The Leader's Guide to Radical Management

I just finished reading The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century by Stephen Denning. 

I really liked most of the ideas in the book. This can probably be attributed to Confirmation Bias, because almost all the conclusions he has drawn about old-style business management agree with my own.

There were two problems I had with the book, and both of them are significant -- although both issues are about the author not going far enough. I have no problem with the ground he covered; it just seems he couldn't bring himself to draw the conclusions that his thoughts point him to.

First, the entire context of this book is founded on the idea that existing companies can change to become Radical Management companies. And yet, again and again throughout the book he gives solid examples and arguments showing why those very companies can't change. The Radical Manager is presented as an enlightened creature working within the traditional hierarchy, despite all his examples of intractable entrenchment. As I've argued elsewhere, the people in power inside traditional management hierarchies got there because they wanted power, first and foremost. Those are the very last people who are going to pave the way to their own loss of power. Denning talks about how managers need to "give" power to teams (often conditionally; anyone with experience knows a system where someone can decide to give and take power does not describe autonomous teams).

The other book I'm currently reading, about how ideas evolve, may explain why Denning seems to be stuck here. In order to create new ideas in your head, you need to have direct experience with the (witnessed) ideas that you are combining in order to make (imaginary) ideas in your head. As you get further away from the real, it becomes harder to imagine the possible. It's possible that Denning may be so entrenched in the old that -- even though he clearly sees all the problems -- he is unable to imagine anything except the evolution of the existing power hierarchy into some kind of radical-management hybrid. I can certainly sympathize with this dilemma. I'm still trying to figure out the combination of conditions that produced Open Spaces conferences, and discovering the New Organizational Structure feels like the (mental) battle of my life.

The less-complementary alternative explanation is that Denning is writing this book in order to produce Radical-Management consulting fees, so he must hold out the hope that it's possible to transform an existing company to those who have the power to write checks. Still understandable, but being tied to profits makes it even harder for him to break out of the constraints of his thinking.

The second problem is that, when it comes to the actual organizational structure of Radical Management companies, he offers little more than hand-waving. This might be because of his aforementioned inability to let go of the idea of transforming existing companies, which could prevent him from seeing anything other than a variation on the existing structure. All of my experience and study says that it is the organizational structure that is critical. It is the day-to-day practices that keep the boat afloat and headed in the right direction. For example, in Open Spaces everything happens because of the practices and processes, and one of the great things is that they are few and easy to remember, but each one is focused on and supports the goal (creating the best experience for the conference attendee -- which of course every conference will claim as their goal, but only practices and processes tell you the truth about the goal, and that's just one reason they're so important).

It's not that Denning gives you no guidelines at all. He talks about things like radical transparency and self-organizing teams, but these are presented as "things your organization should have" and there is no structure to support them, other than the idea that "management must lead the way," which relies on the very people who stand to lose the most power leading the way to the loss of that power.

Again, I really liked a lot of the book -- it was a warm, cozy cup of confirmation for me. But it would have benefitted from some editing. There are places where you start to think "have I read this already?" at which point you can start skimming and not miss anything.

Here are my highlighted passages from the book, with some additional comments.

Peter Drucker noted, “Workers throughout history could be ‘supervised.’ They could be told what to do, how to do it, how fast to do it and so on. Knowledge workers cannot, in effect, be supervised.”

The fact that current management practices prevent a full human flourishing is in itself an economic, management, social, and moral problem of the first order, built on the notion that the workplace is a system of things that is more important than the particular individuals within the system. 

Harold Geneen, the CEO of ITT, expressed the idea pithily in 1965: “The goal of management is to make individuals as predictable and controllable as the capital assets for which they are responsible.” 

In fact, a principal attraction of business process engineering was precisely that under the guise of being something entirely different, it was more of the same. It was another superficial fix to a system that was suffering from rot from within. 

The champions of business process reengineering failed to see that the activity was Taylorism under a different label. 

IBM had done research on the best way to develop software, and its conclusion was the surgical team ... 

The "chief surgeon" team was the structure touted in Fred Brooks' The Mythical Man-Month.

In 1973, Peter Drucker provided a clue as to where to look: “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods.... The customer is the foundation of a business and keeps it in existence.” 

