MIT Alumni Leadership conference
Introduction
Hello.
My name is Peter Stern and I am the Chief Technology Officer and Co-founder of Datek Online. When I arrived in New York City in the summer of 1995, Datek Securities Corporation was a small brokerage firm the specialized in day trading. It had a few dozen traders and about that many customers. Over the next few years it would grow to be the fourth or fifth largest online brokerage firm, with close to a million customers. Even better, Datek Online would be recognized as a brand associated with innovative products and technical excellence. Datek Online is also one of the few internet companies that has been profitable throughout its history, and we remain profitable despite the current economic downturn. We accomplished all this from scratch, while competing with firms that started out with brand names, millions of customers, and thousands of employees.
One conclusion that you might draw from this story is that we knew what we were doing. You would be wrong. I think we had some good ideas, but we did not really know what we were doing. We were not following some carefully constructed plan. Maybe that would have been smart, but it sounds dull to me. We made lots of mistakes, but we did learn from them very quickly. In fact, since I did learn most everything I know by making mistakes, I have a very negative way of explaining things. While I am going to explain things in terms of fixing problems, if this were a meeting where I had to be positive, I would probably explain it in terms of offering solutions. I hope you don’t mind, but today you get the raw, negative version.
I have been asked to share with you what I may have learned about business and leadership.
So far, I have spent my entire professional life avoiding giving and receiving platitudes, obvious statements that are expressed as profound wisdom. When I started to prepare for this presentation, I found it hard to not package what I know as platitudes. Knowledge, in comparison, is easy to package, easy to share. You can learn knowledge from books, how to program a computer, how to fill out a tax form. Wisdom has the regrettable properaty that it is only truly appreciated after you have made at least one mistake that wisdom would have helped you avoid.
So what I have to offer you today are platitudes. My hope is that after you go and make some mistakes, you will remember what I have told you and then it might appear as wisdom.
Avoiding Leadership
Leadership is difficult. It is so difficult, nobody can even explain it. I noticed on the website for this conference, you do not know what leadership is either. You explain it with a list of traits a leader might have. It’s a good list of traits. Others explain it with a story, or metaphor. I have never seen a good definition.
And as hard as Leadership is to describe, its that much harder to actually do, so avoid it. Avoid building an organization where leadership is required for as long as you can. Accomplish as much as possible before you need leadership. Don’t worry, this whole speech is not about avoiding leadership. But let me give you some pointers for avoiding it before we get to the other parts.
Do not hire more people than you need to. A lot of managers are very concerned with headcount. They want to build an empire, to manage more. Do not measure success in headcount. If you have the right people, you can get a lot more accomplished with fewer people than more.
Keep your organization in one room for as long as possible. A room is a body of space that you can comfortably shout across. If everybody is in one room, its harder for people to become occupied with conflicted goals. Its easy for everybody to find the other person in the room who can best help them with some task. You just stand up and shout, “help, who knows about this thing?” You don’t need organizational charts when your organization fits on one room. You might need them for board meetings or investors, but your organization won’t need them to accomplish its goals.
We kept everything in one room up until we had about 30 or 40 people. It was a very busy, messy room, but we had a great time and everybody learned a lot. That was definitely key to our early successes.
If you fail in keeping your organization small, and its looking like you might have actually start worrying about leadership, or even, God help you, exhibit it yourself, then here is something you should know. I figured this out the hard way, and then much later read about the reasons for it. The human brain still behaves like it did 100,000 years ago. It has some built-in rules for how it deals with different sized groups of people. Because of this, your organization will behave very differently as it grows, and the quality and quantity of leadership required will vary a lot more than you would expect. Leadership seems be required exponentially as your organization grows, with very discrete break points.
A group of 7 or less requires no leadership.
Between 7 and 30 people, you need a lot more leadership than you did below 7. It does not take much more effort to lead, say 30, than it does 10, though.
After 30 people, you are now in a whole new type of organization, and new and better leadership skills are required up until you get to a group of about 100.
