Hacking capitalism with capped returns

This post is an exploration of the idea of capped returns which we’ve been talking about and experimenting with in some of our Enspiral businesses for the past few years.

Loomio has just completed the first significant capped return investment with external investors using redeemable preference shares and Enspiral Dev Academy is in the process of following suite.

It has a relatively long preamble so feel free to jump straight to the details of capped returns.

The problem: Money is eating the world

I love business. It has been a driving force for progress and the source of much to be grateful for. But our current model of capitalism is voracious and knows no bounds.

Capitalism was useful for a time but it is now maladapted to our current environment and we need a better system.

The current economy must grow to survive

The gravitational pull of our financial system is toward growth. Success is not defined by making profits, but by growing the size of those profits over time.

Imagine you run an investment fund, looking after people’s retirement savings. You naturally want to do the best you can for your clients and and earn bonuses. Say you have two investment opportunities – one which is profitable but static and one which is profitable and growing. If both are equally risky, which do you choose?

Now imagine you are running a publicly traded company which is profitable but steady, and there is someone who wants your job and has a plan to grow the company’s profits. Who do you think the directors and shareholders will choose?

This is a very simplistic view of a complex system, but it highlights one of the maxims of our business world: failure to grow is failure, full stop. At the level of an individual company or investor this makes a lot of sense, but at a systemic level it is an awful idea.

Weevils, Cancer and Tyrants

These metaphors may seem overly harsh but I think they highlight some of the core reasons why our current financial systems aren’t working for us.

When you can’t see the barrel for the flour

If you put a few weevils in a barrel of flour and seal the lid they will eat, shit, and reproduce. The population will grow exponentially until the flour is gone, and all that will be left is a barrel of dead weevils and crap. This is the logical conclusion of exponential growth in a closed system.

Weevil

This isn’t because weevils are evil or have a bad design – it’s just that they evolved in a different context, where there is always another barrel of flour to find and no attempt is made to maintain a steady population in the same place. In the wild, by the time the weevil’s ancestors return to the original barrel other organisms have had time to turn the shit back into flour.

Similarly, our financial system evolved in a different context to the world today. As a framework it is only a few hundred years old.  It was the 1800s when the modern corporate form started to resolve. The human presence on the planet was much sparser and we were so deep in the flour we couldn’t see the barrel.

It isn’t surprising that the system normalised limitless growth.

Going Rogue, the natural way

One characteristic of the natural world is that while organisms often compete with each other they nearly always act in ways which support the health of the whole. Those natural experiments which were detrimental to the whole were mostly selected out as evolution stumbled upon a realisation that became encoded into our collective genetic intelligence, “Oops, crashed the ecosystem. Better not do that again“.

When you’re working on a timeline of billions of years that’s a fine strategy. But for a small bunch of humans running experiments over centuries, a considered approach might be more appropriate. Luckily, we can learn a lot from these natural experiments and I think the story of cancer is instructive.

A multicellular organism is a carefully choreographed dance between trillions of cells (roughly 1 trillion cells per kilogram in a human). Cells grow, reproduce and die.

When the DNA of a cell gets messed up, it can go rogue and start doing its own thing. In certain configurations of rogueness we call this cancer. It sucks.

Cancerous cells

There are a few patterns in cancer pathophysiology which are enlightening for the current topic:

  • Cells which mutate to reproduce much faster than normal and start outpacing other cells in the organism
  • Cells which start reproducing when the body doesn’t tell them to (self sustaining growth signals)
  • Cells which ignore anti-growth signals
  • Cells which ignore the signal to die (apoptosis signalling pathway) and effectively become immortal
  • Cells which grow where they aren’t meant to (metastasis)

This rebellion-like scenario becomes an undesirable survival of the fittest, where the driving forces of evolution work against the body’s design and enforcement of order. Wikipedia: Cancer
(emphasis mine)

A common trend in all these scenarios is that the cell’s health is at odds with the health of the whole organism. There are a few take-aways for an analysis of our financial system:

  • When companies are hooked on growth they will take individual action that is harmful for society as a whole.
  • The system of capitalism has been incredibly successful and as a system it is growing and improving faster than other systems in our society, particularly our political ones.

When killing the tyrant isn’t an option

There is a big difference between capitalism and cancer though: it is not just a few rogue businesses causing problems that we can try to remove. The whole system behaves like cancer and, while harmful, serves an incredibly useful function in society with many positive side effects.

In this way our financial system is more like a tyrannical general who does something useful like protecting the population, but enslaves the population in the process. Being enslaved kind of sucks, but just killing the tyrant isn’t much of an option.

