26 May 2019

The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers – Ben Horowitz

Introduction

Every time I read a management or self-help book, I find myself saying, “That’s fine, but that wasn’t really the hard thing about the situation.” The hard thing isn’t setting a big, hairy, audacious goal. The hard thing is laying people off when you miss the big goal. The hard thing isn’t hiring great people. The hard thing is when those “great people” develop a sense of entitlement and start demanding unreasonable things. The hard thing isn’t setting up an organizational chart. The hard thing is getting people to communicate within the organization that you just designed. The hard thing isn’t dreaming big. The hard thing is waking up in the middle of the night in a cold sweat when the dream turns into a nightmare. The problem with these books is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations. There’s no recipe for building a high-tech company; there’s no recipe for leading a group of people out of trouble; there’s no recipe for making a series of hit songs.

That’s the hard thing about hard things—there is no formula for dealing with them. Nonetheless, there are many bits of advice and experience that can help with the hard things.

Chapter 1: From Communist to Venture Capitalist

Until you make the effort to get to know someone or something, you don’t know anything. There are no shortcuts to knowledge, especially knowledge gained from personal experience. Following conventional wisdom and relying on shortcuts can be worse than knowing nothing at all.

At the time most people believed only scientists and researchers would use the Internet. The Internet was thought to be too arcane, insecure, and slow to meet real business needs. Even after the introduction of Mosaic, the world’s first browser, almost nobody thought the Internet would be significant beyond the scientific community—least of all the most important technology industry leaders, who were busy building proprietary alternatives.

Most business relationships either become too tense to tolerate or not tense enough to be productive after a while. Either people challenge each other to the point where they don’t like each other or they become complacent about each other’s feedback and no longer benefit from the relationship. With Marc and me, even after eighteen years, he upsets me almost every day by finding something wrong in my thinking, and I do the same for him. It works.

Chapter 2: “I Will Survive”

No matter who you are, you need two kinds of friends in your life. The first kind is one you can call when something good happens, and you need someone who will be excited for you. Not a fake excitement veiling envy, but a real excitement. You need someone who will actually be more excited for you than he would be if it had happened to him. The second kind of friend is somebody you can call when things go horribly wrong—when your life is on the line and you only have one phone call. Who is it going to be? Bill Campbell is both of those friends.

“Remember, Ben, things are always darkest before they go completely black.” He was joking, but as we entered our first quarter as a public company, those words seemed prescient.

Chapter 3: This Time with Feeling

An early lesson I learned in my career was that whenever a large organization attempts to do anything, it always comes down to a single person who can delay the entire project. An engineer might get stuck waiting for a decision or a manager may think she doesn’t have authority to make a critical purchase. These small, seemingly minor hesitations can cause fatal delays.

It turns out that is exactly what product strategy is all about—figuring out the right product is the innovator’s job, not the customer’s job. The customer only knows what she thinks she wants based on her experience with the current product. The innovator can take into account everything that’s possible, but often must go against what she knows to be true. As a result, innovation requires a combination of knowledge, skill, and courage. Sometimes only the founder has the courage to ignore the data.

In my weekly staff meeting, I inserted an agenda item titled “What Are We Not Doing?” Ordinarily in a staff meeting, you spend lots of time reviewing, evaluating, and improving all of the things that you do: build products, sell products, support customers, hire employees, and the like. Sometimes, however, the things you’re not doing are the things you should actually be focused on.

Chapter 4: When Things Fall Apart

You won’t be able to share every burden, but share every burden that you can. Get the maximum number of brains on the problems even if the problems represent existential threats.

In my mind, I was keeping everyone in high spirits by accentuating the positive and ignoring the negative. But my team knew that reality was more nuanced than I was describing it. And not only did they see for themselves the world wasn’t as rosy as I was describing it; they still had to listen to me blowing sunshine up their butts at every company meeting.

As the highest-ranking person in the company, I thought that I would be best able to handle bad news. The opposite was true: Nobody took bad news harder than I did. Engineers easily brushed off things that kept me awake all night.

A healthy company culture encourages people to share bad news. A company that discusses its problems freely and openly can quickly solve them.

Beware of management maxims that stop information from flowing freely in your company. For example, consider the old management standard: “Don’t bring me a problem without bringing me a solution.” What if the employee cannot solve an important problem? For example, what if an engineer identifies a serious flaw in the way the product is being marketed? Do you really want him to bury that information? Management truisms like these may be good for employees to aspire to in the abstract, but they can also be the enemy of free-flowing information.

If you run a company, you will experience overwhelming psychological pressure to be overly positive. Stand up to the pressure, face your fear, and tell it like it is.

Training starts with a golden rule: Managers must lay off their own people. They cannot pass the task to HR.

  1. They should explain briefly what happened and that it is a company rather than a personal failure.
  2. They should be clear that the employee is impacted and that the decision is nonnegotiable.
  3. They should be fully prepared with all of the details about the benefits and support the company plans to provide.

Make clear with your language that you’ve decided. As previously discussed, use phrases like “I have decided” rather than “I think” or “I’d like.”

