Subscribe to the OVP Blog RSS Feed: Enter your email address:

Delivered by FeedBurner

Thursday
Feb022017

Understanding Decision Fatigue and the Implications on a Start-up

The New York Times recently republished a very interesting 2011 article “Do You Suffer From Decision Fatigue”,

which describes academic research into the impact of decision fatigue on the quality of decisions.  Click on the link and read it because it may change how and when you make critical decisions.  Some of the takeaways include;

- As people make decisions, they become tired from the act of making the decision.  While assessing options and implementing a decision after it is made takes energy, the act of decision making itself is by far more taxing. 

- As people are asked to make more decisions, they will increasingly lean toward status quo or no decision versus continuing to make decisions.  Or they will go along with recommendations of others versus making their own decision.

- If you are already tired – at the end of a long day – the energy you can commit to decisions is much lower and your speed to decision fatigue is much higher

- Decision making burns glucose at unexpected levels.  Taking breaks and replenishing glucose can take away much of one’s decision fatigue and can reset the clock for a period of decision effectiveness.

The article talks about members of an Israeli parole board who were assessed on their decisions to parole similar convicts having been convicted of similar crimes.  It turned out that convicts in similar situations had a 70% likelihood of parole early in the morning and just 10% near the end of the day.  Percentages after breaks and after lunch also spiked but rates prior to lunch were quite low.  Across a broad number of cases, these behaviors became predictable and were attributable only to time of day, length of time since the last break, and time since the last nourishment. 

At Osage we think a great deal about decision bias and trying to remove as much bias as possible from the investment decisions that we make.  The writings of Kahneman and Tversky have become widely read and respected with regard to decision bias and we integrate these lessons in what we do.  But decision fatigue may also play a role in many of our critical decisions in ways that we may never be fully aware.  This made us also think about the thousands of decisions the leaders of our portfolio companies make and that their customers make and how decision fatigue might affect business success.

How does decision fatigue relate to start-ups:

Think about sales meetings: We don’t control what has happened during the day to the potential buyer of our software solution but unfortunately for us, this could be as critical as to what she thinks about your product.  So, when you can, schedule meetings or critical sales calls in the morning.  If the meeting is in person, bring a universally liked snack or two – dark chocolate squares, a five pound bag of M&Ms for a big group, vegetables and hummus – for afternoon meetings.  So many sales processes end with no decision.  How many of those fell victim to decision fatigue versus other corporate priorities?

Think about lead conversion:  A lot of analysis has been done about how lead conversion improves with speed of response.  Call in the first few minutes of someone filling out a form online and their conversion rate can be 4x higher than average.  Reaching out to people who fill out a form on weekends, early mornings, or late evenings have proven to be even higher.  There is a reason why a person who expresses interest in a product while surfing the web on a Sunday afternoon has a meaningfully higher conversion rate – their decision fatigue is low and the interest is high.  Getting back to them while they are in this state can accelerate sales cycles.

Think about management meetings at your company: Scheduling meetings in the morning versus afternoon may make a lot of sense.  Not making too many decisions in one meeting may be critical.  If you want to get something approved with little discussion, put it at the end of a long meeting agenda and make a strong recommendation.  Haven’t you noticed that people spend a lot of time discussing things early on an agenda but rarely take as much time to discuss things late in a meeting?  And remember, food for the meeting room could also be critical. 

Think about when you make important choices as a leader: As a decision maker, be careful of quickly agreeing with someone else’s recommendation or simply putting off the decision.  Are you really supporting this person and their preferred path, or are you tired?  Take a look at your calendar and think about the day – are you more taxed than you think? 

Think about hiring: How many interviews should you do at a time?  When do you stop listening?  I know that I have behaved like that parole board when I have been forced to do a ten session slate of interviews in a day with few breaks.  Sometimes it’s hard to listen or engage, and making no decision by simply passing on the candidate becomes the default as fatigue increases.  How many great candidates get rejected because the interviewer is simply fried from the process?  I was reminded of this recently when I was screening several hundred resumes from an MBA program resume book.  With decision fatigue in mind, best practice likely would have a person do this in thirty minute intervals and have a limited number of review sessions each day – and even better, to get several people to score each resume while putting each reviewer’s resumes in different order to make sure the same people were not given early preferential views by each reviewer.  No wonder people whose names are at the beginning of the alphabet seem to see more success.

