by BILL WADDELL
In Simple Excellence Adam Zak and I wrote, "The simplest, leanest and best managed a company will ever be is in its infancy when senior managers wear lots of hats, everyone is fully engaged, and the business operates with a sense of camaraderie forged by a shared sense of urgency. Cash is king in the start up, and spending is tightly controlled. The start-up hangs on every word spoken by the customer, and suppliers are chosen cautiously. It takes success to destroy all of that."
That same principle is behind Steven Pearlstein's recent article in the Washington Post "Protecting Honest Tea's Brand Under Coke's Big Bureaucracy". He writes, "big corporations invariably screw up their entrepreneurial acquisitions, … by sucking all the innovation and promise out of them by imposing their bureaucratic ways of doing business." Those bureaucratic ways of doing business by and large have to do with a management obsession with control.
Pearlstein is correct in raising concerns that the corporate staff at Coke is very likely to justify its existence and prove its superior intelligence and wisdom by picking apart the details of the little tea company and imposing controls, metrics and management reporting processes to whip them into shape. Each thin layer of bureaucratic waste piled on the acquisition will be justified by an opportunity to save a few bucks through economies of scale, derive a penny or two of synergy, or wring a couple of pennies of efficiency from them. By the time they are finished the tea people will be so thoroughly covered with waste that the "innovation and promise" will be completely drained. The senior thinkers at Coke will be driven by a need to control the tea company – make sure it does what they think is best based on their view of the big picture – all well intentioned – each move incrementally supported by numbers and economic logic – and all adding up to disaster.
The cost of control is astronomical, but usually hard to quantify, both in real terms buried in overhead, and in lost opportunities as the energy and creativity is sucked out of the lower level folks when they have to fight the bureaucrats to do the things to contiuously improve that once were done on the fly, but now must be thoroughly documented in advance and presented to multiple levels of the organization via Power Point and detailed cost-benefit analysis.
To see the cost of bureaucratic control in its most obese and ugliest form, one has only to read the reports from the Government Accounting Office whining and moaning about the lack of progress in the Department of Defense in getting the mother of all ERP systems in place. The report on government waste issued earlier this month complained that some $10 billion (yes the 'b' in 'billion' is accurate and not a mistype) is spent every year on business systems in the DOD, yet there is still not absolute management control over the millions of DOD employees and contractors, and that duplication of expenses still occurs, that" key management controls" are still not in place. Incredibly, this effort to get every dime of DOD money and every person under "management control" has been rolling since 1995 at this $10 billion a year pace.
Managers readily join the taxpayer chorus slamming the government for outrageous waste, but much of the government waste is just a larger scale version of the same waste managers routinely impose on themselves.
The simple, lean, aggressive, customer and cash focus of the entrepreneur comes with the risk that mistakes might be made, and the people on the front lines might not make the same decision in the heat of the moment that an analyst far removed might make with more information after the fact. But that entrepreneur will fix problems, improve processes and satisfy customers much, much faster; and he will do it without spending vast sums on systems and staffs to track and analyze every detail and every decision. Control and empowerment are antonyms. Control and speed cannot co-exist – the pipe dreams of the systems fanatics notwithstanding. Professional management kills entrepreneurism. Excellence is achieved through simplicity and the quest for control results in anything but simplicity.
Lost in the Northeast says
And yet those who start companies and then sell them off to make zillions of dollars are still lauded aren’t they? If they cared a whit about their company or the people they brought in to build it they would never sell to the corporate control freaks in the first place, would they? Entrepreneurs who build then sell–often serially–are just as much to blame as the corporate overlords who impose the waste of bureaucratic controls.
Dean says
It isn’t just about control, however. Often the company’s current business model is seen as a limit to the growth that the acquiring company wants to see, so they do what they know.
It starts with accounting software. They know they can’t take a $2mil business to $20mil with the head honcho still managing everything on an excel spreadsheet, so instead of showing the new comptroller how to manage the spreadsheet they bring in the corporate software.
Once the tail has started wagging the dog, the descent into bureaucracy is inevitable.
Bill Waddell says
Absolutely right, Dean. Quite often the big brother is so convinced of the worth of their bureaucratic heavy-hand of management they honestly believe they are helping and enlightening these small timers by putting the corporate systems in placeat the small acquisition.
Eric H says
Well, yes and no. Having followed Kathleen around various forums (shows, markets, small outlets, internet sellers, etc.), I have come to agree with her that mature businesses frequently get the details more correct. Not always, but more frequently. True infant operations are run by amateurs who – while they may be wearing many hats and getting some stuff exactly right – don’t know what they don’t know. Or they consciously decide that as a small business, they should be exempt from what the rest of their industry regards as perfectly reasonable expectations, so they intentionally ignore some things they shouldn’t. Some of them are convinced that business is inherently evil, so they intentionally act in ways that will guarantee their demise. They completely miss important and sometimes obvious stuff like workplace safety, product safety, incoming inspection, supplier selection, regulatory requirements, and so on. They will hire the first person who knows one thing more than they do and let that employee run roughshod over them. They will let their friends talk them into bad decisions (frequently because they tell them what they want, rather than what they need), they will get greedy and move beyond their ability and means too quickly, they will fall in with experts who are no such thing. They spin bugs as features, cut corners when they should invest, and spend when they should save.
As Kathleen often points out, most apparel businesses (or just plain businesses?) are started by women but run by men. The women have a lot vested in the design or some other part of the business, while the men are more vested in the business part of the business. If those assertions are true (and she has the data to back it up), then there has to be a transitional phase where you mature out of infancy into something like adolescence, or perish. And I know that in the wider sense, it is true in other industries that the business starter is not always equipped to keep the place afloat (I’m thinking specifically of a few startups in the high speed motion photo industry and aerospace). So I think you are referring more to that adolescent phase than the infancy.
Sorry, didn’t mean to go off on such a long rant, but I have dealt now with enough of these starry-eyed, would-be captains of industry to know that size and competence are not always, clearly, linearly, and negatively related.
As an aside, I will note that at one military installation I know of, there were at least 7 different accounting systems in place, and the contractors were expected to make their data compatible with all of them. The federal government is not one monolithic organization: it is many, and they frequently compete. Every 4 years, we are treated to a competition for control of this mess, but the truth is that “in charge” and “in control” are not necessarily the same thing.
Kathleen says
This reminds me of me circa 1993-1995 when I first started working with entrepreneurs. I was excited and the world bloomed with possibility. Finally I could work with people who were so small/new they were still doing things right!
I can only speak for myself but my thoughts amounted to abject delusions. I couldn’t possibly have been further from the truth. In fact, it is what compelled me to write a book about how to become an apparel manufacturer. Believe it or not, there wasn’t a single one; mine was the first.
I hadn’t intended to comment on this entry but I was reminded of this trainwreck entrepreneur this morning:
http://www.fashion-incubator.com/archive/mistakes_designers_make_pt87 which makes these points better than I ever possibly could.
I can only speak to apparel manufacturing but I’m endlessly frustrated by entrepreneurs who think the aura of good intentions (as they define them, usually self serving) are sufficient to become successful enterprises. 97% of apparel companies are started by women but 98% of those that remain viable are owned by men. There are many reasons for it but a primary one is that women are less likely to focus on the needed maturation of their skills and of those they employ to mature into the adolescence of their endeavors. I think it can partially be attributed to being marginalized by peers (as I would also attest) or being marginalized by those they aspire to become peers with but that is a topic for another day entirely.