The payoff for successful marketing is supposed to be increased sales. One frustrating aspect of innovation services firms can be their inability to take advantage of all their marketing success. Ironically, success in marketing can actually create problems, along with sales.

Unlike a product company, the capacity of a service company is strictly limited by size — you can’t just crank up your machine and make more of what you sell. This is a great thing when you’re bootstrapping, but not so great once you’re established.

Atomic’s upfront team will handle three times the sales opportunities in 2011 as we averaged during the period 2006-2009. The dramatic increase is partly the result of how successfully we tell our compelling story. We can also credit being in business for 10 years, having a good reputation, high demand for repeat business from our happy customers, and a general under-capacity in our industry.

So what’s the problem with having 300+ opportunities but the capacity to deliver only approximately 75 projects annually? Unfortunately, there are several. First, it takes a lot of time to handle 300+ opportunities with care and attention. Second, it’s darn discouraging to work hard on a sale, knowing you may not end up having the capacity to complete the work. Third, every project you win creates the immediate need to sort out several internal complexities (putting together the right team, optimizing the strengths and availability of individuals, delivering within the customer’s time constraints, balancing the competing demands of other existing projects, etc). All of these complexities are exacerbated by constantly running at or near capacity.

On balance, the positives of being good at marketing outweigh the negatives, of course. I just find it ironic that there are in fact any downsides at all to successful marketing. As with most hard problems, this is one worth solving, and we’re experimenting with some new ways to balance demand, capacity, and our sales process.

Innovation services firms can use thought leadership marketing very effectively. At Atomic, one of our core value mantras is “teach and learn”. We practice this value and further our marketing efforts through publishing, presenting and blogging. Since we’re analytical, somewhat data-obsessed people, we of course attempt to track the effectiveness of our thought leadership marketing through Google Analytics (GA).

Combined, the Atomic Object website and blog receive in the neighborhood of 5000-6000 visits per month. The blue line in the graph below shows the visits for every day in August 2011. GA can tell you all sorts of interesting things about visitor behavior, which pages are popular, where visitors live, traffic from browsers, etc. You can spend a lot of time exploring and pondering the meaning of the data.

Unfortunately, GA can tell us almost nothing about the most important visitors to our website.

Total website visits and potential customer visits by day.

I estimate we’ll handle approximately 300 sales opportunities this year. Even assuming they all came through the website (they don’t, obviously), and further assuming that 10 times as many potential customers look at our website as actually contact us, the visits from potential customers is a drop in the bucket compared to the overall site traffic. The green line in the graph shows theoretical potential customer traffic modeled on the assumptions above (10 potential/actual * 300 actual/year * 1 year/12 months = 250 potential/month). This drop in the bucket is probably exaggerated, as I think it’s not terribly likely that our site sees 10 potential customers for every actual contact. Multiplying by 10 also covers the other very important “customer” of our website — potential new hires.

When the most important traffic to your website is tiny compared to the total traffic, it’s difficult to use GA to measure the effectiveness of the site for its ultimate purpose. For example, GA can tell us nothing about which browsers our potential customers are using. And the content I wrote 15+ years ago on OO aggregation vs inheritance probably isn’t too interesting to potential customers, even if it is one of our most visited web pages. Do potential customers see our client list? our bio pages? our case studies? GA is silent.

While there are some clear advantages to having a lot of traffic, I’ve found it very difficult to pull the “signal” of potential customers out of the “noise” of overall visits. It’s a good reminder that what Eric Ries refers to as vanity metrics applies more broadly than just to startups. In the end, if the phone doesn’t ring or the contact mailbox is empty, all the traffic in the world is for nought.

The value mantras of Atomic Object arose from a common understanding that lived in our collective heads and daily interactions. For example, it was during an interview debrief, when we were deciding whether or not to extend an offer, that I first heard Patrick Bacon observe that the candidate really didn’t seem to “give a shit” about his own growth and mastery. (No offer was extended.) Patrick’s comment seemed to me the perfect way to summarize our desire to work only with people fully committed to their projects, customers, careers, peers and company. I first used this phrase publicly in a keynote talk for GLSEC in 2006.

I formally named our values in 2009 after a discussion with Jeff Patton. When describing our somewhat lengthy Values Atomica document to him, he suggested distilling the ideas it contained into smaller, handier phrases. It was easy to name our first, and perhaps most strongly held mantra: “give a shit”. That name has also given me pause at times. The sentiment could be expressed as “care deeply”; the meaning is close, the wording less controversial and memorable.

Many job candidates respond positively to our first mantra. I generally get a laugh when I use it in a talk, and positive comments afterward. On the other hand, I’ve heard from at least one experienced employee at a largish client of Atomic’s that it makes us seem immature. Therefore, I have to assume there are some potential clients, who I may never talk to, who read or hear Atomic’s value mantras and have a negative reaction.

Using the name of the mantra as it exists internally is consistent with another closely held mantra, namely to “act transparently”. “Give a shit” connotes active participation in life and work, an essential behavior for all Atoms. It thus seems like the right way to describe Atomic. On the other hand, there’s no good to be done by offending people externally.

I’m very curious what GNB readers think. “Give a shit” or “care deeply” — which name would you use in public, and why?

Innovation service companies, like Atomic Object, sell their time and talents to help clients grow revenue or expand a market through the creation of software. Without products of their own, innovation service firms have no financial leverage: it’s an hour out, a dollar in. Like a shark that can’t stop swimming or it will drown, service firms need to keep moving through a steady stream of projects to remain in business. Lack of financial leverage means that to be sustainably successful, an innovation services firm needs to maintain an excellent track record, market-relevant skills, and a pipeline of future clients and projects. The inexorable pressure to find projects and execute them well, which I see as valuable, also inevitably inspires owners of such companies to think of ways to generate recurring revenue.

Software service firms naturally look to create software products in their quest for the holy grail of recurring revenue. Unfortunately, the fundamental differences between product and service companies makes doing both under one roof very difficult. I only have anecdotal data, but my observation is that most service firms either fail at creating and maintaining successful products, or convert entirely to product companies and drop their service offering. A well-known and very successful example of the conversion strategy is 37Signals. I know many more cases of service firms that have failed to establish successful mixed service/product companies — this is a hard nut to crack.

Spec dev

Atomic has pursued a “partnering strategy” to increase our financial leverage while respecting and nurturing our services core. We do this by giving up some project revenue in exchange for equity, a royalty, or a revenue share. By taking on some of the market risk alongside our clients, we are exposed to the potential upside of the product we help create. We’ve been making speculative development investments, or “spec dev”, as we call them, since 2003. In that time we’ve made 10 investments, and are on the cusp of an additional two. The image below is an approximate graphical representation of our spec dev investments. Projects colored yellow generated some returns, but weren’t particularly good investments. Gray projects were complete losses. Blue projects were very good investments and Red are too early to judge.

The internal rate of return of Atomic’s portfolio has been approximately 27% to date. Several recent investments are too early to have paid off, and my return calculation doesn’t include any future value for existing investments. This rate compares very favorably to the single digit or even negative returns that venture capital funds have averaged in the last decade.

The Shining Star

Blue Medora is Atomic’s most successful partnership to date. The company makes middleware that allows monitoring and management systems to connect with critical enterprise applications like PeopleSoft, Siebel, Citrix XenServer, EC2 and SAP. Having grown to 12 employees on a solid royalty business with IBM, Blue Medora’s CEO, Nathan Owen, saw the opportunity to leverage their expertise and grow the business substantially in the Oracle market. Rather than slow organic growth funded by earnings, Nathan and I decided to pursue our first outside funding for the company.

Blue Medora closed on an investment round of $1,250,000 at the end of 2012. We’ll use the money to hire staff and build product to exploit the Oracle opportunity. In addition to the satisfaction of a quick, successful, capital raise (3 months from pitch to close), I’m particularly happy that we were able to raise all the funds locally, in West Michigan. Start Garden invested $500,000, its biggest single investment to date. Grand Angels came in with $725,000 from approximately 20 of its members and its co-investment sidecar fund.

How we play

We never commit more than 10% of our capacity to spec dev investments, so we’re not gambling with the company’s existence. We hold the assets in the company’s name and run our returns through our standard profit sharing plan, so everyone in the company benefits when they pay off. We value our spec dev assets very conservatively for the purposes of our internal ownership sales. We report on our investments at every company quarterly meeting.

I recently gave a talk in Detroit for a D-NewTech meeting where I described our spec dev strategy, what we look for in partners, lessons we’ve learned, and how our portfolio of investments has performed. My talk starts around the 5:00 minute mark of the video.

Our spec dev investments have not only boosted our financial results, but they have become an interesting and valued part of what working at Atomic means.

      

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Salespeople are most often compensated either fully or partially with commission. The conventional wisdom is that sales people need incentives to sell and should be kept hungry through at-risk compensation packages. I think this is a risky way for innovation service firms to pay the people who are selling their services.

Atomic doesn’t use a commission approach to compensation for the people who sell our services. But in the spirit of regularly challenging ourselves on closely held beliefs and business practices, we recently considered what using an at-risk model of compensation for our sales people would mean. Below I list some of the downsides I see with commissions. At the end I describe how we handle sales at Atomic Object.

Downsides to commission sales

Limited inventory

Service firms have a clear limit on how much they can sell. Once the capacity to provide service is committed, there’s nothing more that can be sold for a given time period. If a salesperson’s compensation is tied to commission, this puts a hard constraint on their income regardless of their success in selling. Selling more isn’t possible, and this isn’t fair to the salesperson.

Commissions no doubt work better for software product firms that can sell any number of licenses or copies of a product. With a digital product, there’s no limit to the product that can be sold. That’s not true when the product being sold is the skill and time of the people in the firm.

Maker happiness

It is easier to sell development time than it is to sell projects that are interesting, challenging, and satisfying to our highly skilled and committed employees. In the long-term, our success depends on recruiting and retaining the best makers (our generic term for those who create value for our clients).

Honest budgets

It would be easier to sell projects if we took an overly optimistic (i.e. unrealistic) view of their total cost. This would push the unpleasant discussion on realistic budget levels off to another day and to the makers in general and project leads, in specific.

Small clients

The time and effort in upfront work for a small client is often as much as for a large client, with size measured by revenue from the project. A rational salesperson compensated mostly on sales would favor larger clients, even when a project from a small client might fill a capacity hole and keep makers busy.