Past 100, the rules change again, up until abut 600 people.
These numbers are estimates. I have spoken to people who were in similar situations, and we tend to have different numbers at different levels, but the pattern of our experience remains constant.
I have heard rumors from colleagues at much larger organizations that there is another break point somewhere in the 2000 to 5000 person mark, but since I can’t believe that more than 600 people can really work together anyway, I think that has more to do with geography and architecture than any real change in the organization.
It is difficult for me to explain exactly what the different leadership qualities are for these different sized organizations. What I can tell you is that the amount of scaffolding required to support these different sizes will increase in discrete and exponential jumps. Org charts, project plans, mission statements, policies, procedures, documents describing your best practices, all of this is scaffolding, and you will need more and more of it as you grow.
I call it “scaffolding” for a very specific reason. Organizations are meant to accomplish something. I have never found an organization whose intended purpose was to produce project plans. A project plan is just scaffolding to help you complete the project. The project plan is not the project. But many, many organizations I come in contact with seem much more focused on erecting scaffolding than in actually constructing a building to the point where tenants can move in.
Leadership
What is leadership? I don’t know. I don’t think anyone has a good definition. We all describe it with stories or a list of roles.
So here is my role-based definition.
A leader is one who determines a goal, implements a process to accomplish this goal, and applies metrics to see if the process is helping to fulfill the goal.
I see three parts to leadership and they are each equally important. They are so important that I am going to write them like this:
Goal
Process
Metric
Let’s talk about these in detail.
Leaders determine goals. This is the obvious one. Goals come under lots of names. Sometimes they are called mission statements. Leaders pick good goals. Picking a good goal is something of an art form. A good leader can pick highly motivating, possibly even inspiring goals.
Leaders implement a process. I have this belief, hopefully, this being MIT, no one here will argue with me, but I have this debate with lots of people I would not expect to disagree, I have this belief that everything in the known universe can be described as a process. I think I can draw a process diagram, an input-output diagram, for everything. Everything. I often draw them to analyze a technical product. I think they are also useful for building all sorts of business processes where the people involved disagree. Sales. Legal decisions. Human resources. A good leader implements a process for the organization that tells them how to do things. I have seen a lot of so-called leaders pick some great goals, and then completely neglect providing a hint of process, for providing the outlines of a mechanism for how to do things.
Lastly we come to my idea that leaders apply a metric. By metric, I simply mean a measurement system. This component is often forgotten or ignored. When I encounter an organization that has failed to reach its goal, when they have always lacked is a measurement system to help them gauge success. Leaders apply metrics. They might not state their metrics out loud, they might be internal metrics that the organization cannot see or know, but they are there ahead of time and being used.
I think these three things, goals, processes, metrics, are applied together to support a lot of things. Businesses in general always require these. Over grilled fish 300 yards from Ground Zero, a lawyer friend of mine explained the four components of crafting a legal strategy:
1) What is your goal?
2) What is your next step?
3) Does your next step get you closer to your goal?
4) What will this step cost?
To me, items 1 and 2 are goal and process, and items 3 and 4 are components of a metric.
So while I think these three things together are a really important component of business and a great many other things, they probably are pretty poor at uniquely describing leadership.
Sorry.
General Platitudes
Now I have a list of platitudes to share, important things I learned about growing and running a business. I don’t think they have anything specifically about leadership, but I do think they are important for running any organization.
Do not avoid conflict. A lot of organizations spend a great deal of effort at avoiding conflict. Politicians avoid conflict. Leaders should not. Conflict can be good. Conflict can lead to the rapid evolution of better ideas. I read somewhere, probably in Harvard Business Review, actually, I hope that’s not bad, considering this is MIT, that when the Chief Engineer for Toyota was asked, back in the late 1970’s when they were kicking some serious automotive butt, how Toyota was able to engineer such great products, he answered, “with lots of conflict.”