The traditional approach to manage this dynamic has been to put constraints around business activity through regulation and to balance commerce with government. Instead of just a tyrant, we also have a queen who keeps the general in check and occupied on useful things.

Balance of power

In our world the queen’s power has been waning as the general’s rises. Over time, the constraints on business have been removed in the quest for bigger armies, wealth, and power. Instead of the general serving the population, it sometimes feels like the population exists to serve the general. That’s messed up.

In short,  business has become so good at growing that it has deeply corrupted our governments and media. It has weakened the critical constraints on growth, and our planet is starting to look like a barrel of flour full of weevils, headed for collapse.

The Solution: steady state economics

There are two paths in front of us – option A is to transition to a steady state system where the amount of total growth is (at least) balanced by the amount of total contraction. Option B is to collapse, when a system which can only function by growing hits the limits of a finite planet.

Option B lacks appeal so let’s not dwell on that too much. Let’s explore option A.

Here are some design constraints I’ve been exploring for possible solutions to help migrate to a steady state economic system.

  • No (initial) dramatic regulation changes – our political systems are too deeply captured
  • Cheap to start and experiment with
  • Easy to copy and improve
  • Provide better options for investors and businesses than the current system (else why would they switch)
  • Serve the commons – the current system can’t co-opt the good bits of the idea and keep working at odds with the health of the whole

Those constraints are kind of daunting, but I have found them useful to focus my thinking. In particular there has been a lot of work done by people looking at the fundamentals of our monetary system as the root cause of growth addiction. I think the theory is sound but the experiments or proposed solutions I’ve seen always fail one of the constraints.

The ideas below are not a comprehensive solution by any means, I think they show promise and are worth sharing as early stage prototypes needing a lot more work.

The Idea: capped returns

It’s pretty simple – Whenever investors or entrepreneurs receive equity in a business the total returns on the equity are capped. The returns should be fair but they do not result in a perpetual claim on the profits of the venture.

The implementation is pretty simple as well. Whenever a company issues shares, it writes a matching call option where it is required to repurchase the shares at an agreed upon price.

Sounds like crazy talk, right? Why would anyone do this kind of deal, and why would it matter if they did?

What happens when all the shares are repurchased?

A big party!

In this model a company has two types of shares – financial shares which yield returns until they are repurchased, and governance shares which only have voting rights and do not expire. This is pretty simple to set up in a company constitution.

When the financial shares are gone all that is left are the governance shares and now 100% of the profits from the venture are available for the organisation’s social mission. These profits are controlled by the (governance) shareholders through the company directors.

Without the financiers’ boot on their necks, the directors are now free to be much more creative with how they spend profits. They could invest in making their company the best possible place to work, or fund ambitious social impact projects, or invest significantly in the commons.

The company still needs strong governance and checks and balances to prevent things like inflated salaries or inefficient operations, but these are solvable through mechanisms other than owners optimising for profit.

How is this better for investors?

Capped returns aren’t better for all deals or investors, but they will be for some.

If you are trying to maximise financial returns, then a perpetual claim on profits is better than a capped return. You would only take the capped return if no other options were available.

This investment structure will open up deals for businesses which weren’t fundable before — good businesses with great financial prospects that could generate healthy returns but would never raise traditional equity.

Some of these businesses are launching in developing economies where liquidity options such as an Initial Public Offering or acquisition aren’t possible. Others are early stage ventures which aren’t shiny enough to return a Venture Capital fund in one go, so miss out on angel funding.

Others are impact driven businesses with no interest in being acquired or maximising the dividends they pay to shareholders. They exist to change the world through achieving their social mission.

Capped return investments can also dramatically change the risk profile of investing in an early stage business by agreeing on payment terms that are a share of revenue and look more like a capped royalty than traditional equity.

In short, these types of deals can be better for investors by opening up deal flows that were inaccessible before, and by changing the risk profile of early stage ventures. For investors who want to keep the social mission at the fore or invest in the commons, it is a much better model.

Why would an entrepreneur care?

Starting a company is not a rational act. It is an act of unreasonable conviction and passion, a belief that you can see something that few other people can, and that your vision is true. The art of entrepreneurship is balancing this unreasonable conviction with the humility to listen to the world and adapt accordingly.

Founders are deeply attached to the businesses they create. Many realise that they aren’t the people to lead the business over its whole lifecycle but they still care about what happens after they step away. They care about the people, the customers, and the mission.

Capped returns are a way of preserving that which is most dear while still accessing capital and receiving fair compensation for the sacrifice and value creation of launching a successful business.

Financial incentives matter, but with adequate access to capital to fund the next venture it really doesn’t matter if an entrepreneur makes 1 million or 100 million.

