40%, 5x, And The End of Free Money

There is bad news accelerating in the job market. Well, it is good news for a sustainable economy, but bad news for the short-term economy. What kind of jumbled mess am I talking about? Here is a harsh statement that I have made throughout most of my leadership career: “Technology professionals are common, but the ones that can apply technology to solve a difficult problem are rare and priceless.”

Having been first a Chief Information Officer and then a Chief Executive Officer in an operating career spanning 35 years, I have always stood by this statement. But, as you might imagine, the statement plays differently at different times depending on a whole range of externalities that exist at that particular moment in time. In my view, what hasn’t changed in 30 years, is the reality that most people, including business executives, who do not possess computer programming (aka software engineering) or data analysis (aka data science) skills believe that those who speak mysterious computer programming languages and are not to be trifled with, lest they choose to work elsewhere. And yet, as people holding these titles have continued to be paid at the high-end of the wage scale, particularly intensified over the decade-and-a-half, some important realities are setting in that are fundamental truths. Allow me to explain the title of this article piece-by-piece, and then pull them together.

40%

It is a well-known fact—and I’m being charitable and conservative—that at least 40% of Information Technology project fail. And nearly every CEO, CFO, CIO and CTO of any experience knows that that is being generous. Projects to develop software; to create data lakes and data warehouses for better decision-making; to create automated efficiency; and to rejigger customer experiences via digital transformation are—in short – rarely on-time or on-budget and most often do not produce the intended results. Ironically, the more money and human resources executives throw at them seems to drive an inverse relationship to success. Almost as if the cliché of too many cooks in the kitchen might be true! In attempt to address these challenges, many brilliant consultants have developed software development methodologies that debate the merits of waterfall vs. so-called agile approaches. Additionally, software development and IT operations has been co-mingled into what is commonly known as devops in an effort at integrated responsibility. In a related space, the profession of project management has more and more woven itself into the realm of IT projects to drive increased accountability and performance. Mostly, this has produced greater visibility on project variances in schedule and cost.

I am not suggesting that efforts to drive a greater likelihood of IT project success are not worthy or important, quite the contrary. However, what cannot be denied is that these efforts are not new, that the rate of success is not significantly higher than it was one or two decades ago, and still at least 40% of IT projects fail. We’ll get to the reason why shortly.

5xers

As I have mentioned in my published book, Not Just In Sickness But Also In Health, truly great IT professionals are rare, just as are exceptional professional athletes. Not unlike a professional sports team, without a superstar leader who is usually playing offense, it is difficult to win against competition. I am reminded of this at the moment as my favorite NFL team had one of the league’s leading defenses and a horrible losing record this season. In the world of software development and data science, you will hear about people who are referred to as 3xers, 5xers and occasionally 10xers. It is not difficult to decipher the meaning of these descriptors, as they are intended to convey the relative productive and value of an individual compared to the average person working in a similar position. If we just settle on the rare 5xer, you can ask around, but I doubt you would find too many organizations that would even say that more than 1 out of 10 people on their software engineering teams is a 5xer. Using a bit of algebra, that means that on a team of 10 people, 10% of the team is doing about 35% of the meaningful work. Is the 5xer getting paid 3.5 times the average worker with the same title—not likely.

So, does the team need 10 people? If it’s 8 people or 5 people, and you are actually cutting down on the amount of rework having to be done by the average or lesser performers, you can accomplish as much or more with fewer people. Here is where the politics of headcount and budget and software methodology enter in. The information technology managers have embedded processes into their budgets over many years that separate true productivity of individuals from total headcount, leading to the carrying too little talent at too high of a cost. Over the past decade, the 1xers and the less-than-1xers have been able to move from one failing or unrealized project to the next company. This actually suppresses the development of the now more-highly-paid 1xer because they are not becoming expert in a particular company, product or industry. This, in turn, leads to a macro-churn that becomes a logical excuse for IT managers to say that they must increase compensation for IT professionals or lose them to other companies. Costs spiral up, productivity descends downward.

And here’s one more point I have made over the years that can really upset people: many so-called software or data engineers do not come into the workforce via a rigorous academic background. Rather, they get jobs based upon the title of their degree or certification. How likely is it that somebody who does not do well above the mean on standardized tests of math, logic and comprehension, or does not stack up well on their GPA, is going to end up being able to solve hard problems that have challenged others before them? It can happen for sure—and I have witnessed it on occasion—but is unlikely.

Free Money

While a subset of business leaders are involved in the intricacies of Information Technology fundamentals, nearly every one understand the need for capital. It’s pretty straightforward: either your business or the unit you run in your business produces more revenue than it has expense, or you are consuming capital. The consumption of capital towards the development of high-growth entities has been a religion over the past 10-12 years, as it was back in the very late 1990’s. Basically, if you cannot earn a meaningful risk-free return on your money, it raises the appetite for risk. In the evaluation if risk, then come the MBA’s who calculate net-present-values and terminal values, with few of them ever having operated a company.

When you stir high-growth, a projected gross-margin, and low-cost capital into the pot, you get an amazingly exciting witches brew that portends an explosion of capital returns for investors. But, as is plain to see in the public investment markets, if you change the money ingredient to move from close to free, to a mere 5% federal funds rate, the witches brew stops boiling. Why are we pouring more money into this pot if it’s not going to yield riches? And so, much quicker than most people can wrap their heads around, the capital starts looking for other ways to make returns. Board of directors, private equity and venture leaders, and operating managers of existing companies start asking, “Why are we spending money on things that aren’t producing more certain returns?” Heck, if we put our cash in short-term treasuries, at least we know we’ll have more money than we started with. And by the way, if the economy is not growing in terms of the actual production, but rather only in dollar terms because of the unit cost of labor and goods (i.e., inflation), then if we don’t start skinnying down our costs and increasing our productivity, we could end up in a world of hurt!

While it’s certainly true that software is eating the world and that nearly every company needs to drive through some level of digital transformation, there is a big squeeze on that was always going to happen. Do more companies need to automate sales, manufacturing and distribution activities? Sure, but the highest cost is people in most cases. Do technology companies need to get more efficient at developing platforms and applications. Sure, but the highest cost is people. Do the venture capital firms and private equity firms need to sort out their ultimate winners in current funds from those who just won’t make it this cycle? Sure, but the highest controllable cost is people.

Resetting What’s Important in Technology

If people are the most expensive part of developing useful technology, then how we think about people is the most important part of advancing future success. In simple terms, the way that companies will get better results and the way that technology professionals will do better work and have better jobs is the same. It’s called industry focus! We need to stop treating programming and data science skills as generically applicable rarities, but rather, as fundamental underpinnings of professional competency. Companies need to invest in and teach the information technology professionals about the industry and businesses they are in, and what the overall strategic and business objectives are. If you make them piece workers, then that’s what you’ll get. In order to make that investment, however, information technology professionals (aka employees) are going to need to make multi-year commitments to learning the businesses for which they are developing and integrating solutions. In other words, the technologists need to serve the business rather than the business kowtowing to the technologists. “Preposterous!” you say. I say that as the reality of 40%, 10xers and the end of free money starts to dawn on leaders in the current economy, those that straighten out this relationship are going to be the winners.

The reality of technology serving the business has always been the case, but we have lived through a period of distortion that did not enhance the alignment of IT professionals with the businesses they serve. I am confident that if business leaders and IT and data professionals keep in mind that they must foster a deeper understanding of the business for employees, we will get us back on track to driving massive business innovation through the application of technology.