The mathematics of optimization shows that only one variable can be maximized. Two variables cannot be simultaneously maximized unless one variable comprises the other. It is thus possible to maximize both satisfied clients and delighted clients because satisfied clients include delighted clients. It is not possible to maximize both client delight and shareholder value. You have to choose one or the other. 

“Whenever a customer feels misled, mistreated, ignored or coerced,” Reichheld writes, “then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value. When sales reps push overpriced or inappropriate products onto trusting customers, the reps are generating bad profits. When complex pricing schemes dupe customers into paying more than necessary to meet their needs, those pricing schemes are contributing to bad profits.” 

This helps explain why some companies that appear to be financially flourishing suddenly run into trouble: they have been mining their long-term customer relationships with bad profits to prop up the bottom line. 

In radical management, the values are reversed: performance is given priority over predictability. If the client is delighted in surprising ways, so much the better. The bottom line is client delight, not a predictable outcome for the system. 

Note: the complexity of some of his practices comes in the attempt to transfer power rather than building the structure from scratch.

This includes an array of actions, including identifying team members who share a passion for the goal; getting the right mix of skills and challenge; giving employees a voice in whether they want to join the team as well as giving the members the ability to determine who else is on the team; getting a team that is the right size; getting a proper location, preferably colocation; and systematically identifying and removing impediments to getting the work done.

The habits of managers who have worked in a sequential push fashion for decades are set and embedded in the culture of most large companies. It is common sense, obvious, and logical to do the requirements, then design, then implement. It gives the impression of an orderly, accountable, and measurable process with simple, document-driven milestones. It is a natural marriage with hierarchical bureaucracy. It ties in with thinking built on the economies of scale, mass production, and mass marketing. There is only one problem: in a complex dynamic environment and where competitive survival depends on being able to delight clients, it doesn’t work. 

By making decisions at the last responsible moment, the team has the best information to make informed decisions. It avoids wasting resources by making unnecessary inventory or early decisions that will have to be undone. 

as the new generation of people joining the workforce are increasingly looking to the quality of working life as a key factor in deciding which firms to work for, hiring the best people will be a force for change. 

The willingness of management to encourage the identification of such impediments and take action to remove them is one of the make-or-break aspects of radical management. 

Nontransparency has always been the norm for communications in hierarchical bureaucracies. That’s because a hierarchical bureaucracy is a hermetically sealed container, whose continued existence depends on the participants’ speaking consistently with the underlying assumptions of the power structure, even when they are at variance with external reality. By contrast, radical management is an open system that depends on the ascertainment of truth—what will delight clients—in order to achieve its goals. 

It’s difficult because the implicit respect for workers is the direct opposite of traditional management in which the system is seen as more important than people and quality is the responsibility of overseers. 

Traditional management sets a limited goal of “good enough” quality, which translates into an acceptable number of defects and an acceptable range of standardized products that, it is hoped, meet customer requirements.

Traditional managers speak to employees as employees, and power is the currency of the communication. These managers present themselves as the superior of the subordinates, although out of feigned politeness, traditional management refrains from calling subordinates “inferiors.” 

In reality, the subordinates may be superior to their “superior” in many respects: knowledge, skills, courage, integrity, or something else. As a result, traditional managers are continuously involved in exaggerations and mystifications to preserve a facade of superiority. It is in this facade that traditional managers place their hopes of getting things done. Yet in the world of knowledge work, it is perceived for what it is—a facade. As a result, if traditional managers mention or allude to social norms in such a setting, they sound fake because the relationship is hierarchical. 

One way of drawing on that memory is to have the team members tell each other stories of their own experiences of high-performance groups that they have experienced in the past. This may enable the group members to start to see each other as people who have had such experiences. 

A century hence, when historians come to write the history of the current age (assuming our species survives so long), they will, I believe, be puzzled as to why so many people managed—and so many more people allowed themselves to be managed—in ways that were known to be unproductive, crimped the spirits of those doing the work, and frustrated those for whom the work was being done. Why, they will wonder, did this continue for so long on such a wide scale?

Note: traditional companies hire when they have a space, not when the best talent appears.