Acknowledge the contributions. If you want him to stay in the company, you should say that and make it crystal clear that you want to help him develop his career and contribute to the company. Let him know that you appreciate what he’s done and that your decision results from a forward-looking examination of what the company needs, not a review of his past performance. The best way to do this, if appropriate, is to couple the demotion with an increase in compensation.

CEO—only took action on the positive indicator and only looked for alternative explanations on the negative leading indicator. If this advice sounds too familiar. and you find yourself wondering why your honest employees are lying to you, the answer is they are not. They are lying to themselves. And if you believe them, you are lying to yourself.

Parcells: “Al, I am just not sure how we can win without so many of our best players. What should I do?” Davis: “Bill, nobody cares, just coach your team.” That might be the best CEO advice ever. Because, you see, nobody cares. When things go wrong in your company, nobody cares.

Chapter 5: Take Care of the People, the Products, and the Profits—in That Order

Hire for strength rather than lack of weakness. By running sales, I understood very clearly the strengths we needed.

One interview technique that I’d used to sort the good from the bad was to ask a series of questions about hiring, training, and managing sales reps.

I made it clear that I expected every manager to meet with her people on a regular basis. I even gave instructions on how to conduct a one-on-one meeting so there could be no excuses.

While I had told the team “what” to do, I had not been clear about “why” I wanted them to do it. Clearly, my authority alone was not enough to get them to do what I wanted. Given the large number of things that we were trying to accomplish, managers couldn’t get to everything and came up with their own priorities.

Me: “Do you know the difference between a good place to work and a bad place to work?”
Steve: “Umm, I think so.”
Me: “What is the difference?”
Steve: “Umm, well . . .”
Me: “Let me break it down for you. In good organizations, people can focus on their work and have confidence that if they get their work done, good things will happen for both the company and them personally. It is a true pleasure to work in an organization such as this. Every person can wake up knowing that the work they do will be efficient, effective, and make a difference for the organization and themselves. These things make their jobs both motivating and fulfilling. In a poor organization, on the other hand, people spend much of their time fighting organizational boundaries, infighting, and broken processes. They are not even clear on what their jobs are, so there is no way to know if they are getting the job done or not. In the miracle case that they work ridiculous hours and get the job done, they have no idea what it means for the company or their careers. To make it all much worse and rub salt in the wound, when they finally work up the courage to tell management how fucked-up their situation is, management denies there is a problem, then defends the status quo, then ignores the problem.”
Steve: “Okay.”
Me: “Are you aware that your manager Tim has not met with any of his employees in the past six months?”
Steve: “No.”
Me: “Now that you are aware, do you realize that there is no possible way for him to even be informed as to whether or not his organization is good or bad?”
Steve: “Yes.”
Me: “In summary, you and Tim are preventing me from achieving my one and only goal. You have become a barrier blocking me from achieving my most important goal. As a result, if Tim doesn’t meet with each one of his employees in the next twenty-four hours, I will have no choice but to fire him and to fire you. Are we clear?”
Steve: “Crystal.”

A lot of companies think their employees are so smart that they require no training. That’s silly. When I first became a manager, I had mixed feelings about training. Logically, training for high-tech companies made sense, but my personal experience with training programs at the companies where I had worked was underwhelming.

Grove wrote, “Most managers seem to feel that training employees is a job that should be left to others. I, on the other hand, strongly believe that the manager should do it himself.”

Almost everyone who builds a technology company knows that people are the most important asset. Properly run startups place a great deal of emphasis on recruiting and the interview process in order to build their talent base. Too often the investment in people stops there. There are four core reasons why it shouldn’t:

How many fully productive employees have they added? By failing to measure progress toward the actual goal, they lose sight of the value of training.

Andy Grove does the math and shows that the opposite is true: Training is, quite simply, one of the highest-leverage activities a manager can perform. Consider for a moment the possibility of your putting on a series of four lectures for members of your department. Let’s count on three hours preparation for each hour of course time—twelve hours of work in total. Say that you have ten students in your class. Next year they will work a total of about twenty thousand hours for your organization. If your training efforts result in a 1 percent improvement in your subordinates’ performance, your company will gain the equivalent of two hundred hours of work as the result of the expenditure of your twelve hours.

During a time of particularly high attrition at Netscape, I decided to read all of the exit interviews for the entire company to better understand why people quit high-tech companies. After putting economics aside, I found that there were two primary reasons why people quit:

  • They hated their manager; generally the employees were appalled by the lack of guidance, career development, and feedback they were receiving.
  • They weren’t learning anything: The company wasn’t investing resources in helping employees develop new skills.

The best place to start is with the topic that is most relevant to your employees: the knowledge and skill that they need to do their job. I call this functional training. Functional training can be as simple as training a new employee on your expectations for them (see “Good Product Manager/Bad Product Manager”) and as complex as a multiweek engineering boot camp to bring new recruits completely up to speed on all of the historical architectural nuances of your product.

This type of effort [training] will do more to build a powerful, positive company culture than a hundred culture-building strategic off-site meetings.

The other essential component of a company’s training program is management training. Management training is the best place to start setting expectations for your management team.

Take your best people and encourage them to share their most developed skills. Training in such topics as negotiating, interviewing, and finance will enhance your company’s competency in those areas as well as improve employee morale. Teaching can also become a badge of honor for employees who achieve an elite level of competence.