Long-term client relationships

A small project for a client that may provide a large amount of work in the future may be valued differently by a salesperson compensated on the immediate value of a sale than a salesperson thinking of the lifetime value of a client.

Worthy but small clients

Clients that may not be monetarily valuable to the company, but are judged worthy in some other dimension (mission, community, long-term potential, etc) may not get the attention they deserve.

Marketing vs sales

Though they are often on the frontline and in a perfect position to market the company, salespeople who receive commission have no real incentive to do so long-term. They benefit most from focusing on short-term sales that directly affect their bottom-line.

Idle capacity

Salespeople compensated only on selling will have no concern for the ultimate goal of a service company, namely, to keep their makers busy. This means they are de-coupled from the ultimate goal of company profitability.

Sharing opportunities

Unless specific rules for compensation address sharing, salespeople would rationally prefer to horde sales leads and handle them individually, even when the odds of a successful sale are increased by involving more than one person.

Maker help

Involving a maker is often very helpful in closing a sale. The time of makers must be carefully balanced between billable projects, sales, and everything else. A salesperson compensated only on sales, and not company profitability, would have no incentive to use a maker’s time wisely.

Sales at my company

Atomic Object has four people who “sell”. Our system for selling involves:

1. taking inquiries from people with software development needs
2. determining whether there’s a good match between their need and our capacity and abilities
3. determining a budget and timeline
4. selecting the appropriate team
5. kicking off the project

We think about this as the upfront work of each project. We often work together on sales opportunities. When those four people are not selling, they’re checking in with teams and projects, working on marketing, cultivating client relationships, recruiting, contributing to client projects, managing people and processes, and thinking strategically. Direct time on sales takes approximately 20-25% of our time. (That’s theoretically equivalent to one full-time sales person supporting 35 or so makers. In practice, I don’t believe a single human could last more than a few months doing this work alone.)

The compensation for the four people who handle the “upfront” project work for Atomic is an hourly wage approximately 20-30% higher than our senior maker salaries. To me that differential acknowledges the difficulty and stress of our upfront role, and the unusual blend of skills it requires.

The upfront team has no compensation that is determined directly by their success or failure in selling. However, each member of the upfront team has a significant equity stake in the company, so keeping the company profitable (i.e. busy) results in nice quarterly distributions.

We count on the individual judgments of the upfront team to make the right short-term decisions between clients relationships, opportunities, marketing, projects, maker happiness, and strategic initiatives to create long-term value. Their equity stakes align well with this.

No one way

I know firms like Atomic that are successful with a commission model. I can readily imagine firms that would fail with something like our model. As with most complex human endeavors, success or failure ultimately rests on the individuals involved.

If you’re a founder and you don’t like doing sales, or you’re ok with sales but want to get back into technical work, you might decide to hire a salesperson. I’d suggest looking first to your current employees regardless of their current role. The traits of a successful salesperson might surprise you.

If you do need to go outside, you should think very carefully about the drawbacks of a commission model. It might be hard to hire someone who identifies as a salesperson if you don’t offer commission. But you can also view this difficulty as a filter for selecting someone who will take a long-term view of your company’s success, and gain satisfaction from their work beyond their paycheck.

It’s clear what works best for us here at Atomic but I’d love to hear how others handle this problem.

       

I have been aware for some time that my position and the demands of my job at Atomic Object isolate me, to some extent, from a complete and accurate understanding of how employees are feeling and what they’re thinking. Because it seems like an important thing to know, I’ve always valued receiving insights from Atoms willing to share their observations from “in the trenches.” I’ve recently come to see that this strategy of accepting secondhand feedback has significant downsides. In fact, I’m so convinced now that this is a bad idea that I will, going forward, avoid seeking it out. I will also politely decline when such information is offered to me. However, I think my original intention (attempting to gain an understanding of how employees are feeling) was good, and I have a new idea about how I might better achieve that goal.

I think it’s very important to always be open to firsthand questions, complaints, clarifications, and discussion. Shutting that down would be an abdication of one of my main leadership responsibilities. The change I’m describing here, and the new solution I’m proposing to experiment with, does not effect my openness to firsthand feedback and conversation. Nothing can replace a direct conversation between two people to build empathy and understanding.

I’m also not talking about the tricky problem of leaders getting honest feedback on their performance. That’s a separate, thorny issue that I’m not considering here.

The problem

My problem is with secondhand reports of employees who are confused, unhappy, or complaining. What I’m no longer interested in hearing are things that sound like this:

I’ve heard Joe complaining about the expectation for blogging.

A lot of people are feeling stressed about work hours.

People are confused as to why you mailed the company about making a case for professional development support.

The company is feeling tense or stressed.

I’m no longer open to hearing these sorts of statements because: they aren’t actionable, they may not be accurate, they might be disguising the source of unhappiness, they may only be temporary, they are easy to over-react to, and they could cause me to slander, through unsupported extrapolation, the many great people I work with.

Not Actionable

When I learn secondhand that someone in my company is confused or complaining, I can’t directly approach that person without compromising my “source”. Everyone has bad days, and following-up, even with some cloaking and sensitivity on the things I’ve learned, might be unnecessary and unhelpful.

Telling the person reporting the observation to me that they should follow-up with the complainer, shifts the burden to a person who may be neither responsible for this sort of work, nor equipped to do it well.

Not accurate

By definition, getting a complaint secondhand is getting it less accurately than from the source. The reporter colors the report. Even when well-intentioned, it isn’t possible for one person to fully and accurately characterize the feelings of another.

Any claim that involves more than one or two people is probably an exaggeration. “Many people” and “a lot of people” and, most extreme of all, “the company”, are approximations that imply much more knowledge than is usually true. How many times, I wonder, has someone passing along secondhand complaints actually talked to more than two or three other people? My guess is, not often. I think it’s very easy, and very human, to exaggerate the count of your observed population. I’ve been guilty of that myself.

Disguised source

The temptation to represent a complaint or negative feeling of your own, more safely through another, is all too human, but not particularly noble.

Only temporary

Who doesn’t occasionally complain about something or feel down? That’s pretty human too; as is returning rather quickly to a more even-keeled attitude. Hearing about, and reacting to, a snapshot of negative emotion could be unnecessary, possibly intrusive, and a burden you don’t need to bear.

Overreaction

Stories of individuals — their words, their emotions, their actions — are powerful, and hard not to react to. The more you know and have relationships with individuals, the easier it is to overreact to their individual distress or complaints. But for a company larger than, say, 10 people, it’s probably inevitable that at any point in time at least one person is unhappy or confused about something at work. Assuming that a single individual’s complaint is universal is a mistake I’ve been guilty of, and overreacting is a potential consequence of that mistake.

Crazy extrapolation

When I’m feeling stressed or off-center, I’m more likely to make the mistake of extrapolating one person’s complaint or confusion to a group or even everyone I work with. Here’s how my crazy thinking might spin up: Joe doesn’t seem to understand why working 40 hours a week is important? Damn! Everyone in their 20s seems to be clueless about what a full-time job means! How can they not get it? What’s wrong with this generation? What new action should I take to get the point across? (fume, fume)

This mistake amounts to slander, pure and simple, even if I don’t speak the words openly.

My new approach

Seeking secondhand information, or simply being open to receiving it, has had negative consequences for me, and possibly my company. With any group of more than 10 people, it is probably impossible to communicate anything of substance without being misunderstood by at least one person. Through crazy extrapolation and over-reaction, it’s possible to come to the conclusion that either I can do nothing right, no effort is good enough or appreciated, or no else gets it. None of those are true, of course, but those negative feelings building over time can be both discouraging and bad for the company.

Given that the secondhand information isn’t actionable, has negative consequences for me and others, and doesn’t achieve the original goal of keeping me accurately in touch with my employees, I’ve decided to shut this channel of information down.

What I’d like to create in place of this secondhand channel is a culture of distributed responsibility for encouraging people with complaints and confusion to seek first-hand clarification and conversation. For example, if person X hears person Y complaining, or making statements that are at odds with person X’s understanding of a situation or communication from a company leader, then instead of person X bringing that to the leader, person X should share his or her perspective with person Y and encourage them to stop verbalizing their complaints and instead talk directly with the leader who’s confused or confounded them, and who has some ability to clarify or rectify a situation or problem. In short, I hope everyone becomes willing to say, “I hear your concern, I respect you, and I want you to take positive steps to resolve the issue productively. Go talk to the source.”

I believe my original motivation for being open to secondhand feedback was a good one: How do I, as a busy leader of a company of many individuals, stay in tune with how people are feeling and the general tone and temperature of the company?

How happy or satisfied or fulfilled people are feeling at my company and whether this feeling, in aggregate, has gone up or down recently, seems like a really important thing to know.

We track a couple of financial KPIs (key performance indicators) so why can’t I figure out a KPI for probably the single most important thing at Atomic?

In fact, I think I have. Stay tuned and I’ll share this idea with you in my next post.

      

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People are the only valuable asset of an innovation services company. While reputation, client list, culture, standards and tribal knowledge are also valuable, those all derive from and are maintained by people. Considering how important people are to Atomic Object, it seems crazy, when I think about it, that I don’t have a reliable way of measuring the state of our people. I’ve put more thought and effort into financial and technical measurements than people measurements.

We measure things like test coverage, project test status, billable hours and utilization, and we track revenue and profit margin. These are all strongly determined by or related to successful projects and happy clients. And happy clients, in turn, presuming you employ people with the right skills and expertise, derive from content, satisfied, happy employees. This might be the most important thing I should be measuring.

So what should I try to measure in people? Contentment? Satisfaction? Fulfillment? Joy? Happiness? — since I’m not sure, I decided to stick with the most general term, which is happiness.

Admittedly, measuring happiness of a group of people isn’t straightforward. But suppose I could reliably measure the aggregate happiness of my company. What would it tell me? Would it be reliable? Would it be helpful?

How I’d use a happiness metric

If I had a reliable measure, over time, of the aggregate happiness for the company, I believe I’d have a valuable tool to help make and time the implementation of big decisions, and a measure of the impact of significant policies and new initiatives.

While the absolute value of my happiness metric would be meaningless, I believe changes of that value over time would be meaningful. Since the metric I’m imagining is an aggregate metric, I would rely on first-hand investigation, conversation, and group discussion to understand the root cause behind the change I was measuring.

