September 2020

High Output Management by Andy Grove

— A summary and review of Andy Grove's book, High Output Management.
High Output Management by Andy Grove

This book summary was originally posted on Abi Tyas Tunggal's Substack. Subscribe to Abi's blog for more summaries and insights.

Andy’s book is unapologetically almost a how-to manual, that kind of deconstructs the world of business into first principles. It’s like, “Here’s what matters. Here’s how to think about it. No one needs a degree.”

- Tobi Lutke, Co-founder and CEO of Shopify

Andy Grove escaped the ruins of postwar Europe and became one of the architects of Silicon Valley and the modern world as we know it.

Born to a middle-class Hungarian Jewish family on Sept. 2, 1936, Andy’s early life is summarized in Swimming Across:

I had lived through a Hungarian Fascist dictatorship, German military occupation, the Nazis' “Final Solution”, the siege of Budapest by the Soviet Red Army, a period of chaotic democracy in the years immediately after the war, a variety of repressive Communist regimes, and a popular uprising that was put down at gunpoint.

Heeding the word of an aunt who had survived Auschwitz, Andy joined the flood of refugees walking across the border into Austria in hopes of a life in the West. He arrived in the United States at 21, barely able to speak English, with less than $20 to his name.

By 31, Andy would earn his bachelor’s and Ph.D. in chemical engineering, work at Fairchild Semiconductor for four years, and write a textbook on semiconductors.

At 32, Andy joined Intel on the day of its incorporation as employee number three, following Robert Noyce and Gordon Moore from Fairchild. Working as the company’s director of engineering, he established Intel’s early manufacturing operations before becoming president at 43, CEO at 51, and chairman and CEO at 61.

During his tenure, Intel’s revenue grew from $2,672 to $20.8 billion. Andy also found the time to write a practical handbook and powerful management manifesto many still consider the best book on management.

Nearly four decades after it was first published, High Output Management has reached cult-like status and become a Silicon Valley staple. Leaders of highly productive teams re-read it, top venture capitalists give copies to startup founders, and every manager worth their salt devours its content.

The book’s core concept remains true:

A manager’s output = the output of their organization + the output of the neighboring organizations under their influence

As does the essential skill of creating and maintaining new businesses that can be summed up in a single word: managing. This is why High Output Management’s fans include:

  • Bill Campbell: Coach to Larry Page, Sergey Brin, Eric Schmidt, and Sundar Pichai at Google, Steve Jobs at Apple, Jeff Bezos at Amazon, Jack Dorsey and Dick Costolo at Twitter, Sheryl Sandberg at Facebook, and former Apple board member, CEO of Claris, Intuit, and GO Corporation;
  • Drew Houston: Co-founder and CEO of Dropbox;
  • Keith Rabois: Partner at Founders Fund, co-founder of Opendoor, COO at Square, and early employee at LinkedIn and PayPal;
  • Mark Zuckerberg: Co-founder and CEO of Facebook;
  • Marc Andreessen: Co-founder of a16z, co-founder of Netscape and Opsware, and co-author of Mosaic;
  • Ben Horowitz: Co-founder of 16z, co-founder of Opsware;
  • Brian Chesky: Co-founder and CEO of Airbnb;
  • Brian Armstrong: Co-founder and CEO of Coinbase; and
  • Ev Williams: Co-founder of Twitter and Medium.

Learning the basics of production

Your task is to create a cafe that sells one dish: a three-minute soft-boiled egg, buttered toast, and coffee. It must make a profit, and you must serve each item simultaneously.

Customers would prefer to have a meal when they sit down, which would require infinite production capacity or ready-to-serve inventory. Either would eat into your margins, making it harder to sell at a competitive price while making a profit.

You need a system to deliver breakfasts at a scheduled time, acceptable quality level, and low cost.

Customers don’t mind waiting five to ten minutes for breakfast. But how do you ensure that?

Start with the limiting step and plan production around it. The limiting step is the most difficult, sensitive, expensive, or time-consuming step.

Start with the egg. It takes the longest, costs the most, and is the crucial part. Using the egg’s cooking time as your base, give yourself enough time to toast the bread.

Use the toasting time to determine when to pour the coffee.

Finally, add the time it takes to plate up and offset each step.

The time it takes to finish is the total throughput time.

Eggs are the limiting step
Eggs are the limiting step

Production operations

You can learn three fundamental production operations from cooking breakfast:

  1. Process manufacturing: Physical or chemical changes to the material (boiling the egg and toasting the bread);
  2. Assembly: Arranging the egg, toast, and coffee to make breakfast; and
  3. Testing: Examining components or the final product for faults (toast is brown and coffee is steaming).

Complications

We’ve assumed you won’t have to wait for the toaster, can always boil the egg, and never run out of coffee. In practice, any part of your production flow could be your limiting step. So what can you do?

  • Hire specialists: An egg-cooker, toast-maker, coffee-pourer, creating overhead which may be too expensive;
  • Invest in capital equipment: Buy another pot, toaster, or coffee maker; or
  • Create an inventory: You could pre-boil eggs and pre-toast bread, risking waste.

As a manager, your job is to find the most cost-effective way to deliver the best breakfast in the least time.

You decide to invest in a continuous egg-boiler to provide a constant supply of perfectly boiled three-minute eggs. Your continuous operation has low flexibility, and you can’t adjust eggs if requested.

Customers benefit from lower costs and predictable quality.

But if the egg-boiler malfunctions, the eggs in the machine can’t be sold, and you have to throw out toast because there is nothing to serve with it.

To prevent this, you open the occasional egg to ensure quality, a functional test.

Better yet, use in-process inspection and monitor the temperature of the water. Always opt for in-process tests over those that destroy the product.

Eggs could also be cracked, rotten, or take different times to cook, which is why incoming or receiving inspections are important.

If all eggs are rotten, you need to close the cafe for the day. Consider having a raw material inventory capable of covering your consumption rate for the time it takes to replace it.

But inventory costs money, so weigh pros against cons. Just don’t forget about the opportunity at risk: how many customers would you lose, and what would it cost to lure them back?