First, the impetus will begin with a single individual.
Second, the change will happen organically.
Third, a small high-performance team will be needed to inspire and guide implementation.
Fourth, the change will happen quickly or not.
Fifth, the change idea itself will steadily evolve.
Sixth, the change process will run on human passion.
Seventh, it will be focused, disciplined passion. There will be freedom to create, but within clearly delineated, adjustable limits.
Eighth, outside help will be used but not depended on.
Ninth, the top of the organization must support it and be supported.
Finally, the idea will be more important than any individual.

If you’re not hearing laughter, it’s a sign you’re still in the land of traditional management.
By contrast, my encounters with traditional management were always deadly serious. Jokes about the hierarchy were not tolerated. That’s because laughing at the hierarchy puts the power structure in question. In traditional management, the power structure is no laughing matter. In radical management, jokes about the hierarchy are possible. People are doing what they are doing because they believe in it, not because of the power structure. 

Traditional managers live in dread of the unpredictable. Surprise brings traditional management to a halt, and the world no longer corresponds to the plan. The plan must be revised so that the future can be a copy of the plan! 

It is now as impossible for us to think that we could do no work and be happy as it was impossible for Aristotle to think that we could be both employed and free. Finding meaning in work and at work has become part of what it means to be human.

I wonder if this somehow corresponds to or arises from the idea of romantic love.

The vast and somber edifices of the traditional corporation still stand. Grim and impregnable, they also seem destined to last forever. Yet they are also rotting from within: the return on their assets is only a quarter of what it was just a few decades ago. Their life expectancy is already startlingly brief—no more than two decades on average, even based on past experience. The despotic management practices that are causing the decline are anachronisms from a former era. It is only a matter of time before they come to be seen as uneconomic and intolerable as despotism in the political sphere.

Startup Is Vision

A very artistic way to describe/motivate startups. I especially like the way he reinvented "Who Moved My Cheese?" (Which was a silly book, anyway).

A Pattern Language for an Organization?

This post attempts to describe the foundation for a happy organization, and it has some very interesting ideas, such as:

There is no such thing as "hiring." Rather, people come into the organization as apprentices, helpers, perhaps do a small job, perhaps work for nothing as apprentices, and then grow gradually into part time or full time positions, as their capacity for responsibility, and their place in the functional processes, becomes clear.

 Alas, much of it seems spotty, like a list that someone started and then forgot about. Still, I like the intent.

The Next Bubble

My friend and coathor James Ward is up here in Crested Butte for a couple of weeks and we were talking in one of the coffee shops. When he's not here we have very little contact by email or other means and even then it's cursory. But when we're face-to-face, the ideas fly (being in the same physical space matters). Of course, we aren't constrained by the usual "putting-in-hours-and-must-appear-productive" parameters that 20th-century business imposes. We're just relaxing and enjoying ourselves and that's what allows the really creative thoughts to emerge.

James commented that his spider-sense was telling him there was another tech bubble arising and wondered what it might be. Could it be, for example, cloud computing or perhaps mobile devices?

People often consider the first tech bubble to be the internet boom-and-bust, but I've seen a bunch of smaller ones back when the computing industry itself was much smaller and we mostly kept our bubbles to ourselves. The first one I remember was the Artificial Intelligence (AI) bubble, probably in the late 80s or early 90s. There had been some (unspecified) breakthrough that was going to allow us to apply AI to everything and revolutionize the world. Languages like Prolog and Lisp were going to be big. As time passed, the people actually tasked with doing the work discovered that there seemed to be some very important missing pieces. More time passed and we started thinking that maybe we could settle for expert systems instead of true AI. Even those never panned out. The whole thing turned out to be a scam, perpetrated by people who had seemingly figured out the rest of us could be fooled for awhile, and propagated by those who could produce enthusiasm (usually for the potential profits rather than the actual technology) without anything but surface knowledge of the topic (could that be the definition of a salesperson?). As you will see, that wasn't exactly the case; it was actually a collective delusion.

We've had several other mini-bubbles, which mostly seemed to hinge on the "computers can think" meme, and which often expressed themselves as programming-by-drawing-pictures tools.

It appears to me that the foundation of any bubble is information arbitrage. Information arbitrage means that someone knows something that other people don't (yet) know, and they take advantage of that information lag somehow. A bubble happens when that information turns out to be ... not false, exactly (because then it would be relatively easy to disprove), but somehow subtly misleading or based on a widely accepted belief that turns out to be less than true.

