Niko Canner – Become a Perfect Instrument - [Invest Like the Best, EP.157]

Niko Canner is the founder of Incandescent where he and his team help the leaders of large companies in the areas of strategy and innovation. He was also the founder of Katzenbach Partners and a member of Bridgewater’s management committee. Niko is a fantastic writer, and I highly recommend you check out his blog “On Human Enterprise,” which has posts on many of the most interesting aspects of business and personal purpose. This conversation was inspired by many of those posts. Please enjoy. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:17 – (First Question) – The story of Doctor V 3:24 – Aravind and the Choice of Great Achievement 4:00 – Becoming the perfect instrument 6:05 – What is Niko planning to be the perfect instrument of 8:18 – How should individuals think about finding what they can be the perfect instrument of 8:59 – Brett Victor – Inventing on Principle 10:59 – How do businesses apply this principle 13:20 – Making choices easier 16:43 – Era’s to a company and when it’s time to start a new one 19:52 – How can business culture be cultivated and useful 22:53 – Cultures at the tail end of a distribution 24:33 – Can hierarchy be fluid, or does it need to be a dedicated corporate structure 27:47 – My Unlikeliest Favorite Business Book 28:03 – The Millionaire Real Estate Agent: It's Not About the Money... It's About Being the Best You Can Be! 30:46 – The Red Test and how it can be used by businesses 36:54 - Ten Principles for How to Run a Company 42:25 – Dealing with the sponsor owner brief in the software world 45:24 – How does one choose customers 46:32 – Bill Hubbard passage – A Theory for Practice: Architecture in Three Discourses 49:09 – Kindest thing anyone has done for Niko Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:57Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My guest today is Nico Canner. Nico is the founder of Incandescent, where he and his team help leaders of large companies in the areas of strategy and innovation. He was also the founder of Katz and Back Partners and a member of Bridgewater's Management Committee. Nico is a fantastic writer and I highly recommend you check out his blog, On Human Enterprise, which has posts on many of the most interesting aspects of business and personal purpose. This conversation was inspired by many of those posts. Please enjoy.

• 1:50Patrick O'Shaughnessy?

  Okay, Nico, so this is going to be a different episode. We may touch on investing. I think our conversation will check in on that topic every so often, but really it's about individual and firm action and behavior. And to frame the entire thing, I would love for you to begin by telling the story of Dr. V.

• 2:06Speaker 02

  So Dr. V is somebody who achieved something that any sane person would think is impossible. In his mid-50s, he founded an organization called Aravind.

• 2:20Speaker 02

  Which was originally an 11-bed hospital in Madurai in the south of India, focused on addressing curable blindness from cataracts. And over the course of 30-something years, he built an organization that treats a volume of patients equivalent to about three-quarters of the entire UK national health system, but at 1% of the cost. And their outcomes are as good as leading academic medical centers in the US. They're so good that it is the leading destination for Harvard Medical School residents in ophthalmology. So a truly incredible organization that's achieved

• 3:03Speaker 02

  a mixture of quality, cost, and innovation that you would think couldn't be achieved. And they've done all of this without taking a dollar philanthropy into their core operations, even though the majority of patients that they serve, they serve either for free or for extremely reduced costs. And they have a cross-subsidied model where some patients pay a good deal for a slightly smoother version of the patient experience. And that floats the whole organization. So Dr. V built the organization. He passed away seven years ago. It continues in full force today.

• 3:47Speaker 02

  And he's, to me, a kind of personal emblem of what it means to be able to be in pursuit of the seemingly impossible.

• 3:56Patrick O'Shaughnessy?

  There's three quotes that, in a piece that you wrote about Dr. V, three questions that he asked, which are kind of silly. Or they seem silly at first, and as you read them again and again, they become more and more meaningful. Maybe you could describe those questions and why you're so interested in them.

• 4:11Speaker 02

  The question that is most deeply resonant, he frames as, "How do I become the perfect instrument?"

