Some Thoughts On Non-Competes

It was nice to see the news a few weeks ago that Massachusetts House Speaker Robert DeLeo vowed to put new limits on contracts that prevent employees from working for competitors. "Non-competes" that restrict the free movement of talent from one company to another can do real damage to an individual's livelihood and the economy at large. Many people believe that the reason that the explosion of successful tech companies happened in Silicon Valley is because of California's effective ban on employee non-competes. Allowing talent to flow to the best organizations without friction is good for a local economy.

Unfortunately, over the past several months I've seen lots of startups going in the opposite direction by including aggressive non-compete terms in employee agreements.

Many companies take it a step farther and require 'no-poaching' terms in their vendor contracts and even try to collude with other local startups and agree to not steal one another's employees.

I don't think companies fully understand the damage that's being done with these types of arrangements. Let me explain.

Imagine that you're working for a startup in Buffalo, New York (Buffalo actually has a pretty hot startup community by the way). And imagine that there are another 20 tech companies in Buffalo that, at some point, you could go work for -- you have the talent they need and you'd potentially like working for some of these companies. Then imagine that the startup you currently work for requires you to sign a non-compete as part of your employment contract. Then you learn that your company requires all of their vendors and customers and partners to sign an agreement that precludes them from poaching your company's employees.

As your company grows, the number of other companies that can demand your services around your home has dropped from 20 to, say, 12. Suddenly 40% of the companies that would potentially demand your services now can no longer demand your services. So the demand for your services has decreased 40%. You're now 40% less valuable than you used to be.

At a minimum, a company doing this to their employees is unethical. At its worst, it's illegal (Apple, Google, Intel and Adobe recently paid a $415 million fine for colluding on no-poaching efforts to suppress employee wages).

When a company creates an agreement where another company cannot poach its employees, they are artificially reducing the value of those employees and their ability to make a living.

Again, the spirt of this is understandable. Hiring and training employees is expensive and companies want to fight to keep their best people. But addressing employee churn through contracts is a backwards way of handling the problem.

The better (and harder) way of dealing with the problem is to create an environment where good employees feel valued and are being challenged and are working on difficult problems and are developing professionally and personally and are being compensated fairly. Writing contracts to compensate for shortcomings in these areas is cruel and likely very ineffective in the long term. And it's nice to see that the state of Massachusetts is catching on and pushing for legislation that will protect employees and the local economy.

The best way to keep employees loyal is to act in a way that deserves loyalty.

The Unintended Consequences of Individual Metrics

Several years ago when I was working with an e-commerce company we came up with a framework for how to grow transactional shopping revenue. We called it "the Box".

The idea was to get shoppers into the box (acquire new users and get them to come back to our sites regularly). And then, once they were in "the box", to make good things happen (get them to buy lots of stuff).

We setup two separate teams: one team was focused on driving traffic and the other was focused on converting that traffic into dollars.

The "traffic driving" team didn't worry about shopping conversions and the "conversion" team didn't worry about driving traffic. We put the teams in silos and told them to focus on their goals. The thinking was that if both teams did their job, overall revenue would grow.

The beauty of the framework was that when weekly revenue grew, we could very easily determine who deserved credit. Was the increase caused by something that the traffic driving team did or something that the conversion team did?  Very rarely was it both. Neither team could hide behind another's success. We could easily identify the initiatives that we're contributing to overall revenue and those that weren't. It seemed like a great model.

But we quickly saw that the structure we setup caused some problems.

The traffic driving team, in an effort to drive traffic (as opposed to revenue), found some quick, easy and suboptimal ways to drive traffic to our sites. For example, they'd email millions of users with an offer from a high-end car company. The response rate would be great and traffic grew, but nobody bought (low conversions). Users just clicked around and looked at the cars because they were interesting. Most weren't planning to buy, or if they were they were planning to buy offline.

