Growing pains

Dotcoms and high-tech enterprises with soaring growth rates and a culture of chaos bring particular problems for HR management. But the new economy still needs to learn lessons from the old if businesses are to survive

When on-line retailer sank, it was hard to ignore the glee with which the traditional media reported its demise. As the papers ran headlines like “” and cab drivers confidently predicted that the Internet boom was over, it was easy to conclude that the Internet really was just a high-tech con trick and that companies couldn’t grow at such speeds and survive.

Easy but wrong. proved just one thing – if you set yourself up as an on-line retailer and bemuse potential customers with a mystifying user interface and a myriad of software plug-ins, they will get fed up. Beyond that, has about as much relevance to the development of the Internet as Shakin Stevens did to rock ‘n’ roll.

The hype surrounding obscured the fact that many dotcoms’ plans are built on growth rates so high, they sound dangerous. This is the kind of problem managing directors in more traditional industries, where annual growth of 20 per cent is a minor miracle, would kill for but it is a problem nonetheless. As one Internet executive told Personnel Today, “You can’t work at a successful dotcom for long without hearing someone behaving like Scotty on the starship Enterprise and saying, ‘The engines won’t hold out much longer Cap’n.'”

Ideological baggage

Authors have suggested that the “information economy” will supersede capitalism just as the world of dark satanic mills once supplanted the agricultural economy. The leaders of companies in this new economy aren’t quite so bold but the digital revolution is not without ideological baggage which may make the job of any HR professional caught up in this maelstrom that much harder.

There are many ways new companies are supposed to have the edge over old ones. They are supposed to be faster moving, less hierarchical, more flexible and less hidebound. Of course, not all new companies have all these virtues but on the whole they are usually seen – by themselves at least – as a step up the corporate food chain from “dinosaurs” such as Chrysler and IBM.

High-tech companies are often based on what Charles Handy, in his book Gods Of Management, calls the erosion of management. Put simply this is the idea that professionals don’t need bureaucrats to tell them what to do. Handy dubs those companies/managers/staff who believe in bureaucracy followers of Apollo and compares them to professional perfectionists (Athena), the career managers who have little or no allegiance to their employer (Dionysus) and the can-do entrepreneurs (Zeus). You do not have to believe in Handy’s convenient categorisations to believe that the new economy is particularly attractive to career managers and entrepreneurs.

In this brave new world, HR may often be seen as part of the very bureaucracy these bright young start-ups are leaving behind. Pino Audia, associate professor of organisational behaviour at the London Business School, recalls the disastrous introduction of HR at one software company. “The HR guy just didn’t fit in at all, he was the only one turning up for work in a suit, so you could see he wasn’t going to last long.”

Richard Hagberg, founder of US consultancy the Hagberg group which analyses IT and Internet companies, says, “If an individual is out of touch with the culture, the organisation’s cultural antibodies will often attack.”

Management theorist Henry Mintzberg, writing in the Harvard Business Review, characterises these new companies as “adhocracies” which he says “show the least reverence for the principles of classical management, especially unity of command”. Mintzberg’s point is perfectly illustrated by Jim Clark, founder of Netscape, who confided to author Michael Lewis that high-tech companies virtually need to destroy themselves to stay competitive.

So what has all this to do with the way high-tech companies grow? Put simply, this culture probably impairs their ability to manage their growth and, ultimately, stacks the odds slightly against success. Growth is, after all, the key criterion by which these companies are judged by investors as many dotcoms are still in the red. Even on-line bookstore Amazon lost $308m in its last quarter.

When structure is needed

For publicly traded dotcoms, perceptions of growth keep the stock price up which helps them because they can use their paper to buy competitors. But at some point, often as they are preparing for their public listing, dotcom companies have to become more structured, a move they may find painful.

“These companies make a virtue out of chaos,” says Audia. “If new employees aren’t clear about their job and have to define the role for themselves, managers will say this is what makes them a suitable employee. Similarly, they will insist that the lack of structure is deliberate, part of what makes their company tick and part of what the Internet is all about. But the really good managers will be prepared to trade some of this wildness and creativity for a bit of structure when the time comes.” That time often comes when a company has more than 100 staff.

Thriving on chaos, as US business guru Tom Peters recommended in one of his books, has become the modus operandi for many hot dotcoms but it is not without risks, even if the company is initially successful. Many dotcom managers insist they are better placed to succeed in the long run because they are not as rigid as the corporate dinosaurs they are about to replace. But Audia does not think bureaucratic rigidity can solve the mystery of why some companies fail to build on their early triumphs, a mystery he calls “the paradox of success”.

