Architecting Human Resources Management Systems in Early and Growth Stage Technology Companies Dave Litwiller, July 2011

Introduction Companies progressing from concept- or seed-stage into start-up or growth stage need to explicitly plan for the human resources management (HRM) model they will use going forward to fosterexpansion and success. There are diverse and complex factors that affect HRM models. These include personalities, culture, management monitoring and reporting, technology and markets. Despite rich variation, the intense interrelatedness of HRM practices to form a coherent system empirically yields coalescence into to a small number of distinct, prevailing models. Companies exiting earlier development stages into start-up or growth typically perform best when they largely commit to one of three pervasive HRM systems. The probability of business success adopting one of these a co-ordinated set of systems and behaviors is much higher than without. Companies which adopt a selected model early and stay with it greatly outperform those that change models or vary significantly from the preferred forms. The case for careful up-front selection of the HRM blueprint becomes even more powerful when one considers that a company that sustains its chosen HRM system is several times more likely to succeed than a business which cannot.Radically altering the employment relations model is destabilizing, even at a relatively small size. Reengineering the HRM model in flight is extraordinarily difficult because of how interdependent and ensconced practices become with the skills, status and deeply held values of employees, as well as the business reputation with customers. The three dominant systems are: 1) Founder Aristocracy 2) Technical Supremacy 3) High Commitment Below are summary descriptions of each, strategic situations of greatest suitability, advantages and disadvantages,pivotal implementation success factors, and common situations of best fit.

Founder Aristocracy Summary: A founder aristocracy makes no apologies for the founders reigning supreme in all significant decisions, resource allocations, and in the relationship with employees, shareholders and customers.

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Suitability: This form of HRM is best for companies that are unlikely to need to expand beyond the span of control of the founders, their energy, and time horizon of interest. Advantages: A founder aristocracy is fast to start and scales most rapidly during early growth because much of the key relationships and know-how stay with the founders. Decisions can be made rapidly, subordinates can be trained quickly, and rarely is there doubt about who is in charge when tough choices need to be made. Disadvantages: This HRM model usually deprives the company of the ability to attract, retain, or fully engage the most dynamic employees. If there are any significant leadership or capability gaps among the founding team, they can be difficult to fill. Even with a sufficiently comprehensive suite of founder attributes early on, the efficiency and effectiveness of the organization typically starts to wane with growth beyond twenty or so staff when the amount of founder contact with the extended organization necessarily declines. Success Factors: The founder aristocracy system works best when the founders are able to establish and maintain nearly all enabling skills and relationships in technology, operations, customer relationships and other pivotal internal and ecosystem linkages. It demands unwavering commitment of time and priority to the business by the founders. The founders also need to have a matching view for how far they see the organization growing from the outset, given the natural growth limit of this model. Best Fit: Frequently the founder aristocracy model works well where the founders want to remain the bosses of a limited size, proprietor-run business over the long term, or, where the business is aiming for a quick flip in a situation where the IP and customer relationships become rapidly ensconced in the technology of implementation, as is the case in many lean start-up consumer web services and mobile applications.

Technical Supremacy Summary:Technical supremacy HRM is based on decisive technology leadership and mastery of a distinct science or engineering discipline in the eyes of customers, partners, employees, and employee candidates. Suitability:It is most appropriate where technologies are on a trajectory of foreseeable ongoing relevance, and superior performance or rapid development is a significant competitive advantage in the strategic environment. Advantages: Technical supremacy provides a reputation that attracts and motivates the best R&D employees, drives them to the highest level of performance, and draws in customers with the most compelling needs. Disadvantages:Problems arise if the executive and investors have a misplaced sense of the technical superiority and durability of the business, or if competitive circumstances change to demand 2
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significantly different skills, or the business fails to recruit and train a sufficient number of industry leading experts. If any of these difficulties occur the competitive position of the business can be impaired or lost. As well, the ego and professional advancement of other functional groups of the business can be difficult to sustainin the presence ofso strongly acknowledged supremacy of the technical community. Success Factors:The technical mastery model flows most easily from founders and near founders who are widely recognized in the technical field as pioneers or innovators, who are also committed to remaining at the fore of the field, and who can directly recruit early hires. As well, there needs to be both the substance and the reputation for discriminating screening and a demanding onboarding process for new hires to drive up desirability of the company as an employment destination for the most capable and motivated in the technical domain who wish to burnish their credentials. Best Fit:This system is suitable with base or interface technologies of ongoing and rising relevance, where the fundamental performance drivers remain similar over time, and have significant influence over the performance of the larger systems in which those technologies are used. These conditions are often present in interface semiconductors, transducers, materials science, bio-technology instrumentation, and video game development.