Decision fatigue – be aware of it.  When you are in a position to make important decisions, ask yourself if you are mentally in the right place to be taking such an action.  If not – take a break, have a snack, maybe even sleep on it.   You won’t regret it.

Friday
Jan272017

Common CEO Mistake: The Buddy Hire

It is tempting.  You are a new CEO and you need to make an impact quickly.  You have been successful in the past and there have been people who were on your team previously whom you would love to have with you on this new journey.  You don’t know the current team that well and have not fully assessed everyone’s talent, yet some new blood at the top would definitely help.  It is tempting.  Tempting to hire quickly, to bring in a number of people you know, and to make sure you have people around you who you trust and who can have your back.  Tempting but in so many cases this is the wrong move.

When I first arrived at Verticalnet, where I ultimately became CEO, in mid-2000, we had a new leader who had been hired from a different industry.  This CEO, Joe, practiced this kind of hiring broadly and brought in many senior executives who knew little about the business or industry.  Then his hires acted the same way.  Soon business development was full of former supply chain consultants and marketing was all ex-Lotus people, while product management seemed to be from two camps with completely opposite views of the world, and marketing was run by someone used to selling to big box retailers.  It didn’t end well as 1,500 jobs were shed from that point until about the time I took over and most, if not all, of these buddy hires did not survive the cuts. 

Think about the potential mistakes of this “buddy hiring” behavior if you were the CEO:

-          In crowd / out crowd:  Quickly there are the new hires who have a history with you and the old hires who don’t.  A natural gap is created, especially if the people you hire know each other and not just you.  The motivation of the people who have been there is quick to decline, despite their initial optimism about a new leader and a new approach to the business.  Often, the new hires are not local and will need to be relocated over time or do the weekly commute.  Thus these new people are in the office for only three full days a week, amplifying the challenge.

 

-          The wrong hiring tone has been set: You hired these new team members without having the existing team interview them or you said to the existing team; “I want you to sit down with Meg and tell me if you think she is a good fit for CTO.  She and I worked together for five years and I think she is awesome.”  Now really, what can your team say?   “She’s awesome” is the usual reaction.  Your hiring behavior just set the tone for the company.  Now others will do the same thing and will hire people they knew before and quickly every function potentially becomes a little clique of previous co-workers. 

 

-          To a hammer everything is a nail:   Your people might have been good at the last job, but will they be good at this one?  Different business, different customer, different solution.  Some executives are great at jumping from situation to situation but many are not.  Pattern recognition is a negative when the business is different.  Hiring people who say “we did it this way at the last place where I worked with our current CEO” is not only alienating but it often could be just the wrong thing to do and not what you, as CEO, want them to do.

 

Do yourself a favor and institute a formal hiring process, or if the company has one, abide by it.  Create job descriptions and interview scoring templates.  Have hiring teams who are tasked with interviewing a minimum number of candidates before making a hire.  It is great if you have a strong network and access to talent and you should always be excited about bringing people from your network into the process – as long as you tell people to hire the best person and not the person you know.  Maybe you should interview the top three candidates and form your own opinion of who is truly the best individual for the situation.  Require relocation of new hires if the job is an on-site job.  You will still end up hiring some people with whom you worked before and that’s ok, because everyone will agree that they are great and were part of the process.  Even then, team building exercises are critical, as are creating new stories from shared experiences at the current company while leaving most of the old stories at the door.  

One caveat.  When building out a sales team and looking to move quickly to hire sales resources, leveraging a network seems to create much less resistance.  This is likely because the results are tangible and those that fail will not survive, no matter the past relationships.  Still drive a structured process where possible, but in technology sales, past success is often a predictor of future success.

The behaviors described above are very real.  We see these actions inside of our portfolio and we look to change these behaviors before the culture gets permanently altered.  When we are interviewing CEO candidates, we ask in detail about hiring and HR practices as well as how people leverage their networks.  A CEO with a strong personal network is a great asset, but only when combined with a strong process-based hiring discipline.

Wednesday
Jan112017

Watson Food for Thought

I am a big fan of Watson and the business model vision that IBM has for allowing other businesses and start-ups to leverage the power of Watson for their own solutions.  While Google, Facebook, and other massive data stores seem intent on leveraging their own data for their own use, IBM appears to be taking a more open approach, leveraging its massive base of computing knowledge to accelerate other companies’ strategies and collect recurring tolls along the way. 