At the same time, the conversion team put brands that converted well (such as Target and Wal-Mart) front and center on our websites. While those brands did convert well, they produced small average order sizes and didn't pay us a significant commission. Combine that with the fact that the traffic driving team wasn't pushing shoppers to the offers that the conversion team was promoting and we quickly found that our user experience was disjointed.

It became clear that we couldn't have our teams operating in silos. To maximize revenue, they had to work together. They had to collaborate. They had to do more than just their own job.

This initiative underscores the challenges around siloed teams and metrics. When high performing people are given clear objectives with quantifiable metrics attached to them, they'll very often accomplish those objectives. And there will very often be unintended consequences from that accomplishment.

All of that said, even after that experience, I still strongly believe that managers must create clear, measurable metrics for every employee in the organization that only that employee can control. It's a crucial part of an accountable, high performing organization.

But at the same time managers need to closely monitor whether or not those siloed metrics are positively or negatively impacting the overall health of the business. Setting up a framework where individuals and teams are focused on producing impactful work week to week is the (relatively) easy part. Getting multiple teams focused on snyergistic activities that add to the overall value of the business is much more difficult. And much more important.

Innovation & CEO Tenure

Vinod Khosla interviewed Larry and Sergey from Google a couple weeks ago. I recommend watching the entire thing when you have some time.

[youtube https://www.youtube.com/watch?v=Wdnp_7atZ0M&w=560&h=315]

At one point Larry explains the fact that the average Fortune 500 CEO's tenure is approximately 4 years. He notes that it's really, really difficult to solve big problems in 4 years. Twenty years, maybe. But 4 years, no way. So as a result we have a system where our largest companies are acting in a way that is very short-sighted.

We all know the stories of the giant, successful companies not seeing how things were changing and ignoring the little upstarts only to eventually get toppled by them. We've always chalked this up to naivety and arrogance on the part of large companies. Polaroid is a great example. They ignored the digital camera and didn't recognize what its impact would be until it was too late and eventually found themselves bankrupt.

But when you consider Larry's point, that CEOs are only focused on 4 years out, you can see how it actually made sense for Polaroid's leadership to ignore the digital camera. New innovations move slowly, the best thing for Polaroid's stock price (in the short-term) was to continue to focus on their core business -- not to pivot and get ahead of a trend.

We're about to see the same thing happen to big car companies. Self driving cars are the future. And they're going to operate much differently than the cars we have today. But it'll take a while, maybe 10 or 15 years. If you're the CEO of Ford or General Motors, why should you redirect your resources away from regular cars, if you're really only worried about the next four years? You're much better off focusing on the here and now. Very logical, but also the thing that will wipe them out of the self driving car business. We can see it right now, it's going to happen, but they won't do anything about it.

I'm not arguing that companies should have 20 year terms for their CEOs, but companies do need to recognize that their short-term focus paralyzes the company in dealing with trends and getting ahead of the small upstarts. Companies would act very differently if they were looking further around the corner than the tenure of their leaders allows.

Open Conversations

Back in 2005, Union Square Ventures -- the well-known NYC-based venture capital firm -- converted the homepage of their website into a blog. Brad Burnham, one of USV’s partners explained their reasoning at the time.

"We realized that our thesis evolves incrementally as a result of our dialogue with the market, and that the best way to manage that was to accept that we would never get to an answer, so we should just publish the conversation. The best way to do that is with a blog. So here it is."

A few months ago, they took this a step further and turned their website into a conversation, allowing anyone to share links and discuss topics related to the firm and the firm's investments. They also now cross-post their own blog posts and even take pitches from entrepreneurs on their site. Really cool.

In some ways, it’s surprising that an institutional investor would be so open and willing to have a public conversation about their investments and their investment strategy. VCs don’t have hard assets, they don’t have engineering talent, and they don’t have a product. Their entire value is really their investment thesis and their ability to execute on that thesis. So it’s a pretty bold move for them to open up all of that intellectual capital to the world.

But as Brad noted, he believes that opening up the conversation actually puts them at an advantage.