Training must be mandatory.

Managing the company is the CEO’s job. While you won’t have time to teach all of the management courses yourself, you should teach the course on management expectations, because they are, after all, your expectations. Make it an honor to participate in these sessions by selecting the best managers on your team to teach the other courses.

The job of a big company executive is very different from the job of a small company executive. When I was managing thousands of people at Hewlett-Packard after the sale of Opsware, there was an incredible number of incoming demands on my time. Everyone wanted a piece of me. Little companies wanted to partner with me or sell themselves to me, people in my organization needed approvals, other business units needed my help, customers wanted my attention, and so forth. As a result, I spent most of my time optimizing and tuning the existing business. Most of the work that I did was “incoming.” In fact, most skilled big company executives will tell you that if you have more than three new initiatives in a quarter, you are trying to do too much. As a result, big company executives tend to be interrupt-driven. In contrast, when you are a startup executive, nothing happens unless you make it happen. In the early days of a company, you have to take eight to ten new initiatives a day or the company will stand still. There is no inertia that’s putting the company in motion. Without massive input from you, the company will stay at rest.

Running a large organization requires very different skills than creating and building an organization. When you run a large organization, you tend to become very good at tasks such as complex decision-making, prioritization, organizational design, process improvement, and organizational communication. When you are building an organization, there is no organization to design, there are no processes to improve, and communicating with the organization is simple. On the other hand, you have to be very adept at running a high-quality hiring process, have terrific domain expertise (you are personally responsible for quality control), know how to create process from scratch, and be extremely creative about initiating new directions and tasks.

Here are some interview questions that I found very helpful: What will you do in your first month on the job? Beware of answers that overemphasize learning. This may indicate that the candidate thinks there is more to learn about your organization than there actually is. More specifically, he may think that your organization is as complex as his current organization. Beware of any indication that the candidate needs to be interrupt-driven rather than setting the pace personally. The interrupts will never come. Look for candidates who come in with more new initiatives than you think are possible. This is a good sign. How will your new job differ from your current job? Look for self-awareness of the differences here. If they have the experience in what you need, they will be articulate on this point. Beware of candidates who think that too much of their experience is immediately transferable. It may pay off down the line, but likely not tomorrow.

Why do you want to join a small company? Beware of equity being the primary motivation. One percent of nothing is nothing.

It’s much better if they want to be more creative. The most important difference between big and small companies is the amount of time running versus creating. A desire to do more creating is the right reason to want to join your company.

Force them to create. Give them monthly, weekly, and even daily objectives to make sure that they produce immediately. The rest of the company will be watching and this will be critical to their assimilation.

Consider scheduling a daily meeting with your new executive. Require them to bring a comprehensive set of questions about everything they heard that day but did not completely understand.

Answer those questions in depth; start with first principles. Bring them up to speed fast. If they don’t have any questions, consider firing them. If in thirty days you don’t feel that they are coming up to speed, definitely fire them. Put them in the mix. Make sure that they initiate contact and interaction with their peers and other key people in the organization.

Often CEOs resist acting in functional roles, because they worry that they lack the appropriate knowledge. This worry is precisely why you should act—to get the appropriate knowledge. Indeed, acting is really the only way to get all the knowledge that you need to make the hire, because you are looking for the right executive for your company today, not a generic executive.

Backdoor and front-door references. For the final candidates, it’s critically important that the CEO conduct the reference checks herself. The references need to be checked against the same hiring criteria that you tested for during the interview process. Backdoor reference checks (checks from people who know the candidate, but were not referred by the candidate) can be an extremely useful way to get an unbiased view. However, do not discount the front-door references. While they clearly have committed to giving a positive reference (or they wouldn’t be on the list), you are not looking for positive or negative with them. You are looking for fit with your criteria. Often, the front-door references will know the candidate best and will be quite helpful in this respect.

Despite many people being involved in the process, the ultimate decision should be made solo. Only the CEO has comprehensive knowledge of the criteria, the rationale for the criteria, all of the feedback from interviewers and references, and the relative importance of the various stakeholders. Consensus decisions about executives almost always sway the process away from strength and toward lack of weakness.

At a basic level, metrics are incentives. By measuring quality, features, and schedule and discussing them at every staff meeting, my people focused intensely on those metrics to the exclusion of other goals. The metrics did not describe the real goals and I distracted the team as a result.

I often see teams that maniacally focus on their metrics around customer acquisition and retention. This usually works well for customer acquisition, but not so well for retention. Why? For many products, metrics often describe the customer acquisition goal in enough detail to provide sufficient management guidance. In contrast, the metrics for customer retention do not provide enough color to be a complete management tool. As a result, many young companies overemphasize retention metrics and do not spend enough time going deep enough on the actual user experience. This generally results in a frantic numbers chase that does not end in a great product. It’s important to supplement a great product vision with a strong discipline around the metrics, but if you substitute metrics for product vision, you will not get what you want.

If you report on the quantitative goals and ignore the qualitative ones, you won’t get the qualitative goals, which may be the most important ones.

