Organizational Debt is like Technical debt – but worse

Startups focus on speed since they are burning cash every day as they search for product/market fit. But over time code/hardware written/built to validate hypotheses and find early customers can become unwieldy, difficult to maintain and incapable of scaling. These shortcuts add up and become what is called technical debt. And the size of the problem increases with the success of the company.organizational debt

You fix technical debt by refactoring, going into the existing code and “cleaning it up” by restructuring it. This work adds no features visible to a user but makes the code stable and understandable.

While technical debt is an understood problem, it turns out startups also accrue another kind of debt – one that can kill the company even quicker – organizational debt. Organizational debt is all the people/culture compromises made to “just get it done” in the early stages of a startup.

Just when things should be going great, organizational debt can turn a growing company into a chaotic nightmare.

Growing companies need to understand how to recognize and  “refactor” organizational debt.


I had lunch last week with Tom, the CEO of a startup that was quickly becoming a large company – last year’s revenue was $40M, this year likely to be $80M maybe even $100 million in ad revenue. They had reinvented a traditional print media category onto web and mobile devices for a new generation of users who were no longer buying magazines but reading online. Their content was topical, targeted and refreshed daily. Equally important their VP of Marketing had brilliantly executed a stream of social media campaigns (Facebook likes and partnerships, email campaigns, etc.) to drive traffic to their site, which they then turned into ad revenue.

Tom was excited about their next big round of funding that valued them at almost ½ a billion dollars. He talked about how they were trying to maintain their exponential growth and told me how many people they were adding, and the issues of scaling that rapidly. (They had doubled headcount from 100 to 200 in the last year and were planning to double again.) While he kept bringing the conversation back to their big valuation I tried to steer the conversation back to how they were going to deal with:

  • training the influx of new hires – in both culture and job specific tasks
  • retaining their existing hires who were working for intern-like salaries with little equity.

His answer centered on the great location of the new building, what great furniture they were getting, and the compensation plans for the key members of the executive staff.

This didn’t feel good.

They’ve Never Run A Company
Since the meeting had been a courtesy to Phillipe, one of their VC board members, I grabbed coffee and asked him what scaling challenges he saw for the company. I was taken aback when I got a reply that sounded like VC buzzword bingo – phrases like “They’re a platform not a product” and the ever popular “they’re a potential Unicorn.”

While the strategy sounded like a great long-term plan, I poked a bit and asked, “So what’s the training and onboarding plan for the new hires? What are you doing about the pay scales at the bottom of the organization? Aren’t you concerned about losing qualified people that the company spent the last few years training but never compensated adequately?” I got answers that sounded like the Tom’s – new stock grants for the executive staff, great new building, and oh, by the way, Tom and his co-founder got to sell some stock in the new round. And let me tell you about the vision and strategy again.

As Phillipe kept talking I listened but not really, because I started realizing that while he was a genius in finding and nurturing great early-stage deals, and had a vision that sounded great for the new investors, he didn’t have a clue about how to actually scale a company. He had never run one, and worse, had never been on a board of a startup making the transition from searching for a business model and product/market fit, to the next phase of “building” the infrastructure to support scale.

Unless they were planning to flip this company, organizational debt was going to hit faster than they could imagine. They needed a plan to “refactor” organizational debt. And Tom wasn’t going to get it from his board.

Focus on Bottoms Up as well as top Top Down
While the company had a great plan for keeping the top executives, and had all the startup perks like free food and dogs at work, they had spent little time thinking about the organization debt accruing with first 100 employees who had built the company underneath them. These were the employees that had the institutional knowledge and hard-earned skills. Originally they had been attracted by the lure of being part of a new media company that was disrupting the old, and were working for low salaries with minimal stock. And while that had been enough to keep their heads-down and focused on their jobs, the new funding round and onslaught of new employees at much higher salaries had them looking around and updating their resumes.

Surprisingly, given the tidal wave of new hires, formal training and job descriptions were still stuck in the early stage, “we’re too small to need that” mindset. The reality was that with hundreds of new employees coming on board the company desperately needed a formal onboarding process for new employees; first, to get them assimilated to the company culture and second, a formal process to train them in how to do their specific jobs. Unfortunately the people who could best train them were the underpaid employees who were now out looking for new jobs.

Organizational debt was coming due.