Introducing change

Part of the job of a company’s leaders is to keep an eye on exogenous forces (clients, the market, technology, the world in general) that may impact the company’s health, or which present a valuable opportunity. These pressures or opportunities from outside the company sometimes require change inside the company. Given that change is generally stressful for people, and the absorption rate for change by any group of people is finite, tracking happiness over time could be very helpful when trying to decide when the introduction of change will be successful or particularly stressful.

New initiatives

Strategic initiatives such as new service offerings, major new internal policies, expansion to new markets, or new partnerships, put stress on the company. They may require extra work, or establishing new relationships, or some travel burden. Tracking happiness over time would give me a measure of that stress, when it peaked, and when it receded.

Structural impact

I’d like to have a happiness metric to gauge the long-term impact of structural changes like company ownership, changes to our service offering, the kind of clients and projects we take on, or how we schedule and assign projects.

How I do this now

I measure happiness of the company now in a very ad-hoc fashion. I watch how people interact after standup. I observe laughter and frowns. I chat casually with probably half the people in our office in any given week. I ask others how they think the company is feeling. I watch how well attended company parties are. I visit with spouses. While these measures are helpful, they are inevitably distorted by sampling error and my own feelings.

I could be disciplined about talking to everyone in the company regularly, in a formal fashion. But in a company with 40 or so employees, that would not only take a significant amount of my work week, but it would still be subject to my personal interpretation, relationships, and position. It would be difficult to quantify consistently, and it might be hard to learn the truth, given my role.

A better measure?

What if instead I anonymously asked every employee a simple question?

How happy do you feel right now?

I imagine an interface that makes it possible to answer this question on a simple three or maybe five point scale in less than one second.

I don’t want people to spend a lot of time thinking, I want them to simply react, as close to unconsciously as possible.

I don’t want to ask people to segregate work from personal happiness.

I don’t want people trying to average out their feelings over a period of time (e.g. month, quarter or year).

I want to make it easy to answer spontaneously.

I don’t want people to have to write in order to respond.

I will rely on the aggregation across people and time to make the metric meaningful.

Possible implementation

I’m envisioning something that integrates with our time tracking tool, PunchIt. Since everyone in the company interacts with this tool multiple times per day, it seems like an obvious place from which to sample the population.

The image below is my crude mockup for how this might look superimposed on PunchIt. A single mouse click on one of the faces would send the result anonymously, to a web service, dismiss the happiness poll widget, and return focus to PunchIt.

My guess is that sampling everybody once or twice a week would be sufficient to capture meaningful data while not making the polling a burden. I believe that varying the time when the polling occurs would both improve the accuracy of the data as well as make it less obtrusive.

An immediately obvious measure of happiness is retention. But waiting until you lose people seems dumb. Presumably a significant, sustained, drop in happiness would indicate that we’re at risk of losing talented people. The aggregate measure I’m contemplating wouldn’t tell me who I’m at risk of losing, but it would be a signal that something was up, and that I should investigate. Atomic doesn’t have a retention problem^*, but we don’t have a profitability problem either, and I measure that.

In my casual research on what other people have done to measure employee happiness, I’ve found companies using net promoter scores, traditional surveys (e.g. 65 statements, 2 open-ended questions), and short interviews or reports. I’ve not found anything as simple as a single question with a spontaneous response.

Displaying the metric

I’m envisioning something on our open office information radiator that charts aggregate happiness over time. Displaying this where everyone can see it would help all of us understand the mood of the office, and know when we should be having conversations about what’s going on.

If the aggregate measurement was accurate, I’d also have a way of gauging the significance or breadth of an individual’s observations about the broader group. I’d know how much credence and weight to give to statements like “the company is stressed”, or “everybody feels this way”, or “I hear a lot of people grumbling.”

I might see interesting patterns. For example, I might learn that I can time company meetings or important emails (that that have the potential to trigger stress or confusion) for parts of the week where aggregate happiness is higher.

Consider the two scenarios below. In the graph on the left, the mood of the company has improved over the long-term average (dashed line). That’s not only nice to know, but might tell me that the change introduced recently has had a positive impact. It might also tell me that the company is mentally able to tackle a new initiative or wrestle with a difficult challenge. In the scenario on the right, the aggregate happiness has decreased markedly and is trending down. I’d be arranging company-wide conversations to find out what’s bothering us, and whether we should be doing something about it. I’d be worried about stress levels and looking for ways to smooth things out and not to introduce new stresses.

Conclusion

What I’m proposing is a radically simpler measurement of overall company happiness. It would be a metric that is subject to all sorts of factors (health, traffic, mood, caffeine, personal relationships, clients, bugs, sunshine, colleague interactions, etc); a measure of the whole person. My hope is that it would becomes meaningful and useful as these tiny, easy-to-do, spontaneous samples of personal happiness are aggregated across many individuals over a period of time.

I don’t intend to stop gathering anecdotal evidence about the company’s overall happiness. And of course no metric replaces the action of conversations with individuals, groups and the company as a whole. I see my happiness metric as the canary in the coal mine — an early warning about something dangerous in the air.

Am I nuts? Do you think tracking this metric over time would provide me meaningful data to gauge the overall emotional state of the company?

^*In the last five years we’ve had some involuntary turnover, but we’ve only had two people who left because they thought they’d be happier somewhere else.

      

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There are easier places to work than Atomic Object. We don’t specialize in one industry or technology domain, so we’re constantly learning. We push hard to build the best app possible for a given budget, and ideas always exceed budget. We all contribute to our marketing efforts through the company blog. Everyone’s expected to understand the economics of the company and make smart decisions with their time. We push ourselves constantly to develop professionally. In short, we have high expectations of ourselves and each other.

So why do talented people with lots of employment choices choose to be Atoms? Daniel Pink’s three dimensions of motivation are part of the answer. We score high on mastery and autonomy, and we adopt our client’s purpose for the duration of each project. A serious commitment to sustainable pace keeps the intensity manageable. Lastly, and perhaps most importantly, we have strong bonds to each other. Those bonds were strengthened last year with an experiment I called “pair lunch”.

With thirty-five employees in our Grand Rapids office we could no longer rely on the natural mixing of project starts and stops to make sure everyone worked closely together even once a year. If they don’t have projects together, I thought, let them eat lunch!

When I started the experiment, I kept the rules as simple as possible:

1. The company would buy lunch for any two employees who hadn’t lunched together in the last month.
2. You can’t ask anyone about other rules or guidelines. Trust your judgment.

I encouraged everyone to use pair lunch to get to know each other as individuals, talk about non-urgent company stuff, and generally avoid making lunch a continuation of project work.

Pair lunch has been very successful in making connections between people who wouldn’t otherwise have had an opportunity to get to know each other. The image above illustrates the overall success of the experiment because of the richness of the connections. The nodes represent individuals, the lines show who had lunch with whom, and the line weight indicates how many times they had lunch. By making it a benefit, and giving it a name, people seem to feel freer to initiate lunches with no particular agenda or need to meet. This seems particularly valuable in a company with a fair number of people who aren’t naturally inclined to initiate a social event.

This mail from Brittany is typical of the many comments I’ve received on pair lunch:

[Pair lunch] is one of the better ideas you’ve ever had.
Drew and I pair lunched today and we shared lots of good conversation about usability testing, AO culture, and many other topics.
[This is] something we never would have done without the encouragement to do so.

New employees

One of the things I do for new hires is to facilitate pair lunches in their first two weeks of work. I do this by asking three or four people to initiate a pair lunch with the new employee. I hope these lunches, along with our Culture Pair assignments, smoothes a new employee’s entry into the company. Having the lunch initiated by other employees (versus me arranging them) also teaches the practice.

Fun stats

As with everything we do, pair lunch started as an experiment. It didn’t take long to see this experiment was successful, and pair lunch has become a highly appreciated benefit. Here are some stats for the first 12 months:

• Total number of participants was 47.
• Total number of unique pairs having lunch was 216.
• The most lunches participated in by a single person was 26.
• The fewest lunches participated in by a single person was 2.
• The largest number of distinct lunch partners for a single person was 22.
• The number of lunches per person averaged 9.5.
• The maximum number of lunches for any single pair was 4.
• The average cost of lunch was $28.

Cost

A year of lunches, $6,782. Personal connections in the company, priceless.

For comparison, we spend approximately $10,000 each year on the parties that follow each company quarterly meeting.

There were 242 lunches in the first year. At roughly $144 per participant per year, pair lunch is not only an inexpensive benefit, it’s helped build and maintain the personal relationships and strong bonds that keeps Atomic working.

      

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Transparency in a company does a lot of great things. Perhaps first among them is it builds trust. Transparency also creates the potential for broader employee participation in the analysis and investigation that proceeds major strategic decisions. If you can share an opportunity and your ideas early, you can tap your internal brain trust and improve your odds of success, I believe. What I’ve recently figured out, through some painful experience, is that taking advantage of the potential that transparency creates requires more than openness from the leadership of the company. It also requires what I’ll call “positive engagement” on the part of employees.

Atomic Object has recently been investigating what is, for us, a fairly major strategic opportunity. There are three people whose job description includes strategic work: me, Shawn Crowley, and Mike Marsiglia. (That’s not to say other people at Atomic don’t think strategically or generate ideas, just that we’re the ones who are expected to do so.) With this particular opportunity we were fully transparent with the company very early on. So early on, in fact, that we were still in the “vision and possibility” stage, and had not yet fleshed out a plan or assessed all the risks. The situation was evolving rapidly, much was unknown, and the opportunity presented certainly wasn’t on our list for 2013. During the course of our investigation and planning we arranged a lunch meeting for anyone interested in hearing where things stood. We filled them in on how things were progressing and what we’d learned, giving everyone the chance to ask questions. My goal for the meeting was to maintain the high level of trust we have through transparency so that we could benefit from a greater diversity of perspectives and start building support for the initiative.