I’d love to see more companies be as open as USV, and to begin having open conversations with their employees, vendors, partners and customers. Personally, I’m constantly having conversations with my colleagues and with the market about the things I’m working on. These conversations help me get better at what I do. Part of the reason I write on this blog is to help me think things through.

What USV has done is scale their conversations and their ability to get better at what they do enormously. Instead of just having conversations with their colleagues that sit across the hall, they're having conversations with (potentially) anyone in the world. That kind of scale has to put them at an advantage over other VCs.

The obvious concern with this approach is that opening up the conversation about your work and what your company does will give away sensitive, proprietary information that would put the company at a disadvantage against the competition.

But I think there are two critical insights here that strongly counter that concern.

1. With very, very few exceptions, companies don’t have some secret and final solution that will drive their success. As Brad notes, most growth and success comes incrementally as a result of perpetual interaction with the market. The thesis is never final, it is always evolving. This is true of nearly every company.
2. Just because you can view and participate in the conversation that a company is having doesn't mean you can recreate what that company is doing. When I write about a new approach I'm taking, by the time someone reads it, internalizes it, and acts on it, I've already moved on and improved on that approach. In addition, my approach is probably wrong for you anyway. You're in a different situation, have different resources, have different connections, have different opportunities and different constraints. It's useful for us to have a conversation, it will help us both. But it doesn't put either of us at risk.

So with very, very few exceptions, I think more companies should begin to open up their internal conversations, challenges and ideas to the public. In the book The Wisdom Of the Crowds, James Surowiecki talks about the fact that across multiple applications (business, military, psychology) large groups of average people are much smarter than any small group of elite thinkers.  I think it's a mistake for companies to think through their challenges in private. A company's likelihood of success is much greater if they open up their challenges to the 6 billion people outside of their walls -- in addition to the small group of individuals inside them.

Put simply, in most cases, the long-term benefits of open conversations are far greater than any potential short-term risk.

Cannibalize Your Own Job

If you have a job, especially if you have a good job, that pays a decent wage, the odds are that it's only a matter of time before your employer outsources, automates, or finds a way to do the work that you do more cheaply. And when they do, you're either going to take a pay cut or you're going to be out of work. The days of working in the same job for 30 years, getting a nice watch every decade, and a retirement party at the end are long over.

In a global economy, mediocrity is unsustainable. Companies must constantly be getting better -- faster, smarter, more profitable. Successful companies are perpetually searching for ways to cut costs and add efficiency, and that includes getting rid of expensive humans.

Given this, to survive in this world, most of us have two options:

The first option is to fight it. Stay below the radar and try to fit in. Make friends with your boss and delay the inevitable. Don't make a raucous, don't try to scale things. Stay quiet and stay out of the way. This is not a bad short term strategy. It will likely work for some amount of time. But in the long-term, the forces of profitability and efficiency are going to catch up with you and your average performance will be out the door.

The other option -- the much, much better option -- is to embrace this reality. Instead of fighting it, actually help your company outsource, automate or cheapen the things that you do. You should help make your job more scalable. There's nobody in a better position to identify which tasks can be done more cheaply and which tasks can't. Help your company identify those things that can be done more cost effectively and come up with ideas on how they can be done more efficiently and advocate for it. You don't want to be doing that kind of work anyway.  You want to be doing the hard stuff that adds value. And this will allow you to spend more time on the stuff that your company needs.

And after you’ve scaled your current work, do it again. Keep cannibalizing your own job.

Of course, depending on the complexity of your job, it could take a long time to cannibalize yourself. In some cases it could take years.

Also, note that once you cannibalize yourself, you don't have to leave your company. Just the opposite. You should be thriving at your company and getting promoted, or at least spending more time on more valuable work (which you should be compensated for).

So in your job today, keep producing -- writing great code, building great products, closing big deals, etc., but while you’re at it make sure you’re aggressively looking for ways to scale -- before somebody else does.