Organizational debt circled

“Refactoring” organizational debt
I had promised Tom the CEO we’d grab coffee again. When we did, I asked him about his head of HR, and heard all about what great medical and insurance benefits, stock vesting, automated expense account forms, movie night, company picnics, etc., the company had. I offered that those were great for an early-stage company, but it was time to move to a new phase (and perhaps a new head of HR.) Since Tom was an engineer I explained the “Organizational Debt” metaphor. He got it instantly and before I could even suggest it, he asked, “So how do I refactor organizational debt?”

I suggested that were seven things he could do – some quickly, some over time:

  1. Put together a simple plan for managing this next wave of hiring. Tell each hiring manager:
  • No new hires until you write/update your own job description.
  • Next write your new hire job description.
  • Next write how you will train new hire(s) in their functional job.
  • Next write how their job fits into each level upward and downward
  • And how it supports the mission of each level upward and downward
  1. Realize his expense plan is too low. I offered that it appeared he put together an expense budget using current employee salaries. If so, he was in danger of losing the people he most cared about keeping. He should stop thinking about 10% raises and start thinking about what he’d have to pay to replace employees who hold critical knowledge and train new ones. It felt to me more like 50% raises in quite a few cases.
    He needed to have his head of HR:
  • Do a salary survey of existing employees and industry comparables
  • Identify the employees they wanted to keep
  • Upgrade their salaries and equity ASAP

Some of the harder suggestions had to do with the organization as whole:

  1. He needed to consider refactoring some of the original hires and their roles. Some employees don’t scale from “Search” to this new phase of “Build”. Some because they are performance problems, or don’t fit a bigger organization, attitude etc. Some of these may be friends. Leaving them in the same role destroys a sense of what’s acceptable performance among new employees.  This is hard.
  2. In addition to refactoring the people, it’s time to relook at the company culture. Do the cultural values today take into account the new size and stage of the organization? What are the key elements that have “made it great” so far? Are they the same? different? how? why? It may be time to re-visit what the company stands for.
  3. Now that the company no longer fits in a conference room or even the cafeteria, it needs a way to disseminate information that grows with the organization. At times, this requires the same messages being repeated 4 or 5 times to make up for the fact the CEO isn’t always delivering them personally. Emphasize in the corporate messaging that while it is a period of rapid change, the company culture will be an anchor that we can rely upon for orientation and stability
  4. Does customer communication need to change? In the past any customer could talk to Tom or expected Tom to talk to them.  Is that feasible? Desirable?
  5. Finally, since this is new territory for Tom and board, create an advisory board of other CEOs who’ve been through the “build” stage from a startup to growing company.

Lessons Learned

  • Companies lucky enough to get to the “build” phase have a new set of challenges
    • They’re not just about strategy
    • It’s about fixing all the organizational debt that has collected
  • Onboarding, training, culture, and compensation for employees at the “build” phase all require a fresh look and new approaches
  • Failing to refactor organizational debt can kill a growing company

31 Responses

  1. Steve, this is a great article and your advice equally applies to any organisation that is moving at speed – whether that’s due to growth or simply change driven by market dynamics. Thanks for taking the time to focus on this issue as it’s often one that is relegated as “unsexy stuff that will figure itself out.”

    Liked by 1 person

  2. Thanks for the post. Very informative as per norm. I noticed the point about some staff holding critical knowledge. I come from the open innovation school of thought where concentrating knowledge in too few people hinders the innovative culture of the organisation. Here the idea is that knowledge sharing and new knowledge generation is part of the every day expereince and therefore the risk of critical knowledge being lost goes down. While ensuring the company continues to generate new knowledge continuously.

    Be great to see what the group thought on this.

    Like

  3. Steve

    Incredibly valuable post

    Many thanks

    Rick

    Like

  4. A great post Steve and very much overlooked. I have seen a lot of casualties in this stage of growth and it dam hard to get it right. How do you keep the entrepreneurial mindset while putting all the systems and processes in place. You give some very sound and practical advice in your post. However can you or anybody reading this post recommend a good book on the subject? there appears to be very little worthy contenders on Amazon. Many thanks for everybody’s suggestions.
    Davin

    Like

    • Ben Horowitz’s The Hard Thing About Hard Things is a series essays about what CEO face in the “Build” phase – the transition from searching for a business model into a company.