At HP, the company wanted high earnings now and in the future. By focusing entirely on the numbers, HP got them now by sacrificing the future. Note that there were many numbers as well as more qualitative goals that would have helped:

  • Was our competitive win rate increasing or declining?
  • Was customer satisfaction rising or falling?
  • What did our own engineers think of the products?

Your company now employs twenty-five people and you know that you should formalize the performance management process, but you don’t want to pay the price. You worry that doing so will make it feel like a “big company.” Moreover, you do not want your employees to be offended by the feedback, because you can’t afford to lose anyone right now. And people are happy, so why rock the boat? Why not take on a little management debt? The first noticeable payments will be due when somebody performs below expectations.

A great HR organization will support, measure, and help improve your management team. Some of the questions they will help you answer:

Recruiting and Hiring

  • Do you sharply understand the skills and talents required to succeed in every open position?
  • Are your interviewers well prepared?
  • Do your managers and employees do an effective job of selling your company to prospective employees?
  • Do interviewers arrive on time?
  • Do managers and recruiters follow up with candidates in a timely fashion?
  • Do you compete effectively for talent against the best companies?

Compensation

  • Do your benefits make sense for your company demographics?
  • How do your salary and stock option packages compare with the companies that you compete with for talent?
  • How well do your performance rankings correspond to your compensation practices?

Training and Integration

  • When you hire an employee, how long does it take them to become productive from the perspective of the employee, her peers, and her manager? Shortly after joining, how well does an employee understand what’s expected of her?

Performance Management

  • Do your managers give consistent, clear feedback to their employees?
  • What is the quality of your company’s written performance reviews?
  • Did all of your employees receive their reviews on time?
  • Do you effectively manage out poor performers?

Motivation

  • Are your employees excited to come to work?
  • Do your employees believe in the mission of the company?
  • Do they enjoy coming to work every day?
  • Do you have any employees who are actively disengaged?
  • Do your employees clearly understand what’s expected of them?
  • Do employees stay a long time or do they quit faster than normal?
  • Why do employees quit?

Chapter 6: Concerning the Going Concern

if you manage a junior employee and they ask you about their career development, you can say what comes naturally and generally get away with it. As we saw above, things change when you deal with highly ambitious, seasoned professionals.

Hire people with the right kind of ambition.

The right kind of ambition is ambition for the company’s success with the executive’s own success only coming as a by-product of the company’s victory. The wrong kind of ambition is ambition for the executive’s personal success regardless of the company’s outcome. 2. Build strict processes for potentially political issues and do not deviate. Certain activities attract political behavior. These activities include:

  • Performance evaluation and compensation
  • Organizational design and territory
  • Promotions

You should evaluate your organizational design on a regular basis and gather the information that you need to decide without tipping people off to what you plan to do. Once you decide, you should immediately execute the reorg: Don’t leave time for leaks and lobbying.

Members of your team will from time to time complain about each other. Sometimes this criticism will be extremely aggressive. Be careful about how you listen and the message that it sends. Simply by hearing them out without defending the employee in question, you will send the message that you agree. If people in the company think that you agree that one of your executives is less than stellar, that information will spread quickly and without qualification. As a result, people will stop listening to the executive in question and the executive will soon become ineffective. There are two distinct types of complaints that you will receive: 1. Complaints about an executive’s behavior 2. Complaints about an executive’s competency or performance Generally, the best way to handle the first type of complaint is to get the complaining executive and the targeted executive in the room together and have them explain themselves.

Do not attempt to address behavioral issues without both executives in the room. Doing so will invite manipulation and politics. Complaints of the second type are both more rare and more complex.

If you receive this type of complaint, you will generally have one of two reactions: they will be telling you something that you already know, or they’ll be telling you shocking news. If they are telling you something that you already know, then the big news is that you have let the situation go too far.

If the complaint is new news, then you must immediately stop the conversation and make clear to the complaining executive that you in no way agree with their assessment.

Once you’ve shut down the conversation, you must quickly reassess the employee in question. If you find he is doing an excellent job, you must figure out the complaining executive’s motivations and resolve them. Do not let an accusation of this magnitude fester. If you find that the employee is doing a poor job, there will be time to go back and get the complaining employee’s input, but you should be on a track to remove the poor performer at that point. As CEO, you must consider the systemic incentives that result from your words and actions. While it may feel good in the moment to be open, responsive, and action oriented, be careful not to encourage all the wrong things.

For a complete explanation of the dangers of managers with the wrong kind of ambition, I strongly recommend Dr. Seuss’s management masterpiece Yertle the Turtle.

People who view the world purely through the team prism will very seldom use the words I or me even when answering questions about their accomplishments. Even in an interview, they will deflect credit to others on their previous team. They will tend to be far more interested in how your company will win than in how they will be compensated or what their career path will be. When asked about a previously failed company, they will generally feel such great responsibility that they will describe in detail their own misjudgments and bad decisions.

Mark had already interviewed sales reps at our number-one competitor’s company and knew what deals they were in. He relentlessly questioned me on how we were going to win the deals that they were in and how we planned to get into the deals that we weren’t in. He wanted to know the strengths and weaknesses of everyone else on the team. He wanted to know the game plan for winning. The topics of his potential compensation and career advancement didn’t come up until the very end of the process. And then he only wanted assurances that compensation was performance- and not politically based. It was clear that Mark was all about the team and its success.

