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Corporate Culture

Art Kleiner is author of the book Who Really Matters: The Core Group Theory of Power, Privilege, and Success. Francis McInerney serves as managing director of North River Ventures.

Art Kleiner is author of the book Who Really Matters: The Core Group Theory of Power, Privilege, and Success. Francis McInerney serves as managing director of North River Ventures. At WTF 2004, their presentations addressed the influence of core groups within organizations, the impact of their decisions, and the value and costs of information velocity. What follows is a partial transcript of their talk.

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Art Kleiner: About 10 years ago, when I was writing about heretics and hippies who were influencing corporations, I started thinking about visionary engineers. Why aren’t people within companies rewarded commensurate to the value and quality of their ideas? I started thinking about core groups, the people who set the direction of an enterprise.

These are simple explanations for complex dynamics. Capitalism sucks. Entrenched interests look out only for themselves. And publicly held corporations are hostages to the quick-returns shareholder-ROI cycle. These explanations don’t satisfy me because there are always counter-examples. They just don’t have a lot of voice and tend not to be on the radar.

Here’s my explanation. The basic premise is that organizations matter because they amplify human activity, The number of organizations doubles every 25 years. In an organization, everyone’s decisions matters. Who to buy paper clips from matters just as much as whether to outsource to China matters. We all make decisions in organizations partly based on our own self-interest and partly based on what we think will help the organization. If you can solve out the self-interest, you’d end up with one thing that accounts for the aggregate decisions people make.

In all organizations, there’s a core group of people thinking. We carry around with us a mental map and frame of mind that’s a representation of the organization and where it wants to go. We tend to anthropomorphize our organizations. In any organization, there are core groups that are on everybody’s minds. Anywhere you go, ask whose interests need to be taken into account when you make decisions. It’s a weird way to look at organizations, but I haven’t yet found a counter-example.

This applies to all organizations. They have more in common with each other than they have differences. Someone can work for a government agency as well as a for-profit corporation and still do basically the same stuff. Much of what I’ve learned about business has been based on workplace television. Take Ted Baxter. He was the anchorman of the TV station, but he was disrespected by many.

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We collude with power. Every decision we make, small and large, we reinforce the legitimacy of those who hold power. That’s not necessarily bad, but it’s susceptible to exploitation. I think Enron was exploited by a core group. You know what it’s like when you’re in a core group of organizations. Things come your way whether you want it or not.

The big question on the table is if we want to accomplish great things, how do we foster great core groups? We might want to start organizations and be deliberate about who’s in the organization. You can’t just put people in the core group, but you can put practices into place to get others to recruit people for the core group.

One of the things that makes organizations do great things is that they’re looking out for consequences, not just consequences five years from now but 50-100 years from now. Let’s say you want to introduce a new product. How long will it take to know how the core group likes the idea? Probably five to 10 minutes. How long does it take to know whether it’ll succeed in the marketplace? Probably a year. How long until do you know it’ll improve the world? 50 years? 10 years? The important thing is to know that there are people in place who are looking out for the long run.

Francis McInerney: I came up with a notion back in 1967 that the survivability of all organizations was based on their velocities of information. Those organizations, even countries, that can process information within themselves relatively better than others will survive more than those that do not. My thinking then moved to the next step: How do you measure information velocity within organizations? How do you track that? Over the years, I struggled with this. In addition, I spent decades working with C-level management in a whole host of big telecommunications companies. I also work in a large number of consumer electronics companies. I’ve got a global perspective as well as a telecom perspective.

One of the things that has always stunned me is that the closer I’m able to get to measuring the velocity of information within an organization, the amount of value created, and the risks of not becoming a high-velocity organization, there is still resistance to becoming high velocity. I use two simple measures. One is the efficiency of the use of cash. If you can convert a sale quickly, you must be very fast. I also look at the efficiency of operational capital. When Compaq bought DEC, it must be that a core group within that organization made the decision despite any due diligence that would indicate that they could not survive the acquisition of DEC. People within organizations can make decisions that kill them.

The same could be said for Hewlett-Packard buying Compaq. It’s an almost existential crisis. We have to ask ourselves how it is that otherwise perfectly selfish human beings can make decisions that are suicidal. We have a situation in corporate culture where there’s a gene that turns companies off. What interests me most is not the failures, but the much more subtle question of how the truly great survive.

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An excellent example is Dell. Dell has a very simple situation. Dell converts a sale into cash in -42 days. That means it converts a sale into cash before it incurs any expense. That’s all they do. If you look at their entire structure, nothing does anything but that. By having your hands on all of the touchpoints of the sales chain, you end up with a proprietary perspective of customer behavior. Then there’s Hewlett-Packard. Six or seven years ago it took 120 days to convert a sale into cash. Now it’s maybe 35 years. They’re getting better, but they’re still 75 days behind.

There is a different time dimension when you look at a company like Dell than there is when you look at Hewlett-Packard. I call it Moore’s Time. This is where we start to have the existential crisis. You see winners and losers. Wal-Mart has excellent numbers. So does IBM. But the losers, the consequences of an information velocity lag of 70-odd days, translates to at least a 10-year competitive disadvantage.

All the time, executives are asked to make a decision to improve something by two or three months. The consequence of failure is stupefying. A 10-year lag is terminal. You don’t come back from that. There are a lot of companies that have slow information velocity but still have high shareholder value. The market is making a mistake here. Your position on the information velocity curve will not hold forever. My favorite example of falling off the curve is Japan. I’ve not yet met a Japanese company that can deal with the logistics of what a Dell does.

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