Fighting For Mobile Real Estate

The other day I wrote about the unbundling of web services. That's where an aggregator comes along and adds value by pulling lots of different services into one place -- Craigslist and Facebook are good examples. As these companies become successful, competitors come in and bite off little pieces of their service and build slick apps that do one thing really, really well. StubHub and AirBnB are good examples of apps that are 'unbundling' Craigslist.

With this in mind, I came across this chart noting that later this year mobile internet usage is going to exceed desktop usage.

As mobile usage overtakes desktop usage, specialized apps that do one thing really well are going to be more and more important.

As we know, the challenge with a mobile app is that they're very limited in what they can do. You can't do as much on an app as you can do on the desktop. So as mobile becomes a bigger part of our lives I think we'll see more and more of this unbundling.

But I think we'll also see more and more bundling of retailers and merchants. That is, we're not going to download multiple grocery store apps or multiple clothing store apps or multiple travel apps.

Using myself as an example, I travel a lot. I book with 5 different airlines and probably 6 different hotel chains. As we move towards more and more mobile usage, am I going to download 11 apps? Of course not – I’m going to download one -- Expedia.

The interesting paradox with mobile is that while it will certainly continue to force innovation and specialized, "unbundled" web services, it will also drive lots of "bundled" retailer and merchant applications. Consumers will increasingly demand (and need) less and less clutter on their screens.

In short, the apps that will win the fight for real estate on our home screens will be those that serve a very narrow function very effectively (buying a plane ticket) while at the same time offering the broadest variety of options (tickets from every carrier).

Craigslist, Facebook & EMRs

Benedict Evans has a phenomenal post up on his blog where he discusses the future of LinkedIn. Go read it, it’s excellent. In it he talks about the law of bundling and subsequent unbundling of web services. He uses Andrew Parker's brilliant image below to illustrate the point.

Craigslist came along and bundled everything into one place and, as a result, completely dominated. They destroyed multiple businesses in the process (including the rental and roommate web service I worked with just after college). They were immensely successful.

But now we're seeing the unbundling of Craigslist. Small players are coming in and biting off small pieces of their business and providing superior value. AirBnB does room rentals better than Craigslist, StubHub is a better ticket reselling service, LegalZoom is a better place to find legal services, etc.

Craigslist detractors believe that this will be death by 1,000 cuts.

Craigslist isn't alone. This is exactly what Facebook has been going through over the last several years: Twitter is attacking the status update, Foursquare is attacking the location feature, Instagram is attacking photo sharing (so much so that Facebook was forced to buy them), Vimeo is attacking video sharing, etc.

Of course, while unbundling is bad for the bundler, it’s great for the consumer. Consumers get more value, more features and easier to use web services.

When I saw the Craigslist image I couldn't help but think of the large EMR (Electronic Medical Record) companies -- Epic Systems, Cerner, Athena, Allscripts, etc. These companies have provided immense value by bundling and integrating a massive amount of clinical data with a nearly endless variety of healthcare related software services. They manage ambulatory clinical data, inpatient clinical data, practice management, patient communication, prescription filling, patient scheduling, billing, meaningful use compliance, population health, specialist referrals, patient engagement, risk management and many other things under the same platform. And just like Craigslist and Facebook, they've benefited hugely as a result.

But you can begin to see some cracks in their armor. As clinical data moves to the cloud, more and more startups are coming along and biting off small pieces of the EMR business and providing better value. This is the beginning of the unbundling of the big EMRs.

That said, what's easy to do in b2c software isn't so easy in b2b software. There are significant switching costs associated with switching health IT vendors and most hospitals and health systems are very risk averse and will take their time adopting new technologies (it's much easier for an individual to buy a ticket on StubHub than it is for a hospital to buy a new patient portal).

But with the dollars that are flowing into healthcare focused venture capital and the excitement around those investments, it’s only a matter of time before we see this unbundling accelerate and see more value flowing to providers and patients. And that's a good thing for our healthcare system.