Take the housing industry, for example. We had come to believe that (A) Houses have intrinsic value and (B) the price of real estate always goes up (this being a favorite foundational selling tactic of real-estate salespeople). The bubble then progresses in nudges, trying to find the limits of how far it can go. If, for example, A and B are true, then it should be safe to loan money to people who don't seem to be able to pay it back. What's the worst that could happen? You'd repossess a house that has increased in value. It's a no-lose situation! Based on this analysis, the sky is the limit and the housing industry appears to be the best investment you can make. People pile on.

There's the small problem that if we build too many houses then all of a sudden no one will want them. And of course there is a limit on the price -- there's going to be a point where someone decides they can't make those payments.

But we keep nudging: banks keep making slightly better deals than before to make that next loan, and builders figure that they can build and sell their houses, that elsewhere less-enlightened builders might overbuild and end up with unsold units. But here, the demand continues and it would be crazy to stop because then some other builder would make all that money.

All this "knowledge" about the situation continues to build, and such "knowledge" has one foot in the truth so it's easy to think it's all true. But as the pseudo-knowledge pyramid builds, at some point the needle crosses over from sort-of-true to mostly-false.

Regardless of their actual medium, be it tulips or software or houses, all bubbles are ultimately fake-knowledge bubbles. The bubble phenomenon takes advantage of the wiring of our brains, which are pattern-matching machines that can sometimes detect true patterns when given only the subtlest of information. But they are equally prone to making up superstitions based on that subtle information, precisely because those who go check that noise in the night that they might or might not have heard are a bit more likely to survive and reproduce.

So the fundamental way to determine whether something is a bubble is to figure out whether the thing you're investing your time or money into has intrinsic value. This is how Warren Buffet made all that money -- he ignored all the stock analysts (who were themselves only playing a game of "telephone" and listening to other analysts) and determined, using his own metrics, whether a company produced anything of value (this is also why he pulled Berkshire-Hathaway out of the market during the internet bubble -- he had no way to determine the value that everyone was claiming these internet stocks represented).

What about James' query: does cloud computing or handheld devices represent a bubble?

Cloud computing takes away all the previous hassle of creating and growing an internet company. Now you can focus on the one thing that adds value: your unique idea. You no longer have to deploy on a single server, then struggle to catch up if your product gets popular, ultimately raising money and building a server farm like every other internet company. Cloud computing removes that needless duplication of effort. More importantly, it allows experiments to be cheap -- creating an internet application can be a relatively effortless process, so it becomes much easier to simply try something out rather than attempting some kind of market analysis. Indeed, the iterative experimental approach is becoming optimal.

Cloud computing thus provides huge value. It's the way we'll be deploying most of our applications in the future.

And handheld devices? Undeveloped countries are now able to leap forward precisely because of such devices. A village can have a solar-powered handheld device before it has anything else. The information that can be exchanged this way can change the world, and the human demand for information is huge. Our oversized brains are designed to accumulate culture, and they want to.

So what, then, is the next bubble? Let's look for something that has attained mythical status, something to which people are attributing magical properties. Something that's been getting big, exciting news because its stock valuation is so high you wonder, "Wow, really? For what?"

Does social networking leap to mind? Here's the fake-information bubble: no one can really say exactly what social networking is, or why it should be worth so much. Thus it's mysterious and magical and must be worth many billions.

Here's what social networking actually is, though: The internet for everyone else. The original internet was exclusively for techies, who were the only ones who could put things up on it. But social networking systems allow everyone else to put things up on the web. That's it.

I'm not saying it isn't valuable for everyone else to be able to use the internet this way. It definitely is. But it's certainly not crazy-billions valuable; in fact it needs not to be. It needs to be the roads and sewers and electricity infrastructure. It can't be yet another way for some company to sell your attention. Indeed, that very thing is what will cause the bubble to burst. In a true free market, which the internet has been the best example of in history (not perfect, but closer than anything we've seen), new systems appear that organically route around obstacles.

What Business?

