COMMUNISM! That is probably the thought of those who remember the Cold War. And they are right. Such a system is popularly called “communism.” Let’s clarify one minor detail first. There has really been no such thing as communism throughout history. The countries of the communistic block practiced a social order known as “socialism.” OK, maybe a communistic flavor of socialism.

Socialism is characterized by an administrative hierarchical power structure to control the economy. This sector is comprised of people who don’t own anything, yet control everything. Whole countries and significant parts of the world were deep red merely twenty years ago. You may wonder, why am I talking about something that’s gone in history?

The answer is that I was not talking about communistic countries in the first place. Look at the description again … does it remind you of something else? Something you see every day here and now? It sure does.

I am talking about large American corporations.

If you have any doubts, read the first passage again and see for yourself.

Shocking, isn’t it? Russia was red, but it seems that America today is covered with red pockmarks everywhere you look. But maybe it’s not so bad, is it? Let us recall why it is that we did not like communism. Of course, there was that plainly evident fact that the Communists were strong, and we wanted the whole world, not merely half of it. They wanted peace, and in their language peace and world are the same word … but that’s not what our mass media said we were worried about. We were concerned with the system, right? So, what’s in the system that we did not like? Of course, there is an issue of human rights … although Pinochet in Chile, Saddam Hussein in Iraq, and a few other dictators that we brought to power are not exactly champions of human rights (not to mention former CIA operatives Manuel Noriega from Panama and Osama bin Laden.) So, there should be something else that was the principal problem of communistic states. And actually, there was.

According to our beliefs, a socialistic/communistic economy is simply not efficient. Without free internal competition progress stagnates, productivity falls, and the whole thing heads straight for a disaster. People are simply not interested in performing in such a system. Hierarchical management systems bring biases into the goals and execution that are incompatible with the survival of the system and the prosperity of the people. With the complexity of the system up, control drops, and being a pet of your boss becomes more rewarding than really doing your job. More to that, soon the pets rather than the workers are getting promoted. In no time the guy on top is only good at being somebody’s pet and fighting off the competition, no longer good as a worker. Once it happens, the system is doomed. Which, as many Americans believe today, was confirmed about twenty years ago.

What is really puzzling for me is this: How is it that we think that communism is inefficient, yet still practice it every day inside our own businesses? How is it that we practice communism in large corporations – sometimes corporations the size of small countries – and still be surprised that they turn out inefficient, moronic, and don’t care about their employees or shareholders?

Granted, sometimes non-mercantile relationships work. An average atomic family with a mom, a dad and two kids lives in a perfect communism where common resources are shared by the members of the family. This is without counting who brought them in and without granting monetary rewards for helping each other … and it works great. As another example, if you own a small company with 10-20 employees, you control the system directly and everything is fine as well.

However, somewhere between 400 and 600 employees is where things start to get sour. It may also be said that somewhere around the fourth level of management, businesses go through a significant change and arrive at the worst. It is almost like at a certain number of employees, the negative effects of communism in the corporate structure grows out of control, and then we get irresponsible managers, favoritism, and a system that goes astray.

Does this magic number of 600 people, or four levels of management, remind you of something? Yes, the level of the organizational complexity that we talked about in previous chapters. In fact, the systematic negative effects of communism are exactly the way in which the drop in control due to complexity shows up in organizations. That is what’s happening in large American corporations all over the country.

Russians were red. They’ve changed their minds. Our economy is covered now with the red pockmarks of large corporations. We need to do something about it. We need to change the way large corporations are governed and managed. We need a cure for this mini-communism. Fortunately, we do not have to demolish our whole political system to achieve that in the manner that Russians had to do. We can do that one company at a time. We can heal and turn around one company at a time. But we need to do that soon … because our shirts are at stake.

You see, his book is more than 500 pages long. I just made an experiment, and one page requires almost exactly 3 minutes of my time to read it attentively, in fact, even a bit more. Yes, sure, speed reading would help, but that’s not what you want reading a really good book. 500 pages to 3 minutes make 1500 minutes to read it just once cover to cover. If you floundered arithmetic classes in your elementary school, let me tell you, that’s 25 hours of your time. Or, more than 3 work days of intensive work without interruptions, not even bathroom breaks! In reality, that’s more like a week of work.

It’s really odd, but somehow the American public treats buying books the same way as buying beef, pork or potatoes – by the pound. Somehow, the thicker the book is, the better it sells and the higher price you can demand. Isn’t it odd?

Think about it. A 500 pages book requires a work week of my time. I don’t know about your income, so lets assume something average. According to the U.S. Census Bureau average (mean) personal income for both sexes age 25-64 is about $44K, or about $844/week. Tony Robbins’ book I mentioned above has a very moderate price of $16, but once you factor in the time you have to spend readings it, the cost of ownership goes up to $860. Really. $16 for the book and $844 for the time you spend reading it. That’s what an average employer pays to an average employee for a week of work. And you spend a week of work to read that book. That defines the real cost of the book.

