I had a chance to catch up with my friend Rick while I was in Seattle. Since we go back a long time, we had plenty of things to talk about. One of the things that we touched on was his time with Microsoft – he worked there on software development starting in the mid-80s. He said that he thought that one of the primary drivers of Microsoft’s success was the HR department during that period – Rick felt that the quality of people there had been extremely high. My observation at the time was that in hiring people, they were skilled at identifying quality rather than just looking for conformance to criteria as a proxy for quality. So even though I don’t often look at the HR department as a driver of innovation, I think that in this case it probably was.
Right after our talk, I was on the plane back to Brisbane where I finished reading The Drunkard’s Walk: How Randomness Rules our Lives by Leonard Mlodinow. Towards the end of that book (which is very good and well worth checking out), Mlodinow talks about the role of chance in the success of Microsoft in the middle of a discussion of whether or not CEOs really deserve all of the credit and blame that they get the outcomes their firms experience. One of the points that Mlodinow makes in the book is that the vast majority of variation in profits that firms experience fall well within the normally expected range of random change, and that consequently, our tendency to credit CEOs with the relative success or failure of their firms is not very well-grounded in evidence.
I mostly agree with this angle, and it’s one that I try to get across in my classes. It is one of the logical consequences of viewing the economy as an evolving complex system. Which ties in to another issue that Rick & I discussed – power law distributions. Power law distributions are commonplace in the economy – two key examples are the distributions of wealth and returns to innovation. When I’m teaching this idea, the ‘so what’ question is fairly important. One natural conclusion is that people should be a bit more humble in the face of success, and a bit more persistent after experiencing failure. I also gained an insight into this when I was talking to Rick. Mlodinow makes the point that a lot of business processes generate random returns, but that one strategy that you can use is to increase your likelihood of success by increasing your skill level, or the quality of your product or service. One way that you can do this is implementing the mid-80s Microsoft strategy – make sure that you’re hiring better people than everyone else. This doesn’t guarantee success, but it improves your chances. And in a complex economy, improving your chances is probably the number one management task. You’ll still face mostly random outcomes, but investing in quality definitely tilts the odds a bit more in your favour.