Conflict is an excellent defense against what I call the least common denominator effect. An example of this is when a product is created that has at least part of an idea from every person in a meeting. This is what happened when the person running the meeting says, “hey, that’s a good idea” to every idea presented, usually because they don’t want to offend anyone. Not offending anyone seems like a pretty good strategy for getting something done. But obviously, not every idea is a good idea. I have lots of ideas, and most of them are crap. Most of everyone’s ideas are probably crap. And I get offended when you tell me my idea is crap. So let’s foster some conflict, explain to me why my idea is crap, let’s throw it out, and focus on some new and hopefully better ideas. Do not tell me my crappy idea is good and try to work it in, somehow. It does not make for good business.
Too much conflict, of course, is bad. If everyone is arguing all the time and nothing is getting done anyway, well of course this situation will not succeed. However, in my experience, there are 5-to-1 odds that an organization is spending too much effort avoiding potentially valuable conflict.
Closely relatedto the “do not avoid conflict” concept is Do Not Lie. In an effort to avoid conflict, I have seen a lot of people lie. I have also seen that it always works out badly in the end. Sometimes, more often than I would expect, what seem like harmless white lies work their way into lawsuits. Do Not Lie, at least not in the workplace. Do not lie to your customers, to your partners, not even to your employees. If an employee asks how they are doing, and they are doing poorly, you are always better off explaining that sooner rather than lying about it to avoid an embarrassing conversation. Do not say “maybe”, when the answer is “no”. That is lying.
A leader who does not tell the truth typically has two or three opportunities to lie with little consequence. However, a leader who takes those opportunities then finds they are unable to stop lying, and the organization becomes completely demoralized with the next lie. Both results are guaranteed, and either results in nullifying the leader’s ability to lead.
Do not avoid risk. Business is all about turning risk into gain. For a business to be successful, it has to take on risk. So measure risk, try to minimize it, but if you try to minimize to nothing, you will also find that you cannot accomplish anything. I work at a brokerage firm, and we have a department called Risk Management. My job is to provide innovative ways for letting Datek Online customers use their assets. Obviously, moving assets into or out of any account is riskier than just letting them sit in the account. Whenever we ask Risk Management about how we can move money into or out of an account, the answer is, “You can not move money at all, that would create risk.” I don’t think we have a Risk Management department. They do not seem to manage risk. They are, however, an excellent Risk Avoidance department. Not unexpectedly, Datek Online has been poor at providing certain types of online cash transfer products that require accepting risk.
Now, here is my favorite platitude. Do the simplest possible thing that works, get it working, and then, if you must, make it better. I heard from the previous speaker that only 3% of technology projects succeed. I know why that is. It is simply because technologists love complexity, and always make solutions more complicated and complete than they have to be. It is very rare for me to walk into a technical meeting and not be able to remove some complicated and non-essential component of any plan. Since cost or effort increase exponentially with complexity, larger projects fail. The larger the organization, the more abhorrent it finds the acceptance of minimal solutions. I am not sure why. It seems to be a pattern based on past mistakes. There are lots of smart people who describe this concept with regards to technology much better than me. My personal favorites are the Steve McConnell books.
But doing the simplest possible thing works in all areas of business, not just technology. It works in devising a new policy for HR. Suppose you have a situation where you need a policy, but you don’t know enough to write a really good and complete policy. You could, however, write a one page memo on a topic, resolve most aspects of the situation with this one page memo, and then release a complete policy a few months later. Nobody ever does that. So instead, lots of mistakes are made, all sorts of problems arise that a one page memo would fix, and eventually the policy arrives. When it does, its usually incorrect anyway. Does this sound familiar?
I really could speak for hours about how to do the simplest possible thing, and provide dozens of comical stories about how everybody is attracted to complex solutions, but I see I am almost out of time, so one more thing before I go.
I want to re-iterate what I said at the beginning. The most important thing I learned is do a lot, make a lot of mistakes, have a metric for identifying when you made a mistake, fix it, and learn.
Then, make a new mistake.
Thank You
<unfinished>
Questions and Answers
How did you craft your business plan?
How are online brokerage firms ranked?