“My work has convinced me that the root of the problem lies in the effect success has on executives. After prolonged success, they restrict their information search and form rigid beliefs concerning the effectiveness of their current strategies – beliefs which lead them to persist with strategies that no longer succeed.”

This trap is especially easy to fall into when, as is true of many dotcoms, there is no mechanism by which alternative views can be expressed without, to use Hagberg’s metaphor, being attacked by cultural antibodies. One question management consultants often ask of a thriving start-up is, is it time for the founder to step down? Some founders, particularly those with great technical gifts, may not be best suited to the job of running a company of 100 or so staff. This issue is even harder to deal with in dotcoms because many lack strong or influential HR departments and because many are built around personalities who represent the corporate brand to investors.

Perceptions of the Internet

One final complicating factor, especially in Silicon Valley, is the way the Internet is perceived. For every CEO such as Amazon’s Jeff Bezos who is in it for the long term, there are hundreds who see this as their ticket to $20m. If you read Wired journalist Po Bronson’s book Nudist On The Late Shift, it is clear that many employees see high-tech not as an industry but as an alternative Hollywood – they may not be as famous as Tom Cruise but this way they’ll enjoy the same lifestyle. So you meet people who, on their second day in the job, are looking for their next position because their present employer isn’t ambitious enough.

In a much milder form, this is a problem which Richard Latham, founder and chief executive officer of British high-tech company Bluewave, is familiar with. “It’s our job to grow the company fast enough to make room for the ambitions of our employees,” he says.

Bluewave is not strictly a dotcom – it provides a host of IT and Internet services to corporate customers – but it is subject to many of the same pressures, particularly when it comes to staff. Turnover now stands at £4m and Latham has a simple answer to the problem of growing too fast.

“You can turn the sales tap off, you don’t have to do everything,” he says. “We have grown at about 100 per cent a year since we were founded in 1995 and we are comfortable with that. That’s actually quite slow for the Internet and IT sector but we’re not worried because if we keep growing at that rate we’ll achieve our target of being a Fortune 1000 company in 10 years’ time.

“In our industry, at least two-thirds of the work is done by small companies so it is not as if we’re engaged in a battle for market share. A hundred per cent a year is a growth rate we’re comfortable with.”

Even 100 per cent places some strain on the management, especially in the crude mathematics of recruiting. In one month earlier this year, Bluewave’s workforce rose from (in Latham’s words) “70-something” to “90-something, maybe even 100”. Hiring is done mainly by line managers because Bluewave does not yet have a personnel or HR department, although Latham admits, “We’re looking to create one, we need one now”.

Recruitment has hitherto been carried out largely by line managers but the war for talent means it remains at the top of each manager’s agenda. “We are under daily attack from headhunters,” says Latham, “by e-mail, phone, whatever. Staff have been offered share options, golden hellos, you name it.” Despite this incessant attack, the company’s staff turnover is an industry-busting 14 per cent a year.

Managers work hard to hold this rate down. Apart from a rest room, staff are encouraged to use e-mail to request a free appointment with a masseur or share a joke. “Over 40 per cent of our e-mail traffic has nothing to do with work,” says Latham with a pride that many technically unsophisticated managers would find baffling.

Looking after staff morale

Movement between locations – the company has offices in New York, Singapore and London – is encouraged because, says Latham, “Whichever office you are in, it always feels like Bluewave.” But the biggest contribution to staff morale is probably management’s insistence that you should not be working past 6.30pm, a complete contrast with the 24/7 work ethic many British high-tech companies have imported from Silicon Valley.

This summer the company will introduce its first employee share option scheme, something which, if you believed the hype, every dotcom and IT start-up has as a matter of course. But then Bluewave, for all its masseurs and stress-relieving devices, is not the kind of high-tech company that Hollywood central casting would design. For a start, it was funded by Latham and has been self-financing, so he doesn’t have any venture capitalists to placate with a five-year money-back guarantee and exit strategy.

Bluewave also has few pretensions about radically changing corporate culture. “There was a lot of talk about flat management structures and democratic decision-making some years ago but that didn’t always work,” says Latham. “These days, staff don’t want to spend hours sitting around talking things over and whenever that happens you can almost hear them saying, ‘Will somebody just make a bloody decision?'”

But does he hear the frequent complaint that Bluewave isn’t quite the company it used to be? “Oh yes,” he says. “I first heard that when we went from two to four employees.”

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