The lunch meeting was well attended. Of the 30 or so people in the Grand Rapids office that day, we had 20-25 present. We started out with a summary of where things were and where we thought they might be going. We shared the outlines of the plan, pointed out how it had evolved, and then opened things up for general discussion. Relatively few people asked questions or spoke up. No comments or observations about the upside or possible positive outcomes were raised. Risks were raised, and for those that we had previously identified and addressed, our plan for mitigation was not acknowledged. Fear was a common theme. Overall, from my perspective, the meeting was de-energizing and not helpful. I came away feeling that no one saw any value in the opportunity. Most people seemed frozen by a fear of change and their reaction felt like a lack of trust in us (myself, Shawn, and Mike) to evaluate the opportunity carefully, or execute on it successfully. At least that’s the story I was telling myself later that afternoon. Transparency wasn’t feeling so great to me that day.

The next morning at our company standup meeting I shared my frustration and perspective on the lunch meeting. Our standups never last more than 5 minutes, by design, so I didn’t belabor the point but I was honest about how the experience made me feel. We’ve been using Crucial Conversations as a framework for handling difficult subjects and experiences, and I tried to apply that model to this situation. Immediately after standup, 10 or so people spontaneously coalesced around me in what became a very interesting, lively, and valuable exchange.

What I learned from the discussion was that the story I was telling myself (“people don’t trust me, they fear any change, they have no vision, they think we’re going to be duped”, etc) was very much at odds with what the participants of the ill-fated lunch meeting were thinking. What I learned was that their level of trust and respect for us made them assume the opportunity was a good one, and they just needed to think about downside risk. (Going quickly to risk and corner cases might be an occupational hazard of software developers.) No one bothered to point out the positives because either, they thought them obvious, or, they didn’t want to look like sycophants. The strong message was that the transparency of the lunch discussion was very valuable and appreciated.

The irony of this experience was that the very transparency that fosters trust in me by our employees had stressed my trust in them. The secondary standup meeting crystallized something in my brain: the idea that transparency and participation in strategic decisions are not merely a right of the employees of Atomic Object, but also come with a corresponding responsibility. Not upholding this responsibility takes you out of the conversation and jeopardizes your right.

I call this responsibility “positive engagement”. Risks and possible negative outcomes must always be considered. But simply listing all the ways something could go wrong isn’t terribly helpful. After all, it’s easy to generate such a list for any sufficiently interesting or complex initiative. Identifying risk and suggesting ways to better understand or mitigate those risks is what I consider positive engagement.

Some of these same issues came up when we opened our office in Detroit a year ago, so I’ll use that as an example.

BAD

“The Detroit talent market is bad. We won’t be able to find anyone to hire.”

GOOD

“The Detroit hiring market makes me nervous. Let’s research the local CS programs and talk to companies like us in the area.”

Intentionally as a group, and unselfconsciously as individuals, reviewing and voicing the upside and possible positive outcomes of an initiative is another aspect of positive engagement. We might learn something from the diversity of our positive viewpoints, as well as the negative ones. Getting the un-spoken positives into the open helps balance the negatives and helps us avoid the mistake I made in the story I told myself following the lunch meeting (“everyone fears change; no one trusts our vision”).

BAD

Silence

GOOD

“If we had a Detroit office, we would be so much closer to our clients on the east side of the state. They’d benefit and so would we.”

We scheduled another update lunch a couple of weeks after the first one. We had similar turnout and interest levels. This time, however, there was a more balanced discussion about the pros and cons of the opportunity. There were concrete suggestions on how we might further understand and mitigate risks. Some excitement and interest in the vision was expressed. Questions were asked about specific details. The tone and tenure of the meeting was very different. The influence of that honest conversation following standup, and the learning that happened as a result, created a better result through positive engagement.

      

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The philosophy behind Great Not Big isn’t simply one of avoiding growth, or a hard limit on how large Atomic Object might eventually be. Instead, it’s a question of focus. Our focus and priorities have always been on being as great as we possibly can be. Growth is an unintended consequence of our achievement, such that it is, at greatness. We opened an office in Detroit last year to find out if we could replicate our model for a software product development consultancy. Doing so was a means of managing the pressure to grow that happy clients bring, while maintaining a size in Grand Rapids that kept us focused on being great. The experiment went well, and we’ve successfully bootstrapped an office in Detroit that has been serving clients, attracting talent, and engaging with the technical community for the last 13 months.

AO Seeks Managing Partner for Detroit Office

Atomic Object is searching for a managing partner to lead our Detroit office. The managing partner role at Atomic is a challenging and correspondingly satisfying one. It is an opportunity to build your own software product development office, supported by a proven model, strong brand, and active mentoring and training.

Our Detroit office currently employs five great developers, so this isn’t starting from scratch. What this office ultimately becomes, however, will be crucially dependent on our new managing partner’s skills, dedication, and ambition. This position is a rare opportunity for a developer or designer who relishes the idea of building and leading a team of dedicated, passionate makers.

Qualifications

We’re looking for someone who is excited about contributing to the revival of the city of Detroit and interested in doing the hard work to gain the entrepreneurial rewards associated with the creation of long-term, sustainable value for our clients, Atomic, and themselves.

The qualified candidate will have 8-12 years of recent experience as a software developer or designer. They’ll use that experience to inspire, grow, and lead a passionate and talented team of makers. Mastery of modern software technologies, particularly web and mobile, will enable them to engage with potential clients as a consultant and advisor following our pre-project consulting approach to sales.

The ideal candidate will already be an active part of the technical community in Detroit. He or she will recognize the economic importance of innovation services firms and relish the opportunity to help a variety of clients grow their companies and revenues through the creation of software products.

The new managing partner will be responsible for handling the steady stream of sales opps that currently come into the office, as well as networking and local marketing to increase our visibility in the metro Detroit area.

The job of managing partner for an Atomic Object office is not an easy one. It requires an unusual blend of skills, natural talents, and experience. Correspondingly, the potential for long-term wealth creation is much greater than what is typical for a developer or designer working as an employee. A significant element of the Atomic model is local ownership, and the managing partner will be a critical player in that regard.

Atomic Detroit

Our beautiful office in the Harmonie Park neighborhood of Detroit’s central business district has been operating successfully since its opening in May 2012.

Our new managing partner will work autonomously and be responsible for what the Detroit office ultimately becomes, but she or he won’t be working alone or starting from scratch. Atomic’s model for running a successful software development consultancy has been experimentally crafted and refined over 12 years. It’s been tested, stretched, and refactored as needed. The model includes a rich bounty of practices, tools, policies, structures, learnings, and knowledge. The managing partner will be supported with training and mentoring by Atomic leadership and senior staff from our Grand Rapids office. This is not a “sink or swim” proposition.

The microsite for Detroit hiring describes in general why you’d want to join us. It also contains a detailed job description for the managing partner role. Interested candidates can either submit a resume to detroit.jobs AT atomicobject.com, or reach me directly to discuss the opportunity by calling our Grand Rapids office at 616 776 6020.

      

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Nearly three years ago, Atomic started experimenting with a new form of governance. Today, our Board approves nearly everything brought in front of it. Does this mean we’ve created a rubber-stamping sham of governance? Is Atomic run as a dictatorship with a thin veil of employee participation? Has our experiment in renewable governance failed? I don’t think so. To the contrary, I think it’s been a huge success. In this blog post I’m going to explain our experimental governance structure, as well as why I think the high approval rate of decisions and initiatives is an indication of success.

How Atomic governance works

In November 2010, we formed an internal group of advisors as an experimental governance structure. Since we were experimenting, we kept this structure out of our operating agreement. Our Board consists of eight senior staff, all of whom are employees with a significant ownership position. The Board meets monthly, or whenever events necessitate. Unlike similar entities, we don’t have external advisors on Atomic Object’s Board. Four of the Board positions are currently held by senior developers/owners while the remaining four positions are held by our Business Manager, Mary O’Neill, myself, and Vice Presidents Shawn Crowley and Michael Marsiglia. Shawn, Mike, and I effectively operate as an executive committee of the Board. We run the meetings and, because of our role in the company, are the most likely (though not only) people to bring questions, issues, and initiatives to the table.

Our experimental Board structure was driven partly by our efforts toward succession planning, and partly by the effect of broadening the ownership of the company. As I write this, 65% of our employees have some ownership in the company, founder ownership is down to a total of 53%, and three people, including me, act as the leadership team for Atomic Object.

We borrowed our decision making process from another successful Michigan company, Zingerman’s Community of Businesses: For any given decision, everybody on the Board needs to be at a level of at least 80% support; once that level of consensus is achieved, the decision is made and everyone on the Board is expected to support the decision 100%. Our Board is a “working” board—we expect everyone on the Board to help implement the decisions we make.

The most recent modification we’ve made to our experimental governance structure is to hold Board meetings in an open fashion and share the minutes with the entire office. We typically have between four and ten non-Board employees observe meetings.

Typical scenario

I’m going to describe a somewhat idealized scenario for our Board’s interactions. Since each situation and Board meeting is different, not every issue goes through this entire process.

Someone (typically myself, Mike, and Shawn), brings a question or opportunity to the Board during a regular monthly meeting. In this first consideration of the question, we strive to discuss only the problem or opportunity, and not a solution or particular decision. This is a time for questions and exploration, i.e. The Investigation Phase. Ideally, we achieve agreement on the dimensions of the problem or opportunity, and why it matters to the company. We do not take or expect any particular action at this time, other than to generally agree on further research. Following this initial meeting, the person or people who brought the issue to the Board will continue to investigate, learn, work on, and prepare a plan of action. Since our Board meets monthly, there is plenty of time for informal conversation and participation by the Board and other employees before the next formal meeting. This “offline” discussion is a critical element of our process for two reasons: 1) it broadens the perspectives on the question, and 2) allows time for due consideration.

During the phase when a problem or opportunity is being considered (the investigation phase), the executive committee of the Board provides regular updates to the Board, and often the company as a whole, to keep the issue front-of-mind and share any incremental knowledge gained. Eventually, a concrete, detailed proposal for action is brought before the Board for discussion and approval.

The final meeting before a decision, which may be a regularly scheduled or event-driven meeting, involves the Board implementing the “80% agreement, 100% support” rule. Everyone either agrees, and we’re decided, or those who are in disagreement must bring an alternative plan before the Board.

Benefits

Our experience so far is that our Board has consistently approved decisions brought before it during this final decision meeting. On the surface this might seem like the Board is a rubber stamp of approval, i.e. a non-value adding body. To the contrary, I believe the Board is playing a vital role in Atomic’s governance. The existence of the Board, and the structure of our deliberations, adds value to our decision making by their very existence, not because of some final vote at the end of the process.

