The Exchanges

Q So starting on accountability, tell me, what's the matrix management structure? Let's start with that.

A Sure. So most organizations today are built to a blueprint that was perfected really in the 19 twenties by Alfred Sloan when he was the CEO of General Motors. And it's called a matrix management because everybody fundamentally has two lines of accountability or reporting. They have their functional responsibilities, you know, as an engineer, as a marketer, as a finance person, and then they have their product line or P and L responsibility. So, you know, they work in this division or that division. So, you know, either you work on truck Or minivans, or SUVs, or, you know, compact cars. You have, like, a specific kind of product that you work on, and so your formal manager is usually your divisional manager, so that you report up to some kind of CEO or divisional head, but you also have, you know, what most people call dotted line responsibilities to the head of your function, who makes sure that you work with appropriate standards in that function, so you're not going to get very far, not going to be promoted very far, you know, if your engineering work is sloppy, if your marketing is not up to standards, if you don't follow good accounting practices and finance. That is the dominant model that most companies these days are organized around.

AI assessment note: “everybody fundamentally has two lines of accountability or reporting”

Q So starting on accountability, tell me, what's the matrix management structure? Let's start with that.

A Sure. So most organizations today are built to a blueprint that was perfected really in the 19 twenties by Alfred Sloan when he was the CEO of General Motors. And it's called a matrix management because everybody fundamentally has two lines of accountability or reporting. They have their functional responsibilities, you know, as an engineer, as a marketer, as a finance person, and then they have their product line or P and L responsibility. So, you know, they work in this division or that division. So, you know, either you work on truck Or minivans, or SUVs, or, you know, compact cars. You have, like, a specific kind of product that you work on, and so your formal manager is usually your divisional manager, so that you report up to some kind of CEO or divisional head, but you also have, you know, what most people call dotted line responsibilities to the head of your function, who makes sure that you work with appropriate standards in that function, so you're not going to get very far, not going to be promoted very far, you know, if your engineering work is sloppy, if your marketing is not up to standards, if you don't follow good accounting practices and finance. That is the dominant model that most companies these days are organized around.

AI assessment note: “everybody fundamentally has two lines of accountability or reporting”

Q Not at all, but I'd love to start today with a little on you. And what was the start of your writing? And then when was the inflection point when it really hit what we love to call product market fit, so to speak?

A You know, I never imagined that Lean Startup would take off the way that it has and become this global movement. I mean, really, I was as surprised as anybody. When I started writing about Lean Startup, Gosh, 2008, 2009. Having a startup blog was not really the thing to do. Oh, how the world has changed. A lot of my advisors and mentors told me that it would be embarrassing to do that. Oh, that's a, that's an old man's game. Don't do it. And so, you know, I actually initially started blogging anonymously. That's how embarrassed about it. I was, you know, so I really didn't expect it to become this thing. And I remember one of the very first times I gave a big talk about it in public. This was at the old web two point expo. May it rest in peace. And I remember going into one of the rooms where I was going to be speaking, and the room was so packed, I couldn't physically get into the room, saying to somebody, that's very rude of the previous speaker to keep going on and not make room for me to come in and speak. And he's like, no, you don't understand that people are here for you. And I was so surprised I didn't believe him. I thought, you know, I thought someone else had monopolized my room. So yeah, it was, it was one of those moments where you realize, wait, something's happening here. You know, it's not what you previously thought. So that was kind of the first moment I remem…

AI assessment note: “When I started writing about Lean Startup, Gosh, 2008, 2009... at the old web two point expo”

Q Not at all, but I'd love to start today with a little on you. And what was the start of your writing? And then when was the inflection point when it really hit what we love to call product market fit, so to speak?

