TBM 243: Capital Inefficiency

In this post, we will explore capital (in)efficiency and why the current preoccupation with developer productivity (and efficiency overall) is a symptom of something else. We will discuss layoffs, trust, personal identity, and interest rates. It’s going to get heavy.

Quick Definitions

Capital:

Skills, knowledge, experience, machinery, patents, copyrights, working capital, debt and equity, partner relationships, brand, etc.

Capital Efficiency:

A measure of how effectively a company uses its sources of capital to achieve its objectives, which may include growth, profitability, market share, and other strategic goals.

Feeling It

Whether or not you call it capital efficiency, you have "felt" capital efficiency and inefficiency. Adding many people to a team struggling with debt, dependencies, and a designed-by-committee strategy just "feels wrong." These problems tend to multiply when you add more people to the mix. With the right leadership, guidance, and approach, you can make things better—and may even benefit from growing the team later—but adding people is typically not the best first step and makes matters worse.

The same "feeling" goes for overstaffing relative to:

• The market opportunity

• The current architecture

• The current org structure (e.g., hand-offs required, etc.)

• Feedback looks and access to customers

• The appetite to empower teams and seek aligned autonomy (especially when establishing teams in new geographies)

• The health of communication channels

• Business model and pricing/packaging

• Product stage

• Ability to onboard new team members

• Opportunities for career advancement

• Ability to sustain employee morale and engagement

These are all examples of capital inefficiency. Many ALSO hint at under-funding: working down debt, architecture, platforms, organizational design, feedback systems, enablement, business model design, leadership development, etc. Without support, these things cause capital inefficiency. Capital inefficiency isn't just about where we've overspent relative to the outcome. It also relates to underinvestment AND the very nature of the outcomes we seek.

Low Interest Rates

You probably also had these intuitions five years ago but with a twist: cheap capital (low interest rates) made throwing people at problems more attractive on the surface. The financial pain of inefficiency was reduced. 

"Oh, is that team struggling? Well, start another one!" 

"Oh, is that a problem? Just build your own!" 

"That looks interesting! Let's do it!" 

"Lead hundreds of people without a lot of experience? Go for it! Give it a try!"

 "X is a bit toxic. What should we do? Oh, have them go off and manage Team Y for right now!"

Big teams—big resumes and big salaries! Big projects—big resumes and big salaries! 

Those times are over, and lots of companies (people) are now being forced to deal with the decisions they made. Many teams and projects have crumbled quickly amidst our current macroeconomic reality. Whether those were the right or wrong decisions at the time (lots of people got rich, let's face it) is not the focus of this post, but you get the idea.

Pointing Fingers

This industry-wide phenomenon is where we find ourselves when discussing developer productivity, operational efficiency, cutting costs, etc. Everyone wants someone to blame—lazy developers, leaders, managers, investors, etc.—but the dynamic is far too complex to lay the blame at any one person's feet.

It's like a city reeling from an economic downturn. In the golden days, money used to fall from the sky.

"Is traffic congested? Build more roads!"

"The waterfront is undeveloped? Luxury condos!"

"Education lacking? More shiny new gadgets!"

But those days are over. Interest rates are up—projects, half-finished, litter the skyline. Traffic is worse despite the new roads. The luxury condos are mostly vacant, and the schools face an exodus of frustrated teachers and disillusioned students. Everyone "feels" the capital inefficiency. But everyone seeks a scapegoat. Is it the mayor, the city planners, the real estate developers, or the citizens? 

Low-interest rates seduced everyone to some degree (with varying degrees of upside). It's sad that current layoffs are often the result of past hubris, but that's how it goes, I guess.

Narratives

This means that there is almost certainly talk about employee productivity, efficiency, and effectiveness in your company. But behind these conversations is the most basic act of narrative clash and framing.

IT ISN'T ACTUALLY ABOUT THE DATA OR THE SCIENCE AND RESEARCH. 

This is critical. You have to understand this because many things become clear when you do. It is about our collective narratives.

Employee: "So you're telling me everyone got rich here, and now they are kicking back while I have to clean up their mess amidst layoffs?"

Product Manager: "Was I even a good PM? Did we make the right decisions? Was it all luck? "

Managers: "But I grew the team to 120 people! That was a big success! But was it? Was it working, or was it all for show? Can I manage ten reports, for real? Or was that a mirage?"

Customer Support: “Oh, I see! We took care of all the dirty work and loose product edges, and now you’re telling me we’re cutting our team?”

CFOs: "The layoffs were worth it! Were they? Has the playbook changed?"

Founders: "Did we push too hard? Was it the right move? Are we better off for it? I need to say this was my responsibility, but was it?" 

Architects: "Should I have pushed harder to fix those things? Was throwing people at it a good idea? Did we need to build this in-house just because I could hire people?"

Investors: "What is the company worth? Is the opportunity really here? Are we smart investors or lucky investors?"

Developers: "Am I a good developer? Are there 10x developers? Were those high-profile things I worked on now on the cutting room floor worth it? What does it mean to be an effective developer these days?"

Designers: "It was an amazingly designed product, but no one wanted to pay for it once times were tough. Am I a good designer? And finding a new gig is so tough—was all that stuff about UX being so important just a smokescreen?

Once you see this, you can't unsee it. We're all trying to make sense of the situation and our place in it. Coupled with the real impact of tightening budgets and layoffs, this manifests as a preoccupation with ROI, productivity, and efficiency and a "narrative clash" as different stakeholders duke out who can save the most face and who can preserve the most power and influence.

When you walk into a meeting to talk about productivity or efficiency, you are walking into a meeting with the last decade of wax and wane and individual professional identity (and financial outcomes)

Onward

My advice: focus on the core concept of capital efficiency.

• Put on your systems thinking hat and think about areas of capital inefficiency. 

• Realize that capital efficiency has a strategic component.

• Call the kettle black: if your company is cutting costs, call it "cost-cutting."

• Capital inefficiency takes on many shapes—some manifest in overstaffing and others as understaffing and underinvestment.

• When considering the opportunity costs for addressing areas of capital inefficiency, consider opportunities to increase revenue, protect revenue, reduce costs, and avoid costs—not just reduce costs or make people more efficient in the near term. 

And consider the role of narrative and blame-seeking. It's out there. We're all part of it and struggling with it. Name it to tame it. Be curious. Realize the discussion you’re having on the surface is not the discussion you’re having below the surface.

I should caveat this post with the fact that while I am a full-time employee of a great company, I am also a very active member of various communities, do a reasonable amount of informal advising, regularly speak to friends across the industry, and have "been around for a while and have lots of gray hair." In short, please don't assume I'm talking about my employer. The topics we discussed above are widespread across the industry, and it is vital we talk about them.