High Commitment Summary: The high commitment HRM (HCHRM) blueprint places overarching mission, the betterment of the company,its operating methods, intense customer focus, and employees capabilities ahead of other objectives. Particular groups, functions or people are subordinate to the larger goals. The HCHRM is the most expandable human resources model, as well as being most adaptable over time and changing competitive circumstances. Suitability: The high commitment HRM offers the greatest scalability for the business. It has unequalled ability to contribute to the growth of a company to hundreds of employees and beyond. This framework provides the most robust system to adapt to changes in competitive circumstances as conditions change. Commonly, over time there can be movement between technical leadership, cost leadership and customer service as the basis of competition as the marketplace evolves.HC delivers the most robust unifying influence through such changes. Moreover, HC can grow to embrace multiple operating sites, national cultures, and endure through significant changes in supplier, customer and partner relationships. Advantages: When the objective of an early- or growth-stage technology business it to become an enduring business of sufficient scale to achieve an IPO as a plausible liquidity or financing vehicle, and to prosper beyond, then the HCHRM model is unequalled. Additionally, when done well, a HCHRM blueprint can serve as a significant competitive advantage attracting, motivating and retaining employees, allowing such firms to thrive even in high mobility external labor markets.

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Disadvantages: The high commitment HRM model takes the most time to initiate and ongoing effort to sustain. It is also most sensitive to inconsistencies in behavior, particularly by the leadership team, but also among different groups (functional, divisional or geographic) or individuals. HCHRM is challenging to maintain if there is a high rate of employee turnover because of the time investment required to suitably train newcomers and the internal inconsistency of such a pattern. Success Factors: Communication, transparency, consistency across the enterprise and over time, exemplary leadership by example, and goal of making a difference in the chosen field of endeavor as a higher calling in addition to achieving a strong financial model.As well, employees need to be chosen and on-boarded to ensure cultural fit. Together these ingredients can inspire intense loyalty and effort by employees, driving performance and employee retention. Best Fit: The HC blueprint is most appropriate for businesses bringing forward game changers, platforms upon which other significant business and industries are expected to be built, and long-gestation businesses. It is also commonly used for businesses developing and marketing medical devices and therapies, enterprise software, telecommunications and networking equipment, clean technology, and, complex systems involving multiple technical and operational disciplines.

HCHRM Expanded The importance of the HCHRM system for building rapidly growing, large, and prosperous businesses merits further attention. The highest performing organizations operate at many times the productivity during their rapid growth years as compared to average peers. There are several interacting and supporting elements of coherent model practices from which to achieve highest collective productivity and strategic impact. The HRM system must be stated in a way that current and prospective employees can understand and apply consistently. Consider several examples, one from the grandfather of HCHRM technology companies, Hewlett-Packard, another from a more recently founded enduring success, Intuit, and finally from recent star Zynga.

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The HP Way(circa 1992, summarized) We have trust and respect for individuals We focus on a high level of achievement and contribution We conduct our business with uncompromising integrity We achieve our common objectives through teamwork We encourage flexibility and innovation

Intuit s Operating Values(circa 2002) Integrity without compromise Do right by our customers It s the people Seek the best Continually improve processes Speak, listen and respond Teams work

Zynga s Core Values(2011) Build games you and your friends love to play Surprise and delight our players Zynga is a meritocracy Be a CEO and own outcomes Move at Zynga speed Put Zynga first, decisions for the greater good Always innovate

Customers define quality Think smart, move fast We care and give back

Deeply held beliefs should be brief, clear and actionable so that staff and management can interpret them consistently and live them.

Pervasive Attributes of High Commitment Work Systems The overarching characteristics of HCHRM can be categorized by people, leadership and culture: People y y y There is selective recruitment, challenging training, methodical enculturation and removal of misfits The business targets and rewards those who seek responsibility and not merely accept it Staff and management see themselves as responsible for more than their job descriptions

Leadership y Defines, communicates and reiterates corporate vision and strategy. Staff is engaged and involved in the debate, though decisions are made by leaders. Once decisions are made, everyone abides by them as if those decisions were their own Over-communicates about company progress, challenges, measures of performance, and relationships to mission objectives. Particularly in challenging circumstances, communication keeps up 5
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y y

Hires for capability and a positive, winning attitude. Roots out passivity, poor attitudes and passive dissent Walks the talk, leading by example