Enspiral first retreat

When I first started Enspiral I made a clear decision to give the whole thing away – to generate opportunities instead of money. It worked. I am now flooded with opportunities, and in a similar financial position to when I started. I’m very glad that I structured things that way, but as an entrepreneur it isn’t the sort of deal I would do over and over again.

When setting up Dev Academy my co-founder and I agreed on capped returns for ourselves and our investors. Time will tell how it plays out, but from my point of view it feels like a good balance between giving everything away and fair compensation.

How does this link back to steady state economics?

The biggest problem with our current system is that the growth path of successful companies very often end up with an IPO or acquisition by a listed company. No matter where they start, companies tend to end up in a profit maximising system with incentives to externalise as many costs as they can onto society. In this model, a few win while society loses.

The shares in those public companies never expire. They transition from being a vehicle for fair compensation to investors and entrepreneurs to becoming licenses to extract wealth from society that are sold to the highest bidder. There are dividends being paid out today on shares in companies where every person who took the risks and put in the capital to start it up has been dead for 100 years. The returns have become divorced from their original connection to meaningful inputs to the business.

If capped returns became the norm of business then the growth path of a successful enterprise would be to pay back its founders and investors early on in its lifecycle (first decade or two). Then there would be a big celebration as the business became a freehold impact venture with a binding mandate to serve wider society.

There would still be motivations to grow, but they would be far less than our current system. We would increase the net amount of energy going towards the commons and positive social impact.

We could make a decent dent in financial inequality, as investors would need to work harder to find new deals for their upcycled capital instead of passively living off ‘financial extraction licenses’. This post on the founding story of Ford has more thoughts on the relationship between perpetual returns and inequality.

Reaching Scale

**Warning, speculative thinking ahead**

Building a small ecosystem of capped returns is all well and good, but it won’t make much of a difference in the grand scheme of things. This idea has the most potential for impact if it becomes the new norm and displaces indefinite returns significantly – maybe entirely.

To do this, it would need to move from niche ecosystem to wide spread movement, similar to the alliances around climate change and other major social movements.

It would be easy to create a mechanism where a company’s constitution mandates that its surplus is either spent on the social mission or reinvested in capped return vehicles, similar to how the GPL locks IP into the public sphere. This would create an ecosystem of capital legally bound to a capped returns social impact model – a self-reinforcing engine of positive change.

Add in a commitment to transparency, like Buffer’s transparency dashboard, some basic workplace democracy, and a simple brand like Fairtrade, and you have the basis of a low-cost network uniting investors, entrepreneurs, staff, and consumers to out co-operate traditional business.

Combined with a sustained political movement to plug the costs externalised by businesses (a long battle in its own right), this would create a playing field where the capped returns business ecosystem has a the following sustainable advantages:

  • cheaper capital – capped returns fundamentally lowers the value of capital which means that it is a better deal for businesses needing investment. The compounding capital in the ‘once in, never out’ ecosystem can handle the supply side and make capitalism more efficient.
  • a stronger social contract – because the ecosystem is contributing to the health of the whole rather than destroying it

It would also be possible to play with other dynamics such as procurement policies weighted towards capped returns suppliers, or IP which is put into the commons but only accessible to companies in the capped returns ecosystem. Combined, all of these could create an economic ecosystem which is more effective and efficient than the current one. The good thing about business is that when you are better, you usually win.

At its core, reaching scale would be about building a broad-based movement around the immorality of an extractive economy, and demonstrating a viable alternative that people could participate in. The new economy could out compete the current one and would eventually displace ‘anti-social enterprise’.

The Inspiration

I first bumped into parts of this idea in 2012, in a blog post on revenue share royalties as an investment model in developing economies (which I’ve never been able to find again, please share if you can).

This prompted me to start hacking on some internal experiments with Enspiral folks which I called Fairy Gold. Since then this approach has influenced how I’ve been structuring deals, particularly Dev Academy.

In 2013, there were some panels at SOCAP talking about Demand Dividends, which are royalty-based financing with a cap. I also bumped into Luni from fledge who was doing capped returns as part of his impact accelerator.

Indie.vc made a splash in early 2015 when they launched a fund with capped returns (conditional on the founders not selling out), and I’d encourage you to checkout Bryce Robert’s thinking on the topic, which is quite different to mine: here, herehere and here.

Sacred Economics and the New Capitalist Manifesto have been pretty influential in my thinking and I highly recommend them.

What Next?

There are a lot of “ifs” in this post, and the idea needs refining and experimentation. The lifecycles we are talking about are relatively long, and it would take many people from different backgrounds collaborating over decades to see if this could work.