A You know, I never imagined that Lean Startup would take off the way that it has and become this global movement. I mean, really, I was as surprised as anybody. When I started writing about Lean Startup, Gosh, 2008, 2009. Having a startup blog was not really the thing to do. Oh, how the world has changed. A lot of my advisors and mentors told me that it would be embarrassing to do that. Oh, that's a, that's an old man's game. Don't do it. And so, you know, I actually initially started blogging anonymously. That's how embarrassed about it. I was, you know, so I really didn't expect it to become this thing. And I remember one of the very first times I gave a big talk about it in public. This was at the old web two point expo. May it rest in peace. And I remember going into one of the rooms where I was going to be speaking, and the room was so packed, I couldn't physically get into the room, saying to somebody, that's very rude of the previous speaker to keep going on and not make room for me to come in and speak. And he's like, no, you don't understand that people are here for you. And I was so surprised I didn't believe him. I thought, you know, I thought someone else had monopolized my room. So yeah, it was, it was one of those moments where you realize, wait, something's happening here. You know, it's not what you previously thought. So that was kind of the first moment I remem…

AI assessment note: “When I started writing about Lean Startup, Gosh, 2008, 2009.”

Q Do you need the unbundling of financial budgets then within large corporations to allow for this small scale micro innovation within subsectors owning their own budgets?

A That's a great question. I definitely am a believer of it. I talk a lot in the book about the contrast between metered funding, the way we do venture investing, where you have a fixed budget, but it's your money. You can spend it on whatever you want, and no one ever takes the money back, and what I call the typical corporate entitlement funding, which is you're part of an annual allocation process, and the basic assumption is that if you're doing, barring a catastrophic failure, your project is going to continue quarter after quarter, obviously with some adjustments, Most corporate managers call it the spigot. The spigot is going to increase some days, decrease some days, depending on how you're doing politically, but it's never going to go to zero. The problem with entitlement funding is it means that it's very difficult to run an expensive experiment. Because if I, if I go to a manager and say, listen, I want, I want a 100,000 dollars to run an experiment. Every manager understands that there's no such thing as a 100,000 dollar experiment. There's only a 100,000 dollars a year annuity in perpetuity. You know, once I let this project be funded, it's going to Keep getting funded, and we're going to keep throwing good money after bad, and you know, yes, I might be able to get adjusted down to 75,000 dollars next quarter, but you know, maybe the politics will be such that it get…

AI assessment note: “I definitely am a believer of it.”

Q Absolutely pretty gross. I do want to touch on that element you exactly said there in terms of promotion. And how do you think about evaluation of promotions? Who gets promoted? Why they do? And the thought process and framework around it?

A I'll give one anecdote from a company, a big company that I worked with. They had a kind of a star chamber, you know, secret meeting every month or every other month where a group from HR with some of the senior leaders in the company would huddle and evaluate the promotion pipeline for the most senior executive level in the company. We're talking about like the senior corporate vice president. And For every manager in the company, this is the ultimate prize. I mean, this is like one step below being promoted all the way to the CEO. You really made it in your career if you become one of these executive vice presidents. And I remember I was working with a lot of teams in this company at the time, and we were always having trouble getting the executive vice presidents and the kind of next level down, the senior vice presidents or whatever they called them, you know, the kind of like the upper echelons of management to take this seriously because, you know, they're busy and they have to make the quarter and they're running the current business. So don't always have Infinite time, you know, to focus on innovation or whatever. And I remember talking to the HR folks about this meeting they have to do the evaluation, and one day they told me, hey, good news, we've just added an evaluation criteria to the promotion. How well the manager in question embraces this new way of working usin…

AI assessment note: “we've just added an evaluation criteria to the promotion.”

Q Finishing today, next five years for you, and what's the roadmap to global domination here, Eric?

A Man, I didn't know anything about what the past five years were going to be like, so that's a really hard one. I mean, look, I'm working in parallel, obviously, on this kind of greater problem of how do we build a modern managerial culture, but I also do it as the CEO of a company called the Long-Term Stock Exchange, where we're trying to change financial incentives, and of course, we put on a Lean Startup conference every year. The next one's coming up in a couple of weeks, where we try to do education and kind of bring the message of what life is really like in the trenches of founders and VCs and innovators to life. So working across all those branches, I feel like maybe we can make a little bit of a dent in the way that we build companies from scratch.

