How highly productive companies and nations are alike

I’ve been thinking a lot lately about the origins of productivity. Specifically, how many of the factors that contribute to it are similar between nations and companies.

The big governance factors behind national productivity are pretty well-understood: the rule of law, contract enforcement, private & intellectual property, investment in human capital, political stability. Big-D Democracy is not necessarily on that list (though hugely important for other reasons), but there are certain cultural factors that are often related as well: social trust, egalitarianism, the free flow of information, and openness to new ideas. More generally, there is a sense that as an individual, it’s in my interest to “follow the rules,” because that’s how I will get ahead.

The problem for nations, of course, is that the governance elements that wealthy elites and big business like are usually inimical to maintaining the social conditions needed to maintain long-term high productivity (not to mention social well-being, which is important but goes beyond the scope of this post). For example, big business and oligarchs hate the taxes needed for the state to reinvest in human capital, like education or healthcare systems. They’d also prefer that patent protection be a lot longer, consumer rights be restricted, and to be subject less regulation, among other things.

Taken to extremes, measures like these are great for businesses, but bad for a society. When you restrict opportunity too tightly or make it impossible to get ahead without begging favors from the powerful, you get the miasmas of corruption and inequality we see in many low-productivity countries (and here in the U.S., to a somewhat different degree). This isn’t a political argument – it’s just an empirical observation.

The situation is not altogether different in companies, and especially so in knowledge industries. In knowledge industries, where productivity is measured as much or more in quality of output as it is quantity, flogging or shaming the workers doesn’t move the needle much. Rather, knowledge industries have focused on recruiting the best talent into the organization in the first place and developing them once they’re there. Whether you’re at Wachtell or Goldman Sachs or Facebook or McKinsey, each organization does this in different ways tailored to their industry. Elite recruiting classes are brought in, there’s some trials by fire, and the “best” are promoted quickly. There’s not just investment in amenities that make people feel good and their lives easier, but also in skills development and, crucially, the culture-building necessary to make people want to do more.

(Side note: there are also huge problems with how organizations like these conceive of and define “talent” and where they choose to source it. This is related to the nature of “prestige industries” to focus on attracting candidates who flatter them, rather than selecting purely for skills. That’s the subject for a separate blog post.)

That last bit is key, because in knowledge work, people have to want to do good work, and more importantly, good work has to matter. If it doesn’t matter when a job is half-assed, then why full-ass it? An anecdote: when I was in the Peace Corps, I dutifully filled out quarterly reports and sent them back to headquarters, but never heard a peep about them. I realized, one day, that they actually weren’t being read. So the next month, I wrote my report in purple crayon, sent it in, and didn’t hear anything about it. After that, I stopped doing them altogether, and no one seemed to notice. Guess how seriously I took my country leadership after that? It’s a small example, but made me realize that sometimes, especially in big organizations, rules and procedures get put in place more for show than anything else. And when this happens, it’s a warning sign of bad leadership.

Most American company cultures are substantially alike. A few are actively bad, and a very few are outstanding. The best inculcate cultural incentives that make people want to do their best work and then pair them with the resources to do so. These cultures look a lot like the social factors behind high-productivity societies: social trust, egalitarianism, the free flow of information, and openness to new ideas. While rule-following may seem counterintuitive in the current “disruption”-obsessed zeitgeist, it still works if you think of it more as a commitment to a company’s values and mission over podunk procedures.

For-profit companies cannot be democracies, for obvious reasons, and that’s where the analogy fails. Nevertheless, you can draw certain parallels between stagnant companies and stagnant nations: failures to invest in their people, certainly, but even more, timidity, failures of imagination and, most of all, just not giving a shit. When leaders just don’t give a shit, they focus primarily on enforcing routines and procedures, chasing flattering press, and keeping a courtly distance from the rank-and-file. When you see these signs, beware that a low-productivity company stands behind them.

In terms of what this means for software companies, my sense is that the best firms with the brightest future today are not usually the biggest or most-established. They’re the ones headed by smart leaders who give a shit. Grabbing the enormous opportunity still out there will require intentional building of culture and incentive systems to get the highest leverage out of expensive human capital – i.e. high productivity systems.

 


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