Because of the existence of our Board, and the need for their eventual approval, the executive committee (the party most often bringing issues and opportunities forward) considers a broader range of perspectives than they might otherwise. Knowing that every issue will be considered, reviewed, and worked on by up to eight people, and discussed broadly with everyone in the company, provides an interesting check and balance on the power of the executive committee, not because of the final vote, but because of the process itself.

Considering the process, it would be odd to arrive at the final decision point and not have the agreement of the Board. By living our fifth value mantra, and following our process, we’ve shared what we’ve learned as we learn it, which, in turn, means no surprises and a more participatory decision making process.

Conclusion

The high rate of approval of decisions and initiatives, far from being a sign of failure or irrelevance, is a sign our Board is working well and our decision making and implementation is stronger because of it. The value of our governance structure and our Board isn’t in that final vote, it’s in the process that gets us from issue to proposal to support.

       

We have very few rules at Atomic Object. Our employee handbook is intentionally labeled “Atomic Guidelines”, and is full of examples, expectations, and explanations but very few concrete rules. The rules we do have concern time tracking, start of the workday, and contributing to the blog. We favor guidelines over rules because it forces each one of us to engage with the spirit and intent of an issue, and leaves the responsibility for deciding on a course of action with the individual. (I am quite familiar with the folly of trying to create a perfect, complete specification, i.e. rules, for anything sufficiently complex, whether it’s a software system or a company.)

One bad apple is one bad apple

I’ll admit it, it’s hard not to make rules. When I’m frustrated with employees that consistently don’t meet our relatively few basic expectations, and I hear lame excuses and feigned confusion, I’m tempted to throw out our guidelines and make concrete, black-and-white, unambiguous rules with clear consequences for ignoring them. I step back from this cliff by reminding myself that we employ 47 people and only a very, very few push me in this direction. That’s the first lesson I want to share:

Don’t take general action to address problems with a few specific people.

I learned this one the hard way, unfortunately. I’ve discovered that a few problematic people can unreasonably poison my attitude towards a lot of people if I’m not careful. I try to remind myself, when I’m feeling frustrated, that for every problem I’m dealing with, I can find 10, 20, 30, even 40 people who are positive counter-examples.

Strongly resist generalizing from one to many when it comes to bad behavior.

Rules and games

Should you succumb to your frustration and create a system of rules, you will have created a game. This guarantees two things: 1) people will play the game, and 2) you will lose. I suspect that something happens when you create a lot of rules that distracts people and veils the original issue behind the rules. By shifting people’s focus to the rules, they lose focus on the original intent. Their creativity, time, and energy goes into playing the game, not achieving what the rules were intended to enforce. In this state, they probably start to feel more morally obligated to playing the game fairly than working in the business. At least that’s how my inner pop-psychologist explains it. Whatever’s going on here, the lesson I’ve learned is:

When you make rules you create a game, and people will play it.

The odds of an employer winning this game are small. To create rules, you’re forced to abstract a lot of the messy world into a simple model devoid of detail. That model will be found wanting when it meets the real world. There will always be cases you didn’t consider, situations you didn’t anticipate, subtleties and nuances you neglected. You will find your rules wanting, and someone playing the game will find plenty of ways around them. If you react by adding more rules, you’re entering into a cycle from which you can’t escape. Your hole is getting deeper, and you’re still digging. Even if you persevere to an end-state where you achieve perfect compliance with the rules, you lose. You’ve wasted a lot of time and energy in playing the game. You’ve probably pushed employees into finding other ways of “beating” you. My conclusion is that:

You can only lose such games.

Consequences

If you acknowledge the folly of rules, what happens when you have guidelines that are clearly communicated and well-understood, and one or more people choose to consistently ignore them or not act in good faith with them? Avoiding rules doesn’t mean not having consequences. Unfortunately, it’s been hard for me to find ways of defining consequences that aren’t full of rules. I think this comes from wanting to be fair.

If the consequences have teeth, it’s only fair that people know what they are, and when they’ll be triggered. That reasonable statement leads into the jungle of rules, unfortunately, but having no consequences for ignoring important guidelines is undisciplined, and unfair to the people who share the pain, pull their weight, and own their responsibilities.

I’ve realized, thankfully not from experience, that the “nuclear” option is useless in most cases. If you’re frustrated and angry, it’s tempting to think, “Screw this; I’m sick of putting up with this. If you don’t comply, you’ll be fired.” That’s a nearly useless consequence, as you’re very unlikely to ever pull the trigger on it. It’s an idle threat for anything other than the most egregious and serious failures of responsibility.

The nuclear option (firing) is useless.

Effective consequences, and their enforcement, have these common characteristics:

• Are aligned with the negative effect of having ignored the guideline or expectation.
• Provide a path back to compliance and re-alignment with the company.
• Have an element of mystery or uncertainty to them, without being arbitrary or capricious.
• Are judged by a human, not an algorithm.
• Are open and have a component of social judgment.

An example: blogging

Atomic’s blog, Spin, is a shared company blog that everyone at Atomic contributes to. Our approach makes for a rich, authentic, and diverse set of topics and posts, and is consistent with our value mantras, in particular, “share the pain”, “teach and learn”, and “own it”.

We came to this approach after earlier failures, plenty of debate, and education. No one who lived through that time period could fail to remember or appreciate the arguments or understand the expectation for blogging. Those expectations, and distillation of the rationale for our blog, are thoroughly documented in our guidelines wiki. The vast majority of the company writes excellent posts and meets the basic expectation that everyone will contribute a post at least once every 40 days (we’ve adjusted that number up as the company has grown– from 30 days, two years ago, to roughly match the supply of posts to a once-per-day publishing schedule).

A few people, unfortunately, are prone to miss their deadlines, offer unacceptably short, trivial posts or enter sloppy, rambling, error-filled drafts to technically comply with their every-40-days deadline. (Thankfully, these don’t make it to Spin, as each post goes through our expert and patient editor, Lisa Tjapkes.)

The consequences for “going red” (we dedicate a portion of our central office information radiator to showing everyone’s blog status) have been nothing more than a guilt trip: explain to our Board through reply to an automatically generated email why you failed on your commitment. Responses to this consequence have ranged from contrition and regret to completely ignoring the email to the functional equivalent of “I didn’t feel like it.”

Clearly, at least for some people, there are no teeth in this bite. When letting this situation ride was no longer acceptable to me, or fair to the vast majority who make the effort to blog, even when it’s not fun or perfectly timed, I decided new consequences with more teeth were necessary. I tried to follow the guidelines above when I devised them.

New consequences

I made no change to the guidelines: blog about what you like, do so at least every 40 days. You’ll still get automated emails when you’re 10 days from due, and when you’ve gone past due (turned red). You’ll still be expected to explain yourself to the Board. But you may also lose 50% of your cash quarterly bonus for the next quarter and be suspended from participating in Spin. In addition, if you are suspended from Spin, the days between posts for everyone else will be decremented to ensure we have enough content.

There are no hard-and-fast rules about when the suspension will be triggered (that would create a game). There are no documented edicts like “one goof per person per year” (more games). A human will judge each situation (they are rare enough to do that, and hopefully will become even more rare) so that legitimate excuses like family emergencies or sickness don’t trigger suspension. After a quarter of suspension, you may re-apply to participate in Spin and regain your full quarterly bonus (there’s a path back to a place of integrity). The forfeited bonus will go towards our other marketing efforts (the punishment is aligned with the negative consequences to the company). Your individual line on the information radiator will turn black to mark your suspended status (social consequences).

If I were to ignore what I’ve learned about these situations, the new consequences would be much different: You get one mulligan per year. When you go red, the trigger is pulled. The punishment is being fired. No one else is aware of your fail, or feels any pain. It’s a design that violates every lesson learned, and yet, wouldn’t be that difficult to talk yourself into when feeling well and truly frustrated.

I hope our new design reduces or even eliminates the failures of those who don’t meet our expectations. It will also be interesting to see if this new approach has any unintended consequences. I’ll write again when I have some data to share.

      

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What is an innovation services firm worth? I had to answer this question when we started broadening the ownership of my company beyond its co-founders.

The traditional answer to the question of what a service firm is worth is, “not much”. All the assets walk out the door at the end of each day. Since talent is portable, a change of ownership could result in a mass exodus, destroying much of the purchased value. There are usually very few hard assets in a services firm. Who would buy such a thing, or if they did, pay very much for it?

Yet the last few years have seen numerous transactions in which software development consultancies have been purchased for significant sums. This is partly explained by the general shortage of software talent, and by the value which such talent can create in a product firm. Rapidly growing product companies buying their vendors, and private equity investments in services firms, exemplify these transactions. I was not interested in an outside investor, but I still needed to establish our value.

My goal was to transfer ownership in the company to our employees. I believed then, and continue to believe strongly, that ownership should be purchased, not gifted. Ultimately, my quest for the correct answer ended in the realization that there is no “truth” to be discovered here, and that my ownership is worth what I’m willing to sell it for, and what someone is willing to pay for it. The best way I could determine to find that mutually agreeable valuation was to calculate it from financial first principles.

Shortcuts & multiples

There are plenty of places that publish data suggesting that the value of a firm is some multiple of its EBITDA or revenue. Inc magazine runs such an article on a regular basis. It’s easy to conclude from these sources that valuation is a trivial exercise — just do a simple multiplication and you’re done. What I believe is commonly misunderstood is that these studies are merely reporting on transactions that happened, not what drove or justified the deals. You can calculate that a company is worth 4.5 times EBITDA only after some buyer does the investigation and due diligence, decides what they are willing to pay, then does the division to determine the multiple. The multiple didn’t determine the value, it was merely observed after the fact. The reports that provide these multiples are only useful if they represent many transactions, and if the underlying business conditions are similar and the deals were well done.

First principles

When I thought about the value of a services firm from a first principles perspective, I identified three primary elements to consider: * Assets (furniture, computers, cash, AR, investments, etc) * Liabilities (debt, AP, current payroll, leases, etc) * Present value of expected future profits

Expected future profits is determined by current contracts, client base, reputation, size, operational efficiency, margin, and market demand. While the individual components of the expected future profits are very difficult to value, taken together, they can be said to have determined past profitability, and that is easy to measure. Calculating the present value of those future profits is merely recognition that a dollar today is worth more than a dollar tomorrow. In short, future profits can be predicted from past profits, and the value of that future profit stream can be discounted to map it into a value today.

