Disruptive Leadership

Electrek has published a company-wide email from Elon Musk. It contains pithy proscriptions to cheer the soul of anyone wearied by corporate bureaucratic processes. Here are two:

– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.

This is so great! Now nobody has to get permission from their boss to do anything! If you think it’s the right thing to do, do it!

One thing to keep in mind, though. People sometimes disagree about what the right thing to do is. Sometimes you can try several options and see what works best, but this is rare, particularly if money is tight or time is tight. We can probably assume time is tight at Tesla.

For example, let’s start with another part of Elon’s letter:

Some parts suppliers will be unwilling or unable to achieve this level of precision. I understand that this will be considered an unreasonable request by some. That’s ok, there are lots of other car companies with much lower standards. They just can’t work with Tesla.

Let’s say there is a supplier who hasn’t been meeting expectations. Someone from Sourcing decides to find another supplier. Someone from Purchasing negotiates with the existing supplier to reach a mutually acceptable agreement. Someone from Design decides to change the design so the part is not needed. Someone from Manufacturing figures out a quick, efficient way to modify the part during assembly to resolve the issue while still meeting cost targets.

Is it realistic that all of these solutions could be found within the same time frame? No. Is it realistic that four different people start working on different, overlapping solutions? Yes. And they probably each need to work with three or four other people, discussing options, agreeing on changes, determining who will do what, just to figure out what the end results (both costs and benefits) would be from pursuing their initial idea. So how will this group of sixteen people (an implausibly small number) react when one solution is chosen?

Four people will feel great. Twelve people will feel that they have wasted their time and efforts, and they will be less willing to help in the future – both within their sub-group of four, and within the larger group of people who were involved in looking for a solution.

So who makes sure we don’t have sixteen people working on the same problem in an uncoordinated overlapping or contradictory fashion? Who makes sure that the solution to Problem A does not cause new problems with the solution to Problem B?

To use a different example, if we are driving around town and looking for a parking spot, who decides whether we turn right or left, or continue on straight through the intersection?

That’s called “chain of command.” Chain of command means that Person A gets to decide about Topic X and we will all live with their decision.

What Elon is suggesting here is fully possible, within boundaries. Maybe any decision that costs less than $1,000 dollars, just do it – costs more and takes more time to debate it than to try, and then try something else if it doesn’t work. But ideally you would want to make sure the decision isn’t going to have a lot of unexpected consequences on other people, and, generally speaking, managers are more likely to have the experience and information to recognize if a decision is going to unintentionally affect other people too.

Speaking of boundaries, check out this part of the letter:

All capital or other expenditures above a million dollars, or where a set of related expenses may accumulate to a million dollars over the next 12 months, should be considered on hold until explicitly approved by me. If you are the manager responsible, please make sure you have a detailed, first principles understanding of the supplier quote, including every line item of parts & labor, before we meet.

Ok, let’s just try to get a very rough sense of perspective on this.

Elon wants to build 5,000 cars per week. Call it 50 weeks per year, leaving two weeks out for factory upgrades. That’s 250,000 cars per year, so any decision having an impact of $4 per car has to be approved by the CEO.

Tesla spent about $4.2 billion USD last year on automotive operations, up from about $2.6 billion in 2016. That is an increase of about 4.5 million dollars every day of 2017. Four and a half decisions per day is not too much to ask of a CEO, but usually these decision are not simple one-time snap decisions like: cream or no cream?

Tesla had 37,543 employees in 2017, according to Statista.com, and in the letter Elon mentions adding 400 people per week for “several weeks”. So let’s say 40,000 employees and figure 200 work days (Elon probably works 7 days a week but that is not likely to be representative); anything that adds a cost of 13 cents per day per employee has to be approved by the CEO. That’s either one decision for the whole year, or one thirteen-cent decision every day, or perhaps one 90 cent (roughly) decision every week, which would “accumulate to” a million dollars in 12 months.

All of these examples are only outer limits, of course; if every single employee were making decisions every day that crossed this threshold, Tesla would be spending even more money. But, for context, in one place I worked every employee could spend up to $500 on a single transaction (or for a single purpose), and it actually is quite limiting in a business context. It wasn’t enough to pay for an hour of time from the videographer.

If no manager at any level can spend a million dollars, limits will be correspondingly lower for an assembly line supervisor than for a Chief Office or Vice President. People might even have to get approval from their, well, chain of command.

Speaking of that, let’s see what happens when you don’t go through your chain of command:

I have been disappointed to discover how many contractor companies are interwoven throughout Tesla. Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work. This means a lot of middle-managers adding cost but not doing anything obviously useful. Also, many contracts are essentially open time & materials, not fixed price and duration, which creates an incentive to turn molehills into mountains, as they never want to end the money train.