But the opportunity is huge. Our economy is one of the most powerful systems in human society, and it is currently causing a lot of damage. If we can shift the fundamentals of our economic system from extractive to generative, it would be difficult to overstate the impact we’d have on our world.

I am up for more experiments. The only deals I’m considering anymore are ones where the returns are capped. I would love to collaborate with anyone else who is exploring this space.

 

Hacking capitalism with capped returns

Loomio lessons – 90 day planning

Recently we had Richard Bartlett from the Loomio team pay a visit to Dev Academy and share some of the lessons they have learned around their 90 day planning cycle. The price of the workshop was a blog post and like Lannisters and Dev Academy graduates a developer always pays their debts.

Rich

it’s all about context

A lot of the context is held implicitly in the team and the quarterly planning cycle is an opportunity for the team to add to this context and create shared understanding. The 90 day plan is developed in the wider context of the teams direction which is articulated as purposestrategy and priorities.

Purpose (decades): your long term vision. For Loomio it is to
create a world where it’s easy for anyone to participate in decisions that affect them.”

Strategy (3 years): what are your strategic objectives over the next few years?
This is in flux at Loomio and a new iteration is currently being formulated. You can get a gist of it through these slides.

Priorities (3 months): the targets that the 90 day cycle sets.
The last priorities for the cycle that ended in June were

  • Capital: deliver US$250k in philanthropic funding by June 30
  • Revenue: generate US$2.5k in monthly recurring revenue for use of Loomio
  • Release: develop new interface to the point where all users can switch to it by May 15

Richard made the comment that the numbers in their targets were somewhat arbitrary and that regardless of whether they missed them, hit them or overshot them the value was in the focus it gave. For each new idea or task there was a very clear litmus test of is this a priority.

Inputs

3 weeks before the end of the quarter the team starts gathering data and and sharing it with the members. There are two main inputs into the planning session: a survey and reports.

Team Survey

This was last quarters survey and it particular reflects the particular dynamics of team Loomio where roles can dramatically change each quarter.

The retreat cycle of Loomio is retreat, offsite, retreat, offsite – with the retreats being 3 days in summer and winter and the offsites being one day. Richard commented that the survey felt more useful for the offsite cycles as the extra time in the retreat created more space for creating shared context.

Another noticing about the survey is that it was a useful tool for some people to switch out of day to day mode and start thinking about the big picture instead of jumping straight in the deep end of strategic planning.

Reports

Overlapping the survey process there is also a culture of writing reports to share with the team.

The coordinators write a collective report focused on the priorities for the last quarter specifically addressing what did we do and what did we learn.

Individuals in the group also write up longer form reflections on the work they did and any opinions they have about future directions.

retreats and Off sites

The Loomio planning process culminates in their quarterly gatherings. Lots of work goes on here but one of the key outcomes is the skeleton of a plan for the next 90 days along with coordinators tasked with implementing that plan.

We have a strong retreat and facilitation culture at Enspiral and Loomio is a team with a high density of strong facilitators so this part of the process is under constant experimentation. This winter retreat marks their 7th retreat together and retreat cultural tech is a topic for several blog posts.

Takeaways

The Loomio team have gone through four iterations of their 90 day planning process and I am looking on with envy from an Enspiral Dev Academy point of view. We have just enough time to put together a 90 day plan for this cycle, though the boat has nearly sailed.

While the planning adds value to a single venture I think the real opportunity is when multiple ventures sync up with their context sharing. Add in some digital connecting during the retreat process from lots of teams reaching out of their bubbles and it would change the collaboration landscape at Enspiral dramatically.

For more information about Team Loomio be sure to checkout their blog and wiki.

Loomio lessons – 90 day planning

Why I train programmers – Take 2

Some Enspiral folks were a little less than whelmed at my previous post about why I train programmers. And here I was thinking it all made perfect sense.

Screen Shot 2015-06-04 at 01.46.52 pm

Fortunately we are in computer land where undo and redo are in full effect so I will take another stab at it.

4159-education-blackboard

teaching is deeply rewarding

We focus quite a lot on rich working relationships at Enspiral and it is often as much about the people as it is the work. But when I’m teaching at Dev Academy the people are the work and it takes things to a whole new level.

Our teaching team gets to obsess about a small group of people for 9 weeks. What do they understand? What do they not? Where is their learning edge? How can we tweak things?

I get to watch as people go from the basics of programming to teaching themselves technologies I have only heard of. But more importantly they learn to lead, to give and receive feedback, to handle difficult conversations and all the human things that make such a difference.