Ideally, the promotion process should yield a result similar to the very best karate dojos. In top dojos, in order to achieve the next level (for example, being promoted from a brown belt to a black belt), you must defeat an opponent in combat at that level. This guarantees that a new black belt is never a worse fighter than the worst current black belt.

Start with an extremely crisp definition not only of the responsibilities at each level but also of the skill required to perform the duties. When describing the skills, avoid the generic characterizations such as “must be competent at managing a P&L” or “must have excellent management skills.”

Next, define a formal process for all promotions. One key requirement of the process should be that promotions will be leveled across groups.

So which method is better, Andreessen’s or Zuckerberg’s? The answer is that it depends. Facebook has so many advantages in recruiting employees that being disciplined about absolute title levels does not significantly impair its ability to attract the very best talent. Your company might not have these advantages, so lofty titles may be a good tactic. In either scenario, you should still run a highly disciplined internal leveling and promotion process.

One good test for determining whether to go with outside experience versus internal promotion is to figure out whether you value inside knowledge or outside knowledge more for the position. For example, for engineering managers the comprehensive knowledge of the code base and engineering team is usually more important and difficult to acquire than knowledge of how to run scalable engineering organizations. As a result, you might very well value the knowledge of your own organization more than that of the outside world. In hiring someone to sell your product to large enterprises, the opposite is true. Knowing how your target customers think and operate, knowing their cultural tendencies, understanding how to recruit and measure the right people in the right regions of the world to maximize your sales—these things turn out to be far more valuable than knowing your own company’s product and culture.

One excellent way to develop a high standard is to interview people who you see doing a great job in their field. Find out what their standard is and add it to your own. Once you determine a high yet achievable performance bar, hold your executive to that high standard even if you have no idea how they might achieve it.

Bill Campbell developed an excellent methodology for measuring executives in a balanced way that will help you achieve this. He breaks performance down into four distinct areas: 1. Results against objectives Once you’ve set a high standard, it will be straightforward to measure your executive against that standard. 2. Management Even if an executive does a superb job achieving her goals, that doesn’t mean she is building a strong and loyal team. It’s important to understand how well she is managing, even if she is hitting her goals. 3. Innovation It’s quite possible for an executive to hit her goal for the quarter by ignoring the future. For example, a great way for an engineering manager to hit her goals for features and dates is by building a horrible architecture, which won’t even support the next release. This is why you must look beyond the black-box results and into the sausage factory to see how things get made. 4. Working with peers This may not be intuitive at first, but executives must be effective at communicating, supporting, and getting what they need from the other people on your staff. Evaluate them along this dimension.

In most cases one-on-ones provide an excellent mechanism for information and ideas to flow up the organization.

The key to a good one-on-one meeting is the understanding that it is the employee’s meeting rather than the manager’s meeting. This is the free-form meeting for all the pressing issues, brilliant ideas, and chronic frustrations that do not fit neatly into status reports, email, and other less personal and intimate mechanisms. If you are an employee, how do you get feedback from your manager on an exciting but only 20 percent formed idea that you’re not sure is relevant, without sounding like a fool? How do you point out that a colleague you do not know how to work with is blocking your progress without throwing her under the bus? How do you get help when you love your job but your personal life is melting down? Through a status report? On email? Yammer? Asana? Really? For these and other important areas of discussions, one-on-ones can be essential. If you like structured agendas, then the employee should set the agenda. A good practice is to have the employee send you the agenda in advance. This will give her a chance to cancel the meeting if nothing is pressing. It also makes clear that it is her meeting and will take as much or as little time as she needs. During the meeting, since it’s the employee’s meeting, the manager should do 10 percent of the talking and 90 percent of the listening. Note that this is the opposite of most one-on-ones. While it’s not the manager’s job to set the agenda or do the talking, the manager should try to draw the key issues out of the employee.

Some questions that I’ve found to be very effective in one-on-ones:

  • If we could improve in any way, how would we do it?
  • What’s the number-one problem with our organization? Why?
  • What’s not fun about working here?
  • Who is really kicking ass in the company? Whom do you admire?
  • If you were me, what changes would you make?
  • What don’t you like about the product?
  • What’s the biggest opportunity that we’re missing out on?
  • What are we not doing that we should be doing?
  • Are you happy working here?

The primary thing that any technology startup must do is build a product that’s at least ten times better at doing something than the current prevailing way of doing that thing. Two or three times better will not be good enough to get people to switch to the new thing fast enough or in large enough volume to matter. The second thing that any technology startup must do is to take the market. If it’s possible to do something ten times better, it’s also possible that you won’t be the only company to figure that out. Therefore, you must take the market before somebody else does. Very few products are ten times better than the competition’s, so unseating the new incumbent is much more difficult than unseating the old one. If you fail to do both of those things, your culture won’t matter one bit. The world is full of bankrupt companies with world-class cultures. Culture does not make a company. So, why bother with culture at all? Three reasons:

about designing a way of working that will:

  • Distinguish you from competitors
  • Ensure that critical operating values persist such as delighting customers or making beautiful products
  • Help you identify employees who fit with your mission

Jeff could have spent years auditing every expense and raining hell on anybody who overspent, but he decided to build frugality into his culture. He did it with an incredibly simple mechanism: All desks at Amazon.com for all time would be built by buying cheap doors from Home Depot and nailing legs to them.