At some point the proof is in the pudding. There are thousands of business books published each year; some claim the number is as high as 11,000 (that claim, admittedly, is made by a company that sells you summaries of business books -- there's actually a kind of derivative market for business books!). All these books claim to know some kind of answer, and if you spend much time reading about business management history, you know that the vast majority of claims about what works and doesn't in business are specious. On the other side, ideas that have been proven through experiment (often again and again) are often continuously ignored because they don't fit in with the current set of convenient and comfortable business beliefs. It's not hard to come to the conclusion that the vast bulk of management ideas and practices during the last century are nothing more than superstition.

The opposite of superstition is science (ironically and yet appropriately, the very thing that Frederick Winslow Taylor was claiming he was doing while he was lying through his teeth, fabricating his data to fit his desired conclusions). It's very difficult, perhaps impossible to do true science when it comes to management, but we can at least apply the most basic principle of science which is to try things out. This is far from deterministic -- if you listen to the Stanford Entrepreneurial Thought Leaders podcasts you'll hear lots of very successful entrepreneurs telling you their version of the one true way to start a successful business ... with widely differing and often clashing conclusions about what those "truths" are.

But even if they're often wrong, the people who have tried things out themselves are miles ahead of those who simply postulate that one management method or another might work. It's not science, but at least it's an experiment.

This has gotten me thinking that, if I'm going to turn the business world on its ear by proposing the next organizational structure, one of the most effective ways of promoting said structure is to actually start a company to experiment with that structure and -- because I believe that structure will automatically evolve to improve itself -- figure out better and better ways of doing things through experience.

This is clearly one possible path for this project. To be honest, it sounds more attractive to me than writing yet another book. I don't know if I want to write a book based solely on reading other books and visiting companies, unless I'm sure I could contribute something useful. However, creating some kind of actual test which shows that these principles work (and how to create a structure that makes them work) seems like it might have a far bigger impact. Doing, rather than talking.

This opens up a ton of questions, which is good because these are the very questions I need to be able to answer if someone asks me how they can start such a business (or if I were to create a book or a workshop to teach that). Questions like how to finance it without losing control of the organization to the point where the financiers can destroy the vision in an attempt to extract short-term profits. If the organization is a collective, perhaps there is a way to self-fund or bootstrap.

Assuming the problem of financing can be solved, what should the business do? Although to some degree it doesn't matter what you do, I have no reservations about trying to stack the deck in my favor as much as possible (if the business fails, I'd rather it fail because my ideas about organization are wrong, because then at least I'll know). So the obvious choice is something in the software world; this has the added benefit that software companies tend to require much less overhead to get started.

I also seem to have more experience in what is probably categorized as B2B; it seems like most of my work in the past falls into the category of helping businesses do their work better (through training and consulting).

So I imagine a business that makes software tools that help other businesses. To bring it full circle, what about a business that makes software tools that help companies implement next-organizational-structure ideas? (Even if I don't yet know what those idea are or what the tools would look like...). That has a kind of nice snake-swallowing-its-tail characteristic, because the business would have to constantly focus on the new structure and how to implement it better.

The B2B approach might also solve part of the funding issue, if enough customers were interested enough in the products to help by purchasing up front; taking the Kickstarter idea and applying it to B2B.

You Only Get One Wish

In my studies of management and during my visits to companies, I have noticed a naivete among thinkers in both camps. When I was working as an engineer, all this naivete seemed to be limited to those in management, who seemed to know so little about what the company was actually making that it was ridiculous that they could even try to make decisions that affected engineering. In hindsight I think this was an accurate assessment; 20th-century management believes that you don't need to know anything about what you're managing, that it's all about tuning the manufacturing system to maximize profits.

Looking at the other side in the form of companies started by engineers, I see the mirror image of that naivete. Because the old-style managers were so clueless, the logic seems to go, we don't have to pay any attention to management. All management is dumb (I confess to having spent much of my life laboring under this oversimplification) so we don't need to bother with it. Engineers can create a company that's only about engineering and management will take care of itself.

This, I believe, is why startups eventually go through the "maturity transition" where the company is supposed to "grow up" and "become mature" by bringing in professional managers and reorganizing -- typically into a 20th-century manufacturing-based organizational structure that goes against what the startup team was hoping to create. And then you get the usual result that the core startup people quietly leave the company and go someplace with a culture they like. This happens at the same time that the new managers are saying "people are our most important resource," completely ignoring the valuable feedback that people are leaving their culture and taking valuable culture with them. The fact that those leaving disagree with the new changes is seen as a good thing -- they aren't "team players."