It is hard to describe what it is like to watch students grow so rapidly, all I can say is if you get an opportunity to teach, take it.

It makes me a better programmer

Our main job as instructors is to help our students fall in love with programming. When I can do that everything else takes care of itself. And the only way to do that is to connect with what I love about programming.

Since I’ve started teaching I have spent a lot more time programming for fun. It turns out that when I connect with what I love about programming it makes me want to do it more, which makes me get better – queue virtuous cycle.

It’s a highly leveraged way to make an impact

The students from our first cohort alone will build far more cool tech during their careers than I ever will in mine and in one week we will be graduating our 9th cohort.

A teaching team of three can train about a hundred students a year so in a full year of teaching I can support about 30 people to enter the field. Teaching all the time is a bit much for me but if train I 10 programmers a year for the next decade the impact starts to add up.

We are also considering launching a trial bootcamp for Enspiral Founders Academy which is super exciting. The Enspiral community launched about 15 ventures in the last 5 years and I want to see if the Enspiral Academy community can 10x that over the next 5, I reckon we’ve got a shot.

it is a stellar way to grow a community

One big lesson I have learned from my time at Enspiral is about the power of community. There is substantial value created by having a high trust group of people who are interdependent and spend time working on projects together.

With Enspiral I used commercial contracts as an excuse for people to build relationships with each and this worked pretty well. But learning together is also a great excuse and is a fair bit faster. I am extremely excited about the community that is growing around Dev Academy, especially once we start adding some entrepreneurs into the mix.

This is just the beginning

I think I always feel like I am just at the beginning of something which probably says more about me than anything else. But true to form this does feel like just the beginning of our journey with Enspiral Academy. The programming bootcamp is reasonably stable and providing a foundation for the business and the next six months is about playing with some scaffolding to see what might grow up along side it.

Why I train programmers – Take 2

Why I spend my time training programmers

I was recently in Gisborne talking to folks about IT education and came up with one of the clearest explanations about why Enspiral is focusing on training programmers and launched Dev Academy.

DevAcademy-5250

It’s all about the economics

I found that it’s pretty easy to run this presentation with only a whiteboard, you just need to remember a few numbers.

How much money do you think New Zealand made last year?

It was about 60 billion dollars, $60,000,000,000 NZD. Less than some countries, more than most (we were number 57 in the world or 36th per capita).

How much do you think Facebook made last year?

It was about 17.5 billion NZD (12.46b USD). Nearly a third of all of New Zealand’s exports.

What about Google? That would be 92 billion NZD or a New Zealand and a half.

Apple? Just 257 billion NZD – four New Zealands.

How big do you think the global IT sector is worth?

Gartner reckons it is about 5.32 trillion (3.8 trillion USD) in 2015. That’s about 80 New Zealands.

IDC estimated that it will be about 7 trillion (5 trillion USD) by 2020. That’s nearly 2 trillion NZD of new business in the next five years. Another estimate from IDC picks that there will be 1.8 trillion NZD growth from just the Internet of Things sector.

If companies from New Zealand earned just a little piece of that it would change the life of everyone in this country. It’s definitely not easy and lots of countries are trying to do the same thing but it is absolutely something we can do.

Whether I was speaking with high school students, experienced business folks, community members or social activists this economic story worked pretty well at getting peoples attention and prompting folks to ask more about this “programming thing”.

I would then go on to emphasise that programmers are only a small part of the puzzle of launching a successful IT business and that lots of other skills were needed.

Why I spend my time training programmers

Self determined salaries

We have recently finalised a round of self determined salaries at Dev Academy and it was one of the most effective and powerful experiments in self management that I’ve experienced. 
freedom_2_by_sevCANNImage Credit

The Problem

The default setting in most organisations is that salaries are private and negotiated directly between an employee and a manager. The information asymmetry helps funnel power up the pyramid and this also results in people who are good at negotiating getting a better deal than those who aren’t.

Ever since first reading Maverick I have been struck with the idea of staff having the ability to set their own salaries. Stumbling across the The Morningstar Self Management Institute in the early days of Enspiral and reading about their work in the space locked in my commitment to self determined remuneration.

This was really easy when we were just a collective of contractors and everyone would set their own billable rates – if customers were happy to pay that rate then it must be good enough. Even when negotiating rates for internal work it was along the lines of “What do you think is fair? Well let’s do that then”.

But fast forward to the end of 2014, Dev Academy had just turned one and when I reflected on our remuneration process it was obvious we had unconsciously slipped back into old habits. Rohan (my co-founder) and I had agreed upon compensation levels with each new hire as they joined the company and traditional power structures and information asymmetries were starting to emerge.