AI assessment note: “I didn't know anything about what the past five years were going to be like”

Q So what are the core challenges with it then? You've worked with many, many companies who employ that structure. What are the core challenges with it, and does it insert the right levels of accountability?

A Yeah, it's very good for what it's very good at. It's so easy to interpret what I and others, other reformers are saying as a criticism of the status quo and saying, hey, this management system is bad or wrong, or the people who operate it are somehow uncreative, right? So I don't want to say anything like that. I really think the system is very, very good when You can hold people accountable to hitting a forecast. Like, that is really the fundamental primary tool at the heart of what I now call the old-fashioned management system of the 20th century, and I don't mean that in a pejorative way. I just mean it's a little bit old now. It's almost a hundred years old, and the way it works is just because, like, imagine that we're having a macroeconomic boom, and every company is selling more stuff, you know, this year than they did last year. You don't want to promote managers just because they're having an up year, and conversely, if we're having a down year, if it's the middle of a session, you want to Punish managers just because they sold less than last year. In order to figure out who's doing a good job, you first have to figure out, well, how many cars or how many widgets should we sell in a normal year? Adjust that for macroeconomic conditions. Make a forecast by quarter of how you're supposed to do, and then hold people against the forecast. And you see that pattern of maki…

AI assessment note: “yet that system really doesn't work very well if we're trying to do something new”

Q I'm really intrigued, because you spoke about blame there, we discussed KPIs earlier, and it all kind of brings back to the accountability element, and one that always really troubles me is how do you insert a culture of accountability without fear? How have you seen that played out in your many differing operational overviews?

A Yeah, this is a really important issue, because on the one hand, most organizations develop a really pathological fear of failure that drives a lot of conservatism. The one concept I found really helpful for thinking about this Is in an established organization, anyone post product market fit that has an actual corporate hierarchy. This is true very early on at startups too. The financial compensation that you pay a person in the current period, like this year's bonus, this year's salary, even this year's stock option tends to pale in comparison to what I call their career equity, which is their future prospects for promotion at the company. For the very early employees, the equity compensation No matter what. For the founders, for the first 10, 50 employees, equity compensation is going to dominate. But once you get past 50 or a hundred employees, the fractional ownership that people have, certainly once you get to a thousand employees, the fractional ownership people have is going to be dwarfed by their future career prospects. And so, what determines your career equity? What determines whether it's likely that you're going to get promoted to a VP job one day? You know, what are the likelihood that you're going to get a lot of discretionary budget and authority and power in your job in the future? In most organizations, that's a very political process. It depends primarily on…

AI assessment note: “most organizations develop a really pathological fear of failure that drives a lot of conservatism”

Q I'm really intrigued, because you spoke about blame there, we discussed KPIs earlier, and it all kind of brings back to the accountability element, and one that always really troubles me is how do you insert a culture of accountability without fear? How have you seen that played out in your many differing operational overviews?

A Yeah, this is a really important issue, because on the one hand, most organizations develop a really pathological fear of failure that drives a lot of conservatism. The one concept I found really helpful for thinking about this Is in an established organization, anyone post product market fit that has an actual corporate hierarchy. This is true very early on at startups too. The financial compensation that you pay a person in the current period, like this year's bonus, this year's salary, even this year's stock option tends to pale in comparison to what I call their career equity, which is their future prospects for promotion at the company. For the very early employees, the equity compensation No matter what. For the founders, for the first 10, 50 employees, equity compensation is going to dominate. But once you get past 50 or a hundred employees, the fractional ownership that people have, certainly once you get to a thousand employees, the fractional ownership people have is going to be dwarfed by their future career prospects. And so, what determines your career equity? What determines whether it's likely that you're going to get promoted to a VP job one day? You know, what are the likelihood that you're going to get a lot of discretionary budget and authority and power in your job in the future? In most organizations, that's a very political process. It depends primarily on…

AI assessment note: “most organizations develop a really pathological fear of failure that drives a lot of conservatism.”

