Technology, The Mirage of Shareholder Value, and Why Icahn Should Just Retire

“We may see the small Value God has for Riches, by the People he gives them to.”

—Alexander Pope (1688-1744)

There are some days that I feel as if I am a late night talk show host blessed with a particularly inept politician. This past week was particularly fortuitous for me, as Carl Icahn has proven himself to be a gift that keeps on giving. I have been fairly blunt in my assessments of his spectacular effort to morph the Dell LBO into a goat rodeo (See here and here.) Hence, it makes me crazy that he managed to show up in the headlines once again this week, engaging in the same fatuous behavior that makes him a caricature of what my friends in finance would call "dumb money". This time, despite the ostensibly impossible odds of success, he decided to take on Apple. For a quick primer, the NY Times Dealbook blog does a great job:

Icahn Amps Up Pressure on Apple, but His Stake Limits His Leverage

It is hard to overstate the the pointlessness of this move. As I type this, Apple's market capitalization is an immense $484 billion. For Icahn to get the 5% stake in Apple needed to incite his usual proxy cat fight, he would need to come up with well north of $20 billion in cash. Which would be fine, except that he just doesn't have that kind of money. How do we know?  Because he was such an abject failure at topping the $24.4 billion offer that Michael Dell and Silver Lake were making for Dell. With bluffing skills like these, he needs to be kept away from the poker table at all costs. I haven't had this much fun watching M&A since a fish oil company called Zapata tried to buy an Internet company 6 times its size with stock in during the .COM boom. Here's some advice for Carl: Stick to raiding businesses where you might have some rudimentary understanding of their operations, like, say, lumber, fish oil, or buggy whips. If you you can't find any, it is far better to quit at the top of your game rather than have us remember you as a laughing stock.

With that said, Icahn is but a pathological symptom of a much bigger problem in the industry: Management's over reliance on optimizing for a high stock price rather than for building a sustainable business. This is especially true for the information technology industry, where the reductionist private equity strategy of cutting research and development in order to run the business for cash flows makes no sense. The fact is that no business can really be run as an accounting identity. In technology however, the product sets and platforms have a half life measured in low single-digit years. Killing a single dollar of R&D will set up for certain failure two years into the future. Tragically, stock prices get managed in 90 day intervals, so, if you are a CEO, firing your entire engineering organization will make you look like a hero in 12 months. In 30 months, you will likely yourself be fired; and your company, your customers, and your employees will be irremediably damaged.

The correct way to run a technology business - any business, for that matter - is to focus on the needs of the customer first. Build a world class product and solution set. Provide a lavish support infrastructure and build lasting relationships. The only way to do this is to assemble a talented and productive team, and show them that their contributions are valued. Build their loyalty. Enable them to to delight customers, and support them and their needs. The wants of the typical shareholder are so far removed from business success because the typical institutional shareholder is far removed from the customer. Does Carl Ichan care about the product needs of Apple's or Dell's customers? Absolutely not. He is clearly eyeing the cash in the bank and would hire new management to implement his redistributive strategy.

Managing for shareholder value rather than for happy customers is a problem that has reached almost crisis proportions. Thankfully, at least in technology, there are always cadres of small nimble companies out there who focus on their customers. They are the ones that are privately held and VC-backed, however. In most successful companies backed by venture capital, not only are the employees focused on the customer, but so are the investors. Maybe it's not a coincidence then, but these investors seem to score some of the most amazing returns for their money over the long term. Hopefully that will not go unnoticed. In business, customers - and not shareholders - always come first.

Um, Can I Work From Home? Please?

It really is amazing how organizations can take a relatively simple idea and supersize it to the point where it is unrecognizable from its original conception. Last week, in a bizarre reversal, we learned that HP has decided that their people should not work from home any more if at all possible. As usual, Arik Hesseldahl from AllThingsD summarizes it the best:

Computing and technology services giant Hewlett-Packard, which appears to be taking a page from Yahoo CEO Marissa Mayer, has quietly begun enacting a policy requiring employees to work from the office and not from home.

While it hasn’t yet reached the level of a company-wide directive with the same jarring effect as a new policy put in place by Yahoo earlier this year, HP employees are being told by bosses that if they can work at the office, they should work at the office.

I thought that I'd discuss this a little because the subject comes up frequently for me and, unsurprisingly, there is no correct answer - just a lot of nuance. So, why are these large organizations recalling their remote workers? What exactly is the "state of the art" when it comes to workplace design? How did we get here in the first place, where CEOs need to issue these kinds of decrees? Well, its quite interesting.

First, let me just make the incendiary pronouncement: Except in a small subset of job roles, working from home for extended periods is probably not a best practice. Sorry. If you read between the lines of the HP announcement, you get a pretty good reason for getting people to the office every day: immediacy of contact. This is not, as it turns out, the only reason to bring people together every day. There are all sorts of others, ranging from morale, to the rotation of the earth and the speed of light.