Atomic Object’s valuation model

The model below is a simplified version of the one we use to value the company for our Employee Share Purchase Plan. I’ve removed our speculative development assets to simplify it. The numbers shown in the model are made up, not Atomic’s actual data. Before walking through it, I should point out that this model is an intentionally conservative valuation used for internal sales to current employees. Very different assumptions would probably be appropriate for the sale of the entire company to an outside entity. From recent deals I’m personally aware of I believe our valuation model is in the neighborhood of 50-100% lower than recent market sales of entire companies.

The tables in the yellow block are critical parameters for determining the value of future profits. The “employee PS fraction” reflects Atomic’s convention of distributing 25% of earnings to employees through a 401k Profit Sharing plan and quarterly cash bonuses.
The discount rate is a somewhat arbitrary number that’s used in the net present value calculation for the discounted cash flow analysis. It’s meant to represent a combination of the cost of money and the inherent risk of future profits. The tax rate is an approximation of the marginal income tax rate for purchasers. We use a four year average for the all-important net margin.

The tables in green represent assets. Cash and accounts receivable (AR) are averages over the prior quarter. The Future Profits table shows the discounted cash flow analysis. Profits are projected out 10 years. We selected this relatively long period based on our 12 years of history and our confidence in the future demand for our services. The net present value of the series of cash flows is then calculated using the discount rate. Another reasonable approach would be a shorter projection of profits, say 5 years, with a correspondingly lower discount rate.

The table in the red block shows the liabilities of the company, including the income tax to be paid on future owner profits. One way our model is conservative is that it is an after-tax value.

The blue block brings together the assets and liabilities to show the total company value.

Conclusion

We’ve used this model since the summer of 2009, and we’ve transacted approximately 47% of the company with it. We update it every quarter now for use in our ESPP. We’ve also used it to buyout departing owners.

I’d be interested to hear what other firms have done, and happy to discuss our approach.

The Numbers and Excel versions of the model will let you explore them more thoroughly.

      

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Can a company really be anything like a family? Is drawing the comparison naive, or a selfish attempt at employee manipulation by a cynical CEO? I use the word “family” for Atomic Object both casually and seriously, but I’ve always had a small degree of discomfort with the comparison. This post is my attempt at thinking that through.

Here are the salient characteristics of families, as I see them:

• care deeply about each other
• sacrifice for each other
• play together
• work together
• support, protect, and help each other
• share food and other resources
• show up at significant life events
• know each other well, and in many dimensions
• socialize and celebrate together
• seek to perpetuate themselves
• have a strong sense of identity (name, crest, etc)
• have shared values, history, and rituals
• tolerate each others shortcomings
• drive each other nuts, sometimes
• have both living and dead members
• don’t chose their members

I think it’s pretty clear that any group of people, as they grow larger, exhibit fewer of these characteristics. It’s probably safe to say that no large companies operate like families, at least across their entire organization. I’ve also heard plenty of stories of small companies that don’t exhibit many of these traits, either.

Like a family

If I include deceased members, Atomic Object is approximately the same size as my extended family (parents, siblings, grandparents, aunts, uncles, cousins, spouses, and their kids). When I evaluate Atomic against the list above, I think “check, check, and check”. When I compare to my own extended family, I see as many matches for Atomic as for my family, and truth be told, I’m closer to some Atoms than I am to some family members. I certainly spend a lot more time with many Atoms than I do with some of my family. (For reference, I have a close, happy family with fairly broad geographical distribution and stay in contact with all living members.) I love my family, and I also love some of my fellow Atoms.

Atomic certainly has a very strong sense of identity and works to perpetuate itself. It’s not uniform, but there are many Atoms who care deeply about each other. We work and play together regularly. We share meals, and profits, and tools, and household stuff. We help each other frequently. We watch out for each other, and there have been times when we’ve protected each other. I can think of many examples of Atoms being tolerant, as well as being driven crazy. We don’t, thank heavens, have any deceased members yet, but I suspect someday when we do we’ll talk about them in those terms.

Atomic’s history is much shorter than my family’s history, but our values and culture are actually more crisply defined and identifiable than that of my extended family. My family does not have a crest or coat-of-arms; Atomic has a logo.

Not like a family

One big difference between Atomic and a biological family is that we chose our members. We are a family of intention, not birthright. On the other hand, families, at least as I think of them, are not entirely closed to changes in membership. Marriage, long-term romantic relationships, “adopted” grandparents, so-called Dutch uncles—these are ways families grow beyond blood relatives. As with divorce, letting an employee go may or may not sever the relationship entirely. And while a blood connection cannot be undone the way employment can be ended, I’ve met people who are not active members of their families—they retain a connection by definition, but they aren’t connected in practice.

There are other differences between a biological family and a company. These have to do with the company’s existence:

• a single, common purpose
• centralized governance
• a goal to make a profit

Families serve higher purposes of societal organization, individual fulfillment, and continuation of our species. Yet by comparison, viewed through the lens of purpose and intention, most extended families seem like loose collections of independent people who are neither organized around nor governed to a specific purpose.

My answer

My conclusion is that companies can in fact have much in common with extended families. Atomic is one of these companies. Comparing us to a family isn’t specious or manipulative. We are like an extended family with a well-defined purpose.

      

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I’ve lately come to appreciate what people at Atomic Object call the “worry gene”, especially in the people I work with. Pushing the genetic metaphor a bit, the worry gene encodes for proteins which, in turn, cause behaviors and actions that directly improve the outcomes and results of projects. Having a strong worry gene is a really great attribute for working at a consultancy.

Some people interpret the phrase “worry gene” in a negative light. I think this stems from the assumption that worrying is bad and unproductive. What this interpretation misses is the critical part of what we mean by the phrase. It’s not the worry, but the actions taken, that matter. If you had a faulty copy of the worry gene, and your cells didn’t create the proteins that resulted in positive action, then I guess that would be bad. But that’s not a properly expressing worry gene. I like to work with people who pay attention and turn their worry into positive, productive action.

What kind of positive actions come from a properly expressing worry gene? Here are some I’ve noticed:

• being generally aware and mindful
• anticipating possible problems
• seeing opportunities
• seeing the big picture
• taking smart precautions
• thinking from other people’s perspective
• having a backup plan for when things don’t go as you expect
• following the Boy Scout motto (“be prepared”)
• stepping back often enough to minimize waste and make necessary course corrections
• not getting lost in the trees, or off in the weeds
• anticipating, not just reacting
• identifying and questioning assumptions
• engaging challenges early, even when it’s going to be hard

When you work closely with a group of people who all have the worry gene, you feel like peers. The burden of our complex projects, and the responsibility we bear to our clients is equally shared. You operate as a high-functioning team and enjoy the incredible satisfaction and esprit de corps that brings.

When you work closely with people who don’t have the worry gene, you feel more like a parent. You carry a burden and bear the project responsibility solo, rather than sharing it. It’s easy to become resentful.

The worry gene’s value is not limited to just the project lead or manager; it is useful for every role people serve on projects. For example, test-driven development is a software development practice that represents positive action caused by the worry gene. When you write tests, you anticipate what might go wrong and think about the future. Human-centered design is an approach that requires you to be empathetic, see the big picture, anticipate what might happen, and remain mindful—all actions or behaviors caused by a healthy worry gene. The worry gene isn’t just about project management.

People with healthy worry genes are mindful of the present and anticipate the future. That makes for happy teams, successful projects, and great products.

      

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When I started Atomic Object with my co-founder in 2001, I followed my instincts and engineering training, as I had no formal business education and very little business experience. I wish I’d known about the knowledge funnel back then. Reading about this simple model in Roger Martin’s book, The Design of Business, was an “ah ha!” moment; he explained so well, and so simply, the process we more or less bumbled our way through in getting Atomic up and running. If understanding is a prerequisite to solving any problem, Martin contributes a simple, visual model and vocabulary to discuss and therefore increase the odds of creating value and improving your business.

The knowledge funnel has three stages: mystery, heuristic, and algorithm.

Mysteries

Mysteries are problems to be solved or new pleasures to be created. From a business perspective, mysteries worth solving are those that people care enough about to pay for. Mysteries are things like “how can I help golfers improve their swing?”, “how do conference organizers deliver value to sponsors?”, or “why do most people drink bad beer?”.

An entrepreneur wrestles with a mystery, perhaps applying a formal technique like design thinking, or a more ad-hoc, intuitive approach. While researching, exploring, and thinking, she eventually makes an abductive leap that leads to a heuristic that may solve the mystery. Abduction is a form of logic, like deduction and induction, but unlike those more familiar forms, it seeks to predict the future, rather than draw conclusions from the past. As such, it isn’t air-tight and guaranteed to produce a successful result. Abduction is about validity (what might be) versus reliability (what is proven).

Heuristics

Heuristics are rules-of-thumb that generally work to solve a problem. They work well enough to be given a name and to build a process around. Once an entrepreneur has heuristics sufficient to solve a mystery that matters to people, she can build a company and deliver value to customers. Heuristics can be refined and improved over time as the company gains experience, learns from experiments, and refines its understanding of the mystery.

Algorithms

Some companies reach a point where their heuristics have become so well-defined, predictable, and effective that they become algorithms. Algorithms produce the same result, every time, for a given input. Making hamburgers at McDonald’s is an algorithm; cooking steaks at home, on the grill, runs on heuristics.

Companies that have developed algorithms to solve the problems of their customers have the potential to scale up dramatically. Martin uses the example of the McDonald brothers solving the mystery of what people in 1950′s Southern California wanted to eat while away from home (hamburgers, fries, shakes, served quickly), and Ray Kroc turning their heuristic solution into rigorous algorithms that could be successfully applied on a grand scale.

Some businesses never reach the algorithm stage. Software design and development firms are good examples of these. My company, Atomic Object, has many heuristics we apply very successfully to our projects (one-week iterations, pair programming, test-driven development, fixed budget engagements, human-centered design practices, etc). But these heuristics require a great deal of experience and adaptation on each project — no one knows how to turn software product development into a set of algorithms that could be predictably applied on a mass scale.