This was yet another reminder for me that self-management processes need clear definitions and constant reinforcement.

For example, while everyone in the company was onboard with the idea of financial transparency we hadn’t put energy into making our remuneration data easily accessible so the only way for a new person joining the team to find out how much everyone was being paid was to ask each person individually or trawl through our xero account. As you can imagine this didn’t happen too much.

So we fixed things.

our Process

Getting started

The first step was writing up a document [extract below] outlining the thinking behind self directed salaries and passing a Loomio decision to try it out. We established a remuneration team to facilitate the process and act as an initial point of contact to help point people in the right direction.

Individual round

We each filled out a remuneration template and the REM team updated a central spreadsheet while acting as a sounding board when asked. For folks who needed extra support someone from the REM team would sit down and work through the details with them.

Feedback

We collated the salary data and normalised it for time (e.g. how much would this person be paid if they worked full time for a year). This helped us compare apples with apples and made it easier to tackle the heart of the problem which was how much should we pay this person compared to everyone else.

This data formed the heart of an anonymous survey which we sent to everyone in the company with two questions for each person.

a) What do you think of this salary: too high, too low, just right or no opinion?
b) Comments?

We shared the responses with everyone the day before our weekly meeting the next day went through a facilitated session to collectively process the information. This took a fairly simple form of

  • Setting the tone for the session and emphasising the delicacy and importance of this work.
  • Going around the circle with each person talking through their thinking behind their suggested salary and their thoughts and feelings about the anonymous feedback.
    • The feedback for that person was projected on the wall before their checkin to provide a shared context
    • The person opposite in the circle was responsible for looping back what they had heard to shake out any initial clarifications
    • After the looping the circle was open for comments and responses from the whole group

This was an amazing session that helped clarify our understandings of each others roles and was a valuable part of building our culture.

Lock it in

After the “digesting feedback” session we had a few days for people to reflect further and then had a cut off point at the close of business on friday to lock in the compensation levels.

The main points of this were

  1. You were free to ignore or incorporate the feedback from the previous session as you liked.
  2. There was no one who would approve your salary, what you asked for is what you got.
  3. If there were any disagreements on monday it would be handled through our
    conflict resolution. (There weren’t any)

Those final two points where Salaries are approved by default and exceptions are managed by a peer initiating a conflict resolution process are the real magic in the system. It is stepping beyond a company where you have a lot of influence to a company which you actively control.

It’s all about the culture

I have tried lots of experiments over the years to help people realise a sense of ownership and empowerment and this was definitely one of the most powerful. At the end of the day setting salaries is pretty common sense stuff and when you give people all the information they will make common sense decisions.

It definitely requires a strong sense of trust amongst your team and a willingness to give and receive challenging feedback. But if your team isn’t up for that then helping them get into a position where they are should be your top priority.


[Extract from the initial document outlining the process]

Principles

Self Determination individuals set their own pay which colleagues provide feedback on but the ultimate remuneration decisions rest with the individual. Significant differences of opinion are resolved by our conflict resolution process.

Transparency – all compensation packages are visible to everyone in the company in a simple and accessible format.

Risk Adjusted – if a staff member puts some of their compensation at risk by deferring payments and accepting Fairy Gold instead of cash then they receive a fair compensation for that risk.

Intrinsic Motivation – we eschew individual performance bonuses and rely upon people’s intrinsic motivations to do a good job. Any performance bonuses are paid out across the whole company.

Adjustable – Individuals are free to adjust their remuneration at their discretion (e.g. if the type or amount of work they do changes) but are required to update their individual agreement at least once per year.

Trust & Integrity – are at the heart of Dev Academy but especially present in the work of setting compensation levels. We assume that each person is striving for the fairest outcome they can envision for themselves and their colleagues.

Self determined salaries

Variable Contributions at Enspiral

Enspiral was built on some pretty simple ideas. Some were there from the beginning, others emerged over time. A few were only obvious with hindsight.

Filter for values then trust people absolutely.
Decentralise money, information and control.
Put the relationship before the deal.
The community carries the business.
Do what you love, find someone else to do the rest.
Use rich information systems to make collaboration easy.
Easy to join, hard to stay.
and lots more.

None of the ideas were particularly unique or revolutionary but it was their unique blend that I found useful. All of them were inspired by ideas from somewhere else, some of them were blatantly copied. This post outlines one of the latter: Variable Contributions.

everything-is-a-giftImage credit: David Joyce

Our financial model was very simple from the beginning. We were a group of programmers who would band together on contracts. 20% of our revenue would go to the collective, 80% to the contractor. It would have been much easier if Cobudget had of existed back then, instead I would just talk with people and then decide how best to spend the 20%.