If you want to get into some very interesting academic research on the subject, the faculty at MIT's Sloan School have plenty of reading material for you. For example, Alex Pentland of the Media Lab has done a great deal of research that shows the value of people who work social circles within office environments. Long before him, Thomas Allen, a distinguished professor at the same institution, published a book that discussed a lot of the same kinds of issues. The overwhelming conclusion you arrive at from the reading is that the effectiveness of an organizations largely depends on how well, and how quickly, information gets disseminated and processed through the ranks. People working in intellectual or physical isolation create problems. Having whole teams of people that never see each other is unambiguously bad for productivity and creativity. There's a reason that "open" (i.e. cubicle-free) office environments are popping up everywhere: It forces people to talk to each other and collaborate.

The problem is that, for many years, it has been all the rage to geographically disperse organizations and try to make that work. Usually, the justification for this is money - the desire to cost reduce some aspect of the process by leveraging cheap labor in low wage locales. At some point it became a real estate cost reduction: Office space can be smaller if everyone worked from home, and so a company can pay less rent. Just like everything else related to pathological management behavior, if a little of something is good, a lot must be better.

Of course, these schemes have a cost, and that cost is usually management overhead. The managers have the unenviable task of getting all these people to work together. It usually means having to say the same stuff multiple times to different people in different time zones, waiting days for consensus to form, backtracking and starting over when misunderstandings inevitably arise, and a lot of wasted time. It also means that communication many times becomes mostly hierarchical. Information sharing becomes stunted unless the manager is an amazing person. Worse yet, it adversely affects corporate culture in ways too numerous to mention here. It's clear that this is what Meg Whitman is ruminating on at HP. It is also an interesting thought experiment for us to consider what this trend portends for the future of knowledge work.

As for the original question about working from home, I do allow it for a small subset of people. If you are one of them, it means that I have worked very close to you before, and I understand your work habits and your thought processes intimately. It means that I have decided I will allocate the time to interact with you daily, and maybe hourly.  It means that you have committed to being in the office one week a month at a minimum, and I will make sure that your travel is paid for. In fact, if this is you, you can consider it the supreme compliment from me: You are incredibly valuable to the organization, because I do not have the time to do this for more than a couple of people and still do my job well. If this is not you, I'll talk to you at the espresso machine...

Sunday Night Scotch: Every Day, A New Reason to Start a Company

All bad precedents begin as justifiable measures.
- Julius Caesar

One of the non-tech items that caught my eye over the last week was the interesting news from UPS that was covered by all manner of news outlets, perhaps most colorfully by MarketWatch's Jim Jelter in the video spot called.... drumroll please... "Why Your Boss Is Dumping Your Wife". The video is after the break below in case you missed the news. To summarize, UPS decided that they were going to deny coverage to working spouses of employees if they were at a company that also offered health insurance. Regardless of the political excuses, this idea was inevitable: My former employer was imposing a non-trivial surcharge to employees of working spouses who were similarly eligible - and this was back in 2008. Oh, well. I guess both Dell and UPS are OK with not being on the Fortune "Best Companies To Work For" list.

I think this is a great opportunity to try and understand how something like this could seem like a good idea to anyone. First, a look at the math: According to the Health Connector website here in Massachusetts, the difference between insuring me, my spouse, and my two kids, and dropping my spouse, works out to be between $320 and $550 per month depending on the plan. That works out to $4-6K per year in cost, of which $3-4K might be paid by the company.  UPS claims that this will affect 15,000 employees, so that tops out at a nice round $60 million, or roughly 7% of net income in the last 12 months. (By coincidence, that is the exact figure the company mentions.)

Admittedly, there are two ways of looking at this: On the one hand, some might say that health benefits have become too extravagant to be shouldered by the shareholders of the business. It's the shareholder's money after all. I am way out on the other extreme, however: Why does the business and its leadership suck so bad, that this is the only scheme they can conjure to increase shareholder value? Professing your lack of love for your employees, prima facie like this, is surely not a way to make your customers happier. Moreover, that earnings bump next year will likely do nothing for the stock price. Analysts know well that it does not represent real growth in the business. So then, why bother?

Like human beings, large organizations are very complex. Also like humans, to get an idea of what really propels organizations, you need to observe them at the moments where they are least inhibited: In this case, a time of despair. The economy is rather flat. The numbers are likely to disappoint. Somebody is going to lose a bonus. This is where discipline counts. Real leadership would dictate that you go talk to customers and find out what can be done to grow their businesses and yours. Mediocre leadership would dispatch a team of "efficiency experts" to see if they can find coins under the sofa cushions in the employee lounge. Doing the former is hard. It's much easier to do the latter. Each time you opt for the latter, you only make things worse down the road.

The point here, is that it is very easy for big businesses to lose their compass a little bit at a time. The proven way to make money is by focusing on addressing the needs of customers. Whenever there are substantial resources devoted away from that one singular focus, it almost always leads to a bad outcome. The reason startups can do so well is because they have no choice but to focus on their customers or perish. The reason the Googles and the Microsofts of the world got so successful is because they enabled their employees to do the same in scale. Indeed, that $4K per annum is noise compared to the profits that they bring per employee.

As for my part, if you happen to end up working for the company that I want to build, I can assure you that your spouses will be covered. Your espresso will be provided. Your scotch will be free. We'll throw in a few meals as well. In return, I'm going to expect that you will devote all your energy toward delighting customers. Seems like a good deal, but I assure you that it's the much harder path. It's much more rewarding, though. This is something I know from experience.