The table below shows three examples of mysteries, observations, abductions and heuristics. Notice that:

• None of the abductions are guaranteed to explain the observations; there are other possible explanations.
• There could be many heuristics created from each abduction.
• Building a product or service around a good heuristic is still a lot of work.
• Building a company to support the product or service is its own huge challenge.

Conclusion

The knowledge funnel isn’t just useful for start-ups. In my next post I’ll look at the two main modes companies operate in (exploration and exploitation) and describe the risk that success creates in established companies.

      

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Keeping up with the 150 or so emails I get every day is a challenge, one that I fail at quite regularly. Happily, I’ve recently had a breakthrough on this thorny problem. Pairing with Jamie Lystra, our incredibly able assistant, has tamed the email beast. I’ve improved my responsiveness, reduced my mail-induced anxiety, and found an implementation that balances the conflicting forces of leverage, confidentiality, and privacy.

My first experiment with getting email help from an assistant didn’t go very well. I didn’t get the leverage I’d hoped for, and having full access to my email account proved to be a problem in the end. I wish Alexandra Samuel’s HBR article on delegating email to an assistant had been written a year ago. She has some great ideas and advice, and it could have helped me avoid some pain.

While the first experiment failed, the need for help didn’t diminish. A new approach was called for. My colleague Shawn Crowley suggested that rather than share full access, I think about a filtering and forwarding approach.

Baseline requirement: a great assistant

I believe the primary factor for success in getting help from an assistant, whether in email or any other area, is the person him or herself. Jamie is justifiably proud of the important work she does. She’s gratified by helping me, Mike and Shawn. She seeks out new ways she can help us. She’s thoughtful, reflective, and pro-active. She’s loyal, steady, discreet, and optimistic, and exercises good judgment. With an assistant like this, any strategy for getting help with email would probably work.

Filtering, forwarding, and digesting

While our company email is hosted by Google, I continue to use a desktop mail client with IMAP. I like having all my email in my laptop, and being able to read and respond to mail without a network connection. My mail client of choice is OS X’s Mail.app. Mail has a feature similar to forwarding known as “redirect”. The difference between forwarding and redirecting is that redirect preserves the original sender in the From: header. When I redirect a message to Jamie, she sees the message as if it came from the original sender, not me. This helps her process my mail, and makes it easier to respond if appropriate.

Here’s how we’ve worked out an effective way to pair on my email. Throughout the day, Mail.app automatically:

1. pulls all mail with IMAP
2. leaves mail from anyone in my company in my Inbox
3. leaves selective mail from outside the company in my Inbox
4. archives and redirects everything else to Jamie

During the day, Jamie processes the mail that is redirected from my laptop. At the end of the day, she produces a daily digest of my emails in three categories:

1. Important, response required
2. Read, no response required
3. Not sure what this is

I use the daily digest to read mails that matter from my All Mail folder. The third category provides a natural feedback loop to help Jamie learn what matters and improve her handling and efficiency. Since Jamie’s monitoring mail throughout the day, she will occasionally text or call me with something that’s urgent.

Results

The overall results after just two weeks have been very good. I’ve been able to stay caught up on email. My responsiveness has improved. My anxiety level has decreased. Jamie is learning quickly what matters and what doesn’t. She can respond on my behalf on some mails. She’s more aware of what’s happening in my life, which has opened up new ways she can assist.

Our approach has reduced the total time I spend on email. That means there are things I’m missing, and serendipities lost. For example, I don’t see as many Basecamp messages on projects I’m close in. Interesting tidbits from newsletters, LinkedIn, and yes, even FaceBoook, can no longer catch my eye. Since she can’t possibly know when to add this stuff to the digest, Jamie has unsubscribed me from a bunch of lists.

The only downside to how we’ve implemented our strategy is that my laptop needs to be up and running in order to receive and redirect messages.

The level of loyalty, discretion, and diligence that Jamie brings to her job are critical to success since they build my trust. Keeping internal emails out of the redirect stream is a reasonable compromise between confidentiality for other employees and efficiency.

Inbox 0 is now a very attainable goal on a daily basis.
 

      

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My company is 13 years old this month. We’ve reached the average age of US corporations. We’ve succeeded in replacing me — our Grand Rapids headquarters has been more than ably run by Mike and Shawn since January of this year. Heck, we even recently outlived our first dishwasher.

And yet, like our age in human years, we’re a gangly teenager in some ways. We’re still growing into our recently expanded Michigan presence — Detroit and Ann Arbor still have plenty of unmet potential. We’re adapting our internal operations to multiple offices, and we’re refining how an Atomic office at full scale operates.

A few years ago I realized our short-term future was secure, so I started thinking more about the long-term. My initial long-term goal was to have Atomic outlive my involvement in the company. That goal drove me to work on succession, ownership, and governance. Last year at Path to Craftsmanship, I shared a revised long-term goal: I want Atomic to be the first 100-year-old software design and development consultancy. Barring crazy extensions in life expectancy, I’m unlikely to witness this achievement, but it’s my goal nonetheless. I want to set Atomic on the path of Stora, the 700+ year old Swedish forest products company. (It was called Stora Kopparberg when I worked there in the summer of 1983.)

What I like about my 100-year goal is that working to achieve it improves the company today, and that in turn impacts the lives of everyone associated with the company. I believe the attributes of long-lived companies make them more stable, more humane, more fulfilling, more interesting, and more profitable.

What’s Known?

For the Path to Craftsmanship talk, I speculated that these attributes would help us achieve our goal:

• financially conservative
• self-renewing, internal ownership
• stable governance
• leadership succession
• an ability to adapt (customer/market focus)
• a good place for craftspeople to work

Since that talk, I’ve fired myself as Managing Partner in our Grand Rapids office, taken the title of CEO, and started working across our offices. That “promotion” made me think even more seriously about Atomic in the year 2101. What common attributes do 100+ year old companies have? What should I work on now if that’s my long-term goal?

Lessons from IBM

When IBM turned 100 a few years ago, Samuel Palmisano, their CEO at the time, identified three characteristics he believed were critical to getting IBM to the centenary mark:

• a company not defined by a product or business model or service offering
• no overly-strong attachment to the past, or past successes
• the ability to outlive a charismatic leader through focus on a culture and the company

Academic Study

Vicki TenHaken, a professor of management at Hope College, has researched the common attributes of long-lived small to medium-sized companies in Japan and the US.

She found that long-lived Japanese companies shared the following attributes and their corresponding practices:

• Had a clarity and continuity of corporate culture and values
• keep the business in the family
• maintain original name and brand
• observe traditions
• Focused on relationships
• treat suppliers and customers as partners
• maintain and add to their technological abilities
• keep close connections to their local community
• Balanced tradition and innovation through gradual change
• keep management methods up-to-date
• continuously develop new business relationships
• continuously develop new products and services

The common attributes TenHaken found among long-lived American companies were:

• Strategic focus
• focus on their main business, occupying a niche
• not focusing on growth for growth’s sake
• Investments in long-term and loyal employees
• don’t lay people off when work is low
• have above-average compensation including good benefits
• offer employee profit sharing
• A service orientation
• excellent customer service for existing customers
• developing new customers not the focus
• offer services to their loyal customers, even when not profitable
• Driven by core values
• commonly understood, tribal knowledge and values; seldom documented, externalized or explicitly taught

Royal Dutch Shell’s Study

An unpublished study by Royal Dutch Shell from the 1970s was focused on large companies. The investigator of the study wrote a very interesting book upon retirement, comparing companies to living organisms and looking for the common survival traits of long-lived companies. The Living Company posits that long-lived companies:

• Are sensitive to their environment; learn and adapt
• Have a strong, cohesive, identity, and role in a community
• Are aware of the ecology in which they operate, both internally and externally
• Control the financial means of their growth, operations, and evolution

Interestingly, the Shell study found that return on shareholder investment, material assets, industry, product line, or country of origin had no correlation with company longevity.

Built to Last

Published in 1994, Jim Collin’s first business book blockbuster, Built to Last, found five common traits among long-lived companies:

• Built around a core ideology
• Have a cult-like culture
• Homegrow management and leadership
• Stimulate progress through audacious goals, experimentation, and continuous improvement
• Aren’t dogmatic; embrace both ends of various continuums

Results of My Meta-Study

I’ve previously written and talked about the three things every sustainably successful company needs to get right: idea, execution, and culture. Sustainable success is clearly related to longevity. My informal study-of-studies lead me to a common set of attributes of companies with extraordinary longevity. I think about these attributes, and the corresponding practices and behaviors that create them, as being organized into external and internal factors.

External Factors – Idea

The external attributes of long-lived companies correspond to idea.

• Awareness – Track changing customer needs and the market closely. Learning – Measure, reflect. Experiment with new offerings and ideas.
• Adaptability – Continuously improve. Manage change effectively.
• Focus – Stick to a clear, cohesive business offering.
• Growth – Make growth a potential consequence of success, not a goal by itself.
• Service – Focus on excellent service.
• Loyalty – Prioritize loyal customers over new customers, new services, and even profitability.
• Ecosystem – Treat suppliers as long-term partners.

Internal Factors – Execution, Culture

The internal attributes of long-lived companies correspond to execution and culture.

• Identity – Maintain a strong, consistent identity (name, brand) for the company over time.
• Leadership – Leaders and managers are caretakers, subordinate to the company, not the focus.
• Values – Company values and beliefs are well-known and shared.
• Community – The company sees itself as a member of a community and acts accordingly.
• Culture – Culture is distinctive, explicitly transmitted, and acts as a binding agent and source of identification for employees.
• People – Employees are nourished and protected, not easily expendable in lean times.
• Compensation – Compensation is above average.
• Profit – Profit is shared broadly.
• Promotion – Key positions are filled by long-term employees.
• Spending – Operate frugally, spend thoughtfully.
• Finances – Maintain cash reserves and reliable sources of capital.

Looking at the list of attributes above generally makes me happy with what we’ve built at Atomic. It gives me a rubric for evaluating ideas and initiatives for the long-term. Barring disruption by the singularity, I think we’re headed in the right direction to achieve my 100-year goal.
 

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A company can’t reach the milestone of celebrating its 100-year anniversary unless it can out-live its founder. In fact, it can’t even get to the lesser goal of outliving the founder’s retirement unless it pays attention to succession planning. This blog post is about the path Atomic took to reach this point.