20% was a pretty good number. For folks coming out of traditional employment it meant they could charge clients lower rates and get paid more than their old salary. For people coming from contracting backgrounds it felt like a fair margin to pay to the collective for winning the work. It also gave us a reasonable amount of money to fund the core.

When we transitioned into a collective of ventures we went with a similar model and had our services businesses (Legal, Accounting, Programming/Design) contributing 5% of their revenue to the Enspiral Foundation.

But there were also issues. For independent contractors who had their own customer base and wanted to join Enspiral, contributing 20% was a big hit. Or if someone was heavily discounting their rate because a client didn’t have much money then it didn’t feel right either. Over time the 20% started to become a barrier to collaboration and occasionally felt like an unfair tax.

So we changed it. I had read about Graniterock’s short-pay idea in Good to Great years before and it was a direct inspiration for our next step. At Graniterock when they sent customers an invoice they would have a short note along the lines of

If you are not satisfied with any item on this bill for any reason,don’t pay us for it. Simply scratch out the item, write a brief note about the problem, and return a copy of this invoice along with your check for the balance.

This acted as a strong feedback mechanism for identifying problems and improving quality. People get pretty motivated when a customer decides not to pay. You can read more about some of their thinking in this blog post Just Say Yes.

The solution we went for was simple and had a powerful effect on our culture:

  • A venture sets its own contribution rate to the Enspiral Foundation and can change it at any time. 5% of revenue is common but each company creates its own formula.
  • An individual contractor working through Enspiral Services contributes 20% by default. They are free to change it on an invoice by invoice basis and only need to notify people of the change.

We trialled variable contributions for 3 months in August 2012 and there was a general sense of ‘scary in a good way’ when we made the decision.

variable-contributions-loomio

I think it was one of the best things we ever did. People’s relationship with financial contributions to the collective changed dramatically. It was no longer something that was done to you. It was something you chose and if you didn’t think it was fair then you could just choose something else.

If people or companies dropped their contribution rates it would often solicit a response from their peers. Were they hurting financially? Did they not value the collective? Could we do more to help them?

New cultural norms emerged. People in Enspiral Services often now contribute 5% when working on internal contracts for our other ventures. Also in Enspiral Services, we started to send 1/8th of contributions back to the team that people were based in. We used tracking codes in Xero to fully automate the contribution process for contractors.

But ultimately it was about trust. It feels like we spend so much time in our professional lives protecting ourselves from each other. Our whole legal system is designed to stop people hurting us. There is real power in a group of peers saying to each other “I give you the power to hurt me”. It leaves an unmistakable impression on the culture and I think we are much better for it.

Naturally variable contributions are no panacea but they are worth considering for anyone designing organisations, particularly ones with membership based financial models like Enspiral.

Variable Contributions at Enspiral

Book Review: Exponential Organisations

exponential-organisationsOne of my goals for this year is to average a book a week and share my thoughts on the more interesting ones. Despite my mother’s somewhat malicious suggestion to start with War and Peace I actually kicked off with The Warrior of Rome Series while travelling through Italy. I found Historical Novels a great resource if you are that way inclined.

But here is the first serious book of the year Exponential Organisations by Salim Ismail.

Summary: Lots of good ideas but steeped in an outdated value set of the role of business in society.

The key concepts were grouped into two acronyms of SCALE and IDEAS

Staff on Demand: contractors and casual workers instead of full time employees.
Community & Crowd
: building large online communities around the venture.
Algorithms
: automate everything, the server runs the business.
Leverage Assets
: don’t own things, use other people’s things.
Engagement
: make user experiences fun and addictive.

Interfaces: simple ways for people to find what they need in the system. 
Dashboards: manage large amounts of data through real time dashboards.
Experimentation: make it cheap and easy try lots of things.
Autonomy: create the space for people to choose their own adventure.
Social Technologies: help people connect with each other.

Coming from folks behind the Singularity University it had a good overview exponential growth, particularly how unintuitive it is for people to grasp. Despite being quite predictable it always seems to take us by surprise.

LakeMichigan-Final3Source: Mother Jones

I often evaluate books by the ‘how many ideas do I want to copy’ metric and Exponential Organisations had a reasonable amount of this. It was first recommended to me because of the amount of case studies and  whether it was reading about TED scaled to 12,000 events over 5 years or how Github became the backbone of the open source community there were lots of useful nuggets.

Despite that I found the overall language of the book quite toxic and embedded deeply in the business mentality of ‘if it is big and makes money it must be good’. Ugh. I think the heart of my distaste was that a lot of the strategies had the explicit intent of externalising costs from a business onto society and a lot of the case studies celebrated companies which had done that well.