      Liked by 1 person

      • Many thanks for the recommendation

        Like

      • Great book. Just did read it, the first part reads a bit like Homer’s Odysee.

        I once scaled myself from 1 to 25 people within in a year. It’s a very exhausting experience if you do it the first time. I also learned that this scaling is very demanding regarding the own mindset.

        You need to be open to scale yourself, and this is a critical process. You can end as an useful leader or as an arrogant psychopath. People do change during this scaling, they don’t stay the same. Some go crazy, others try to hide from the challenges, and another group is open and ready for changing and learning.

        That’s also the reason why some potential co-founders are bad. They are bad if they are not willing or able to scale their mind. It’s a very narrow path between the abyss of failure and being a maniac trying to rule the world.

        Scaling has the same effect on your mind, like stretching a rubber band to its extreme length. Head is in the stratosphere and your feet are on the ground.

        While preparing my startup I prepare for the worst – that’s ultimate success and growing fast – I’m repeating any day each scaling step and I do look what happens to my mind.

        It’s like mental yoga, keeping anything flexible.

        Like

  5. Steve, very good post

    Like

  6. Great post, and goes along really well with this article I came across a while back – http://robertlaing.com/2015/01/27/you-are-incurring-hr-debt/

    Liked by 1 person

  7. Steve: Great post you always fine the subtle topic which can doom a company if not addressed properly – and quickly

    Like

  8. yes, great post Steve, on a subject many growing companies (and some fully grown ones!) find inconvenient or simply too hard whilst busy selling.

    As you infer it’s a great time to consolidate all that’s good before growing an organisational monster without clarity or accountability.

    I completely agree staff turnover can be hit hard at this stage if a way of working is not established. Companies also find it hard to keep enhancement requests under control from the customers who stuck by them through their other growth pains; and finally it’s time to stop customising to win business, the product should be better than competitors in the specific target market now and ‘return on sales’ needs to increase to pay the new wages and other big-co bills.

    Davin, I’ve not noticed any books on this but I’d recommend the following few models (with a slight biased to enterprise solution providers) They can seem bland or undesirable for some founders but are received extremely positively by the teams involved and in my experience if you can’t clarify these things people are having to make them up as they go along and not enjoying their work as a result:

    Stop, start, continue analysis (have only experienced employees having fun with and feeling empowered by this, certainly no loss of spirit)

    Org chart with crystal clear responsibilities

    Prospect to cash workflow maybe with RACI but definitely with clear
    ownership, process and rules of each stage

    Enhancement request adjudication process with strong defence mechanism to explain the consistent rationale you have to work to in order to be a world class supplier

    Product launch process (my pet subject) which ensures you’re following the right strategy before you build and prepares you for the issues you will face, before you make a sale

    Like

    • Hi Dave

      Many thanks for the suggestions. sound advice and much appreciate it

      Like

    • RACI is a sound approach, but in my experience it’s necessary to boil enterprise grade methods down to startup level. Otherwise there is a significant risk over engineering the processes (which can happen easily if you do have enterprise experience).

      BTW: It would be cool to have a startup like org tool, based on RACI. Bit like a mix of Stack, Facebook and a corporate address book. Who is doing what, who is responsible etc. Even a team of >15 people can be difficult to manage, especially if some of them are remote. Most of the time in processes goes for finding the right person, that tends to end in creating bottle necks by putting too much tasks on the most capable individuals.

      Also supporting re-organization, which can be a daunting task. Can happen fast if you need to re-align teams because of priorities.

      I’m also a fan of very well designed processes (operational processes, product launch process, product management/development, sales, customer service, development, build, marketing). I’ve seen too much inefficient processes and information flows (in StartUps and Enterprises).

      I also have seen that people with a CTO title in a startup had no budget and no team responsibility (which is a recipe for sinking money, motivation and time).

      Like

  9. Thank you for writing about the epidemic of organization debt! The Silicon Valley companies with which I’ve worked vary, of course, but the techno-centric engineering guys seem somewhat blind to the importance of what some of them disparagingly call “the touchy feely crap”.

    Dr. Edgar Schein, the renowned father of organizational culture, lives in Palo Alto, and I have the honor of having a mentoring lunch with him every month. When I ask him why the human skills, team dynamics and organizational health so vital to success are not more highly valued here he often refers to the individualism characteristic of our society.