ACOs vs. HMOs: This Time It's Different

Last week I came across this article titled, Balancing AMC Mission, in the New England Journal of Medicine. The article talks about how Massachusetts hospitals – specifically Mass General and Brigham & Women’s – have reduced costs in response to Massachusetts' healthcare reform bill passed back in 2006. As part of the reform, these hospitals participated in risk-based based contracts with commercial payers and Medicaid and Medicare. The contracts, covering 400,000 lives, have them share risk for medical expenses for patients who see primary care physicians (PCPs) in their network. If the cost of caring for the patients that see a PCP in their network exceeds that of a comparison group, they pay a penalty; if it’s lower than the comparison group, they share in the savings.

A lot of people have compared this approach – commonly known as an ACO (Accountable Care Organization) -- to the HMO failure of the 1990’s. The authors in the article point out a few reasons why this time it’s different that I thought were worth posting here:

1. While the focus of the approach is on coordinating care through a PCP, specialists are much more involved in the coordination this time through automated referral management, virtual visits from specialists, team based care and home monitoring. As an example, they’re reducing costs for diabetes care by automating referrals to diabetes counselors and they’ve identified opportunities to do phone consultations with specialists, as opposed to face to face visits.
2. They’ve added 71 “high-risk care managers”. These managers work closely with the PCP in coordinating the care for 200 high-risk patients. The additional investment in this population is a huge step forward. As we know, the 80/20 rule applies to healthcare – 20% of patients drive 80% of costs.
3. They’ve consolidated all of their clinical and administrative systems into one electronic system – allowing for better, more efficient care coordination.
4. Risk is now shared across their hospitals and their physicians group as opposed to centering risk and responsibility on the PCP.

These are significant differences that have resulted in some early signs of cost reduction. It’s refreshing to see super successful, massive hospitals getting on board and innovating as we move towards a system that manages health instead of manages sickness.

My Interview With Yesware

Last week Jessica Stillman, a freelance writer for the Yesware Blog, contacted me to do an interview on the topic of CRM compliance. See the full interview here. One of the fundamental challenges with CRM compliance is that sales reps often don't understand why managers need them to do lots of data entry because they don’t know what managers are actually doing with the data.  The main point I made in the interview was that managers should be much more transparent on this. Not only should they show their reps how they use the data to manage their business and make good decisions and communicate what’s happening on the ground up to the board and executive team, managers should take it a step further. They should actually allow their reps present directly to the executives and/or board using reports that pull their own individual data from the CRM system.

I found that doing this is extremely empowering to reps and dramatically reduces the friction that comes from low CRM compliance.  If you find this topic interesting, I recommend checking out the full post.

Deviating From Your Core Competency

Related to Mondays post on core competences, it's worth mentioning that there are instances where deviating from your core competency can be a good idea. In fact, some businesses are able to leverage their initial core competency to enter entirely new businesses. And in some cases those businesses have become the major driver of profits. One example of this was General Motors. Everybody knows that General Motors' core competency was making and marketing automobiles. What many people don't know is that back in the early 2000s, most of their profit was generated by their financing arm, GMAC.  So in reality, their core competency wasn't making cars, it was lending people money to buy cars. GMAC was eventually spun off; likely to allow GM to put their focus back on making and marketing cars, and because the car business was dragging down the value of the financing business.

Lots of other businesses find that financing can be more profitable than their core business. Every time I go to a clothing store like Banana Republic they practically beg me to sign up for their store credit card. They're willing to give consumers huge discounts on their clothes (their core product) just to get them to sign up for their credit card. Sure, they probably have found that their credit card carrying customers are more loyal and buy more clothing when they shop, but I guarantee a large portion (in some cases, a majority) of these stores' profits comes from their credit card businesses.

Another example of an industry that has deviated from its core competency is higher education. Large schools like Harvard have found that they make a lot more money managing their endowments than they do selling tuition. Depending on the year, Harvard’s endowment has made 5, 10 or even 20 times more than they've made in total annual tuition. Further, in 2004, Harvard’s top five endowment managers made $78 million in annual compensation – that's 100 times more than the school's president made in the same year.