Material becomes more valuable as it moves through the production process. Detect and fix problems at the lowest value possible. Find and reject rotten eggs when they’re delivered, not on the customer’s plate.

A boiled egg is more valuable than raw, and breakfast in front of the customer is the most valuable.

This cafe stuff is complicated…

Managing the cafe

You now have staff and automated equipment for toast, coffee, and eggs.

Your output is no longer the breakfasts you deliver personally. It’s the breakfasts your cafe delivers, profits generated, and customer satisfaction.

You’re no longer in the weeds, you need indicators focused on a specific goal to track progress. Five indicators you need to look at each day are your:

  1. Sales forecast: How many breakfasts should you plan to deliver? To assess how confident you should be in your prediction, you need to measure the variance between breakfasts delivered versus forecasted.
  2. Raw material inventory: Do you have enough eggs, bread, and coffee to get through the day? Have too much? Cancel today’s order. Too little? Order more.
  3. Equipment: Does anything need repair or replacement? If so, rearrange the production flow and/or lower your forecast.
  4. Workforce: Are all staff there? Do you need to move someone from eggs to toast?
  5. Quality: You need to know what customers think. Otherwise, quality may dip as volume increases.

Indicators guide decision-making. Guard against overreacting by pairing indicators, so effect and counter-effect are measured. For example, increased sales and decreased quality is a problem.

Good indicators are countable and paired with indicators that stress quality. The best indicators cover output and not activity. Measure sales, not the number of eggs boiled.

Indicators:

  • Outline objectives;
  • Provide objectivity and measurability; and
  • Allow comparison of similar teams.

The black box

Think of your cafe as a black box: raw materials and labor go in, breakfast comes out.

The "black box"
The "black box"

Indicators are the vital signs of your cafe, allowing you to scan for unhealthy departures from the norm–windows into the black box.

Leading indicators show what the future may look like, providing time to take corrective action.

To be effective, you must believe in their validity.

Choose credible indicators, so you act when they display warning signs.

Quality is an excellent leading indicator as a reduction in quality often results in fewer sales.

Sales are a trend indicator, output measured against time (this month vs. last month), and a standard or expected level. By extrapolating from the past and comparing results to forecasts, you are forced to think through why.

Sales are a trend indicator
Sales are a trend indicator

If you don’t collect and maintain indicators, by the time you find a problem and gather information to make a decision, the situation will have worsened.

Controlling future output

There are two ways to control output:

  1. Build to order: Making breakfast as requested; and
  2. Build to forecast: Making breakfast in expectation of orders.

Build to order reduces inventory risk but slows production times.

In contrast, build to forecast suffers when orders are higher or lower than the forecast.

When building to forecast, have slack in the system like an inventory. The more stock you have, the quicker you can adapt to market changes.

Inventory costs money. Keep stock at the lowest-value stage possible, which has the highest production flexibility for a given inventory cost: raw eggs, not boiled eggs.

Assuring quality

Assuring quality in production requires inspection:

  1. Incoming material inspection: Inspections at lowest-value;
  2. In-process inspection: Inspections at intervening points in the black box; and
  3. Final inspection: Inspections before a customer receives the product.
Assuring quality in production
Assuring quality in production

While most decisions to accept or reject material are economical, never let substandard material reach customers if it could cause complete failure.

Inspection costs money and interferes with production–balance improving quality, and minimizing disturbances. Two techniques to balance these needs are:

  1. Gate-like inspection: Holds material until tests are complete then accepts or rejects it; and
  2. Monitoring: The bulk of the material flows but you take samples to determine a failure rate. If the failure rate becomes too high, you stop production.

Prefer monitoring when experience shows you aren’t likely to encounter problems.

Ideally, use variable inspections. No problem for weeks? Check less often. If problems develop, test frequently until quality returns. Variable review means lower costs and interference.

Productivity

Productivity is output divided by the labor required.

To increase productivity, you can increase speed or change what you do. As the cliché goes: work smarter, not harder.

Leverage is output generated by specific work. High leverage activities generate high output. Increase leverage through automation and work simplification. Ask yourself why you are doing each task.

You may find activities that exist for no reason.

Improving productivity comes from stressing output; increasing activity can result in the opposite.

Managerial leverage

A manager’s output = the output of their organization + the output of the neighboring organizations under their influence

If you have people reporting to you or influence others, your output is the output created by your team and associates.

If you are a specialist, a know-how manager, your influence on neighboring organizations can be huge. Individual contributors who gather and share information are managers too. They exert power within the organization.

You can be a great individual contributor, but that isn’t managerial output.

Managers must form opinions, make judgments, provide direction, allocate resources, and detect mistakes. These too are necessary, but not sufficient. Activity doesn’t equal output.

Managerial activity breaks down into five groups:

  1. Information-gathering: Reading reports, customer complaints, or memos and talking to people inside and outside of the organization;
  2. Information-giving: Conveying knowledge to members of your team and groups you influence. Beyond facts, you must communicate objectives, priorities, and preferences;
  3. Decision-making: Occasionally, you make a decision. Prefer to participate in decision-making by offering input, forcing better choices to emerge, reviewing decisions made, and providing feedback. Decisions come in two forms: forward-looking decisions (deciding on an activity set) and responses to developing problems, which can be either technical (e.g. quality control) or involve people (e.g. talking somebody out of quitting);
  4. Nudging: You won’t always provide instruction, instead nudge people toward a preferred course of action; and
  5. Role model: You are a role model for your organization, subordinates, peers, and even supervisors.

Spend time where leverage is the greatest. For some, this is large groups. For others, one-on-one in a quieter, more intellectual environment is best.

Increasing managerial output

Increasing managerial output relies on using leverage, the output generated by an activity. As such, your output = L1 × A1 + L2 × A2 + …

For every activity you perform (A1, A2, etc.), the organization’s output will change based on leverage (L1, L2, etc.).

Managerial productivity increases by:

  • Doing activities faster;
  • Improving the leverage of activities; or
  • Shifting the mix of activities from low to high leverage

High-leverage activities

High-leverage activities:

  • Affect many people;
  • Change a person’s activity or behavior over a long period based on your brief interaction; or
  • Impact a large group’s work by providing a critical piece of information.