Imagine that you can buy a book and magically instantly know everything that was in the book. Would it be worth $860? Still, when you buy a $16 book with 500 pages, that’s what your expectations are. Weird, isn’t it?

It’s odd, but when the public buys books by the pound, the publishers have no other way to go, but to comply and produce large books. The result? The market dominated by the “books by the pound”. The result? ROI (Return-On-Investment) for book readers falling down. The next result? Book reading is not treated socially as an attractive career proposition or real self-improvement.

If this trend will continue, the American public will become the least literate in the world (if it’s not already), and for good reason! It will be deprived of high quality literature by the invisible force of the market, so reading won’t bring the benefits anymore, it once did. Can something be done about it? I don’t know… When I write my books, I am conscious of readers’ time, and my books are on average 200 pages only. However, I can tell you first hand, if I’d want them to be successful, I’d have to beef them up at least twice or more before any established publisher will even consider it.

Practically, you are hired to make your direct manager happy, and then his manager, and then his manager, and so forth.

The more levels of management separates you from CEO, the further in line the company and shareholders are.

That’s Hippo, or HiPPO. It represents a decision making concept often used in large corporations. You know, what is it?

HIghest Paid Person Opinion.

In the end, the idea is that you can only have either perfect hiring or only perfect performance reviews. If you make both tight, you will become so fit to the current environments, that any radical change in economy will drive you the way of dinosaurs… See more in the original post.

If not, here it is. You force every team manager rank the members of their teams by the “bell curve”. It means that you sort people into three buckets: a few over-achievers, a few under-achievers, and the rest in the middle. Specific proportion may vary but normally it’s 10-20% on either side and 60-80% in the middle. Then you fire bottom 10% and hire new people instead. Lather, rinse, repeat. The theory says that you get great results. The fame of Jack “The Butcher” Welch says the same.

Have you ever thought that it’s essentially introducing evolutionary environment in the corporation? It’s like some forest, where various species dwell, and 10% of specimen are eaten by the end of the year. The fittest survive and procreate, making overall forest population more and more fit to the environment. Everybody (except those that are eaten) wins.

Speaking of procreation, one thing essential for the evolution is procreation that passes winning traits. How does it work in business? Simple: through the interview process. You see, interview process is designed to accept only those, who are deemed worthwhile by the people, who are already in. Granted, that’s not really procreation, but that’s pretty close analog of it. For example, in software development, if the team believes that C# is great and Java is not, it is not likely for anybody who is good at Java to pass an interview, simply because to be good at Java you have to believe that it’s good to spend the time learning it. Interview process is one of the examples of so called “club system”, where new members have to be recommended by existing ones. In a nutshell, it’s the way fittest (those who were not fired) procreate in any organization: by hiring those similar to them in some aspects.

So, with procreation and natural selection in place, astringent performance review systems a la Jack Welch convert your corporation into an evolutionary environment. Does it work? Well, in the wild evolution worked ok so far — it produced humans, right? And we all like humans, of course, so if it worked so well for us in the long run, it has to work well in managing businesses too. Right?

Wrong!

Lets assume that we have a perfect hiring process, when we get the new people of the same quality as the best people we already have, and a perfect performance review process, not tainted by misunderstandings, differences in styles, personal vendettas and straight incompetence of the management. Would you agree that if that perfect system does not work, there is something really wrong in the whole idea? And, unfortunately, it does not.

To illustrate, I made a small program that simulates such an evolutionary environment or corporation. To make it easily visible, the competition happens between dots of different color in the environment where some specific color is “ideal”. Think about the dots as bugs with masking color, like those white butterflies hiding on white birch trees. The more some dot’s color is different from the “ideal” color of the environment, the less fit the dot is, the less likely it is to procreate, the more likely it is to be eaten in the current cycle.

So, let’s run the program and you’ll see something like that:

Evolution in a static environment

Yes, I said it does not work. Yes, I understand that considering this picture it worked perfectly, or nearly perfectly. The problem is: yes, it does work, as long as the ideal color of the environment stays the same. Unfortuantely, the environment does not stay the same. In the example with white butterflies coal powered factories made the birch trees black, that eliminated white butterflies and forced them to become black. Fortunately for butterflies, their selection process and procreation was not that perfect, they did mutate and they had enough genetic diversity to become black and survive. Corporations with the perfect hiring process and perfect performance reviews process are not that lucky. Lets run the program again but include catastrophic change in environment every here and now, like it happens in a real economy with some crisis happening every 5-10 years. Here is the new picture:

Evolution with Catastrophic Changes

You see? I even made hiring process not-so-perfect and introduced some mutations allowing to hire not that perfect candidates, and it still does not work. The picture with the “perfect” hiring process is even worser.