For example, in the Staff on Demand section a case study was given on how Allstate (insurance) ran a competition on Kaggle with a prize of $10,000 to rewrite their claims algorithm. The winning entry had a 271 percent improvement which was estimated to save the company tens of millions annually. “Quite an interesting ROI” as the author put it.

Kaggle describe themselves as “harnessing the ‘cognitive surplus’ of the worlds best data scientists” which makes me wonder who is paying for generating that cognitive surplus if Kaggle’s customers aren’t. Whether it was Uber or Airbnb, time and time again the book highlighted companies which had grown very fast and made their shareholders very wealthy by externalising costs onto society and clipping the ticket on virtual marketplaces.

The case studies were biased towards a ‘growth is good’ mentality whether the thing growing was cancerous or beneficial. I guess that is fair enough given the topic of exponential growth but I would love to have seen more discussion on the consequences and downsides of these types of organisations.

I suspect the authors would say they are explaining a phenomenon that is morally neutral and can be used for many purposes. That this is a book on the techniques of sword fighting, not the morality of warfare. But just like sword fighting will lead in a certain direction I think a fair number techniques in this book lead to companies which steal value from society rather than create true value.

Despite that there are lots of practices which are just plain better and useful for anyone who is interested in making an impact. The book clearly describes a new breed of organisation which is pretty important to understand.

 

Book Review: Exponential Organisations

Mastermind: setting strategy together

One of the processes we have been playing with at Enspiral is how we set our collective strategy. A team of us ran the first Mastermind process to come up with our 2014 Enspiral strategy and we are just winding up our one for 2015. Teams within Enspiral are also picking up and adapting the process which is often a sign there is something in the idea.

Mastermind, set strategy together.Image by Maz Hermon

I initially had a strong aversion to setting a formal strategy for the network, it seemed much more important to focus on our culture and let the direction emerge naturally from people’s actions. However, I’ve found that the process can be a strong culture building initiative in its own right and having a formal strategy gives people context when they are making decisions in Loomio and Cobudget.

I came to the conclusion that it is important to hold the strategy lightly and realise it is just a snapshot of the network’s intentions, but it’s better to have a snapshot than nothing.

The top level process is pretty straight forward.

  1. Gather as much high level information as you can and consolidate into a digestible format to share with the whole group.
  2. Focus on divergent thinking through individual and group processes to build up a list of possible strategic directions.
  3. Look for common themes and build a consolidated list of possibilities, use dot voting to prioritise the most important.
  4. Have a small group use this information to create a proposed strategy and run through a normal Loomio decision making process to finalise it.

Gather Information > Divergent Thinking > Convergent Thinking  > Summary & Approval

This has lots of elements I like such as

  • An iterative nature to give ideas time to develop
  • A balance between whole group, small group and individual activities
  • A balance between creativity and focus

But I also see it as just a baseline and that the true power of the process lies in future iterations. For example, at Dev Academy we are experimenting with a two step approach of

Individual Mastermind:  each team member is invited to think about their personal strategy and direction for the year.
Regular Mastermind:  we collectively think about the team as a whole with the additional context of  each person’s strategy and intentions.

I really like this adaptation as it doubles down on culture building and also builds a stronger personal reflection process. Personally, I found it really useful to sit down and think about where I should be heading and how best to communicate that with others. It was that process which led me to start blogging again.

I can imagine a truly fractal process where each team at Enspiral has a clearly articulated strategy which can provide context for our whole of network thinking. By having a similar name and process at different scales of organising we reduce the cognitive load for participants and we can also reduce the transaction costs for engaging by automating the information systems.

It also evokes the possibility of truly living strategies that respond to change in real time. At the moment a full network strategy is quite expensive in terms of engagement. Would it be possible to design processes so that the strategy evolved through lots of small alterations as the context changed? Could we build a strategy that is a real time reflection of our collective intent that mirrors a traditional swarm?

Currently we orient ourselves with information from other people’s actions and crude, somewhat outdated snapshots of our collective intent. That’s analogous to swallows bumping into each other to correct their individual paths using images their eyes collected 2 hours ago. What if instead we could orient ourselves based off the accurate, explicit intent of individuals and teams of all different sizes?

If we make forming, updating and sharing our strategic direction cheap enough and ubiquitous in an organisation I think we could unlock elegance that would make the swallows envious.

Here are some of the documents I’m working with if anyone feels like hacking on the process and I’d love to hear of any similar work going on.

My personal strategy
Individual Mastermind Template
Review of 2014 Mastermind Process

 

Mastermind: setting strategy together