Clearly Elon didn’t approve these arrangements, so I have to assume that someone just got the job done, did the right thing, maybe even ignored a “company rule” that was “obviously ridiculous in a particular situation.”

You get the sense, reading this comment, that Elon thinks time and materials contracts are just obviously ridiculous to a common sense understanding. So why would anyone set up a contract that way?

Well, “time and materials” would be a good fit if you didn’t have a really detailed idea of what all the necessary work would be to get to the end result you wanted, or you don’t know all of the precise details that define every aspect of the end result. If you’re not sure or you’re not capable of explaining it well to your supplier, they aren’t going to want to promise to delivery whatever exactly it is you want for a fixed price. But if you tell them, “Hey, let’s figure it out together as we go, and we’ll pay you for your time and materials,” well, now you can get somewhere.

“Figure it out as we go” can be an appropriate strategy where time is of the essence, and it’s pretty easy to see how someone working at Tesla might feel that way.

Going back for a second look at a piece already quoted:

If you are the manager responsible, please make sure you have a detailed, first principles understanding of the supplier quote, including every line item of parts & labor, before we meet.

“First principles understanding” is an excellent approach for figuring out whether something is ultimately possible. It is a terrible way to estimate how successful your first attempt will be. And “detailed […] every line item” is kind of the opposite of “first principles,” in the sense that it has to include all of the things that are not “first principles,” like taxes, insurance, overhead, risk, etc.

What Elon has accomplished already is astonishing by any human measure. The production quality and quantity of cars from Tesla has not been perfectly on track with expectations, but nobody else has done better starting from zero like Tesla. Tesla’s burned through a lot of cash, but other people have gotten less done for the money. Elon’s been a jerk to at least some people, but other people are jerks and also totally ineffective.

I am not brave enough to bet against Elon Musk.

He’s going to die some day, I’m sure of that, and I’m pretty sure that before that happens at least one of his business ventures will collapse; his empire will be split up, and some or all will go on under different management. Eventually Alexander the Great turned back, you know, but I wouldn’t be the one to go looking to pick a fight with him.

Still, if I had to describe Tesla so far, I’d say that with company, Elon has accomplished astonishing things by spending an astonishing amount of money. Now he’s asking his company to keep accomplishing astonishing things but stop spending astonishing money. I don’t think it works like that. He’s asking for each individual to make independent, quick decisions, each decision reflecting the collective intelligence of the company – but don’t hold meetings. I don’t think it works like that.

I am not envious of anyone working at Tesla right now.

 

One last quote:

Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.

This I agree with. This is the kind of meeting you set up when you’re not sure who needs to be involved or exactly what decision needs to be made, when you aren’t fully prepared but you just hope to figure it out in the moment. I’ve been guilty of setting up those meetings myself.

On the whole, it is better to include people than to leave them out. But that needs to be balanced with allowing people to decide for themselves that they aren’t needed after all, without any recriminations.

Reducing possibilities to decisions

Hierarchy has a purpose: to remove uncertainty.

Often the purpose of hierarchy is confused with meritocracy. In a hierarchy, some people hold authority over others. In a meritocracy, people deserve the authority they have because they use the authority well. Ideally the two are perfectly combined, and people in higher positions fully merit the authority that they hold. But as we all know from our own infallible opinions, not everyone who has authority deserves to have it; not every hierarchy is a meritocracy.

Even a hierarchy which is not a meritocracy can be useful.

Imagine four passengers survive a plane crash in the wild. Each has equal survival skills and each is equally uncertain about where the closest civilization can be found. Each guesses a different direction. What would be best for the group? Travelling one hour in a single direction under one leader before switching out and travelling in another direction under another leader? Obviously the group would be better off picking one direction and sticking with it.

This is the fundamental purpose of hierarchy: to remove uncertainty by reducing possibilities to decisions.

Hierarchy cannot accomplish this unless the hierarchy is known and respected. It is the function of the hierarchy itself that must be respected, not the capabilities of each person in it. That the person higher up the hierarchy makes the decision in any cases of dispute or uncertainty is intrinsically necessary for hierarchy to have any value in removing uncertainty.

When hierarchy is not followed, uncertainty proliferates. I watched one CEO hire managers but continue to give instructions directly to employees, without passing it through their manager. Employees learned that any instruction given by their manager could be overridden at any time with new instructions, so they regarded instructions as one possible course of action among many unless the instruction came from the CEO. Employees who had been around for a while were used to this pattern, so new managers never had a chance – all they could do was add more possible courses of action to the ones employees were already considering. The employees all had a notion of what it means to be a manager, so they would generally try to comply with manager directions if it seemed possible; but any time the demands were too many or too contradictory they would default to either what they knew for certain the CEO wanted or what in their own judgement seemed best.