Rather than beginning as a startup and later converting to a "mature" organization with its attendant upheaval and destruction of culture, the organizational structure needs to be in place from the beginning. I'm currently reading The Leader's Guide To Radical Management which draws upon agile methods and lean management techniques to propose a new way to structure companies. I like this book a lot because it almost completely agrees with most of the conclusions I've been drawing and so it makes me feel like I'm not fighting this battle alone, but I definitely have some questions about where he's going (I'm only partway through the book). For one thing, he says that the primary goal of a company should be "customer delight," and that's hard to argue with but I think the primary goal of a company should be to be "the best place ever to work." That's my one wish, and I think if it were fulfilled then all the other goals would automatically fall into place: customer delight, exceptional products and profits. If I absolutely love where I'm working then I want all those other things to happen because I want that place to continue, so that I can continue loving it. Indeed, knowing that I'm delighting the customer will be part of why I love working there.

Notice that I said "one wish." A particularly naive belief in the realm of both startups and "mature managers" is this idea that you just make a list of objectives. Merely writing down this list is somehow supposed to make it happen. More importantly, you somehow get an infinite amount of energy and resources to focus on these things and so you can make this list as long as you want. This illusion of infinite power and control is the hubris that, while it might not destroy the financial viability of a company, does destroy its culture.

Whether you know it or not, you've probably already decided what your "one wish" is. Consider your interviewing process: what is the one question that is your make-or-break for whether you hire someone. If the question is something like, "do you want to be part of the world's leading maker of cheese-puff monitoring equipment?" then you've defined a business goal -- "world's leading" gives it away. You will select for people who are primarily interested in "winning" as defined by 20th-century management (maximizing profits) and you'll create the culture of a 20th-century business.

The critical interview question at Zappos seems to be "how weird are you?" That seems to be the culture they are creating, one that celebrates the uniqueness of the people that work there. My impression was that this had created a workplace where everyone there was almost deliriously happy. It was astounding.

If you think you can create a list like the following and accomplish any of the items, you're in trouble:

• Create a great culture (conveniently vague)
• Hire only the best people (all your competitors will cooperate by hiring only the second-best people)
• Grow like crazy (introduce large numbers of new people into the organization without affecting the culture, somehow)
• Be an environment for innovation (simply by saying that it is)
• Create great products (simply by believing that you are)
• (I'd love to hear more things that people have seen on lists like these, which I can then add to this list)

Instead, you'll end up not being able to do any of them and drifting into the hands of the MBAs, at which point your business culture will degrade into "maximizing quarterly profits." The above points will get incorporated into the company mission statement, where they will quietly rot.

I believe you can only have one thing on your list, one goal, one critical question that you ask people who want to join your organization. Because you only get one wish, you must think hard about what it should be. A single wish also forces quarterly profits into the background, because if your wish is to maximize quarterly profits, you must immediately ask "why?" and "how?" "Creating stuff that people need" also falls short. Given this constraint your goal can be no less than "customer delight," but I think we need to raise the bar even further and say "a place you love to work."

But you can't stop there, because creating the goal is just the first simple, albeit critical, step. The organizational structure must be designed to support that goal, and to empower everyone in the organization to crowdsource corrections in the steering of the company, both to keep it from wandering away from the goal and to correct and improve what and how the company is achieving its ends. Like Open Spaces, that structure needs to be both simple enough to understand and practice, and clever enough to guide the company in the right direction with a minimum of overhead. Discovering that structure is my objective, and it's where the real work lies.

It Doesn't Matter What You Do

The more I listen to Stanford's Entrepreneurial Thought Leader Podcast, the more I hear the term "pivot" -- to the point where some speakers are even saying the concept is overused and startups are pivoting too often and without enough consideration.

The story (well, ONE story, anyway) goes like this: You get an idea and do some amount of development. From what I've heard, this development can range from "none at all" (think Hollywood story pitches) to quite a bit including several cycles of fundraising from friends and family, angel investors, etc. Somehow you get to the point where you think you've really got something, and if you could get enough funding you could create a real product and bring it to market. So you start talking to venture capitalists (VCs).