High-leverage activities don’t always increase output. Some decrease it.

The art of management is selecting and concentrating on one, two, or three activities that provide leverage and ignoring the rest.

Delegating as leverage

Given a choice, do you delegate activities you are familiar with or those you aren’t? Before answering, consider that delegation without monitoring is abdication.

When you delegate, you are responsible for the task’s completion. Monitoring the delegated task is the only practical way of ensuring completion.  

Like any production flow, monitor at the lowest-value stage. Review rough drafts, not final reports.

A second principle we borrow from production is variable inspection. Employ different sampling for different subordinates, changing frequency based on task-relevant maturity (how experienced they are at the task).

More experienced = less monitoring.

Production principles for time management

A common approach to increasing managerial productivity is time management, which can be improved by applying production principles:

  1. Identify the limiting step: Determine what is immovable and manipulate more flexible activities around it.
  2. Batch similar tasks: Everything requires a certain amount of mental set-up. Efficient work relies on grouping related activities.
  3. Build to forecast: The majority of your work should be by forecast, and the medium is your calendar. Most people treat calendars as a place for orders to come in. You should use it as a production planning tool. Schedule work that is not time-critical between the limiting steps of your day. And just as a factory manager says no to additional jobs if the factory is at capacity, you should say no to tasks that would overload your system.
  4. Say no earlier: Stop work before things reach a higher-value stage.
  5. Allow slack in your schedule: One interruption shouldn’t kill your entire day.
  6. Carry a raw inventory: In the form of projects that don’t need to be finished now, but would increase your team’s productivity over the long term. Inventory prevents you from meddling in your subordinates’ work.
  7. Standardize: While continuing to think critically about what you do and the approaches you use.

How many direct reports should you have?

Too few or too many direct reports reduces your leverage. If your work is supervisory, aim for six to eight direct reports—this ensures half a day per week for each subordinate.

As a know-how manager, aim for six to eight subordinates or equivalent (internal customers).

Aim for six to eight direct reports
Aim for six to eight direct reports

Interruptions: the plague of managerial work

Do everything you can to prevent starts and stops in your day. Even if there is an emergency, think about creating indicators that would have provided insight into the problem before it became time-sensitive.

Your work relies on working with other managers. You can only move toward regularity as others do. Do your part by scheduling recurring meetings at the same time each week.

Uncontrolled interruptions happen to supervisory and know-how managers. Most frequently from subordinates and people outside your team whose work you influence.

Force frequent interrupters to make an active decision about whether the issue can wait. Block out your calendar with a note that says, “I am doing individual work. Please don’t interrupt me unless it can’t wait”.

Understand interrupters have legitimate problems they need handling. That’s why they are asking you. But it’s within your right to batch them into an organized, scheduled form such as scheduled meetings, one-on-ones, or office hours.

Just as a manufacturer produces standard products, you should pin down what types of interruptions you get and prepare standard responses for those that come up often.

Indicators can also help you answer questions fast as you have the information needed on hand.

In summary, impose a pattern on the way you handle interruptions.

Meetings: The medium of managerial work

Peter Drucker said spending more than 25 percent of your time in meetings is a sign of a malorganization.

There is another way to regard meetings. Recall, a manager’s job consists of information-gathering, information-giving, decision-making, nudging, and being a role model.

Meetings are nothing more than a medium to perform managerial work. You could do your work in a meeting, memo, or through WhatsApp. Choose the most effective medium for what you want to accomplish. The one that gives you the most leverage.

Meetings fall into two categories:

  1. Process-oriented: Takes place on a regular cadence to promote knowledge sharing and information exchange; and
  2. Mission-oriented: Solves a specific problem and frequently produces a decision.

Process-oriented meetings

To maximize efficiency, infuse process-oriented meetings with regularity. Ensure attendees know how the session will run, agenda items, and the goal.

Process-oriented meetings come in three types:

  1. One-on-one: Between a manager and a subordinate;
  2. Staff meeting: Between a manager and all subordinates; and
  3. Operation review: Allows people who don’t frequently meet to meet. It should include formal presentations where managers describe their work to other managers who aren’t immediate supervisors, and to peers in other parts of the company.

One-on-ones

One-on-ones are high leverage. An hour can impact the work of a subordinate for weeks.

The primary purpose is mutual teaching and information exchange.

You teach your team members your skills, know-how, and suggest ways to approach things while they provide information about what they’re doing and their concerns.

Your role is to learn and coach. When they have stopped talking about a topic, ask another question.

Schedule one-on-ones based on the job- or task-relevant maturity of each subordinate. Have frequent one-on-ones (once a week) with those inexperienced in the specific situation, and less frequently (once a month) for experienced veterans.

Carve out at least an hour. Anything less tends to make the subordinate confine themselves to simple problems.

One-on-ones are the subordinate's meeting. They set the agenda and tone. Having the subordinate set the schedule reduces your workload as you don’t have to create a plan for each direct report.

The meeting typically starts with indicators managed by the subordinate, such as order rates, production output, or project status. Focus on indicators that signal trouble.

You should also cover anything important that has happened since the last meeting: hiring problems, people problems, organizational issues, plans, and potential issues. The criteria of inclusion is whether the issue bothers your subordinate.

You both should have a copy of the agenda and should take notes on it. Taking notes promotes active listening and ensures actions required by either party aren’t lost. Consider using a “hold” file where you both can accumulate essential but not urgent issues to discuss in the future.

Encourage heart-to-heart conversations. One-on-ones are the perfect forum for getting at subtle work-related problems.

Schedule one-on-ones on a rolling basis. Setting up the next one as the current one ends makes it easy to account for other commitments and avoid cancellations.

Staff meetings

Staff meetings involve you and your team members and allow peers to interact.

Anything impacting more than two people present is fair game. If something degenerates into a conversation between two people, break it off and move onto something that affects more people. Suggest the two book a separate meeting to discuss.

Structure staff meetings to ensure staff have time to bring up anything they want.

Your role is to be the leader, observer, expediter, questioner, and decision-maker when required.

Ideally, you keep things on track while your team works out issues.