As investors this creates what is likely to be a huge next wave in start-up innovation driven by artificial intelligence, and as early stage tech investors, our team here at Osage Venture Partners will do our best to invest to seize this opportunity.  Corporations see the huge economic benefit of replacing people with technology solutions, especially as we shift from replacing bank tellers, toll collectors, customer service reps, and gas station attendants to replacing much more expensive knowledge workers.   The social implications of this potential disruption deserve much debate and discussion but that is for another time and another post.

Perceptions on the viability of AI to displace white collar jobs are changing fast.  Industries that never saw automation replacing key roles are shifting their views of the future.  Take law as an example.  I found this following data in an interesting blog: https://www.linkedin.com/pulse/legal-ibm-watson-business-model-reasoning-modes-ron-friedmann

 

 

 

There is a lot to remark on in this data.  First, look at how perceptions have changed in four years.  A 50% increase in percent of people who think first year associates can be replaced in 5 to 10 years by a Watson equivalent– up to 35% of those surveyed.  Almost half believe paralegals will be able to be eliminated in this time frame.  As this was a survey completed by firm leadership, of course the percent who believe partners will be replaced is lower – but is this reality or some form of polling bias, as Daniel Kahneman would point out? 

Of course, this is a poll trying to predict the future, so it could be wrong in both magnitude and timing.  Yet recently with technology penetration, the timelines have been shorter and the impact has been higher than earlier estimates had predicted.  Remember how everyone laughed when Jeff Bezos discussed drone delivery in December of 2013?  Remember how recently we laughed about autonomous vehicles?  Four years ago, 46% of law firm leaders polled said computers would never replace human practitioners.  In 2015, it was down to 20.3%.  Time will tell.

Similar trends are emerging in other knowledge worker functions.  In Japan,   Fukoku Mutual Life Insurance is reportedly replacing 34 human insurance claim workers with “IBM Watson Explorer,” starting this month  http://qz.com/875491/japanese-white-collar-workers-are-already-being-replaced-by-artificial-intelligence/.  Today actuaries – tomorrow lawyers?

The good news is that we should be seeing legal fees coming down steeply in the future, although the computer which replaces me may not need to hire its own lawyer.

Monday
Oct242016

Salary, Value, and Poaching

We have seen a number of high quality people getting poached or almost poached from different portfolio companies over the last couple months.  The labor market for skilled technical and analytic people is tightening and the war for talent seems to be only getting more intense.

One area where we have been seeing forward-thinking company executives take action is in the attempt to market-price employees, especially less experienced, fast-rising team members.  A mistake that is often made is to hire a very inexperienced person (often just out of college) at a low, but fair starting salary and then to increase that salary at the same rate as the overall average employee base raises.  As an example, many companies will hire a new marketing analytics team member at $45k and give them two years of 5% raises, but that means they are barely making $50k.  If they go to the market after two years of working at your hot start-up, with the great experience you gave them, what could they make?  $60k?  $75k?  The key is to ask yourself what you would pay to hire someone of a similar profile and make sure you are paying near enough to that level to make the employees’ decision to shift jobs to not really be about money.  Then if your culture is good, the upside is high, and the options have potential, these people are most likely to stick with you.

This is mostly an issue with younger hires, as the value of a person going from no experience to three years of experience rises at a very steep slope.  From three years to six years, the slope flattens.  Beyond six years, it is really a person-by-person and market-by-market decision, as at that point you pay for talent because most potential has been realized.  Average raises across your workforce just don’t work for the rise in value of a person in the early years of a successful growth curve. 

My advice for CEOs and functional leaders – make a print out of the cash compensation of everyone on your team on a quarterly or semi-annual basis and look at it over the last 8-12 quarters.  By the way – always look at total cash compensation in making this decision, as bonuses and commissions certainly do count.  Calculate the growth in compensation over time.  Ask yourself how valuable and how ambitious each person is.  Ask if you would have been happy with this level of salary acceleration at the same stage of your career.  Then make the appropriate adjustments.  Cash is king, salaries need to be held down as much as possible, and frugality of CEOs is a great quality – yet software companies have one real asset and that is people.  Grow, nurture, and protect your team.  Match salary to experience and value, not time, and keep the poachers at bay.