A senior manager who bypasses a middle manager forces that middle manager to be worse than useless. A useless person adds nothing; a worse than useless person subtracts something. A manager who is bypassed by his boss cannot reduce uncertainty for his employees but adds to it by giving additional input that may or may not be let stand by the senior manager, and takes up his employee’s time asking them what they have been told to do by the senior manager.

In another organization, the general manager of a factory had reporting responsibility to a vice president of manufacturing and a vice president of sales. These two VPs had different priorities. For one, the highest priority was increasing on-time delivery; for the other, the highest priority was reducing cash tied up in inventory. A very high-performing organization can accomplish both, but the fastest way to make progress on either of those goals is to sacrifice the other. Over the course of several years the factory would whiplash back and forth, approximately once a quarter: a few months of squeezing out inventory wherever possible, which resulted in deliveries slipping out when the least unexpected event caused components to be unavailable; then a few months pushing for delivery on schedule, causing accumulation of inventory to account for unexpected disruptions.

A matrix organization is a fundamentally bad idea because it reverses the most useful function of a hierarchy. Rather than having a single superior to resolve uncertain situations, additional uncertainty is produced by the possibility of disagreement between authorities. The matrix organization was invented out of a recognition that sometimes engineering skills are needed to accomplish sales goals, and it was somehow imagined that the only way to have access to skills within an organization is to be the boss of a person having those skills. But this is immature at all levels; respectful people who communicate clearly can obtain assistance from people whom they do not control. This ought to be even more true of people at higher levels in the organization; if your VP of Engineering is useless at supporting your VP of Sales, why is he your VP of Engineering at all?

Furthermore, the matrix organization solution doesn’t scale, as there are quite often more than two relevant interests. If making everyone with a legitimate interest a “dotted line” supervisor helped, an organization would become a dense thicket of “dotted line” responsibility and most employees would find that they must treat anyone higher up in the hierarchy as if they were their own manager. Too often employees do feel this way; but in such organizations very little real change occurs, and the organization survives on the inertia it gathered in leaner days to keep producing enough value to survive.

Hierarchy has a specific and real value, and it is a mistake to think of hierarchy as merely a reward system: you do a good job, you get a promotion. A job well done can be rewarded with more pay, or in other ways. A hierarchy is not necessary to have a reward system. Likewise, if merit were equally obvious to all, a hierarchy would not be necessary because people would spontaneously agree on the best option. And a hierarchy does not require that all possible decisions be decided at a higher level than the question originated; generally, an organization will work faster and more effectively if decisions are made lower in the hierarchy.

But at some point uncertainty is inevitable; there will be significant doubt about which choice is best, and the consequences will be significant. It will be impossible or grossly ineffective to attempt more than one option. Perhaps more than one choice will be effective. The only way you reduce the infinite possibilities to decisions, actions and results is by allowing one person in a group to have the final say in decision making.

Marketing Should Own Inventory

I’ve seen Marketing expected to manage these business success metrics:

  • Market share
  • Profit margin
  • Sales forecasting

To support these goals, Marketing is generally supported out of the following costs:

  • Payroll for employees
  • Media & collateral
  • Public Relations
  • Trade Shows
  • Training
  • Advertising

In two of the companies I have worked with, Marketing felt hampered in its efforts to reach its goals due to product lead times. In both cases “Lead Time” was not formally considered a Marketing Metric, and in both cases “Inventory” was not considered a Marketing cost.

This seems to me to be a fundamental organizational defect. Delivery lead time is a competitive consideration in many markets (I might dare say most markets), and it’s widely recognized that inventory can be substituted for lead time, and lead time for inventory. This equivalence is a fundamental theory of the Toyota Production System.

It’s true that the need for inventory below the shippable SKU level is partly determined by the manufacturing process capability. Manufacturing clearly owns the responsibility to continually improve the reliability and speed of the manufacturing process. But it still seems quite achievable for the responsible Marketing representative to say, “We have X inventory position in order to support Y delivery expectation.” If challenged as to why so much of X inventory is in WIP (not yet shippable), it should be fairly straightforward to show the inventory required to buffer against the supply chain performance.

As all production and supply chain managers know, a great deal of the need for inventory comes from variance between the demand forecast and the actual demand. It’s also sometimes been my experience that Marketing (or Sales) wishes to divert inventory that was built for Customer B in order to satisfy Customer A – but will still sometimes unabashedly complain about the lateness of fulfilling Customer B’s order. Sometimes these sacrifices have to be made; but Marketing should be paying out of their own pocket.

Simply put, Production and Supply Chain should have fiscal responsibility for inventory covering supply chain and manufacturing process variance, and Marketing should have fiscal responsibility for inventory covering demand variance. Somewhere out in the wide world I’m sure it is so; but I wonder why it is not the rule everywhere.