Structuring staff meetings
Structuring staff meetings

Operations reviews

Operations reviews are the medium of interaction for those who don’t otherwise have the opportunity to meet. They include formal presentations where managers describe their work to other managers who are not their immediate supervisors and peers in other parts of the company.

Operations reviews involve the:

  1. Organizing manager: Helps presenters decide what issues and what details to present, books meeting, and is timekeeper;
  2. Reviewing manager: Senior supervisor whom the review is aimed at, asks questions, makes comments, and is a role model for junior managers present;
  3. Presenters: Presents using visual aids where possible, dedicating four minutes of presentation and discussion per slide; and
  4. Audience: Asks questions and makes comments.

Mission-oriented meetings

Mission-oriented meetings are ad-hoc, designed to produce a specific output like a decision.

The key to their success is the chairman, who has the most at stake in the outcome. Usually, this is who calls the meeting.

Before calling a meeting, ask yourself:

  • What am I trying to accomplish?
  • Is a meeting necessary?

Don’t call a meeting if both answers aren’t yes.

As the chairman, identify who should attend and try to get them to. If someone can’t come, see if they can send someone in their place.

Keep meetings to no more than six or seven people. Decision-making is not a spectator sport.

Once over, the former chairman must share minutes summarizing the discussion, decisions made, and actions items.

Attendees need to get the minutes fast before they forget what happened. If minutes are too much of a problem, the meeting wasn’t worth calling in the first place.

Ideally, you would never call mission-oriented meetings.

In practice, routine meetings take care of 80% of problems. Ad-hoc meetings are needed to deal with the rest. If you’re spending more than 25% of your time in ad-hoc meetings, that’s a sign of malorganization.

Decisions, decisions

Making decisions—or more accurately, participating in the decision-making process —is essential managerial work.

The ideal decision-making process

The ideal decision-making process
The ideal decision-making process

The ideal model for decision-making is:

  1. Free discussion: Openly debated all points of view and aspects of an issue, regardless of a person’s status;
  2. Clear decision: Clearly articulate the decision; and
  3. Full support: Commit to supporting the decision, even if you disagreed prior. Disagree and commit.

Decisions should be worked out and reached by people closest to the situation who know the most about it.

The peer-group syndrome

Aim to have peers-plus-one more senior manager in meetings.

Peers look to the more senior manager, even if they aren’t the most competent or knowledgeable person involved, to take over and shape meetings.

Without them, meetings can stagnate until the group reaches a shared opinion, inhibiting the free discussion phase. Peers are often afraid of sounding dumb.

A related phenomenon that influences lower-level people is the fear of being overruled.

Suppose the group (or senior-level manager) opposes a junior person’s position. In that case, they may lose face in front of peers, which is why junior people hang back and let more senior people set the direction.

Focus on output

You can’t always reach consensus. When the time for a decision has arrived, the senior person who has guided, coached, and prodded the group has to make the decision.

To avoid blindsiding people, answer six questions in advance:

  1. What decision needs to be made?
  2. When does it have to be made?
  3. Who will decide?
  4. Who will need to be consulted before making the decision?
  5. Who will ratify or veto the decision?
  6. Who will need to be informed of the decision?

Planning: Today’s actions, tomorrow’s output

Break planning into three stages:

  1. Establish projected need or demand: What will the environment demand of you, your business, or your organization?
  2. Establish present status: Where will your business be if you change nothing?
  3. Compare and reconcile steps 1 and 2: What more (or less) do you need to produce?

Step 1: environmental demand

Your environment is your group and other groups that directly influence what you do, including customers, vendors, competitors, and technological changes.

Focus on the difference between current demands and what you expect a year from now.

Don’t think about what you need to do to meet demand yet.

Step 2: Present status

List your current capabilities and projects. Try to use the same terms you use to state demand. For example, if you define demand in terms of new products, the present status should be too.

Factor in that you won’t finish every active project.

Step 3: Close the gap

Undertake new or modify current tasks to close the gap between future demand and what present activities will yield.

What do you need to do to close the gap? And what can you do?

Consider each question separately and then decide what to do by evaluating the effect your actions have on narrowing the gap. The set of steps you decide upon is your strategy.

Learn more about strategy by reading my post on 7 Powers

The output of the planning process

Planning produces tasks you complete now to affect future events.

Ask yourself: what do I have to do today to solve–or avoid–tomorrow’s problem?

Today’s gap is yesterday’s planning failure.

The output of planning is the decisions made and actions taken.

Andy Grove planned in 5-year increments, but next year is most important. You always have the chance to replan the second year in next year’s 5-year plan.

Remember, saying yes to one thing is saying no to something else.

Management by objectives: the planning process applied to daily work

Once demand is well-defined, you can use management by objectives (MBO). The idea behind it is simple: if you don’t know where you’re going, you won’t get there.

MBO answers:

  1. Where do I want to go? (The objective)
  2. How will I know if I am getting there? (The key results)

MBO sets objectives for a relatively short period, so feedback is maximally useful. If you plan for a year, your MBO should operate on a quarterly or even monthly basis.

Keep the number of objectives small, focusing on everything is focusing on nothing. A few well-chosen OKRs are what make the system work.

Scaling the cafe

Volume has grown, your cafe is at full capacity, costs have come down, and you’ve passed savings onto the customer.

It’s time to scale up to running a chain of cafes. That requires a different skill set.

What got you here won’t get you there.

You’ll need to give local entrepreneurs control. They know the market and will adapt to run their cafe.

But you’ll also want to centralize certain activities to take advantage of your purchasing power. If you do things right, your unit economics will improve as you scale.

Deciding whether to centralize or decentralize decision-making is an integral part of management.

Most importantly, you need to ensure quality at scale. Don’t allow one cafe to jeopardize your brand.

Things are complicated now. You might wish you could go back to the days of serving breakfast yourself. Or at least the single cafe.

With our cafe chain, we’ll learn that management is not just a team game. It’s a team of teams game where groups exist in mutually supportive relationships.

Hybrid organizations

Organizations come in three forms:

Mission-oriented: Each unit pursues its mission with limited tie-in to other units.

A mission-oriented organization
A mission-oriented organization

Functional: Decisions are made at headquarters and cascade down.