• 4:20Speaker 02

  Part of what I find so beautiful about that question is to even ask it, you must begin with a question of instrument of what? And then the inquiry can begin.

• 4:33Patrick O'Shaughnessy?

  Yeah. And let's describe why this is such a great idea and why you think it's important for people to consider that question. Across, we, I think, together reviewed 20 or 30 pieces that you had written in advance of this interview about all sorts of things. And I would say one of the common themes is stepping back and thinking about frameworks, impact, values, goals, and then creating a system that allows those things to happen. I think Dr. V is a great place to start because he's doing this at individual level in a very tangible way. But talk more about why you're interested in this idea of stepping back and asking that basic question, an instrument of what?

• 5:11Speaker 02

  So let's contrast two time horizons. Here, there's the only time horizon in which we are actually able to act, the present moment. And then the very long time horizon of what it means to give your life to something that is deeply important and that rewards cumulative achievement. Dr. V sustained exponential growth that seems modest compared to a lot of today's enterprises, something like 15% for many, many years after an initial period of scaling. When you compound that for a long time, you get to the seemingly impossible, like the achievements that I described.

• 5:55Speaker 02

  So part of what I find so powerful about this question of becoming the perfect instrument is that it bridges from the very long term instrument of what? And how can I progress in my own ability to be that instrument if I have a very long time to work toward changes with the present moment of what is my intention with this thing that I am doing now? How do I bring the best of what it is possible to be and do to this moment? And how do I use this moment as a vehicle to practice and improve?

• 6:37Patrick O'Shaughnessy?

  I'll turn the question on you, which is, in your life, what are you attempting to be the perfect instrument of?

• 6:43Speaker 02

  This maybe gets a bit meta.

• 6:45Patrick O'Shaughnessy?

  That's fine.

• 6:46Speaker 02

  But what I'm really interested in Is what I call by shorthand, human enterprise. How do people achieve really difficult goals? And sometimes that's expressed with how do people build companies from the ground up? Entrepreneurship, sometimes that's about how do people take established institutions and bring them into new places or new levels of achievement? Sometimes it's about individuals trying to do a certain kind of work and the institution is really in the background, just a context that enables them to do what they care about. For instance, a journalist who is, in a sense, hiring their organizational employer

• 7:31Speaker 02

  to create a context in which they can discover things, write, broadcast, whatever it might be. And then at the highest level, how do people use constellations of organizations to cause a change in the world? Where if we look back at Areavant, a part of what Areavant has done, they've done directly, building an organization that directly cures blindness by operations. But they've also built a whole arm of their endeavor that's about advising others in different countries, they only operate in India, creating products that others can

• 8:14Speaker 02

  use to apply cutting edge technology at a low price point. So all of those are variations of the question, how do people achieve things? And I'm interested in both the theory and the practice of that essential aspect of how we operate, whether that's how does an entrepreneur manage their business through different phases of scaling? Or how does a thinker use his or her time to try to progress toward an insight? Both instances of the same kind of problem underneath.

• 8:51Patrick O'Shaughnessy?

  In your experience, how coherently can the average person you're dealing with describe their answer to this same question? The thing of which they are trying to be or build the perfect instrument?

• 9:03Speaker 02

  Not very, for the most part, but I don't think that's. Important, what's important is that almost anybody by beginning to pose the question and think about it can refine their sense of direction.

• 9:18Patrick O'Shaughnessy?

  What advice would you give to individuals curious about this question that want to explore their thing? So there's a fantastic video presentation that I send around constantly by a guy named Brett Victor called inventing on principle, which is basically the idea is what we're talking about. You want to arrive at a principle and then you should spend your time creating things based upon that principle. But it strikes me that that's the easy part. The hard part is finding the principle or the goal or the outcome to begin with. Having thought about this a lot, are there tricks, are there methods that individuals can employ to try to triangulate on their thing?