Tuesday
Jul122016

Strategy Is About Winning

We have a number of companies that have recently made the shift from proving out product / market fit to focusing on execution.  This often happens in the $3-6 million revenue range and in a SaaS business, it happens when growth is sustained at levels well above 50%; the sales engine has shown an ability to scale beyond the initial founder; SaaS metrics are strong; and churn is under control, and hopefully negative on a net revenue basis.  Company leaders then shift to the task of attempting to scale the business without breaking the components that are working.  A lot has been written on how to scale a predictable revenue model and how to build out teams.  I won't attempt to replicate that here.

This stage of focused execution needs to be combined with an emphasis on strategic thinking – and the CEO needs to spend sufficient time on each.  Execution is about every day behaviors and process excellence and it should be the daily focus for much of the organization.  Strategy involves fewer people, it happens less frequently, and if done correctly, it should be asking big and uncomfortable questions.  People use the word strategy all the time to describe things that are actually pretty functional and tactical.  Sales strategy, HR strategy, customer retention strategy, outsourcing strategy and so on.  These are all important but at a micro versus macro level.  Corporate strategy is about winning and is played with the knowledge that for you to win, others will lose.  

I had the opportunity to spend some time at Uber’s headquarters in San Francisco recently.   Uber has great offices, tremendous energy, and an intensity to the place that is surprising in an 8,000 person start up.  In a discussion with one of their senior executives, who had come from another great tech success story, I asked what was different at Uber versus so many other successful companies.  The answer was that the team at Uber feels that their future, their success, and their existence are constantly under tangible and measurable threat every day.  The battlefield is multi-faceted – there are well funded existing competitors and new ones emerging all the time, there are local & state & federal & international regulators trying to stop them, and entrenched providers attempting to avoid disruption.  While many of these battles are tactical, the war is strategic, and major “bet the company” decisions are made with high frequency.  While this strategic urgency may be more palpable at Uber than other companies, status quo can’t exist forever for any business.  In the words of Andy Grove – the former CEO of Intel who completely shifted the company’s strategy from DRAM to microprocessors during a period where another CEO would have been complacent with dominant market share – “only the paranoid survive.”

The paranoid CEOs ask themselves and their teams the tough questions:

  • If I worked for competitor x or competitor y or some absolutely new competitor, what would I do to hurt or kill us? 
  • What would happen if we lost our largest customer?  our biggest channel?  What could one of our competitors do to take this away from us?
  • How could one of our competitors shift the economics of our industry?  How would we recover?
  • What if a competitor with a broader footprint offered their answer to our solution – for free?
  • Is there a strategy for killing any of our competitors or mortally wounding them?   This means understanding at a high level where our competitors make their money and where they are most vulnerable
  • What if the market evolves in a certain direction?  What would render us less relevant or not relevant?
  • What are we doing today that is a distraction of time and resources that could be better spent extending our competitive advantage?

While this sounds obvious, most start-up CEOs get so caught up in the day-to-day details of their business, especially when they are scaling and dealing with all of the issues related to growth, that they forget that businesses built on disruption can get what they have been giving and face disruption of their own.

What are some things a CEO and a management team can do?

  • Schedule strategy off-sites at least once a year and force your executive team to do some work ahead of time answering key questions on the market and your company’s position; emerge with a clearly articulated point of view on where to play and how to win in your market
  • Jump on sales team calls once a month and ask the team what changes they are seeing – new competitors, different customer questions, surprising losses, anecdotes.   These can all be leading indicators
  • Build a product management function that is macro as well as micro-focused and feature / function focused.  Your head of product management should be your strategy consigliere
  • Become an industry expert.  Talk to everyone – analysts, bankers, partners, competitors, other tech CEOs in tangential spaces – ask them what they are seeing, feeling, sensing
  • When you hear something or read something that looks new or different – send it to your management team – use slack or something collaborative.  It is always interesting how that gets the interplay going and how thoughtful different team members can be on topics that seem out of their functional area
  • Maintain a thorough competitive analysis document – again, using Slack or something collaborative; empower your entire team to post information about competitors as they come across it, and conduct a thorough update every 3-6 months, which should include signing up for your competitors’ sales demos

Execution is a prerequisite to success but not a guarantee of it.  The right strategy and good execution trumps excellent execution and the wrong strategy any day.  Strategy is ultimately owned by the CEO because key strategy decisions don’t happen unless you agree and make them happen.  If you are not asking questions such as: “How do we win?” and “How will this (competitor, event, market dynamic, customer segment, etc.) impact our ability to win?” then you are not doing a big piece of your job.  Remember – strategy is about winning.