October 11, 2015

Why Start-Up Businesses Cannot Solve the Unemployment Problem

I am a big fan of Thomas Friedman, so I avidly read everything he publishes. In the April 4, 2010, Sunday’s New York Times , he published an op-ed piece entitled “Start-Ups, Not Bailouts.” His main argument:

“Good-paying jobs don’t come from bailouts. They come from start-ups.” Will start-ups address our structural unemployment problem?

Yes and no. They will be a great solution for well-educated, enthusiastic young people who are currently unemployed and perhaps discouraged about prospects for jobs and careers. Without some additional interventions, they are not a good short-term or even medium-term solution for older workers who have lost their jobs at big companies or government agencies. As the former CEO of a big company and the current chairman of one start-up business, Dossia, and a board member or investor in several other start-ups, big company or government and start-up jobs and work situations are radically different.

Job Scope and Definition

Government and large companies attempt to create and manage well-defined jobs with clear accountabilities and boundaries between jobs. They do not particularly like to have people take on work beyond their job description and like the comfort of evaluating people against fixed responsibilities. Likewise, people who gravitate to government and large company careers like predictability and clarity in their responsibilities. This is especially true in most unionized public sector organizations, which not only have a bias toward clarity and specialization that arises from the collective bargaining environment, but have the added component of bureaucratic rules established under civil service guidelines.

In the start-up environment, the needs of the business overwhelm the tasks defined in a job description. Employees do whatever it takes to get the job done, and have to be flexible in how they do their jobs. They tend to be paid for organizational results, so role clarity is irrelevant.

Unfortunately, our society has bred and developed a mindset among many older people that they should stay within the four corners of their job descriptions and the work rules associated with them. In fact, the territoriality of many big-company or government workers causes people to be criticized if they try to do someone else’s job. They are initially very poorly equipped to work within a start-up environment.

Doing Tasks Directly or Delegating Them

Governments and other big organizations breed in their employees a fear of taking on tasks that experts or specialists are assigned to do. This is especially true of professional functions like IT, finance, engineering and technology, law, and now even HR. The more specialized the body of knowledge, the more people in big organizations are taught to believe they must seek help beyond what they can do themselves. As a result, they delegate to the “experts” and add a lot of cost to an organization.

Government and other big organization managers also believe that being able to delegate tasks is a status symbol. I remember an older manager telling me as the CEO that I should never take notes at a meeting because that was what secretaries were for. Of course, he remembered less of what happened at the meeting than I did, because I had good notes and he didn’t, and I had a much better ability to diagnose and strategize because of the superior insight a review of my notes yielded.

Start-up employees think in exactly the opposite way. They do tasks themselves if they believe they can, seek free help as much as possible, and outsource relatively narrow tasks to experts to keep costs down.

I found that when we transferred sales managers from the U.S., our largest market, to small overseas operations, there was an inverse relationship between the level of managers we transferred and their success level. The first-line supervisors or even individual sales professionals we transferred overseas were generally successful because they were used to doing tasks themselves, which was required in small international operations. The more senior sales managers had a far more difficult time because they had gotten out of the habit of doing things themselves, and were intimidated by the prospect of relearning hands-on tasks in a foreign country.

I question whether someone who has comfortably worked in a big company environment and who has been actively discouraged from doing tasks themselves and been encouraged to “delegate” to others can quickly adapt back to being hands-on.

The Degree of Formality and Standardization of Tasks and Processes

People in government and big companies are schooled to believe that standardization and process uniformity are critical, and that auditable, standard ways of doing things are preferable to more informal and variable ways of doing things.

In start-up companies, tasks are accomplished based on speed, flexibility, low cost, and revenue enhancement. People are rewarded for the end result of what they do, and generally are less concerned with its auditability and formalization.

One example of the difference is how big and small organizations handle travel arrangements. At Pitney Bowes, we use a single travel agency, HRG North America, to make all of our arrangements. HRG, which was unsurpassed in providing travel services to large organizations, secured discounts and committed to do business with a handful of global air carriers, hotels, car rental agencies, and other travel service providers. Even if someone could do better on their own by going to an online site like Travelocity.com or Hotels.com, they were actively discouraged from doing so.

