Inefficiency Hurts at Any Scale.
I’ve been thinking about the impact of inefficiency on different sizes of organizations.
I’ve reached the conclusion that it doesn’t matter what size your organization is; inefficiency is a severe problem. This is because small organizations have fewer team members, and so everyone’s effort counts. For large organizations, there are so many people that even small inefficiencies are magnified.
A few days ago, Meta (formerly Facebook) laid off 11,000 employees, approximately 13% of their workforce. Elon musk cut 50% of Twitter’s workforce (~3,700 people), Stripe and Coinbase laid off 1,100 apiece, Snap another 1,000, and Robinhood cut 34% of its workforce.
This got me wondering. If Meta can still effectively run without the 11,000 people it formally had, were these people doing anything significant? I mean, assuming an 8-hour workday, that’s 88,000 hours of work per day that is not being done that previously was happening.
There are a few ways to reason around this.
Firstly, it could be that the memes and jokes about a lot of employees at the big tech companies, especially the non-codes, not really doing much work. They come in mid-morning, have lunch, attend a few meetings, and so on. Thus, if they go, the organization is entirely unaffected.
Secondly, it could be that there were a lot of initiatives that had not yet reached maturity that are being scrapped because they are either not a priority or they were not moving fast enough towards creating a product that could be shipped to the world.
Finally, it could be that all of these people were hired in the first place because there is some type of correlation between the stock value of a company and how many employees they have. The number of employees is an easy metric to track, and it can act as a proxy for how well a company is doing. Let’s imagine an investor who sees company X hired 10,000 new employees this year. It seems excellent. Obviously, the management at Company X is very bullish on the new products and services that are coming out, and this is a good company to invest in.
And thus, the stock price goes up.
From a management perspective, this may actually make complete sense based on their incentives. The CEO will typically have a significant portion of his wealth tied up in the stock of the company, and so will the rest of the senior management, and they will also have stock that vests over time, so the stock price is perhaps more important to them that the long-term profitability of the company.
So, if they hire 10,000 new employees in a year, with an average total cost (Salary + everything else) of $100,000 per employee, that’s $1B in cost per year or around ~$83m per month.
But, it may make sense for companies at the scale of the ones I mentioned earlier, whose market capitalization is measured in the tens or hundreds of billions. Spend $1b in cash, often using historically cheap credit, and then use it to grow the stock price by more than $1B over that same year.
In fact, even if it wasn’t as efficient, say that the stock price only grew $500m after hiring $1b worth of new hires, it may still make sense for the management to hire these people, because they are incentivized to grow the stock, not on being profitable. In the long term, these two goals may be aligned, but many individuals jump from tech company to tech company every few years, so there is little incentive to think long-term.
So, back to inefficient. A large company can still run with a significant portion of their employees doing nothing.
This is known as Price’s Law, named after Derek Price (22 January 1922 – 3 September 1983) “who was a British physicist, historian of science , and information scientist. He was known for his investigation of the Antikythera Mechanism, an ancient Greek planetary computer.” (Wikipedia)
The Antikythera Mechanism is a fascinating topic, and something that I want to write in-depth about in the future. Essentially, this was found in an ancient shipwreck that was at least 1,000 years ahead of its time. It’s the equivalent of finding a modern-day smartphone in the grounds of the Battle of Hastings in 1066AD!
Anyway, back to Price’s Law!
Price’s law says that 50% of the work is done by the square root of the total number of people who participate in the work.
Jordan Peterson echoed this in a lecture, saying:
“As your company grows, incompetence grows exponentially and competence grows linearly.”
This aligns closely with our discussion on the Pareto Principle (also known as the 80/20 Rule), and we can see that in full force at any office.
So, perhaps this means that in large organizations, inefficiency doesn’t matter because only a tiny % of the workforce is doing any meaningful and essential work. But the problem is, what happens if that small % of people leave? If the 5% that are doing 50% of the work leave, is there another 5% of the 95% left that do 50% of the remaining work?
Maybe, maybe not.
But this is why organizations can fail spectacularly rather quickly — you don’t need that many people to leave to become completely ineffective.
Unfortunately, it doesn’t get better in smaller organizations. It is easier to fill a small team (say up to 20-25 people) full of A players, but that comes with its own set of problems. If you’re a team of ten, and two people leave, you’re down 20% of your capacity, and you probably don’t have an easy way to fix that right away.
And, if you happen to have B or C players on your team, then the same issue occurs. You are too small to afford any inefficiency, unlike larger organizations that can handle that just fine.
A detailed discussion on how to fight inefficiency is best left to another time. But, I can think that the key components of this are a culture of excellence, the importance of hiring well, and a strong focus on process and monitoring.