A functional organization
A functional organization

Hybrid: A mix of mission-oriented and functional groups.

A hybrid organization
A hybrid organization
“Good management rests on a reconciliation of centralization and decentralization.”

- Alfred Sloan, long-time president, chairman, and CEO of General Motors

Most companies are hybrid, a mix of mission-oriented and functional groups. The functional groups are like internal subcontractors who lend expertise to mission-oriented colleagues.

Functional units provide benefits:

  • Economies of scale;
  • You can reallocate resources in response to change;
  • Expertise can be shared; and
  • Business units can concentrate on mastery.

And disadvantages:

  • Functional groups suffer from information overload and must respond to demands from different business units; and
  • Business units often struggle to communicate needs and demands to functional groups.

Mission-oriented units have one benefit. They can stay in touch with the needs of their business or area and make changes fast.

The business of any business is responding to demand, and responsiveness is so vital that it always drives the majority of the organization to be grouped into mission-oriented units.

Grove’s law: All large organizations with a common business purpose end up in a hybrid organizational form.

Dual reporting

A manager should report to someone in the functional organization (e.g., a peer group of managers or a more senior manager) and mission-oriented organization (e.g. the division’s general manager).

The mission-oriented organization provides the immediacy and operating priorities, and technical supervisory comes from the functional group.

Functional managers outline how to do the job, and mission-oriented managers monitor day-to-day performance.

Dual reporting
Dual reporting

Making hybrid organizations work

You need a way to ensure the resources of functional groups are allocated and delivered to meet the needs of mission-oriented units.

Divisional managers should control most of the activity set, but a coordinating body or more senior, functionally equivalent, manager should provide functional supervision.

Hybrid organizations require the voluntary surrender of individual decision-making to the group.

You will no longer have complete freedom and generally side with your peer group’s opinion.

Dual reporting to peers
Dual reporting to peers

Dual reporting is a tax on your managers’ patience but is required to understand the needs and thought processes of peers and their mission-oriented manager.

It’s an inevitable consequence of being part of a large organization.

The two-plane organization

A subtle variation of dual reporting happens whenever you become involved in coordinating something that is not part of your regular work.

For example, if you work as a sales manager and are part of a committee of sales managers that improves the sales processes at your company, you are “reporting” to multiple people.

Your responsibilities don’t fit on a single org chart. Instead, the two hierarchies operate on different planes. Different planes allow you to exert more leverage on the organization. In your main job, your knowledge improves your team’s performance; in the second, you influence the work of all salespeople at your company.

The two-plane organization
The two-plane organization

Modes of control

Behavior in the work environment is controlled by:

  1. Free-market forces: Two entities exchange goods or services and are seeking to enrich themselves. No one needs to oversee the transaction. Value is what matters. Free-market forces fail when value isn’t easily defined;
  2. Contractual obligations: When free-market forces fail, use contracts as a mode of control. Because it’s hard to specify what people will do day-to-day, you’ll need to have generalized authority to monitor, evaluate, and correct work where necessary; and
  3. Cultural values: When the environment changes faster than rules can, or when circumstances are too complicated, cultural values become the mode of control. The interest of the larger group takes precedence over individual interests. For this to happen, you must believe you share a set of values, objectives, and methods that develop through shared experience.

When free-market forces work, management isn’t needed. In contractual obligations, management’s role is setting and modifying rules, monitoring adherence, and evaluating and improving performance.

For cultural values, management nurtures a set of values, objectives, and methods by spelling them out and leading by example. If your behavior at work matches your values, you create a culture.

What is the appropriate mode of control?

The most appropriate mode of control depends on a person’s motivation and the complexity, uncertainty, and ambiguity (CUA factor) of their environment.

The task of a manager is to identify which
mode of control is most appropriate
The task of a manager is to identify which
mode of control is most appropriate

Modes of control at work

Modes of control govern what we do. From one day to the next, you’ll find yourself influenced by all three. When you buy something, market forces are affecting you. When you go to work, you’re adhering to contractual obligations. And when you do work outside your job description to help a colleague, that’s cultural values.

The sports analogy

Like a coach, you must elicit peak performance from your team.

No matter how well a team is structured, no matter how well managed, it will only perform as well as the individuals.

Everything outlined so far is useless without your team continually offering their best.

When a person isn’t doing their job, they are either incapable or unmotivated. To determine which, ask yourself: If their life depended on it, could they do it? Yes, they’re not motivated. No, they’re not capable.

Depending on the answer, you use training or motivation.

The sports analogy
The sports analogy

Motivation comes from within. All you can do is create an environment where motivated people flourish. It’s not about making people say “I feel motivated,” it’s about making them perform better because of the situation.

For most of Western history, motivation was synonymous with the fear of punishment.

As the importance of manual labor decreased, and knowledge work increased, we needed new ways to motivate people. Knowledge work isn’t as measurable as manual labor.

Abraham Maslow’s hierarchy of needs is a mental model for motivation. As you meet lower requirements, higher ones take over. In this model, creating and maintaining motivation relies on some form of dissatisfaction.

The physiological, safety/security, and social needs motivate us to work, but esteem and self-actualization are what sustain performance once lower needs are met.

Maslow’s hierarchy of needs
Maslow’s hierarchy of needs
  • Physiological: Food, clothing, and other necessities for life;
  • Safety/security: The desire to protect oneself from slipping back into physiological needs;
  • Social/affiliation: Social needs stem from our inherent desire to belong to a group;
  • Esteem/recognition: The need to keep up with or emulate others is an authoritative source of motivation. It’s why we feel the pull to keep up with the Joneses; and
  • Self-actualization: What I can be, I must be.” Once motivation comes from self-actualization, the drive to perform is limitless.

Unlike other forms of motivation that extinguish once fulfilled, self-actualization can drive people to ever-higher performance levels.

Some people–not the majority–need to achieve in everything they do. For everyone else, management needs to foster an environment that promotes self-actualization.

Objectives should be set high enough, so even if individuals push hard, there is only a 50% chance of reaching them.

Output increases when everybody strives for a level of performance beyond their immediate grasp, even if they fail half the time.

Create an environment that values and emphasizes output.