Our travelers in the start-up businesses use online auction sites to find the lowest price, change arrangements from trip to trip to maximize flexibility and lower cost, and absolutely do not want to make a commitment to a small number of vendors. They manage overall operating expenses, not travel savings against a specific procurement target set with an outside agency.

Older employees who suddenly have to make their own arrangements take time to learn how to be most cost-efficient, because they have been kept away from these processes in the bigger organization of which they are a part.

Adherence to Budgets and Plans

Governments and big companies are heavily driven by annual budget and planning cycles, and reward employees for adhering to the discipline of a budget and plan. Compensation programs are organized around annual plans or multiple-year programs built from annual plans.

In start-up businesses, budgets and plans are starting points and they are modified rapidly and frequently as conditions change. By the nature of the environment in which start-up businesses find themselves, their ability to predict the environment one quarter out, much less one year out, is nonexistent. People get rewarded for how they respond to emerging conditions, not by how well they adhered to a budget or plan established at the beginning of a year under very different conditions.

Once again, I wonder how people schooled in a more static budget and annual plan driven environment can function in a much more dynamic situation.

Accounting vs. Cash

Governments and big companies are heavily driven by the way they are reporting their financial results to the outside world, which means that their behaviors are heavily driven by the predominant influence of the way accounting rules reshape financial results. Even a metric like free cash flow is determined by accounting conventions that distort cash-flow-based financial thinking. For example, since cash flow is determined as of the end of periodic reporting periods, like the end of a calendar quarter, there is very little attention to day-by-day cash flows, except in the organization’s treasury department, which has to secure cash to pay daily expenses. In the Fall of 2008, a lot of attention was paid to liquidity because financial services firms borrowed daily and did not have matching incoming cash flows. When their daily borrowings were interrupted, these firms suddenly started paying a lot of attention to daily cash flow, but a big industrial firm or a government agency usually is not built on a culture of top-to-bottom daily cash management.

In a start-up business, every employee recognizes the concept of “burn rate,” which is the daily, weekly, and monthly gap between expenses and revenues. They have to pay attention to timing differences between when expenses are paid and revenues are received during a month or week.

Guaranteed Pay versus Pay Contingent on Results

People who work in big organizations want guaranteed wages or salaries. Even when they get incentive pay, they want to know what the target pay range might be, and when they could expect to receive the incentive pay. They want predictable cash flows in their personal lives.

Start-up businesses usually operate with well-below-market guaranteed wages and salaries, but offer significant upside through options and stock grants. Employees in start-ups are not anxiety-ridden by knowing when or where their next paycheck will come. People from big companies definitely are.

Overall Adaptation

As my blog indicates, these are major differences in the way large organization and start-up organizations function. Everyone is capable of adapting to some degree to enable them to work in start-ups, but for older employees who have been used to operating in a particular environment for several decades, it is like getting a divorce and being asked to date people in an environment that is not only completely different from the one in which they functioned during their marriage, but also completely different from when they were last single.

It is psychologically traumatic for people to make this transition. They have to go through a change process similar to what those who lose a loved one experience. They have to get through denial, anger, grieving, fear, and toward acceptance of the new environment. This is not a task that is accomplished solely through job retraining programs or through creation of make-work public sector jobs. This requires a personal transformation of which development of new skills is only a small piece.

Lawmakers who are empathetic to those displaced in this economy do them no favors by offering quick fixes or stimulus-led projects. These are stopgap and transitional packages at best, and ways for people to remain stuck in denial at worst. Blaming the companies that displaced these people is also a stupid, shortsighted strategy.

Even when more steady big company jobs return, they will look very different and people will need to function more like they did in the start-up businesses. The sooner we recognize that, the better.

Thomas Friedman has rendered a valuable service in pointing us toward the need to support the creation of start-up businesses, but that’s just the beginning of what we will ultimately need to do.