Culture y y y y Results matter. There is a desire to win in all circumstances Work is fun. Energy is high. Whining is unacceptable There is one ego in the company, the company itself. There is esprit de corps and a shared pride in the organization roup pursuit of mastery in the company s endeavor. This superordinate goal produces engagement, grit and determination. It releases greater creativity than more rote objectives and converts much more of work into something pleasurable Motivation for staff comes from developing and maintaining the respect of their peers as much as from monetary rewards Obsess over customers. Do what it takes to make them successful Exhibit mutual respect for what different people and functions bring to the table The best idea wins, no matter from whom or where it came Truth speaks to power, connecting leaders authentically to people, protecting the capacity to inquire and improve Value learning and constructively harnessing the lessons of failure. Smart failure fast, cheap and not the same way twice - is not harshly punished. Mistakes are disclosed as soon as they are known so that they can be corrected most quickly and cheaply Integrity is without compromise. If integrity lapses occur, they attack all other aspects of a HCHRM and rapidly become malignant. Any integrity deviations must be swiftly and decisively fixed.

y y y y y y

Above all else, HCHRM businesses thrive over the long term when they execute faster than competitors. They gather needed input quickly and regularly, act upon it to make fast decisions, those decisions are implemented rapidly, and the results are monitored to drive further cycles of improvement. This loop is carried out faster and in a more disciplined way than at most peer and benchmark companies.

Daily Tools Conduct Fast, To-the-Point Meetings with Crisp Action Items and Follow-up. There is little wasted motion in the work about work. Things are done once, the right way. Risks are identified, documented and managed. Efficiency in co-ordination efforts shows respect for peoples time. Doing so makes it easier for them to stretch when elevated hours are required to meet their primary commitments. Capture Knowledge and Share It. One of the undercurrents of all meetings is to ensure that knowledge is captured, and that innovation and resources are shared to keep up co-operation and healthy interdependence.

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DisseminateInformation. People feel much more responsible for the firm when they have comprehensive ongoing knowledge of how the business is performing, the impact of their contributions and input. Reliability and Accountability is Job One. Reliability and accountability at the individual and team levels is the cornerstone of the HCHRM model. They reinforce the peer informal control and organizational culture required to make HCHRM work. Reliability and accountability is enhanced when individual commitments are self-made publicly, among respected peers, in writing, with detail about the reasons why, and supporting actions that will be taken. Subsequent status reviews and updatesshould take place in a similarly open and self-documenting fashion. At the same time, people need to be able to ask for help when they encounter more than they can handleat the time of past commitments. A culture of accountability is one where it is alright to ask for help early, just not to conceal problems or wait until it is too late and then make excuses. Attitude Counts. People who are smart, get things done, and exude this disposition are infectious. Intellectual Honesty and Adaptability. Constructive conflict is encouraged, as long as disagreement is done without being disagreeable or personal. Place Customers First. Profitable relationships with satisfied customers beget marketplace success andfinancial success. Financial success in turn provides its own motivational fuel, driving productivity and quality, and further marketplace success.Placing customers first is the clearest path to a virtuous cycle in the company s business model.

Weekly and Monthly Tools Target Sustainable, High ProductivityWork Hours. Monitor whether individuals regular work hours are extending beyond 55 per week as a warning zone, and above 60 as requiring action to revise or redistribute tasks. Productivity diminishes rapidly above such sustained effort levels, despite perceptions of some to the contrary. Often the result of overload is increased error rates and rework. Sometimes it is reduced collaboration with peers because of exhaustion and frayed temperament. Other times it is insufficient time away from work for exercise, personal relationships and uninterrupted down time to achieve an autotelic state to solve tough problems in a creative way or to think about making work methods and tools more productive. A high performance work environment that can hold up over time is one where people have a whole life plan that works rather than a deferred life plan that does not, particularly as the average staff age reaches over thirty. Encourage Creativity Expression. Provide regular outlets for pent-up creativity directed toward making the company and its customer relationships sustainably better. People need to put their ambitions into action to feel emotionally invested in long-term outcomes. Compensate Primarily Based on Team Performance. Tie the strongest component of variable incentives to team performance, rather than at the level of the individual,or much larger groups. Target team sizes 7
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of five to seven people. This range usually provides for good specialization, while maintaining enough individual impact to keep up peer accountability, from which to reinforce desired individual behaviors through incentives and rewards. Over-Explain Why. Constantly reinforce and reiterate the company s critical priorities and rationale for decisions. People need to be guided in their daily actions by more than just the deliverables of their immediate task. The more staff knows from management the reasons why recentand landscape decisions were made, the more decisively they can adapt similar criteria to speed future execution. Tell Reinforcing Stories. For each of the core values, build stories from the company s history illustrating exemplary behavior and achievement of employees. Recount these stories during monthly meetings and onboarding sessions. They help build a sense of shared mission, tribal identity and sense of privilege being an insider. Stories are more easily remembered and abstracted than other forms of messaging. Run Scared. Staff and management need to believe in themselves, but never lose sight of healthy paranoia about competition and forces of technologychange to stay sharp. Annual Tools Benchmark Competitive Employment Differentiation. Benchmark with prospective, current and past employees whether the firm is distinctively better as a place of work than other employers. The business has to be distinctive and better at something in the eyes of those people if it is to maintain its identity and the foundation of its HCHRM system. Refresh and Tune Strategy.Revisit the company s strategy and whether it provides a distinctive basis for sustained competitive advantage. Renew the strategy, and distil it to a handful of actionable goals for the upcoming year that can be widely shared and constantly reiterated to guide people in their daily choices. Resist Initiation of Multiple Operating Sites. A single operating site provides significant direct productivity and quality benefits over multiple sites during early stages often as much as a 25% increase in productivity and a similar lift to quality. This alone reinforces a HC system. Moreover, a single site cuts down on them vs. us attitudes taking hold which erode the performance of human resources. In most cases, multiple operating sites beyond select sales and customer support offices are best left until a business has grown beyond one hundred employees.