Money as a motivator

At the lowest levels of Maslow’s hierarchy of needs, money is essential. After a certain point, more money doesn’t equal more motivation.

Unless money is a measure of achievement, money at the physiological and security stages only motivates until needs are satisfied. Money as a measure of success can motivate without limit.

If the absolute sum of a raise is significant to you, you are working within the physiological or safety modes. If what matters is how your raise stacks up against others, you are motivated by esteem or self-actualization, money is a measure of achievement.

Once self-actualizing, money is a proxy for progress and an important feedback mechanism for performance. Outside of money, self-actualized people want to improve their competence, and their feedback mechanisms are individualized.

Manager = coach

The manager’s role is to train individuals and bring them up to self-actualization. Once there, their motivation is self-sustaining and limitless.

An ideal coach takes no personal credit for their team’s success and, because of that, players trust them. They’re tough, but fair, trying to elicit each member’s peak performance.

Usually, a good coach was a good player. Having played the game well, they understand what it takes to perform. You want a team of “athletes” dedicated to delivering at the limit of their capabilities, which is the key to consistent success.

Task-relevant maturity (TRM)

The search for the optimum management style is boundless, with the most popular methods mirroring popular motivational theories.

In the early nineteen-hundreds, work was simple. Managers told people what to do, and if they did it, they got paid. Leadership was crisp and hierarchical with order-givers and order-takers.

In the 1950s, management shifted, and people realized there were better ways to get people to work. At the same time, behaviorism flourished, and the theories of motivation and leadership became subjects of controlled experiments.

No style of leadership is best.

Your management style should depend on task-relevant maturity, a combination of the subordinate’s motivation, readiness to take on responsibility, and education, training, and experience.

Task-relevant maturity is specific to the task. It’s normal for a person or group to have high maturity in one job but low in another. Similarly, a person can have high maturity at a certain level of complexity, uncertainty, and ambiguity. If pace accelerates or the job itself changes abruptly, their maturity can drop.

When maturity is low, offer detailed instruction about what needs to be done, when, and how. As it increases, the most effective management style is one more focused on communication, emotional support, and encouragement. Pay more attention to the individual rather than the task.

When task-relevant maturity peaks, your involvement should be minimal. Focused on ensuring the objectives your subordinate is working towards are correct.

You’ll always need to monitor your team’s work closely. As we’ve said before, the absence of monitoring is the difference between delegating and abdicating a task.

Task-relevant maturity (TRM)
Task-relevant maturity (TRM)

Increased maturity = increased leverage

Raise the task-relevant maturity of your team as fast as possible.

Employees with high task-relevant maturity take less time to manage, and once they learn operational values, you can delegate tasks and increase managerial leverage.

And at the highest levels, your subordinate’s motivation comes from within, which we know is the most potent motivation a manager can harness.

But remember, a person’s maturity depends on their environment. When things change, maturity changes, and you must adapt your management style again.

On paper, management by monitoring alone is the most productive approach, but you need to work your way up to it. Even if you get there, things can change, and you’ll have to revert to the what-when-how mode of management.

Don’t make management harder than it already is

Deciding on the task-relevant maturity of each team member is hard. Even if you know, personal preferences tend to override logic and dictate your management style.

Close relationships off the job can help create an equivalent relationship on the job, but they shouldn’t be confused. Is friendship between you and a subordinate a good thing?

You must decide what is appropriate for you. Imagine delivering a harsh performance review to a friend. If you cringe at the thought, don’t make friends at work.

If you’re unaffected, personal relationships will strengthen work relationships.

Performance appraisal: Manager as judge and jury

Performance reviews are the single most important form of task-relevant feedback you can provide.

The review influences a subordinate’s performance, positively or negatively, for a long time, which makes them one of the highest-leverage activities.

How you assess performance, deliver the assessment, and allocate rewards–promotions, dollars, and stock options–will dictate direction.

The purpose of reviews is to improve performance by focusing on:

  • Skill level: Skills that are missing and how to remedy them; and
  • Motivation: Increasing performance at the same skill level.

Reviews also represent the most formal type of institutionalized leadership. It’s the only time you are mandated to act as judge and jury, making judgment and delivering that judgment to a fellow worker.

Assessing performance

Not defining what you desire is the biggest issue with most reviews. If you don’t know where you want to go, you’re not going to get there.

Assessing the performance of knowledge workers is difficult. Knowledge work is fuzzy. Most jobs involve activities that don’t match with the period covered by the review.

You must give these activities appropriate weight when assessing performance, even though you won’t necessarily be objective as you can only measure the output objectively.

Be objective, but don’t be afraid to use judgment too.

Using the managerial black box, we can characterize performance by output and internal measures. Outputs are things you can and should plot on a chart. Think completed projects, met quotas, or increased yields.

Internal measures are what happens inside the black box: what they did to create output for the period under review, and what sets the stage for future output.

There is no formula to determine how to weigh output vs. internal measures. The proper weighting could be 50/50, 90/10, or 90/10 and can shift over time.

A similar trade-off is how you weigh long-term performance against short-term performance. Consider the offset between activity and output. During the review period, the output may have all, some, or nothing to do with events during the same period.

Do you judge individual performance or performance of the group under supervision? Ultimately the performance of the group, but you must determine whether they have added value too.

Avoid the potential trap. Force yourself to assess performance, not possibility—form over substance.

When deciding who to promote, understand no action communicates your values more clearly than who you promote. Every promotion creates a role model for others in your organization.

And finally, no matter how well a subordinate has done their job, find a way to suggest an improvement. Remember, the point of the review is to improve performance.

Delivering the assessment

Level, listen, and leave yourself out:

  • Level with your subordinate, the integrity of the entire system depends on honesty. Praising someone can be just as hard as criticizing them;
  • To listen, employ all sensory capabilities. To ensure they hear you, watch the person you are talking to. It’s your responsibility to continue until you are satisfied that you’ve been heard and understood; and
  • Understand the review is about and for your subordinate, not you. Keep your insecurities, anxieties, guilt, and other emotions out of it.

Delivering mixed reviews

Most reviews contain positive and negative assessments. Avoid delivering a laundry list of superficial, cliche, and unrelated observations. Long lists only leave your subordinate confused and don’t improve future performance.