In fact, the only hope for a corporation with the perfect performance review system to survive strong changes in the economy is to hire pretty much at random. Then, it does adapt:

Evolution with High Mutations Rate

Granted, that’s what some of them do when it comes to hiring new CEOs, but who can afford hiring at random the rest of the staff in the modern world? And if your hiring process works, then all astringent performance review system does is a long-term harm. It pretty much drives the diversity out of the workplaces to the point, when your company doesn’t have the source material to adapt to sharp environment changes.

By the way, this phenomena is well-known in biological evolution. Many species got exstinguished exactly because they’ve become too fit to the current environment, and got killed, eaten, or starved to death once the environment had changed dramatically. Dinosaurs are just one great example, and we’ve lately seen a few corporate dinosaurs of the American economy following their way. By the way, according to the book “Truth About Managing People” by Dr. Stephen P. Robbins, that’s pretty much what happened in General Motors in the last 10-20 years. Notice that the book was written before the company was forced into the bankruptcy.

Of course, with the modern system, when CEO’s horizon is just 1-2 years, and then they are off destroying some other company, it works for them. It also works for speculative holders of shares. Unfortunately, it does not work for the business in question, and it does not work for those shareholders, who expect their shares to appreciate by the time, when they hit the retirement.

References:

Truth About Managing People, The (2nd Edition) by Stephen P. Robbins – FT Press, 2 edition (September 30, 2007), ISBN-10: 0132346036, ISBN-13: 978-0132346030, 240 pages

Say, if you want to herd sheep, it make sense to buy the best breed of sheep that give the best, most expensive wool, right? Same with any business… The problem is that in the knowledge economy, for example, in the software development, managing the best is a little more complicated than herding the sheep. In fact, it’s often compared more to herding the cats. And if you don’t manage “the best” properly, you may easily end up with a serious trouble and get significantly poorer results than by hiring average and managing them properly. Of course, to manage the best properly, your managers should be the best. Ironic, isn’t it?

So, here is the trouble with hiring the best. Philip Su, who works as a development manager at Microsoft, suggests the following recipe to create great software. Get a lot of great developers; give them a lot of computers; provide them with good salaries, stock options, awards and bonuses, so that they don’t have to think about it; then don’t forget to feed them as needed. That’s it. Once they don’t have to worry about money, they’ll do what they love and know — creating great software. Simple, isn’t it?

The only problem is that such creative heaven is very hard to maintain, even if you have money. Shareholders and Wall Street shout at you that you are wasting money. Yeah, like they did not prove lately again that they don’t have a clue how to manage money, their own or otherwise… Analysts look down at you and write articles about you not following the latest fad and not managing your people properly. No, they don’t create software, they find their reward on Earth by teaching others how to do that. Still, the market listens and your company, including your employees, who have tons of company’s stock, suffer.

Then you give up and introduce performance reviews, bell curve, or even layoffs when other companies lose money and have tough times. Well, Adam tasted the prohibited fruit, started to use metrics, heaven is gone and replaced now by an evolutionary environment. That is, the place where the fittest survive, and the rest, well… perish.

Notice, the “fittest”. Fittest is not the smartest. It’s not the strongest. It’s not even the best professional. It’s just that, the fittest. “The boy who lived,” no matter how the survival was achieved.

But maybe it’s not that bad, is it? After all, all nearest relatives of humans – chimps, pigs, rats – they all live in an evolutionary environment and succeed, right?

Speaking of rats, let me tell you an interesting piece of trivia, I’ve heard long ago. On medieval ships rats were a huge problem. One of the ways to get rid of them was called “A Rat King.” Sailors were catching as many rats as they could, put them into an empty barrel, and did not feed them. The weakest rats were eaten fast by others, of course, so very soon you only had “the best” rats in the barrel.


However, and here comes the catch, in the evolutionary environment there is no such thing as strong and weak. There are only those who are stronger, and those who are weaker. Once all the weakest are eaten, one of the strongest become the weakest. And then another one. And the next one. And so on, until there is only one Big Rat in the barrel called a Rat King. The fittest.


After that the sailors release the Rat King, and by this time it already knows that fellow rats taste much better than scraps and moldy grain. So, it does the job much better than any cat could, leaving the ship mostly ratless, “best rats” or otherwise.

Oh, well,… so what did we talk about? Sorry, I’ve got carried away with an irrelevant story… Oh, yeah, corporations that hire the best and then force an evolutionary environment! So, what I am trying to say, is that hiring the best is a fine idea, as long as you know how to manage them. Unfortunately, too many don’t. If you hire the best, you have to put them into a creative environment. If instead you put them into an evolutionary environment, you may get, well, “the fittest” instead. And you’ll have nobody to blame for that but yourself.

Seriously. Evolution is a harsh mistress. Wherever there are resources and competition for them, there are parasites. Turn on evolution in your corporation, and parasites will fill your management ranks. Ever wondered why Wall Street guys were so insistent in their advice to you? They wanted these jobs for their kin!