The first rule of organizational design is that all organizational designs are bad. With any design, you will optimize communication among some parts of the organization at the expense of other parts. For example, if you put product management in the engineering organization, you will optimize communication between product management and engineering at the expense of communication between product management and marketing. As a result, as soon as you roll out the new organization, people will find fault with it and they will be right.

Your goal is to choose the least of all evils. Think of the organizational design as the communications architecture for your company. If you want people to communicate, the best way to accomplish that is to make them report to the same manager.

You might want to organize your sales force by product to maximize communication with the relevant product groups and maximize the product competency of the sales force. If you do that, then you will do so at the expense of simplicity for customers who buy multiple products and will now have to deal with multiple salespeople.

Here are the basic steps to organizational design:

  1. Figure out what needs to be communicated. Start by listing the most important knowledge and who needs to have it. For example, knowledge of the product architecture must be understood by engineering, QA, product management, marketing, and sales.
  2. Figure out what needs to be decided. Consider the types of decisions that must get made on a frequent basis: feature selection, architectural decisions, how to resolve support issues. How can you design the organization to put the maximum number of decisions under the domain of a designated manager?
  3. Prioritize the most important communication and decision paths. Is it more important for product managers to understand the product architecture or the market? Is it more important for engineers to understand the customer or the architecture? Keep in mind that these priorities will be based on today’s situation. If the situation changes, then you can reorganize.
  4. Decide who’s going to run each group. Notice that this is the fourth step, not the first. You want to optimize the organization for the people—for the people doing the work—not for the managers. Most large mistakes in organizational design come from putting the individual ambitions of the people at the top of the organization ahead of the communication paths for the people at the bottom of the organization. Making this step four will upset your managers, but they will get over it.
  5. Identify the paths that you did not optimize. As important as picking the communication paths that you will optimize is identifying the ones that you will not. Just because you deprioritized them doesn’t mean they are unimportant. If you ignore them entirely, they will surely come back to bite you. 6. Build a plan for mitigating the issues identified in step five. Once you’ve identified the likely issues, you will know the processes you will need to build to patch the impending cross-organizational challenges.

A process is a formal, well-structured communication vehicle. It can be a heavily engineered Six Sigma process or it can be a well-structured regular meeting.

It’s much easier to add new people to old processes than new processes to old people. Formalize what you are doing to make it easy to onboard new people.

Don’t separate scale from the rest of the evaluation. The relevant question isn’t whether an executive can scale; it’s whether the executive can do the job at the current scale. You should evaluate holistically and this will prevent you from separating out scale, which often leads to an unwise prediction of future performance.

Make the judgment on a relative rather than an absolute scale. Asking yourself whether an executive is great can be extremely difficult to answer. A better question: For this company at this exact point in time, does there exist an executive who I can hire who will be better? If my biggest competitor hires that person, how will that impact our ability to win?

Predicting whether an executive can scale corrupts your ability to manage, is unfair, and doesn’t work.

Chapter 7: How to Lead Even When You Don’t Know Where You Are Going

If you manage a team of ten people, it’s quite possible to do so with very few mistakes or bad behaviors. If you manage an organization of one thousand people, it is quite impossible. At a certain size, your company will do things that are so bad that you never imagined that you’d be associated with that kind of incompetence. Seeing people fritter away money, waste each other’s time, and do sloppy work can make you feel bad. If you are the CEO, it may well make you sick. And to rub salt into the wound and make matters worse, it’s your fault.

There are always a thousand things that can go wrong and sink the ship. If you focus too much on them, you will drive yourself nuts and likely crash your company. Focus on where you are going rather than on what you hope to avoid.

Jim Collins, in his bestselling book Good to Great, demonstrates through massive research and comprehensive analysis that when it comes to CEO succession, internal candidates dramatically outperform external candidates. The core reason is knowledge. Knowledge of technology, prior decisions, culture, personnel, and more tends to be far more difficult to acquire than the skills required to manage a larger organization. Collins does not, however, explain why internal candidates sometimes fail as well.

Two core skills for running an organization:

  1. Knowing what to do.
  2. Getting the company to do what you know.

Interestingly, most management books describe peacetime CEO techniques and very few describe wartime. For example, a basic principle in most management books is that you should never embarrass an employee in a public setting. On the other hand, in a room filled with people, Andy Grove once said to an employee who entered the meeting late, “All I have in this world is time, and you are wasting my time.” Why such different approaches to management? In peacetime, leaders must maximize and broaden the current opportunity. As a result, peacetime leaders employ techniques to encourage broad-based creativity and contribution across a diverse set of possible objectives. In wartime, by contrast, the company typically has a single bullet in the chamber and must, at all costs, hit the target. The company’s survival in wartime depends upon strict adherence and alignment to the mission.

