Newsletter 1: Tech Investment Framework
Hello.
Technology leadership often finds itself embroiled in a dichotomy of objectives between what they are able to achieve and what the “business” wants. While on the surface this appears to be merely a lack of mutual understanding, in actuality, it emanates from a divergent set of perspectives and priorities. It's not simply a gap in understanding—it's a gap in perspective.
I will start this newsletter by setting a paradigm for us to base our discourse upon. I will be succinct given the two (or three) page limit and build upon it in subsequent issues.
The point: Abstracting technology investment to four principal outcomes.
If you will indulge me, I would like to abstract and think about why anyone takes capital that could be applied to any part of the business or returned to shareholders/owners and instead invest it in technology.
Some context, when I say technology investment, I don't mean just your technology department. I mean the entire ecosystem engaged in the furtherance of objectives the depend on technology. From your technology support person, to your infrastructure engineers, software developers, business analysts, program managers and product managers. The vector is return on investment through use of technology.
Let's start our framework with the customer in the center because they are the proxy for revenue, the lifeblood of any business.
At the highest level, there are only four principal outcomes that an investor wants from their investment in technology.
First, in many (but not all) companies the product is technology based (such as SAAS or eCommerce companies) and in that case that investment should allow the business to pursue the maximum share of their TAM (total available market) at improving margins.
In such companies, and in most companies today; investors also want their employees to be as effective and efficient through the use of technology as possible to serve the business, this is to maximize productivity per unit of cost. This is associate facing technology, such as email, collaboration, HR systems, Financial systems etc. In many companies this associate facing tech is the entire scope of investment.
Underlying all this is the infrastructure that everything runs on; cloud or otherwise.
Of course, surrounding all this is investment in risk minimization from a cybersecurity, compliance or audit point of view.
Each company also pursues at its most fundamental level a “cardinal purpose”. This is not the mission statement, the platitudes in the marketing documents. The cardinal purpose is almost always clinically commercial. It's along the lines of some set of strategies and tactics to grow profit; through revenue growth and also through relative cost containment. The timelines depend upon the appetite of the investors. In private equity the expectations are different from public companies and in growth stage companies are still different .. It is crucial to understand the cardinal purpose of the company in question (and depending upon market and stage of company it could change) to decide how to pursue each one of the four principal outcomes.
As I type this, we can easily see how Instacart’s IPO has changed their relative weightage on the various outcomes, or for OpenAI through what is certain impending regulation and increasing competition, for JC Penney or Crater Barrell through a retail reinvention and finally, unfortunately, for MGM resorts through a very bad, no good situation. Each of their cardinal purposes are particular and unique to their situation but the key outcomes remain essentially the same, just the relative weightage changes.
As we climb up from startups to big public companies, this investment typically has a bad rap. Business folks will have trepidation about cost overruns, delayed timelines, underwhelming output. Technology folks on the other hand are befuddled why the business folks dont understand and have unrealistic expectations given all the constraints.
It's like the situation from Norse mythology. Odin and Loki need each other: Loki needs the protection and structure that comes from being among the Aesir, and Odin occasionally needs Loki's unique skills and perspective. However, this doesn't mean they trust each other implicitly.
This illuminates for me a prime realization, that all of us have to embrace a view that “we are all the business”.
Next time I will pick up on why this awkwardness exists and a framework for dealing with it to build credibility and deliver results.
The Counterpoint:
We do have some examples where technology or similar investment falls into a separate category completely. Investment for undefined outcomes.
3M: This manufacturing giant famously implemented the "15% rule," allowing engineers to spend 15% of their time on projects of their choice. This led to the invention of the Post-it Note, a product that didn't initially align with investor expectations for immediate return but became iconic. Source: https://hbr.org/2013/08/the-innovation-mindset-in-acti-3
Procter & Gamble: The company shifted from focusing solely on short-term gains to a "Connect + Develop" model, which relies on both internal and external ideas for innovation. This was against immediate investor instincts for keeping IP strictly in-house but has led to numerous successful products. Source: "How P&G Tripled Its Innovation Success Rate" - Harvard Business Review
What is the key outcome the investors are pursuing here if not the four key outcomes described above? My hunch is that this isn't “technology” investment per se but rather an investment in culture, employee retention and brand equity. I encourage you to think about it and come up with your own conclusions.
The Aside:
I recently read a few books and am working through The Tao of Physics, a classic By Fritjof Capra originally written in 1975. The last three books I finished were; Influence: The Psychology of Persuasion by Michael Cialdini, Man's Search for Himself by Rollo May and Never Split the Difference by Christopher Voss and Tahl Raz.
From Voss’s book, a recent bestseller, a key concept stuck with me. Voss says that his career as a FBI negotiator taught him that the classic academic negotiating “theories and techniques” were flawed in a fundamental way. They were predicated on “intellectual power, logic, authoritative acronyms like BATNA and ZOPA, rational nations of value and a moral concept of what is fair and what is not.” Further he says, “built on top of this false edifice of rationality was of course, process”. His experience taught him that in understanding human psychology, “we have to accept that we are all crazy, irrational, impulsive, emotionally driven animals”. That is the basis of our negotiation and in extension it is also the basis of how we should lead. More on that in a subsequent letter. However, now I am more aware as I encounter situations that feel like the former and ignore the fundamental nature of our existence as a species; I encourage you to do the same.
Take care of yourself.
-abhi