Q Can I ask, at what point is the inflection point where the requirement to alter that structure and maybe insert the missing function of entrepreneurship exists? When is that inflection point in company scaling?

A You know, it's interesting, and there's something like, you go from this, like, primordial soup, and you go through this big bang, and then you have these discrete structures. There's kind of some analogy to be had in there. So you think about, like, when do you have a marketing department in an early startup? When it's small, you definitely don't have a marketing department. The product is the marketing is the product. So there is no distinction between product and marketing. And then eventually as you grow, you start to develop those as discrete functions. But the key is the seeds of those functions were planted really early. So we start to think about marketing and the marketing apparatus long before we have a formal function. I think the same thing ought to be true for entrepreneurship, but really good founders are not satisfied with just getting one product to product markets. They're thinking a little bit ahead to say, hey, after product markets fit, what's next? What's in the strategy? What's in the roadmap? How do I go to multiple markets? Because we live in a world now where, you know, it used to be you could kind of have one innovation, write it to an IPO, and then you could sit on market dominance for many years, sometimes even for decades, and it might be many years before an international competitor would try to copy what you're doing. Now, any startup that's havin…

AI assessment note: “the seeds of those functions were planted really early”

Q So what are the core challenges with it then? You've worked with many, many companies who employ that structure. What are the core challenges with it, and does it insert the right levels of accountability?

A Yeah, it's very good for what it's very good at. It's so easy to interpret what I and others, other reformers are saying as a criticism of the status quo and saying, hey, this management system is bad or wrong, or the people who operate it are somehow uncreative, right? So I don't want to say anything like that. I really think the system is very, very good when You can hold people accountable to hitting a forecast. Like, that is really the fundamental primary tool at the heart of what I now call the old-fashioned management system of the 20th century, and I don't mean that in a pejorative way. I just mean it's a little bit old now. It's almost a hundred years old, and the way it works is just because, like, imagine that we're having a macroeconomic boom, and every company is selling more stuff, you know, this year than they did last year. You don't want to promote managers just because they're having an up year, and conversely, if we're having a down year, if it's the middle of a session, you want to Punish managers just because they sold less than last year. In order to figure out who's doing a good job, you first have to figure out, well, how many cars or how many widgets should we sell in a normal year? Adjust that for macroeconomic conditions. Make a forecast by quarter of how you're supposed to do, and then hold people against the forecast. And you see that pattern of maki…

AI assessment note: “that system really doesn't work very well if we're trying to do something new”

Q Can I ask, at what point is the inflection point where the requirement to alter that structure and maybe insert the missing function of entrepreneurship exists? When is that inflection point in company scaling?

A You know, it's interesting, and there's something like, you go from this, like, primordial soup, and you go through this big bang, and then you have these discrete structures. There's kind of some analogy to be had in there. So you think about, like, when do you have a marketing department in an early startup? When it's small, you definitely don't have a marketing department. The product is the marketing is the product. So there is no distinction between product and marketing. And then eventually as you grow, you start to develop those as discrete functions. But the key is the seeds of those functions were planted really early. So we start to think about marketing and the marketing apparatus long before we have a formal function. I think the same thing ought to be true for entrepreneurship, but really good founders are not satisfied with just getting one product to product markets. They're thinking a little bit ahead to say, hey, after product markets fit, what's next? What's in the strategy? What's in the roadmap? How do I go to multiple markets? Because we live in a world now where, you know, it used to be you could kind of have one innovation, write it to an IPO, and then you could sit on market dominance for many years, sometimes even for decades, and it might be many years before an international competitor would try to copy what you're doing. Now, any startup that's havin…

AI assessment note: “I think we got to plant those seeds early”