The Un-MBA

On May 24 I visited Lunar Logic in Krakow, which, like Applicake, is a Rails consulting firm. It was spawned from Lunar Logic in Eugene, OR but in 2004 became independent. Recently they launched their first product, Kanbanery, and are moving towards becoming more of a product company.

The CEO is Paul Klipp, who surprises you at first with a midwest-American accent, because he was born in Chicago. After learning that he has an MBA in international relations I braced myself for the usual MBA viewpoints, and got more surprises.

For example, standard MBA brainwashing would never create a product (the graduate) that could utter the sacrilege, "I don't want to grow too big." But Paul seems primarily interested in enjoying his life, so the growth pressures of getting too large (about 40) hold no fascination, and people at the company seem to agree.

One of the stories I found amusing was the time he was a COO for a marketing company in Dallas. When I visited my friend Zack, the COO at Zendesk, he explained to me that the title of Chief Operations Officer could mean just about anything (in Zack's case, "Operations" were about connecting with client companies and not about keeping the servers running). When Paul was COO, he explained, most of the "operations" involved inflating balloons (he got paid well, though).

The Lunar Logic offices are converted flats, the standard unit of real estate if you're going to create a small business in the city. Apparently Poland (Krakow, at least) has no ordinance against mixing businesses and residences. Actually, businesses are good neighbors because they tend to be gone (thus very quiet) in the evenings. So far, I really like the outcome of the architectural constraints that flat-based businesses work within; the results feel far more human to me than green-fields office boxes.

Paul is an experimenter after my own heart, and we agreed on many issues, including some of my edgier ideas. He has even started an open-spaces conference so we had notes to share about that. He's careful about company finances, but other than that he seems to be willing to try all kinds of things. They recently hired a yoga instructor and Paul believes he has seen higher productivity by breaking the patterns of excessive focus on a problem (as reported in Jonah Lehrer's new book, Imagine: How Creativity Works).

One of the tools/principles that keeps coming up for me is transparency. It's something that I've started to reach for first when faced with a problem: "What if we apply transparency here?" It's surprising how often it solves a problem or changes the nature of that problem, or at least makes you look at the problem differently.

Paul's applications of transparency make me feel like the amateur I am. He was not only very forthcoming about how the company worked, but he told me about transparency experiments he had done within the company and about getting surprising results.

For example, we talked about bootstrapping from a consulting firm to a product firm. I've heard people say this is a difficult process, but I've also heard people talk about funding a product startup as being difficult. So, why not just stay in the consulting business (also, why are consulting firms so difficult to scale up)? Paul pointed out that, on the scale of Lunar Logic anyway, the most you could charge for consulting -- if you have a good reputation -- is 20% over what you're paying your employee-consultant. Contrast this with a hardware product company which typically takes all the costs of creating a product and doubles them. The 20% overhead for consulting has to pay all your office costs, administrative costs etc., and then you put the rest in the bank for a rainy day. If work dries up, your rainy-day money can probably only last you a few months before you're out of business. Not exactly a comfortable safety net. Add to that the sublinear nature of company scaling (companies get less efficient as they add more people), and the only way companies like Thoughtworks and Accenture can work is by charging a LOT more and convincing clients you have unique consultants (Thoughtworks), or paying lower rates to the consultants and still charging more by convincing clients that your size is an important factor in their buying decision (Accenture). Either way it becomes a numbers game, and scaling up inevitably leads to having the people that run things be numbers manipulators who don't understand the nature of the service they provide. They get further and further out of touch with the customers which ultimately leads to the demise of the company.

With a product company, you don't have a customer showing up and telling you what they're willing to pay for. You have to figure it out, and if you get it wrong, you have to keep trying until you find something or run out of money. But if you do find a product that customers want, then you have a much better equation, although now you have the problem of trying to anticipate how many units will sell, for how long, the potential for multiple versions, etc. That information tells you whether you can expand, work on other projects, hire new people, etc., but it still seems like a much nicer place to be than calculating how many months the company can exist if contracts dry up.

Paul has also been experimenting with financial transparency within the company. One of the numerous leftovers from industrial-age management is "don't worry your pretty little head over the finances." In the compartmentalized world of industrial corporations, everyone specializes in their own narrow job. Workers on the factory floor don't need to understand the way the business works. We are taught (usually very subtly) this compartmentalization via industrial-age education: now we focus only on spelling, next we focus only on math. The teacher only teaches, the students only learn. The principal runs the school, the teachers follow instructions. After imprinting on this pattern, it's not very hard to accept that senior management decides what to do and how the money is allocated and how we are organized, and we are "liberated" to focus on our specialties.

Except that it doesn't work very well. I've talked elsewhere about The Mum Effect and The Distrust Effect; how information gets distorted as it moves up and down the power hierarchy. An industrial-age company seems to be able to compensate for these effects enough, only because what they're doing is relatively simple and procedural. But an information-age company does not thrive when partitioned -- the interactions are too complex, subtle and fast to rely on a hierarchy for communication. The time and distortion caused when every decision must travel up and down the hierarchy makes the company even more fragile and susceptible to disruption. It's better to make the decisions (and learn from the effects) at the point of contact with the problem.

Indeed, we might even say that in the industrial age, "the less you knew about the company, the better," while in the information age, "the more you know about the company, the better." Because the better you understand the big picture, the better you can align your efforts.