Thesis: The highest ROI for a founder is investing in the productive capacity of their people.
Mechanical advantage in motion physics is the quantification of force amplification through using a tool. The concept explains the impact on weight handling from a pulley to the amplification of force achieved through gears on a bike or in a transmission. It is expressed as:
The simplest visual of these forces working is a circular or continuous lever like a screwdriver where the radius of the handle exerts force amplification of the hand through the connection to the radius of the blade… the wider the handle, the easier it is to screw in or out an implement.
People need leverage to elevate into higher productivity
People are the greatest asset in any software company. The costs they represent make up the lion share of total expenses but thinking about the impact of people as an expense is reductionistic! People are critical to the proper development of any software company. The formula for leverage can help illustrate this fact. The people in a software company are the force exerting object, the output capacity of the software company is the force impacting object and the mechanical leverage is the degree to which the people are supported in their productive capacity with technology and training. The founder’s goal should be to maximize the mechanical leverage to drive profit through more efficient output capacity.
A founder’s past prevents viewing leverage as a worthy investment
Founders often ignore the impact of investing in their people. This is due to a similar anchoring effect that blinds them to the potential. Most founders have scrapped and hustled through the early days and are well acquainted with spending hundreds of hours learning things ineffectively. In some cases, this is not smart, but often it makes sense: they are trading what would be a leisure hour for a learning hour. For example, watching a Khan Academy on reading financial statements while cooking. Employees, however, aren’t driven by the same founder equity chunk to make that trade off a wise decision. As a result, the idea of spending $7,500 to send an employee to a class on reading financial statements feels extremely excessive.
Similarly to training, founders often ignore the impact of better systems; and more premium versions of the systems they use. This is particularly ironic given that these companies are making systems for other businesses to buy! Once again anchoring is the distorting force. Founders have often scrapped by with the free option and dealt with the resulting lack of productivity. This is because they don’t value their own time; hence, the desire to optimize it doesn’t appeal. We too often sit in this tension without recognizing the benefit we would receive even if just to our personal productivity.
The logic behind the disfunction is the low opportunity cost of an hour in the early days
Part of this systematic underappreciation of the founders own time comes from logic. In the early days it is hard to know where an application of hours would yield the most benefit. Also, the early days often have a lot of downtime. Founders are waiting for deliverables from vendors, models from accountants, documents from lawyers, etc. etc. This waiting can blind them to the true value of their time. The perceived opportunity cost of the time is zero… but this is not true.
In a prior company I fell into this trap. We had a support ticket system that cost $49 per month per agent. It seems outrageous looking back on it now, but I could not imagine paying $49 per month for fifteen employees. As a result, the entire company shared one account. This meant that one team member filtered and routed tickets to the broader team by email. This “worked” in the sense that it seemed to save $600+ per month, but the responsible employee quickly became wholly dedicated to performing a service that could have been replicated by a $600 expense. In addition, and more importantly, the employee’s routing activities suffered from mistakes typical to human processes. After we recognized this and upgraded, everything got better: our ticket turnaround first response fell from 4 days to 1-hour, full resolution fell from 14 days to 3 days, customer satisfaction improved from 6/10 to 9/10, and – best yet – the team’s feedback was that the entire process of supporting employees ‘felt’ easier. This later benefit is hard to quantify but looking at our pro forma we got away with 2 less new hires than the team was advocated for while improving results: that translates to a 10-15% productivity gain WHILE improving results.
Introspection and self-work are key to the founder seeing leverage as an investment opportunity
The experience of investing in my people to discover the exponential impact it had on cost, quality and output proved catalytic in my thinking on people leverage. Since so much of a software company’s process is people centric, investing in people is a key activity for any founder. This starts with the difficult task for any founder: evaluating self. The primary barrier to investing in the proper tools, training and support is the founder’s perception of ‘ought.’
We often think how long something ‘ought’ to take or how a project ‘ought’ to have gone. But we fail to recognize two essential things. First, the founder’s capacity to spend a leisure hour exceeds that of her employees. This means founders will have much more time to throw at the problem of ignorance or inefficiency. This additional time has a compound effect. Not only does it tend to perpetuate inefficiency (‘if I can do it, then why can’t they’) but it also cheapens the perceived marginal cost of an hour.