    I hope that we can overcome our cultural biases, examine the facts about what is truly contributing to business failures (lack of trusting relationships, poor communication, lack of clear shared goals, and lack of goal alignment) and work together to accomplish what no single “hero” could achieve alone. The future of Our World may depend on this! (Ref: Vision 2050 Report – World Business Council for Sustainable Development WBCSD).

    Like

  10. Reblogged this on Nikola Zdunić and commented:
    To quote Stephen Parry @leanvoices – ‘The soft stuff is the hard stuff and if you don’t do the soft stuff you wont get the hard stuff’ .

    The quote is quite apt because technical refactoring is the hard stuff and organisational refactoring is the really, really, really hard stuff to execute.

    Like

  11. Reblogged this on Juliet's choice.

    Like

  12. I love this post. It explains exactly the problem I’ve seen having worked for start up companies both past and present. While I’ve not seen the dramatic growth seen by this company, I’ve certainly seen the change from a development to commercial company cause problems in a company run by a senior management unaware of the problems that this brings.

    I’ve made sure I’ve kept this where I can find it again – maybe one day it will be useful. Thanks for writing it.

    Like

  13. Clearing organizational debt requires firing, reusing or re-skilling employees, the writer calls this ‘re-factoring’. Firing people is not pleasant. Reusing and re-skilling is challenging for all.
    “some employees don’t scale” implies that the ‘eccentric characters’ found in start-ups cannot be taken through to the growth stage. The writer claims that doing so would cause problems for the managers of new hires.
    I’m seeing an analogy with craft shop production transitioning to factory production. When this happens, the craftsmen are retained in an R&D capacity, leaving the line managers to do their thing on the factory shop floor.

    Like

  14. Steve – I am a long time reader and fan of your work.

    This post, once again, sums up an obstacle that my company is facing. You have put into words very real struggles that have threatened to end a growing business.

    The people who took a chance on Benzinga at the early stages are true assets to the company’s future.

    Thank you for exploring not just product fit issues for a company but also the issues it faces during the scale stages.

    Like

  15. Reblogged this on ripkifarid.

    Like

  16. Incredibly insightful post! With startups being so commonplace nowadays, I can see “organizational debt” being a huge problem in the future for a lot of places. Thanks for sharing your thoughts on this!

    Like

  17. Often in startups, there is a culture of exploitation when it comes to the little people that do the yeoman’s work. The people at the top talk nonstop about the cool aspects of business (executive perks and fancy new furniture, and they forget about the foundation that keeps the business stable and running…

    Great post.

    Like

  18. Steve , in this recent TED talk the speaker gives a talk about the biggest reason why startups succeed. On his list, the business model places 4th, behind market timing, team/execution and idea. Here is the talk.

    Like

  19. Steve- great post. Love the metaphor. I’d recommend your entrepreneurs look at Holacracy and other methods of self-organizing/self-managing that handle org debt in smaller, continuous chunks.

    Like

  20. Great metaphor – I’ve been referring to this as pruning, but I think I like refactoring much better. Certainly makes it easier to convey the objective to engineers (as opposed to, say, horticulturists).

    One thing I’d add: very often with scaling it’s the members of the founding executive team that need to grow/evolve too. If they don’t have enough self-awareness or experience, this conversation becomes very tricky; understanding that organizations evolve perhaps in relation to each funding round could be critical to managing this step of scaling a company better.

    Like

  21. So true! Many of the “growth and start-up folks” need to hook up with a nuts and bolts person who can translate the vision into steps of an action plan. Unfortunately many disconnect from that part as the characteristics that make them good in the growth/start-up phase are the largest part of the “organization debt burden” Years ago I was doing a lot of leveraged buy-outs and the right mix of management was a key element in their funding and subsequent success. Thanks for putting it so succinctly and eloquently!

    Like

  22. Great article and insight. It takes a lot more than “ideas” to keep a company afloat. Biggest challenges are working through learning curves with entrepreneurs. Managing is important, Listening is better.

    Like

  23. It’s a nice twist that helps people understand organizational issues better. But perhaps there is no difference between technical debt and organizational debt… maybe they are THE SAME THING.

    Like

  24. Hiring can have a lot more smart process; such as formalized triggers, weighted decision making process, clear understanding of true cost of unfilled roles, training, etc.

    There’s actually a capability maturity model for HR!

    Like

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