So, arguably, Harvard's core competency – and frankly, core business – isn't delivering a great education, its real core competency is managing its assets.

Of course there's nothing wrong with using your core competency to create a second, more profitable business. It reduces business risk and contributes to growth. Shareholders love it. But it can reduce focus.

As I wrote on Monday, trying to be good at too many things is dangerous.  And when you get too big, putting your focus in too many places puts the thing that you do really well at risk. And losing focus on that thing is even scarier when that thing is propping up an even more profitable business.

Sticking to Your Core Competency

I've been thinking a lot recently about companies and their core competencies. The idea that a company with a few employees and only a little bit of capital that focuses on only one thing can do that thing more effectively than a billion dollar company with tens of thousands of employees is hard for many people to comprehend. Bijan Sabet wrote about this a while back when he pointed out that so many of the embedded iOS apps have been replaced by applications from tiny startups. From his post:

The default notes app has been replaced by Simplenote

The default messenger app has been replaced by Kik

The default calendar app has been replaced by Calvetica

The default music app has been replaced by exfm, soundcloud and rdio

The default mail client has been replaced by Sparrow

Granted, Apple wasn't necessarily competing aggressively in all of these areas.  But the reality remains that a small group of people that focuses on one thing will always outperform a large group that focuses on lots of things.

With some of this in mind, I came across a blog post by Paul Levy last week on the increasing trend of large health systems getting into the payer space. Due to the growing pressure on reimbursement rates and the increasing prevalence of population health, it only makes sense for health systems to be inclined to cut out a middleman (the private insurers) and become more horizontally integrated. Health systems are finding that they can organize and work directly with large pools of patients (employers, trade groups, unions, etc.) and, potentially, insure and care for them more cost effectively.

While on the surface this may seem like a great idea, Levy points out in his post that many large hospitals have enough problems improving their existing businesses in this complex and rapidly changing healthcare environment:

Here's what I think, based on unscientific site visits, surveys, and discussions with hospital leaders. The vast majority of hospitals--and especially academic medical centers--have barely begun to crack the operational problems that exist in their facilities. The quality and safety of patient care are substandard, compared to what they might be and what has been demonstrated in comparable facilities. The degree of patient-centeredness, likewise, needs major work. Finally, the engagement of front-line staff in process improvement efforts is scattered.

Despite this, 1 in 5 health systems intend to become payers by 2018. And this is where the notion of core competency comes in. Given the massive transition that healthcare is going through -- from managing sickness to managing health -- might some health systems be wise to focus on improving and creating a competitive advantage on what they already do well? As opposed to entering a complicated and risky new industry (health insurance company profit margins generally hover around a very low 4% and the industry is subject to paralyzing state and federal regulation).

Just like Apple has wisely decided to focus their best energy on building great tablets and smartphones and to allow someone else to build great mail and calendar apps (on top of their platform), it might make sense for health systems to continue to focus on improving the quality and efficiency of care and cutting the costs of their existing operations, and to let someone else be great at the underwriting and actuarial work.

Being Wrong

Last week Penelope Trunk had a good post on 5 things she was wrong about. I've found over and over again that people that are alright with being wrong are far more successful (and pleasant to work with) than people that have to be right.  People that can be wrong have the right mix of confidence and humility -- two of my favorite qualities in a colleague. I recommend reading Penelope's full post, but in the excerpt below she captures why being able to be wrong makes people more successful. I liked it so much that I thought I'd post it here.

The real reason I don’t mind being wrong is that you can’t ever be right in a way that matters if you’re never wrong. Think about it: if you are right on something where everyone knows you’re right then it doesn’t matter that you’re right. If you are right about something where people think it’s surprising, then you take a risk of being wrong but you also open yourself up to the joy of surprising yourself with your own insight. It’s a risk high performers are willing to take.