Minimizing Staff, Maximizing Profit

Layoffs, cutbacks, downsizing. Almost every Internet company has gone through this process in the last six months. The press and industry pundits have spun this as a bad thing, that somehow the restructuring of the Internet workforce is a cause for doom and gloom. Well, maybe I’m crazy, but I think it is one of the best things that could have happened to the Internet and the new economy it has created.

More People = Less Accomplished

Have you ever gone into a company and wondered what everyone is doing? Have you ever been perplexed about why at an Internet company of 250 people, at least one-fifth seem to be doing little or nothing at any given point?

The answer to these mind-numbing questions and others like it can be answered by something I like to refer to as Kuegler’s Law of Internet Diminishing Returns. Here is the law in its simplest form: After the first 10 employees, every person that you add to a software-development company or pure-play dot-com will actually add productivity of only one-fourth of a person. That means that, on average, 75 percent of every person’s capability and productivity is wasted above the 10-people maximum.

Don’t believe it? Take a look at the classic book “The Mythical Man-Month: Essays on Software Engineering” by Frederick P. Brooks Jr., a must-read for anyone involved in any phase of managing people in the technology world. Brooks discusses the inefficiences inherent in having a large group work on a single project. His observations and Kuegler’s Law of Internet Diminishing Returns account for why a team of 30 programmers produces less quality code than a team of 5.

What’s Up With That?

What accounts for such inefficiency? The reason actually has many different components, so let’s tackle them one by one.

• Internet development should be nimble. One of the great things about the Internet is that it takes information and allows it to be quickly and easily distributed. This creates a great opportunity for entrepreneurs and small teams to quickly develop technologies and build upon the developments of other small teams, whether associated or not. But to capitalize on this free flow of information, companies need to be small and nimble with the ability to process and act on information quickly. Large companies have a really difficult time accomplishing this.
• Committees and meetings kill productivity. If you get more than 10 people involved in something, it is almost guaranteed that they will split up into working committees, then have to meet to discuss their activities. And larger companies are notorious for having meetings. When I was a VP at a 300-person software company, at least 75 percent of my time was spent in meetings and discussion groups. We rarely accomplished anything; we just seemed to discuss things.
• There aren’t that many people who understand this stuff. I know this will ruffle some feathers, but the fact is that there are not that many great employees out there who really understand the Internet and the business it is related to. Many companies forced themselves to get fat with employees. They hired anyone and everyone who could pass the mirror test. (You hold a mirror up to their nose, and if it fogs up, they are breathing and thus hirable.) But the sad truth is that a large portion of these people did not have an understanding of the Internet. This is slowly becoming less the case, but there are still many people in the Internet business who are not really able to make a large contribution.

Getting Lean to Stay Alive

Here’s one of the stories that inspired the formulation of Kuegler’s Law of Internet Diminishing Returns. A software company that produced application service provider (ASP) software for the marketing business had 50 employees and was not profitable. Its funding was going to run out in three months, and the company would disappear if radical changes weren’t made.

By reducing the staff to eight people, the company was able to stretch its funding for nine months. Though the company principals were worried about reduced productivity, a better product was produced faster with the smaller, more nimble team. This company now has a fighting chance for profitability.

How was it able to cut out such a large chunk of personnel without hemorrhaging? First of all, of the 40 or so employees let go, one-third were midlevel managers. These employees were the ones most likely to be caught in the “many meetings, little work” trap. About 10 percent of the employees let go were not comfortable working at Internet speed. They came from large, established companies and were truly bad hires because they were not accustomed to producing in a start-up environment. In addition to this, at least five employees were not at all involved in the sale, production, or marketing of the company’s products; they were supporting the rest of the overgrown staff. When the staff was reduced, it was easy to lose these people and not lose productivity.

Although many people see the current wave of dot-com downsizing as tantamount to an implosion of the entire U.S. economy, I see it as a positive thing. Many of the companies should have never gotten funding, and many of those people should have never been hired in the first place.

Don’t get me wrong. There are definitely times when companies need to hire people, and it is clear that certain Internet companies need more than 10 employees. (Just imagine a 10-person Amazon.com!) But entrepreneurs should think hard before making hires. I usually describe it in this manner to managers: If you think you need to hire five people, figure out a way to do it with three. They usually surprise themselves with the results.