Your subordinate, like you, has a finite capacity to deal with facts, issues, and suggestions. You may have seven points about their performance, but if they can only take on four, at best, you’ll waste your breath. At worst, you’ll overwhelm them, and they won’t get anything from the review.

There is a limit to the amount a person can absorb at once, especially when it’s about their performance. Remember, the purpose of the review isn’t to cleanse your system of truths but to improve performance.

Less is often more.

Consider grouping aspects of their performance into related items.

You’ll begin to notice the same underlying problems cause different issues, and there may be some indication as to why. These are the messages you should deliver in your review.

Once compiled, ask yourself whether your subordinate will remember all the messages you have chosen. If not, delete the less important ones. What you couldn’t include can be included in the next review.

And while a review shouldn’t contain surprises, if you find one, bring it up.

Assessing poor performers

Poor performers tend to ignore their problems. You’ve made progress when they actively deny the problem rather than ignoring it.

Find facts and examples to demonstrate reality, and you’ll move to the third stage when they admit it’s a problem but maintain it's not their problem.

If they have a problem, there’s no way of resolving it if they blame others. The final and most significant step is to assume responsibility, then finding the solution is relatively easy.

The stages of problem-solving
The stages of problem-solving

Your job is to get them to move through each stage, but finding the solution should be a shared task.

There are three outcomes–the subordinate:

  1. Accepts your assessment and recommended cure and commits to taking it;
  2. Disagrees with your assessment but accepts your cure; or
  3. Disagrees with your assessment and doesn’t commit to doing what you’ve recommended.

The first outcome is ideal, but any commitment to action is acceptable. Complicated issues don’t lend themselves to universal agreement. If your subordinate commits to change, assume they’re sincere.

Try to get them to agree with you, but if you can’t, accept their commitment to change and move on.

Don’t forget about your best people

The purpose of reviews is to improve future performance, yet the majority of reviews for high performers make little or no attempt to define what they need to do to improve their current performance.

Yet we provide poor performers with detailed feedback.

You should concentrate on your best people. It’s a high-leverage activity. If they get better, the impact on group output is enormous.

There is always room to improve, so don’t hesitate to provide feedback to your best people. They crave it.

Other thoughts and practices

Is it a good idea to ask the subordinate to prepare some kind of a self-review before being reviewed by his supervisor? The act of evaluating an employee is a formal act of leadership. Don’t get nudged by self-reviews and commit to non-bias performance reviews.

Should your subordinate evaluate your performance? Maybe. Make it clear it’s your job to assess their performance, and their assessment of you is only advisory. Don’t pretend you and your subordinates are equal during performance reviews.

Should you deliver the written review before, during, or after the face-to-face discussion? Give the written report before the face-to-face conversation. They can read it and will be more emotionally prepared.

What’s the best way to learn to deliver performance assessments? Think critically about the reviews you have received and what made them good or bad.

Interviewing and retaining employees

There are two other difficult tasks you must perform as a manager, interviewing potential and retaining valued employees.

Interviewing

The purpose of interviewing is to:

  • Select a good performer;
  • Educate them about who you and the company are;
  • Determine if there is a mutual fit; and
  • Sell them on the job and company.

Your goal is to make a judgment about how the candidate will perform in your environment.

Assessing your team’s performance is hard, it’s nearly impossible to sit down with someone for an hour and understand how they’ll perform.

Interviews are necessary but realize the chance of failure is high.

During the interview, the applicant should do 80% of the talking, but what they talk about is in your control.

When you ask a question, they may ramble until long after you’ve lost interest. Most of us sit and listen until the end out of courtesy. Instead, interrupt. If you don’t, you’re wasting the only asset you have to assess potential performance: the interview time.

An interview produces the most insight if you steer the discussion toward subjects familiar to you and the candidate.

Applicants should talk about themself, their experience, what they’ve done, and why, and decisions they would change if they could do it again.

Information gathered in interviews tends to fall into:

  1. Technical knowledge;
  2. What they did;
  3. Discrepancies; and
  4. Operational values.

Unlike performance reviews, interviewing is about assessing potential. Asking a candidate about a hypothetical situation can provide valuable information, and you’ll learn a lot about a candidate by the questions they ask you.

Ask them what they would like to know about you, the company, and the job. The questions an applicant asks tells you if they’ve researched your company, what they want to know more about, and how prepared they are.

References checks are another tool you can use, but chances are you’ll be talking to a stranger who won’t volunteer critical information. Even if they do, without knowledge of their business and its values, it may be useless.

If you can try to find a personal connection with the reference, they’ll probably be more honest with you.

Careful interviewing and reference checking doesn’t guarantee anything. It just increases your odds of getting lucky.

Retaining employees

When a valued employee who is not motivated to leave for more money at another company quits, you have failed as a manager.

Your initial reaction is crucial. In many cases, they’re quitting because they feel unimportant to you. If you don’t deal with the situation now, you confirm their feelings.

Drop what you are doing and ask them why they are quitting. When the employee has provided their reasons for leaving, ask more questions. After the prepared points are delivered, the real issues come out.

You need to convey to them that what they do is essential to you, and find out what is troubling them. Don’t try to change the employee’s mind; buy time.

An employee quitting is a significant problem, so ask your manager for help. As this impacts you more than your supervisor, it’s up to you to communicate the need for help and get them participating in a solution.

Pursue every avenue you can to keep the employee at the company, even if it means transferring them to another department. If this happens, don’t make them feel guilty about the new arrangement.

Your subordinate may push back and say they’ve accepted the job and can’t back out. Some people feel pressure to comply with their commitment, but they’ve made two commitments: first to the potential employer and second to you, their current employer. And commitments made to people you work with daily are more durable than those made to new acquaintances.

If none of this works, accept it, be happy for them, and work together to ensure a smooth handover of responsibilities.

Compensation as task-relevant feedback

Money is vital at all levels of Maslow’s hierarchy of needs. People need money for food, housing, and insurance. As they move up the hierarchy, money becomes a proxy for one’s worth in a competitive environment.

