQ: GOOG | Market Cap: $1.5T | Peak Market Cap: $2T, Nov 2021

A true technology company like Google is not focused on incremental improvements to the status quo. Rather, they look for projects and products that will deliver something 10x better than what exists, and solve problems that customers may not even know they have, using technology to power innovative products. It's a VC’s approach to building a portfolio of tools and products – if you take a lot of big swings to build disruptive offerings, even if you miss on several, when you have big hits like Gmail (53% of US email market share), Chrome (63% of worldwide browser market share), Google Maps (67% of map search market share), or YouTube (75% of online video platform market share) you still create tremendous enterprise value.
At Google, tools like OKRs are used to let smart managers and individual contributors set targets that will ladder up to the team or business unit objectives, but the key is in how those business-level goals are set: by clarifying the opportunity for a disruptive product, and then letting the knowledgeable team fill out their how with measurable, transparent quarterly milestones.

Advice: First Clarify The Company’s “What” and “Why”

My colleague shared this advice for a growing company: establish a common, shared, internalized vision for the company - document what you are doing and why. As soon as you have disparate views of what you're trying to do, the strategy you have in place won't work. A system like OKRs can work best when the company lays out a clear strategy for what it is doing, and then everyone internalizes it to pick their local how.

The mission to “organize the world’s information and make it universally accessible and useful” permeates each business unit, and this is complemented by weekly all-hands Q&As to make sure each team member feels ownership in the direction and course-corrects often. New employees are trusted with tremendous transparency into Google’s strategy and codebase on day one (see Laszlo Bock’s Work Rules) and expected to act like business founders, not just task-doers. 

Our discussion reminded me of Antoine de Saint-Exupéry’s advice for leading a group to build a boat. If you want your team to be successful, you can either command and control them by telling them to get some wood, some saws, and some nails and to follow this blueprint to put it together... or you can get there more quickly by teaching them how glorious it will feel to sail on the open ocean with the wind in their hair and let them solve the boat-building problem themselves.

“No one told me the ocean would be so wet!”

For an operating company looking to incrementally improve something that already exists, the mission may not matter as much. There, you need fewer knowledge workers to set up the assembly line, then teach each person to "do this thing, turn that crank from here to there;" if you get the line turning fast enough, you have a good business.

For a technology company that is trying to build something that has never existed before, where there are 1,001 new problems that need to be solved, command and control will not work. In that context you need to empower people to make decisions - set an overall vision for where the org is trying to go, then give knowledge workers the freedom to work out how to get there. If you command them, you will miss out on their intellect to solve problems effectively, and you are overpaying them if you just tell them "put the red button there.”

How to Solve Your Corporate Identity Crisis

The big question, then, is how to decide which type of company you've got: an operating company or a technology company.

A helpful indicator: Do people at the business call the software development team "IT" or "Engineering"? It turns out that operating businesses often have “IT” teams and technology companies have built “Engineering” capabilities.

For an operating business with IT support, IT's goal is to exert the minimum amount of effort to meet the businesses' needs and support the business with technology - to be of service to business, similar to the way that recruiting, accounting, and legal teams offer specialty services that help the business win but are not the company’s competitive advantage.

At a technology business looking to build new things, you need a Product and Engineering organization to take the approach "how can we use technology to improve this?" After all, if you're only trying to make something that already exists more efficient, how much engineering creativity do you really need?

Conclusion

Goal tracking systems are just a tool -- they can be used well or poorly, but to get value out of them, they need to follow from a clear understanding of what your team is trying to achieve. OKRs can organize your how to ensure you stay on track, but the benefits come only after leadership demonstrates the discipline to set the highest-level objectives. When the leader helps his/her team understand what they are focused on and why, smart people can then be empowered to solve problems that haven’t been solved before and build things that haven’t been built before. And they’ll take more ownership if they have a say in how they’ll measure progress towards having the wind in their hair, and the spray of the open ocean on their faces. 

Please reach out to will@wrsolutions.io if you’d like to read the full white paper.