If your pitch is successful, you get VC money enough to fund the whole process. You build your product and start selling it, it's a big hit, the VCs "exit" the process with a big financial win, enough to make their investors happy, pay themselves a bonus, and have even more left over for more investments.

But that's not what usually happens, apparently. Usually there's something about your pitch that doesn't feel right, or any number of other possibilities (the mood of the VCs that day) and you get turned down. Or you get the money, and for any of a lot of reasons your attempt fails -- you run out of money before you finish building something, or you build it and it turns out customers aren't interested. Apparently, a VC firm feels like they're doing pretty darn good if one out of ten ventures does moderately well and the other nine fail. And if they occasionally get a home run out of one of the successful ventures, well, they can keep going for quite awhile on one of those.

Here's where the pivot comes in. You get money, you start building something, but because you're a bit more ahead of the curve than everyone else -- probably you're cheap, rapid experiments -- you discover that you either can't build the product or that there are no customers for what you're trying to build.

If you're so committed to the business plan that you can't extract yourself from it, your company fails. But if you can actually make use of the information that you're headed for failure, you say, "Let's make something else, something that will work and that people actually want." You pivot.

The term "pivot" is like basketball: you keep one foot in place, and move the other one around. The analogy being that you don't drop everything and start over again by changing to a totally different product. Printers to handheld devices might be a pivot; printers to oil rig monitoring systems probably isn't. You want to change as little as possible while moving to an advantageous position, so you can hang onto and take advantage of as many of your strengths as possible.

It turns out that a LOT of initial ideas don't work out. I've been witness to a couple myself, and have my own stable of failed projects (failed for a plethora of reasons). It also turns out that a lot of startup teams can't let go of the initial idea, which dooms them.

The real formula to maximize the possibility of success seems to involve two factors:

1. Your experiment rate (how fast you gather data about what you're trying to build and who might want to buy it).
2. Your burn rate (how much money you have and how fast you're burning through it).

The more you can maximize the experiment rate and minimize the burn rate, the likelier you are to find a product that you can build and sell before you run out of money.

But here's the weird thing: apparently most VCs don't get this, because they invest in an idea. From the above analysis, the idea they're buying into is at best ephemeral. However, some VCs invest in the ability to do cheap experiments. They invest in the team. Which makes sense, because the team is ultimately going to navigate the perils of discovering the best product and bringing it to market.

I will argue that even investing in the team isn't enough to create an innovative company. A great team using the business structure of the last millenium is still going to create a company that gets stuck on one idea. The VCs of the future will ignore the idea and focus on the team and the organizational structure (all right, they won't completely ignore the idea, but the idea will only be one of many tests of the viability of the team).

In fact, once these concepts become generally accepted, I think we'll see new kinds of incubators and other company-forming structures that will, in the spirit of rapid experimentation, test (1) how well the team works together and (2) how well the chosen organizational structure serves the team. If you can discover problems with either of these before investing much in a venture, you can either fix the problems or reshuffle the teams.

Indeed, perhaps this is a model for a new kind of business school. Not a school per se, but a place where people can go to experiment with and form companies. While I have virtually no interest in attending a business school (the burn rate is way too high, and all you learn is last-millenium stuff with almost no experimentation -- it completely fails my formula above), I think I would learn a great deal by going somewhere I could be involved in low-cost, high-speed experiments in actually forming companies. And there's no schedule; you just keep showing up until you "graduate" by leaving with your new company. After such a place gets a bit of a track record, you'll have angels and VCs lining up to invest. (I could also see this idea as the foundation for a conference or workshop).

That's the meaning of the title for this post. Before now, the product was the important thing, it was what people were buying. Once you meet the basic needs for life, however, everything else is experience. Steve Jobs said that he focused on the product, but I'm sure he was simplifying -- you buy a product, but that product creates an experience, and that's what you're actually buying. A product is a fixed quantity, but experience means constant innovation which is not attached to product. If you invest in an idea, you get an implementation of an idea and a company attached to that implementation and product. If you invest in (the right) team and organizational structure, you get an innovation factory.