Introducing Political Debt

When Davids beat Goliaths

As companies grow, their DNA changes significantly. Early stage companies are typically populated by people brought together by a common vision to solve a problem and build a business. Those same people, by definition, have a high risk tolerance, and look to share in the upside in order to balance the risk they are taking.

Assuming the company does reasonably well in the early stage, the next phase for the company is typically to look for repeatable and reliable revenue streams, and its growth becomes fuelled by scaling those streams by hiring managers to run sales & marketing, product development and strategic partnerships. At this point in the business the profile of individuals required for these managerial roles leans towards those with a track record for execution in their respective fields. The motivations of these individuals is less risk tolerant, and their rewards mostly lie with their experience. Thus the CV becomes the qualification for growth in the individual’s remuneration. At the growth stage of a company this is fine, since the individual’s incentives are pretty much aligned with the company’s — grow the product line revenue for the company and grow their own experience and credentials.

Wind the clock further forward, and driven by the company’s successes new competitors will enter the market, or existing competitors will challenge the company’s unique advantages. Over longer periods of time, the market also shifts — expectations change, value perception changes, technology enables and challenges incumbents. At this point it becomes essential for a company to be able to execute strategic moves. A strategic move often requires a company to sacrifice something in the short term to ensure long term value.

Here comes the problem however… At the point the company needs to be able to make strategic moves, it finds a high level of internal resistance from its managers. The resistance is understandable — their incentives are to keep growing their individual areas of responsibility in order to create the most valuable track record for future opportunities. Efforts to reposition the business become hampered by resistance and political posturing within the firm. Thus we define the term Political Debt to represent the rigidity built in to the organisation over time which acts as a force against business strategy. It is this political debt, and not sheer organisational size, that most hampers incumbent giants being challenged by nimble startups.

A dogmatic leader may be able to navigate this political debt and still come out ahead — Apple Inc and Softbank are two examples that have managed to outwit political debt and compete as new entrants and incumbents alike. However, it is questionable if this is a repeatable strategy, or whether these are simply outliers. So what other options do the company’s owners typically consider?

1. Spin Out
2. Strategic Change Consulting
3. Compensation

I’m sure there are other related options and combinations, but let’s take a look at these in more detail.

Spin Out

In a Spin Out, the objective is to cast out the products & services that cause the most debt, in return for immediate liquidity and an ability to focus on strategic change. The major difficulties will be finding a buyer for your crown jewels, while retaining enough cash flow to navigate the turbulent times ahead as you transition into your new growth business.

Strategic Change Consulting

As is to be expected, wherever there is pain there are consultants willing to help you with it, or at least get paid for trying to help you with it. The big consulting firms specialise in ‘blame for hire’ — in order to purge those that are holding you back, but retain credibility with those that remain, the consulting firm will come in and be the face of redundancy, reorganisation and strategic new directions. Except that most people see through this strategy and the remaining officers still retain the blame, and the political debt is often pushed further down into the organisation, or those that step-up take create even stronger politcial debt as they seek to consolidate their opportunistic career rise.

Compensation

Providing adequate compensation to managers whose CVs and ‘experience equity’ may be challenged by the changes your company needs to undertake will likely be a costly affair. The manager will look (optimistically) project forward their potential lost earnings and quickly seek to jump ship in order to consolidate their current position — leaving you with your major source of cash-flow needing a new manager, yet still needing to make your strategic change. Good luck with that.

Alternative Plans

Technical Debt is a similar concept, whereby the code base of a large software project becomes more and more unmaintanable over time.One way to avoid technical debt is to refactor frequently, making sure to purge messy and seldom used code, create better reuse and cleaner architectures of frequently used parts and generally ‘housekeep’ the project. Taking parallels from this, one answer to Political Debt is to avoid letting it build up in the beginning. To achieve this you need to frequently reorganise, recruit, and encourage staff to leave and return often — creating a kind of Alumni effect.

The benefits of this approach are:

1. Create frequent career opportunities for your rising stars. Rather than being stuck beneath a glass ceiling or waiting for incumbents to retire, your rising stars can move into stretch roles more easily.
2. Welcome outside ideas and experience brought in by your returning alumni.
3. Stay nimble and poised to capital on new growth opportunities.

Conclusions

As nefarious and well known Technical Debt is, Political Debt has yet to be commonly recognised as an issue. Learning to spot it growing in your organisation, and formulating strategies to deal with it early on will be strategic assets to any growing organisation. Stay nimble, refactor your organisation frequently and allow your company to grow without becoming slow.