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Sunday, May 30, 2010

Under-estimating the impact of incentives

When all you have is a hammer, everything looks like a nail. As far as organizational structures are concerned, I'm a man with a hammer. That hammer is none other than #1 on Charlie Munger's list of causes of human misjudgment : Under-recognition of the power of incentives.

Take for instance, Jean Louis Gassee's criticism of Microsoft's Steve Ballmer. Setting aside that Gassee failed to sell to Apple at a good price, and BeOS never did very well in the market, it's not clear that any of the things Gassee would have Ballmer do was really actionable.

Microsoft is a 60,000 person company. There's a very strict limit to how much one man, even a CEO can do to move a 60,000 person company. The reality is, when you're at the stratosphere at such a company, the only thing you can do is to really set up incentives so that people do what's good for the company by doing what's good for them.

Take Vista, for example. Vista broke one of the most important rules of Microsoft Windows development: it broke backwards compatibility. Now you can rationalize that Windows' code base is better as a result. But the whole rationale behind Windows was that you can buy any $25 piece of hardware at Fry's and it would work. Windows XP, for instance did that marvelously, and I still have Windows XP boxes attached to various pieces of hardware that won't work on any other operating system. The minute Vista broke that compatibility, a customer would have to buy all new hardware for his new computer. At which point, Apple could (and did!) come along and say, "Hey, why don't you buy my shiny machine? It looks cool, it scores points with members of the opposite sex, and it can also run Windows if you have to."

But presumably Microsoft knew all that! Why despite knowing that Vista's lack of compatibility would screw with Microsoft's revenue and dominance, did it do so? I asked a current Googler who was an ex-Microsoftie this question in 2006. His response was: "The new driver model? The one that broke all your devices? Well, you don't get your promotion to Staff Engineer for being someone who keeps it compatible with the old cruft. You get your promotion for designing a whole new piece of infrastructure that has huge impact on the world. Well, whoever did that got his promotion, and who cares if it tanked the company!" Ouch. People have argued that the new model is indeed more stable, but other techniques such as MicroReboots were also available. There really was no reason for Microsoft to take the risk of defection of customers to other operating systems.

One would think that such perverse incentive systems that can cause companies billions would be fixed, but my guess is that these incentive systems lie deep in the heart of the corporate culture: inventing new things will always be better rewarded than either making existing things run faster, or keeping things compatible, despite the latter two jobs usually being far harder than inventing a new subsystem out of whole cloth. And executives, even C level executives frequently still under-estimate the power of such incentive systems. As an example in late 2008, I had a conversation with a top executive at a well-known Silicon Valley company about what these perverse incentives were doing to his company. His response? "I don't believe it all comes down to incentives. After all, if you do good work and do good things, when you leave and work for other companies or when your friends leave and work for other companies, they'll remember you and bring you new opportunities, so you always have an incentive to do good work." When I heard that response I did not know what to say.

Months later, the company unveiled a "good citizenship award" internally. It was driven by the same popularity-contest-based incentive system that had already failed to promote good behavior. Not surprisingly, things have not changed as a result. When you see repeated examples of such behavior, it becomes much less of a surprise that startups without an incentive system other than handing out stock to everyone will continue to outperform the large organizations. Which again begs the question: Why the rush to get big?


Unknown said...

Canon broke their rule of backward compatibility by ditching FD for EF mount, thus allowing Nikon to dominate in the world of film. However...

Canon now rules in the world of digital.

In your Microsoft example, the problem is this: you're amongst a bunch of engineers who care about specs. Does it look good on paper? Then it must be good. Does it look bad on paper? Then don't do it. In this type of spec driven mentality, you create a soulless product.

A product from someone with vision creates something like a Porche. A product from committee that tries to create Volvo-- specs look good on paper, SHIP IT!

Piaw Na said...

Do you know how long it took for EOS to surpass Nikon? 10 years. Basically, for the first 10 years of EOS's roll-out, it cost Canon market share and money. Yes, it was a deliberate business decision, but I don't think Microsoft's decision here was so deliberate. American companies don't set their goals more than a couple of quarters out, and Microsoft in recent years have not been an exception.

I'm not sure Volvo should be considered unsuccessful as a brand!

Unknown said...

Volvo is a very successful product. It's got the horse power, the safety, and bells and whistles.

In fact, Volvo on paper spec is superior over Porsche in almost every aspect. However, it will never be as sexy as a Porsche.

Look at Zune. It surpasses iPod in every aspect on paper. More memory, more features, more this more that. Sadly, Zune is still a soulless product created by the committee.