Monday, September 25, 2006

Organization Development in High Tech Startups

Silicon Valley is home for thousands of high tech startups. Most of these companies started in the valley and blossomed into Fortune-1000 companies. The success of several startups can be traced to several common traits one of them being their HR policy. This article is about the HR practices followed at these startups - and how such practices helped them succeed. The lessons we can learn are: How one can reduce attrition, How to select employees and Means to control & guide the energies of these people.

Silicon Valley startups typically do not tend to have a strong HR departments - at best HR department will be staffed by one or two persons, yet the founders of the company have usually incorporated the best HR practices - this is done by sheer experience of the founders or is driven by venture capitalists or lawyers or consultants who are deeply involved in any startup. It is this ecosystem which gives Silicon valley companies a better chance for success. The HR policies and organization development practices at these startups makes them "built-to-last".

Blue print for a High Tech Startup

At the very beginning, the founder’s have to present a 'blueprint' for their company to powerful brokers (Financiers, Venture Capitalists etc.). Every CEO in the valley will tell that their company is built by their elite employees. It is therefore no surprise that the organizational ‘blue print’ must contain strategies for hiring the right people, retaining them & compensating them. This can be broken down into three distinct strategies:
  • Employee Selection
  • Employee retention
  • Employee motivation
Employee Selection

How to companies select employees. Founder’s of these startups are deeply involved in hiring the right people for their company. Founders often take it personal when it comes to hiring for key posts. They are involved in every step and personally call on potential candidates, interview them and even negotiate salaries, stock options, performance incentives etc. before hiring them. Time and money are of paramount importance to the company - this makes the founders look for the right skill sets, right attitude and experience in the potential candidates. The objective is to bring the new employee onboard as cheaply and as fast as possible.

Founders play a direct role in selecting employees having the skills and experience needed to accomplish the immediate tasks. Entrepreneurs also look deeply at the long term potential, values and cultural fit - emphasizing on how the new employee would connect with others in the organization.

Employee Retention

Employee retention in startups is ingrained into the organizational DNA. Most founders envision creating a strong family-like feeling and intense emotional bond with the workforce. This has a deep impact on the employees - they are motivated for superior performance and reduce chances of attrition. Imagine if the CEO is a friend of the employee - say director of engineering, then it will be very difficult for him to leave the company.

This emotional bond between founders and employees is carried out at levels of the organization. Director of Engineer - will in turn create a bond with his managers & it flows downwards. When I worked for IDT, I had a great bond with my immediate supervisor.

Employees are compensated adequately for their efforts - even startups pay a competitive salary to attract talent and sweeten the deal via stock options. The possibility of making it big via an IPO is a strong retention tool. Even when a company has gone public, the money value in the non-vested options make it attractive for the employees to stay on.

Once the compensation is taken care of, highly skilled employees - especially engineers and scientists seek challenges. In Silicon Valley - the competition for highly skilled people is so high that every startup must pose enough technical challenges to attract and retain these talented employees. Founders of these companies are often highly skilled and have a futuristic vision - which implies that a vast number of challenges must be overcome inorder to succeed. Since founders are passionate about technology and are personally involved in hiring, they will be the ones who set the work standards and performance metrics at the very beginning.

Employee Motivation

Talented employees are motivated by the work environment and work challenges. This means that efforts needed in employee guidance and control are minimized. Most startups rely on informal control through peers, friendship and organizational culture. Formal control structures are not usually used - instead organization culture of highly committed employees becomes a key motivational source.

Work related challenges and business objectives are tightly coupled with the emotional bond between founders and employees - this acts as a major motivation factor.

An Example

In an interview to Fortune Magazine, CEO of a startup said:
"We worried about the IPO a lot because from the earliest days that was a clear corporate focal point. Get to the IPO point, get the company public. It’s the big payoff for people who have stock. Every person in our company is a stockholder. We grant them options when they join. Everyone worked very hard for six years to get to that point. Our concern was, after the IPO and after the lockups expire [so that] people have the ability to sell stock, we were concerned what the motivation levels in the company would look like [and] what we could do to influence that motivation level. One thing we are working very diligently on right now is identifying what the next corporate milestone will be. 25% growth isn’t the kind of corporate objective or singularity of purpose that gets people riled up. We are looking for something a little more specific, like that $100 million benchmark. We’re in the process of making a final decision of what that overall, superordinate goal is going to be."