A Multiyear Effort

Handing over responsibility and daily operations for our first and largest office was a multiyear project. We’ve now achieved the significant milestone of replacing me as founder in the managing partner role for Grand Rapids.

To be clear, I’m giving these phases names, durations, and significance retrospectively; the only “plan” I made was to achieve the goal, and the initial impetus to start was feeling overwhelmed.

False Start

In 2008 we were seven years old with about 20 Atoms in the molecule. I was selling all the work we did, planning capacity, actively involved in billable work (35% of my time that year), managing people, networking, marketing, wrestling with issues around growth, and working on broadening ownership. I got some help on some of these things, but what was on my shoulders was more than a full-time job (2,370 hours that year), more than I could do well, and pretty stressful.

We experimented that spring with bringing an experienced person in from outside the company to help with sales and strategic planning. It didn’t go well or last long. In hindsight it’s too bad I hadn’t done my research on long-lived companies, as promoting from within is one of their common attributes.

The upside of our failed experiment was that it caused other Atoms to realize how desperate I was for help.

Shawn Stepped Up

In the summer of 2008 Shawn Crowley saw the need, and probably an opportunity. His deeply-ingrained sense of responsibility likely made it hard to ignore and not take action. His expressed interest in and early work on implementing my “design matters” vision for Atomic from 2007 positioned him perfectly to start helping with sales. With no title, no raise, no job description, and nothing more than his natural drive and stamina, he apprenticed himself to me and learned the ropes quickly.

Mike Returns

Mike Marsiglia, Atomic employee #1, returned to the company after three years working in Boston. He and I both knew he was interested in a broader role than software developer. His MBA was a concrete manifestation of that interest. Wisely, I believe, he joined a client project immediately upon his return and spent his first year back at Atomic on a team.

In the summer of 2009 Mike’s project was ending and we pulled him into working closely with me and Shawn. His formal business education was a great complement to my self-taught knowledge, and he began immediately improving and extending the financial modeling I had always done. 2008-2009 were tough years to start being responsible for keeping our makers busy. The economy was experiencing what we now call The Great Recession. 2009 is the only year, thus far, that our revenue didn’t increase (it was flat). It probably wasn’t really any bleaker than 2001, the year we started, but the consequences of failure were much more significant.

The Triad

Shawn, Mike and I were given the internal nickname “the Triad”. It accurately represented how closely we worked together. Eventually I came to regret the name and the way I talked about the Triad’s role in company governance and operations. In hindsight, our three-way, close working relationship was an apprenticeship for Mike and Shawn, and it probably would have been better to characterize it that way. Triad implied a structure that was permanent, and would outlive the immediate need and the learning.

The years from 2009 to 2011 were challenging. Mike and Shawn had to navigate the transition from developer to company leadership and management. They had to figure out new relationships with makers who had always been peers. They needed to exercise some authority over people with longer Atomic tenures, and who were older. In hindsight, I didn’t fully appreciate in the moment how hard that must have been.

Ownership made things even more complicated. Ironically, one of the projects that having help from Shawn and Mike made possible was to implement on my plan for broadening ownership of the company. In the summer of 2009 we pulled the trigger and sold about 17% of the company to seven long-term employees, including Mike and Shawn. The ensuing interest, excitement, anxiety, and uncertainty, along with the formation of the Triad, destabilized existing patterns and relationships and caused some friction and painful growth.

One of the most important lessons I learned in this time period was the difference between the authority I could give a new manager, and the authority that their employees would grant them. The granted form is much more powerful. It’s also necessary based on Atomic’s culture. Given authority may be necessary, but it certainly isn’t sufficient. That was a frustrating thing for me to learn, even if it now seems obvious in hindsight. Managing partners need to earn the respect, trust, and confidence of the Atoms they manage; I can only influence that through good advice.

Working Independently

By the end of 2011 our team was operating very smoothly. Mike and Shawn were fully up to speed on sales opportunities and capacity planning puzzles. They began pushing me out of that work. They had been instrumental in handling some difficult personnel situations. I’d carefully watched them get mad at each other and resolve their conflicts. They were feeling the responsibility, and hence the concomitant stress, of the managing partner role. Somewhere along the line I’d given them VP titles and well-deserved raises. While we still used the term Triad, in truth it had begun to feel to me like we were a Pair+One, and I was the extra.

Transition

The years 2012 and 2013 were transition years. Atomic operated pretty smoothly. Our experiments in governance were successful and stable. Shawn took on the strategic initiative of integrating design into our service offering, breathing new life into that effort and pushing us forward again. After Shawn and Mike created a plan for our first expansion, Mike was instrumental in coordinating the launch of our Detroit office. Sales and capacity planning were old hat for them by now. There was still occasional friction, but it was clear to me that Mike and Shawn had earned the authority granted to them by their fellow Atoms. From 2009 to 2013, we had doubled the size of the company.

By the summer of 2013 I was able to take on temporary duties as managing partner in our Detroit office. I started working more strategically and intentionally on marketing. We took advantage of an acquisition opportunity to more fully implement our Michigan strategy for the company. All of these things were only possible because Mike and Shawn had Grand Rapids covered, could execute so well and so independently of me, and we worked so well together. All three of us worked more hours that year than ever before. I was feeling some deleterious effects of having been in the managing partner role for 12 years.

Pulling the Trigger

In January of 2014 I took the title of CEO, formally gave Shawn and Mike the title of Managing Partner – Grand Rapids, and started spending about half my time in our newer offices. It was a much harder transition for me than it was for them. I went from a job I knew well and had been successful doing, to one with no description. I had to curb my instincts to involve myself in problems and opportunities that were no longer my concern. I had to determine new ways of creating value for the company. I had three new managing partner apprentices to help and form relationships with.

Mike and Shawn, on the other hand, never missed a beat running Grand Rapids. They kicked off experiments to improve the work environment for Grand Rapids Atoms and make the job of managing partner in an Atomic office at scale more sustainable.

My transition has been challenging, but also exciting. It’s taken eight months, but I’m feeling more confident about my role now, and I’m on track to work 250 fewer hours this year than last.

Our Long Journey

When we started down this path in 2008, I didn’t expect it would take six years. And it felt a little funny, at the age of only 46, and with a company that was only seven years old, to even be thinking about succession planning at that time. (Perhaps tech companies live their lives in dog years due to the pace of change in the world we occupy?)

I’m quite happy where we are now, and that I started early. I’m incredibly fortunate to have had Mike and Shawn to transition into the MP role so capably. It has been, and continues to be, the closest, most effective team experience of my life.

Atomic has passed a big hurdle on our way to my 100-year goal. In honor of this achievement I’m going to celebrate with a one month, no-mail, no-work, no-calls sabbatical.
 

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I’ve always believed that innovation comes from people who care. When you care about your profession, your clients, your peers, and your company, you’re never entirely happy with the status quo. You ask questions like, Can this be done better? Quicker? Cheaper? Is there a different product that would help or delight people? The self-applied pressure to improve, combined with creativity, brains and experimentation, drives innovation.

Transparency is a cultural attribute of a company that, when exhibited by managers and leaders, engenders trust in employees. Trust is a critical element to nurture caring people. After all, caring makes you vulnerable, and if you don’t trust the company or the people you work with, your caring is likely to wither, or you’re likely to move on.

Transparent environments have some downsides. I’ve previously written about their ability to spread anxiety, sow confusion, and slow decisions down. These negative outcomes of transparency reflect my viewpoint as the leader of Atomic Object. Research reported in the Harvard Business Review this month helped me see some negative aspects of transparency from an employee’s perspective.

Useful Boundaries

In the Transparency Trap, Ethan Bernstein, an assistant professor at Harvard Business School, describes a simple, powerful model for understanding the downsides of a transparent environment. Bernstein observed four types of boundaries in companies that effectively balance transparency and privacy:

• Boundaries around teams
• Boundaries between feedback and evaluation
• Boundaries between decision rights and improvement rights
• Boundaries around time

Boundaries around teams allows for collaboration, experimentation, and refinement in the relatively smaller, safer, and trusting team context, away from observation and judgment of other teams, managers, and the company as a whole. Bernstein found that not providing a shield for the team was found to inhibit process improvement. When I hear stories of people experimenting at home with a new approach or tool, I think I’m hearing them want some opacity from their team.

Boundaries between feedback and evaluation are needed to keep people open to the feedback that transparency can provide. If real-time feedback on your performance goes immediately to your boss, or is used directly in your next performance review, you’re more likely to spend time managing the perception of this data then using it to improve. Informal peer review, in the team, during a project, is a way I see we’ve successfully preserved this boundary.

Boundaries between decision rights and improvement rights preserves the ability for everyone to improve a process or product, even when the decision rights are concentrated in relatively few people. Making space for people to experiment with and improve the work of the company, while clarifying who will make each kind of decision, seems to me a way to balance quality outcomes and efficiency.

Boundaries around time create the opportunity and mental space for people to innovate, away from the relentless pressure of their project or operational responsibilities. Our business manager is so busy keeping the plane flying that she doesn’t invest enough time improving the way she works.

An Example

We’re in the final weeks of a project to create a new website for Atomic Object. As a software design and development consultancy we have the skills in-house to do this work ourselves. But until we created the right boundaries, this was a painful and frustrating project. In fact, we started and failed twice before this third attempt succeeded. In hindsight, I can see how in our first two attempts we fell into some of the traps that Bernstein identifies.

What made the third time the charm?

Space

Creating a boundary around our design team resulted in a beautiful, distinctive, functional visual design. Every designer in the company worked offsite for a week to kick off the visual design effort and explore new ideas.

Time

Creating a boundary of time for the project team, protected from client and regular work, was critical to making reliable progress. While we’d done some of this in the past, we’d also fallen to the temptation of pulling team members to help clients.

Clarity

Clarifying decision rights and improvement rights eliminated friction we’d felt in our previous, failed attempts. Everyone on the team could suggest improvements, and many of those improvements to our logo, message, tagline, etc, were adopted. But until we clarified my ultimate decision making role, this was a muddied and frustrating process for everyone.

The causal chain of transparency -> trust -> caring -> innovation is very powerful. It’s fundamental to our success, I believe. Understanding the boundaries Bernstein observed helps mitigate some of the downsides of the transparency that underlie this virtuous chain.

The post How to Avoid the Downsides of Transparency appeared first on Great Not Big.

      

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