If a founder is making $100K per year, then their 40-hour work week rate is $48 per hour. However, if the founder thinks of themselves as working 100-hour work weeks, then this rate drops to $19 per hour. Most of us won’t do the math explicitly, but you can guarantee that your subconscious is doing that math. Second, the founder’s ability to determine ‘ought’ on the fly is fundamentally different than an employee. Let’s say the founder is enmeshed in a project to create a pricing framework and quoting tool that spans the organization and accounts for all the permutations of a potential engagement.
It is easy to mentally envision what that could look like from a benefit-to-the-organization perspective, but in practice it is not an easy task. The devil is in the details of execution. But the founder has the trump card. Hence, when amid execution, the founder can decide to change up the requirements and make strategic short cuts. This latitude, even if granted to the employee explicitly, will never exist in a similar way. As a result, the founder can regulate the time needed to complete a task while an employee often cannot.
Getting past ‘ought’ and viewing the capacity of your team as a function of the experience of your team members and their access to tools, training and support is a prerequisite to any successful founder journey.
Selecting the right leverage investments
Once the founder has evaluated the distortion their own work styles have had on their ability to see mechanical leverage as a valuable decision, then the founder must select the right leverage investments to make. Widespread and open-ended surveys will yield ineffective results. The founder must look for ways to widen the handle of the screwdriver. For this, I like to think about the problem in four dimensions: time, quality, communication, and memory.
Time related leverage has the effect of creating more ‘time.’ This means the employee (or founders) input of an hour has a greater output. Time leverage investments could include faster computers, faster internet, more reliable systems (i.e., eliminating downtime), templates (excel models, word documents, forms, etc.), and the like. All of these have the common impact of propelling the time of the team. Time leverage can also be achieved through training. Effective cross training of a team means less reliance on subject matter experts and, therefore, less bottlenecks in the company. Be wary, however, of the inverse relationship between cross training and quality failures. A dangerous team member is one who thinks they know enough but are in the capable novice zone.
Quality leverage investments have the effect of minimizing repeat or repair work. These investments are usually required to bolster the productivity gains driven by other leverage investments through preventing damage. They can include investments like templates (just like above), quality manuals and documented processes, structured review of outputs (particularly of cross trained employees), and the like. Quality can also be impacted by training as well.
Communication is a key area for leverage investments. The communication problems in software companies are legion and grow exponentially with cross training and employee growth. Interestingly, I have noticed communication breakdowns to occur more frequently as the communication frequency increases alongside other leverage investments. That makes communication breakdown a byproduct of productivity gains. This dynamic can tank a growing company. Customers get missed, vendors feel abandoned, the message is muddled… things get bad. So how should a founder invest in communication leverage? Training, training, training. Tools often promise better communication or more extemporaneous communication, but the reality is that unless the team is encouraged to slow down (ironic given the productivity investments) the problems will continue.
The last dimension is memory. A company’s memory is how it improves. The memory is also often key to retaining value. Software companies store value in contracts and contract control is often woefully lacking in companies. Customers frequently operate under a hedgerow of the best of either remembered verbal ‘promises’ or contracts on a clause-by-clause basis. This means the company must invest in memory to combat this problem as well as enable efficient onboarding of new team members, transferability between employees as departments grow and shift, among other benefits. Investing in memory retention typically involves some form of compliance training as well as easy to use digital retention.
The power of leverage is that it elevates your people
These four investment dimensions drive leverage. They provide a framework for a founder to consider the areas they can focus to bolster their team and drive better results. Ultimately, the power of mechanical leverage in a people context is liberating the mundane of the human input into its creative zenith. It liberates people in their giftings to be fully actualized in their calling. This liberation is a blessing; it is a natural good. It benefits the business but also the employees. No one wants to do a job that feels inefficient.
This article is an extract from a case study we published recently published titled “Software Companies Require Great People to Build Them“, written by Dougal Cameron that shares some of our experiences building startups and journeying towards meaningful exits.