By articulating enduring overarching goals from the outset and by creating a powerful sense of belonging, the Commitment model can help companies avoid or minimize the "Post partum depression" syndrome that sometimes accompanies an IPO, release of the first product, or achievement of other key corporate milestones.

To paraphrase what one prominent venture capitalist said: "I automatically ding anyone who comes in here pitching their business plan. If they tell me that their goal is the IPO. If that’ s their goal, there are going to be huge organizational problems down the line. An IPO might be a means to an end, but it shouldn’t be an end in itself."

Corporate Philosophy

Startups often adopt the highest standards. Google, Yahoo or Redback etc. openly & proudly announce that they hire only the best. Most of the companies make statements such as:
  • "We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their job."

  • "We wanted to build the kind of company where people would only leave when they retire."

  • "We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques."

  • "We were very committed. It was a skunk-works mentality and the binding energy was very high."

  • "You work well, you get paid well"

These statements are followed up in action as well. Companies rigorously follow-up on these statements, As a result the credibility and the company image is high among the employees.

Change is Disruptive

In today’s high tech industry - change is the only constant, and high tech startups are the ones who are ushering the rapid changes. Yet in these startups, one can observe an ever enduring and unchanging value system. The company philosophy remains unchanged even after several decades. For example, look at HP or Intel or Oracle or Apple, the corporate philosophy of these companies have not changed even after so many years. These company follow the same high standards of recruitment, they are committed to innovation, committed to work on latest technologies, committed to having a highly skilled, highly motivated work force. These examples imply that many of the HR practices are deeply embedded into their organizational DNA - and that is reflected in their corporate philosophy - And it is unchanging.

Changing the basic HR blueprint is highly disruptive and destabilizes the high tech startups. Changing the blueprint significantly raises turnover, especially among the employees who have been with the enterprise the longest. The evidence of this can be seen in mass attrition - when a CEO or a leader leaves the company. In 1999, 45+ engineers left Motorola and joined Intel - when Intel hired Mark McDermott from Motorola. The attrition at Motorola’s chip unit continued for few more years - even after spinning off the semiconductor unit into ‘Freescale Semiconductors’.

Organizational Performance

Organizational performance is the bottom line. Founder’s early organization building choices, or subsequent changes in organizational blueprints, have a deep impact on companies.

A prominent and highly successful Silicon Valley entrepreneur, who argued founders to articulate a particular model of organizing in the early days of a new enterprise:
"Organizational models and culture are a source of failure for startups. . . . In order to have a successful company organization, one must first have a successful company. Companies that strive to put in place organizational norms and models, cultures from the outset have been successful"

Yet companies in Silicon Valley are reluctant to document and publish their core practices. Hewlett-Packard's written document of seven corporate objectives got written almost 20 years after the company was started, after more than 20 years of practice building a successful company to develop its norms and culture.

Lessons for Entrepreneurs and Managers

For many companies, the costs and risks of transitioning to a new organizational model might outweigh the advantages. Therefore, selecting an initial organizational blueprint that adequately suits the present and anticipated future strategy and environment is better than selecting one that is ideally suited to the current situation but likely to be dramatically mismatched in the future and to therefore necessitate disruptive changes.

An important implication for entrepreneurs: There might be a powerful tradeoff between risk and reward in selecting an HR blueprint for new enterprises. Companies that embraced the right HR blueprint managed to weather the inevitable crises and challenges of a young technology venture and then avoided the need to recraft the blueprint at a later date. These companies tend to survive and prosper.

For managers in established companies, being clearer and more explicit about the HR blueprint can also be enormously useful in dealing with two challenges facing most large organizations: balancing the need for global consistency against the need for local flexibility; and managing mergers and acquisitions.

As companies of all stripes fight the "War for talent," they would be well advised to devote as much careful thought to building a brand in the labor market as they do in the product market. The organizational blueprint seeks to brand the company as the "The employer of choice," a company that takes long-term development of its people seriously in a world is the one which gets the best talent.

1 comment:

Alberto Delirio said...

I was pinning away for such type of blogs, thanks for posting this for us.Hugh