Giving feedback turns out to be the unnatural atomic building block atop which the unnatural skill set of management gets built.

A popular and sometimes effective technique for feedback beginners is something that experienced managers call the Shit Sandwich.

The shit sandwich can work well with junior employees but has the following challenges:

  • It tends to be overly formal. Because you have to preplan and script the sandwich to make it come out correctly, the process can feel formal and judgmental to the employee.
  • After you do it a couple of times, it will lack authenticity. The employee will think, “Oh boy, she’s complimenting me again. I know what’s coming next, the shit.”
  • More senior executives will recognize the shit sandwich immediately and it will have an instant negative effect.

To become elite at giving feedback, you must elevate yourself beyond a basic technique like the shit sandwich. You must develop a style that matches your own personality and values. Here are the keys to being effective:

  • Be authentic. It’s extremely important that you believe in the feedback that you give and not say anything to manipulate the recipient’s feelings. You can’t fake the funk.
  • Come from the right place. It’s important that you give people feedback because you want them to succeed and not because you want them to fail. If you really want someone to succeed, then make her feel it. Make her feel you. If she feels you and you are in her corner, then she will listen to you.
  • Don’t get personal. If you decide to fire somebody, fire her. Don’t prepare her to get fired. Prepare her to succeed. If she doesn’t take the feedback, that’s a different conversation.
  • Don’t clown people in front of their peers. While it’s okay to give certain kinds of feedback in a group setting, you should strive never to embarrass someone in front of their peers. If you do so, then your feedback will have little impact other than to cause the employee to be horribly ashamed and to hate your guts.
  • Feedback is not one-size-fits-all. Everybody is different. Some employees are extremely sensitive to feedback while others have particularly thick skin and often thick skulls. Stylistically, your tone should match the employee’s personality, not your mood.
  • Be direct, but not mean. Don’t be obtuse. If you think somebody’s presentation sucks, don’t say, “It’s really good, but could use one more pass to tighten up the conclusion.” While it may seem harsh, it’s much better to say, “I couldn’t follow it and I didn’t understand your point and here are the reasons why.” Watered-down feedback can be worse than no feedback at all because it’s deceptive and confusing to the recipient. But don’t beat them up or attempt to show your superiority. Doing so will defeat your purpose because when done properly, feedback is a dialogue, not a monologue.

Your employee should know more about her function than you. She should have more data than you. You may be wrong. As a result, your goal should be for your feedback to open up rather than close down discussion. Encourage people to challenge your judgment and argue the point to conclusion.

As CEO, you should have an opinion on absolutely everything. You should have an opinion on every forecast, every product plan, every presentation, and even every comment. Let people know what you think. If you like someone’s comment, give her the feedback. If you disagree, give her the feedback. Say what you think. Express yourself. This will have two critically important positive effects:

  • Feedback won’t be personal in your company. If the CEO constantly gives feedback, then everyone she interacts with will just get used to it. Nobody will think, “Gee, what did she really mean by that comment? Does she not like me?” Everybody will naturally focus on the issues, not an implicit random performance evaluation.
  • People will become comfortable discussing bad news. If people get comfortable talking about what each other are doing wrong, then it will be very easy to talk about what the company is doing wrong. High-quality company cultures get their cue from data networking routing protocols: Bad news travels fast and good news travels slowly.

1. DOES THE CEO KNOW WHAT TO DO?
One should interpret this question as broadly as possible. Does the CEO know what to do in all matters all the time? This includes matters of personnel, financing, product strategy, goal sizing, and marketing. At a macro level, does the CEO set the right strategy for the company?

Two distinct facets of knowing what to do:

  • Strategy. In good companies, the story and the strategy are the same thing. As a result, the proper output of all the strategic work is the story.
  • Decision making. At the detailed level, the output of knowing what to do is the speed and quality of the CEO’s decisions.

Want to see a great company story? Read Jeff Bezos’s three-page letter he wrote to shareholders in 1997. In telling Amazon’s story in this extended form—not as a mission statement, not as a tagline—Jeff got all the people who mattered on the same page as to what Amazon was about.

Chapter 8: First Rule of Entrepreneurship: There Are No Rules

Accountability across the following dimensions:

  • Effort – to be a world-class company, you need world-class effort.
  • Promises – “make a commitment, keep a commitment”. Promising to complete a piece of marketing collateral or send an email is different from promising to meet an engineering schedule that involves solving some fundamentally hard computer science problem.
  • Results –  If someone fails to deliver the result she promised, as in the opening story, must you hold her accountable? Should you hold her accountable? The answer is that it depends. It depends upon: Seniority of the employee You should expect experienced people to be able to forecast their results more accurately than junior people. Degree of difficulty Some things are just plain hard. Making your sales number when your product is inferior to the competition and a recession hits midquarter is hard. Building a platform that automatically and efficiently takes serial programs and parallelizes them, so that they can scale out, is hard. It’s hard to make a good prediction and hard to meet that prediction. When deciding the consequence of missing a result, you must take into account the degree of difficulty. Amount of stupid risk While you don’t want to punish people for taking good risks, not all risks are good. While there is no reward without risk, there is certainly risk with little or no chance of corresponding reward.