Early Stage Implementation Early implementation of some formalism in HRM pays significant downstream benefits, particularly for HC systems. Up- front investment diffuses HRM responsibility where it needs to principally reside, with first staff, line management and supervisors. Early adoption yields significant empirical efficiency and productivity benefitsthrough peer and line management influence, not the least of which is reduced 8
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general and administrative expense downstream compared with later introduction when HRM tends to be more bureaucratic and skeptically received. Items to introduce early: y y y y y y Mission and values statement Rigorous on-boarding process for orientation, training, enculturation and feedback Regular performance appraisal Indicative career progression maps Employee handbook Regular company-wide meetings

While important, the incorporation of these items should take a secondary role until the company has validated product-market fit, or service-market fit. However, upon reaching the threshold of offering fit with market demand, instituting these contributing elements for an efficient and high commitment HRM rapidly rises in importancefor a ramping-up business and pays long term dividends.

Conclusion Founder aristocracies capture the hearts and minds of the founders, but not many other employees. Technical supremacies appeal to the scientific and engineering community, and can more easily grow to a larger size than the founder-centric model. But, for greatest adaptability and scale, the high commitment model is unequalled. The high commitment blueprint comes though at a price of significant up front cost, as well as vigilant ongoing behavior from staff and management to reinforce, protect and renew this culture. Done well, it contributes to the highest comparative rate of business and financial success. It is adaptable and resilient. The most important aspect of implementing and sustaining a HCHRM model is consistency of practices. This blueprint has particularly strong positive feedback among its many related supporting and contributing elements. It demands internal consistency of interrelated factors more than any other model. Done right, many aspects of HRM are achieved through social and peer mechanisms. With coherent practices, the high commitmentmodel is the most robust and enduring for HRM in a growing high technology firm to achieve prosperity and lasting impact.

About the Author David J. Litwiller is an Executive-in-Residence with Communitech, based in Waterloo, Ontario. Hisbackground is in wireless devices, precision electro-mechanics, semiconductors, electro-optics, MEMS, biotech instrumentation, and enterprise software. He serves as an advisor to various private 9
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corporations in matters of strategy, technology, operations, finance, governance, and business development. Mr. Litwiller is the author of Rapid Advance - Mergers & Acquisitions, Partnerships, Restructurings, Turnarounds and Divestitures in High Technology .

References Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies , J. Barron and M. Hannan, California Management Review, Vol. 44 No. 3, Spring 2002 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1511023 Strategic Human Resources: Frameworks for General Managers , J. Barron and D. Kreps, Wiley, Hoboken, NJ, 1999 http://www.amazon.com/Strategic-Human-Resources-FrameworksManagers/dp/0471072532/ref=sr_1_1?s=books&ie=UTF8&qid=1311169351&sr=1-1 Zynga Inc. S-1 Filing, http://www.sec.gov/Archives/edgar/data/1439404/000119312511180285/ds1.htm Inside Intuit: How the Makers of Quicken Beat Microsoft and Revolutionized an Entire Industry , S. Taylor and K. Schroeder, Harvard Business School Press, 2003 http://www.amazon.com/Inside-Intuit-Microsoft-RevolutionizedIndustry/dp/1591391369/ref=sr_1_1?s=books&ie=UTF8&qid=1311169208&sr=1-1 The HP Way http://www.hpalumni.org/hp_way.htm Startup Genome Report , B. Herrmann et al, 2011 http://startupgenome.cc/pages/startup-genomereport-1

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