• 9:56Speaker 02

  So one of the pieces that I wrote a few years ago is most consistently useful. It's called living two stories. It's really a very simple idea, which is that if you aren't sure what you want, you have a couple of jobs. One is use whatever circumstance you're in to try to advance towards something that you might want. And two, explore other possibilities. Simply framing that as having two jobs is quite useful because then you face a design problem about what are you going to do in job two? What is the nature

• 10:36Speaker 02

  of your search at that moment? And then trying to be clear about what are you hiring job one to do? Are you hiring job one to audition for the possibility of being your thing? Are you hiring job one to financially support you while job two brings you closer to an insight about what you want that you haven't yet arrived at? What does that tell you about what you do all day in job one? Are you trying to effort minimize? Are you trying to conserve emotional energy? Are you trying to have job one put you into situations where you might discover things that have nothing to do with your literal job as your employer

• 11:18Speaker 02

  might define it? These are all things that aren't necessarily especially hard to get to if you're structured about asking the question, but that people often don't get to by accident.

• 11:32Patrick O'Shaughnessy?

  How does this relate to what I guess I would call like business strategy? So I think most people listening are interested in how businesses make decisions. And once they're on a path, how they decide the sub path to pursue or not to pursue. You wrote a really interesting post about sort of training to become better at this function. And I'd love to hear what your findings were, having explored it.

• 11:55Speaker 02

  So a few, let me start with one because I think it's frequently misunderstood. People often equate strategy with planning. I need to develop a multi-year plan. I'm going to show investors what my projections are for the business. I'm going to try to have a tighter, more persuasive articulation of our positioning. And all of those are fine activities. Planning has its place. Strategy is generally something different. It's arriving at a small number of mutually reinforcing guiding ideas that then guide a whole lot of choices about what a business actually does.

• 12:37Speaker 02

  So for instance, when Southwest Airlines came to the view in its founding moment, and Herb Keller came to the view that you could combine cheap and fun. Pretty simple ideas, unprecedented in the airline industry, and have driven hundreds of thousands of operating decisions from the smallest to the largest over multiple decades now. Part of what people don't realize about strategy is that it is often progressed in leaps rather than in a steady analytical grind. And to be clear, as you pursue and advance in strategy,

• 13:20Speaker 02

  what your current guiding ideas are, where they work, where they don't, where the holes might be, and to go in search of serendipity, recognizing that you may need to be driving forward on a plan at the same time that you are searching for the ideas that you don't yet have, works a lot better than if you try to reduce it to some kind of linear sequential process in a way that a lot of strategic planning exercises do.

• 13:53Patrick O'Shaughnessy?

  Do you think that a good acid test or something for effective strategy is that it makes choices easier?

• 14:00Speaker 02

  Absolutely. It almost makes choices unconscious if you do it really well, or it causes you to not reexamine things that other people would probably not even consider examining in the first place. Let me give you an example from Areavand, since we started the conversation there. Dr. V, although he started with an 11-bed hospital, rapidly became clear that scale was critical and that he would need to go in search of a much larger number of patients, and especially because he was so concerned with making a difference in the lives of the poor, he wanted to reach patients in

• 14:43Speaker 02

  rural areas who would never realize otherwise that a cataract was treatable. So he lived for a while with this dilemma of how would he achieve these two things, greater rural access and greater scale? And he and his organization invented something called eye camps, where they built a program. It was high-reach and low-cost, where they would go out into rural areas and they would do a range of screenings and they would convince people to come into the Areavand Hospital and get a cataract operation, many of them

• 15:27Speaker 02

  for free or at extremely low cost because they were poor enough that on the sliding scale, they wouldn't pay. This worked up to a point, but for a while, they were stuck. It was still not driving the amount of volume that they expected and needed, and they realized that this was due to too low a yield of people who they had identified in the screening as needing surgery, but who just weren't coming to the hospital. And where they came to, as they lived with this dilemma for a while, was that