The very next day I informed the head of Sales Engineering and the head of Customer Support that they would be switching jobs.

Both executives quickly diagnosed the core issues causing the conflict. They then swiftly acted to implement a simple set of processes that cleared up the combat and got the teams working harmoniously.

You must hold your people to a high standard, but what is that standard? I discussed this in the section “Old People.” In addition, keep the following in mind: You did not know everything when you hired her. While it feels awkward, it is perfectly reasonable to change and raise your standards as you learn more about what’s needed and what’s competitive in your industry. You must get leverage. Early on, it’s natural to spend a great deal of time integrating and orienting an executive. However, if you find yourself as busy as you were with that function before you hired or promoted the executive, then she is below standard. As CEO, you can do very little employee development. One of the most depressing lessons of my career when I became CEO was that I could not develop the people who reported to me. The demands of the job made it such that the people who reported to me had to be 99 percent ready to perform. Unlike when I ran a function or was a general manager, there was no time to develop raw talent.

Chapter 9: The End of the Beginning

[As part of the VC firm] we decided to build the following networks:

  • Large companies – Every new company needs to either sell something to or partner with a larger company.
  • Executives – If you succeed, at some point you need to hire executives.
  • Engineers – In the technology business, you can never know enough great engineers.
  • Press and analysts – We have a saying around the firm: Show it, sell it; hide it, keep it.
  • Investors and acquirers – Being venture capitalists, providing access to money was obvious.

Appendix: Questions for Head of Enterprise Sales Force

Is she smart enough?

  • Can she effectively pitch you on her current company?
  • How articulate is she on the company and market opportunity that you are presenting to her now?
  • Will she be able to contribute to the strategic direction of your company in a meaningful way?”

Does she know how to hire salespeople?

  • What is her profile?
  • Ask her to describe a recent bad hire.
  • How does she find top talent?
  • What percentage of her time is spent recruiting?
  • How does she test for the characteristics she wants with her interview process?
  • How many of her current people want to sign up? Can you reference them and validate that?
  • Could you pass her sales interview test? Should you be able to pass?
  • Does she know how to hire sales managers?
  • Can she define the job?
  • Can she test for the skills?

Is she systematic and comprehensive on how she thinks about the sales process?

  • Does she understand the business and the technical sales processes?
  • Does she understand benchmarking, lockout documents, proof of concepts, demos?
  • Does she know how to train people to become competent in the process?
  • Can she enforce the process?
  • What is her expectation of her team’s use of the CRM tools?
  • Did she run the process at her last company or did she write the process?

How good is her sales training program?

  • How much process training versus product training? Can she describe it in detail?
  • Does she have materials?
  • How effective is her sales rep evaluation model?
  • Can she get beyond basic performance?
  • Can she describe the difference between a transactional rep and an enterprise rep in a way that teaches you something?

Does she understand the ins and outs of setting up a comp plan?

  • Accelerators, spiffs, etc.

Does she know how to do big deals?

  • Has she made existing deals much larger? Will her people be able to describe that? Has she accelerated the close of a large deal?
  • Does she have customers who will reference this?
  • Does she understand marketing?
  • Can she articulate the differences between brand marketing, lead generation, and sales force enablement without prompting?

Does she understand channels?

  • Does she really understand channel conflict and incentives?
  • Is she intense enough?
  • Will the rep in Wisconsin wake up at 5 a.m. and hit the phones or will they wake up at noon and have lunch?

Can she run international?

Is she totally plugged into the industry?

How quickly can she diagnose?

  • Does she know your competition?
  • Does she know what deals you are in right now?
  • Has she mapped your organization?

OPERATIONAL EXCELLENCE QUESTIONS

Managing Direct Reports

  • What do you look for in the people working for you?
  • How do you figure that out in the interview process?
  • How do you train them for success?
  • What is your process for evaluating them?

Decision-Making

  • What methods do you use to get the information that you need in order to make decisions?
  • How do you make decisions (what is the process)?
  • How do you run your staff meeting? What is the agenda?
  • How do you manage actions and promises?
  • How do you systematically get your knowledge?
  • Of the organization
  • Of the customers
  • Of the market

Core management processes—please describe how you’ve designed these and why.

  • Interview
  • Performance management
  • Employee integration
  • Strategic planning

Metric Design

  • Describe the key leading and lagging indicators for your organization.
  • Are they appropriately paired? For example, do you value time, but not quality?
  • Are there potentially negative side effects?
  • What was the process that you used to design them?

Organizational Design

  • Describe your current organizational design.
  • What are the strengths and weaknesses?
  • Why?
  • Why did you opt for those strengths and weaknesses (why were the strengths more important)?
  • What are the conflicts? How do they get resolved?

Confrontation

  • If your best executive asks you for more territory, how do you handle it?
  • Describe your process for both promotion and firing.
  • How do you deal with chronic bad behavior from a top performer?

Less Tangible

  • Does she think systematically or one-off?
  • Would I want to work for her?
  • Is she totally honest or is she bullshitty?
  • Does she ask me spontaneous incisive questions or only pre-prepared ones?
  • Can she handle diverse communication styles?
  • Is she incredibly articulate?
  • Has she done her homework on the company?