Recall if the absolute amount of a raise is significant, the person is probably motivated by physiological or safety/security needs. If it's a relative amount, they’re likely to be driven by self-actualization. Money is a measure.

As compensation increases, the incremental amount of money provides less utility. At this point, use the funds to deliver task-relevant feedback.

Base a portion of a manager’s compensation on performance. As total compensation increases, the bonus should make up a more substantial portion of it.

Designing bonus schemes is hard. You need to determine:

  • The significance of the team’s and individual’s work on performance;
  • The period the bonus should cover; and
  • Whether to base the bonus on measurable objectives or a mix of subjective and objective measures.

Remember that cause and effect don’t always happen at the same time. You must pay the bonus close enough to the work to ensure the subordinate knows why you gave it.

Finally, you don’t want to devise a system that pays out lavishly when the company isn’t growing.

For the base salary, we use experience or merit.

At one extreme, experience alone dictates salary, the other merit only. Either way, a given job still has a maximum wage.

In reality, we make a compromise deriving salaries from a mix of experience and merit.

Compensation as task-relevant feedback
Compensation as task-relevant feedback

Promotions, on the other hand, must be based on performance. That is the only way to ensure performance is highlighted, maintained, and perpetuated at an organizational level.

But what about the Peter Principle, which describes the tendency for organizations to promote employees until they reach their level of incompetence?

The solution is not to fire them but recycle them. Put failed promotions back into the job they did before you promoted them. You know they can do the job, and they’ll be excellent candidates for another promotion later, and the second time they’re likely to succeed.

People view this as a personal failure. In reality, management is at fault for misjudging the employee’s readiness for more responsibility.

If you recycle openly, you’ll be pleasantly surprised about how smooth the transition is.

Don’t force people to leave the company because of your mistake.

Why training is the boss’s job

Poorly trained employees, despite their best intention, produce inefficiencies, excess costs, and unhappy customers.

Remember, your output is the output of your organization. Your productivity depends on eliciting peak performance from your team.

You have two ways to raise performance, and we’ve already touched on motivation. If motivation is about increasing a person’s desire to do their job well, training increases their capability to do so.

Training is one of the high-leverage activities you can perform.

Say you spend twelve hours writing a paper on management best practices and ten people at your company read it.

Next year they'll work a total of about twenty thousand hours for your organization. If that paper results in a one percent improvement in their performance, your company will gain two hundred hours of additional productivity as a result of your twelve hours.

Now imagine if a hundred managers read the paper...

Training must be a process, not an event. Employees should be able to count on it being systematic and scheduled, rather than a rescue effort summoned to solve a problem.

Another reason that training is the manager’s job is that a suitable role model must do it. Proxies, no matter how good they are at teaching, cannot assume the role. The person teaching should be seen as a believable, practicing authority on the subject.

Training should start by teaching people what they need to do their jobs. Once that’s done, you can focus on upskilling and developing new ideas, principles, and skills.

Always ask for anonymous feedback. Prompt the people you are teaching for numerical ratings and pose open-ended questions. Study and consider responses, but understand you’ll never be able to please everyone.

If you receive feedback that the content was too detailed, too superficial, or just right, in about equal balance, you’re on the right track.

What matters is that you accomplish what you set out to do with the training.

Training is hard. It takes much more in-depth knowledge to teach a task than do it. You’ll learn the most from teaching, and that alone is worth the effort.

Putting what you’ve learned into practice

Answer the following prompts. If you reach at least 100 points, you’ll be a better manager.

Production

  • Identify operations in your work akin to process, assembly, and test production. (10 points)
  • Identify the limiting step in a project you are working on and map out the production flow. (10 points)
  • Define where you should perform the equivalents of receiving inspection, in-process inspection, and final inspection in your work. Decide whether these inspections should be monitoring steps or gate-like. Identify where you can move to variable review. (10 points)
  • Identify six indicators that measure the quantity and quality of your group’s output. (10 points)
  • Check these indicators daily and regularly review them in staff meetings. (20 points)
  • What is the most important strategy you are pursuing now? Describe the environmental demand that creates it and your current status. Is your plan likely to result in a positive outcome for you or your organization if successful? (20 points)

Leverage

  • Simplify your most tedious, time-consuming task. Eliminate at least 30 percent of the steps involved. (10 points)
  • Define your output: What are the outputs of the organization you manage and the organizations you can influence? List them in order of importance. (10 points)
  • Analyze your information-and knowledge-gathering system. Does it properly balance breadth and depth? Is redundancy built-in? (10 points)
  • Outline how you’ll monitor the next thing you delegate. What will you look for, and how frequently? (10 points)
  • Generate an inventory of projects you can work on when times are slow. (10 points)
  • Have a one-on-one with each direct report. (Explain to them in advance what a one-on-one is and have them prepare.) (20 points)
  • Look at your calendar for the last week. Classify your activities as low-/medium-/high-leverage. What will you stop doing so you have more time for more high-leverage activities (10 points)
  • Forecast the demand on your time for the next week. How much time will you spend in meetings? Which of these are process-oriented vs. mission-oriented meetings? If the latter is over 25 percent of your total time, what should you do to reduce them? (10 points)
  • Define the three most important objectives for your team for the next three months. Support them with key results. (20 points)
  • Have your team do the same for themselves, after a thorough discussion of the set generated above. (20 points)
  • Generate an inventory of pending decisions you are responsible for. Take three and structure the decision-making process for them, using the six-question approach. (10 points)
  • Evaluate where you are in Maslow’s hierarchy. Do the same for each of your subordinates. (10 points)
  • Define a set of performance indicators for each direct report. (20 points)
  • List the task-relevant feedback your subordinates receive. How well can they gauge their progress through them?
  • Classify the task-relevant maturity of each of your subordinates as low, medium, or high. Which management style is most appropriate for each? Compare what your own style is with what it should be. (10 points)
  • Evaluate your last performance review and the last set of reviews you gave to your team to deliver task-relevant feedback. Did these reviews improve performance? (20 points)
  • Redo one of your reviews as it should have been done. (10 points)

Additional resources

If you found this post interesting, I recommend reading High Output Management in its entirety. Below are some additional resources you may find interesting.

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