• 16:07Speaker 02

  they were focused on the wrong variable. They had managed down the cost of the surgery, but they hadn't thought about the total cost To the person undertaking the surgery, the lost wages of their time, the travel cost to get into the city, all the different elements of complexity. Do they have a place to stay in Madurai, et cetera? And once they focused on the total cost and what today we might call the patient journey, they got dramatically higher yields. So a few very simple ideas about scale, about access,

• 16:47Speaker 02

  about the total cost of the patient journey to someone who was very poor and couldn't afford any incremental investment at the margin that was unnecessary. Those few core ideas drove lots and lots of operating decisions in a way that required a bit of tactical ingenuity, but flowed pretty naturally from those few guiding ideas. When a strategy really works, that's what it's like.

• 17:16Patrick O'Shaughnessy?

  Can you talk about this notion of companies having eras to them? And what an era means to you and when it's appropriate to start a new one?

• 17:24Speaker 02

  So I think of eras as being like levels of a game. That if you're building something, you start out very far from your aspirations. So Dr. V had his 11-bed hospital. He had spent his entire career in the government service, focused both as a physician and policymaker on blindness. 11 beds was a drop in the ocean. But he recognized that he needed to be an operator to get to the place that he ultimately envisioned could be possible. Like, there was no way to start on third base.

• 18:06Speaker 02

  You needed to actually build the thing that nobody had built. And that thing could only be built from a kernel. So an era is a period of time in which you achieve a set of things that then open up the next level of the game. So when he had A hospital, even if it was just 11 beds, that took what was in his mind and instantiated it in the world and showed that he could make the cross-subsidy model work and he could fund organic growth with an operation that charged some patients and didn't charge others and that he could teach his methods and there was a thing that could be expanded.

• 18:52Speaker 02

  That then was a gateway to a next set of problems around growth. And in almost any endeavor, whether it's a business or a path of scientific discovery or an attempt to drive social change, you can score points at your current level of the game. There are things that you can do to advance toward your ultimate goal and patients were treated, et cetera. However, the stakes of getting to that next level of the game are even higher than maximizing the number of points that you score at this level.

• 19:31Speaker 02

  I think often founders aren't clear about the difference between the two and don't have a sharp visualization of exactly what small bundle of things take me to the next level so that they can then reflect on what is the critical path to those achievements. Part of what I like about Lean Startup, even if it only focuses on one aspect of the craft of entrepreneurship, is that it's made a lot of founders much clearer about product-market fit as a kind of breakpoint. If I'm to the left of product-market fit, one set of things that I need to focus on.

• 20:16Speaker 02

  After product-market fit, I have a different set of things and that more binary view can be really powerfully clarifying.

• 20:25Patrick O'Shaughnessy?

  Talk a little bit about business culture and the ways in which it can be cultivated or be useful. So I have to ask about Bridgewater. You spent, you were on the management team at Bridgewater and it's known for an unusual or at least very distinct culture. In what ways do you think something that's in the tails of the distribution from a cultural standpoint is a good or a bad thing for, again, achieving the perfect instrument idea?

• 20:49Speaker 02

  Well, I mean, a lot of people have written and thought about Bridgewater. Like, I think Adam Grant's commentary in the originals book is really useful. I think the world needs more extreme cultures and less of a kind of blended middle of corporate America. And I think this is especially important in the startup world where something that frequently happens is that as companies scale, they bring in experienced executives. These experienced executives arrogantly assume that successful scaling for that company means that it needs to be a lot like many other companies in the industry

• 21:34Speaker 02

  that they have taken as their own kind of model. And they homogenize versus for a founder without assuming that they necessarily know how to create the culture to, from fairly early, be pretty explicit about the ways in which they think their culture should be differentiating, especially the ways in which it should go against the grain of ordinary business cultures and then be on a journey to figure out how to be more that different way. Southwest being a great example. The crew announcements at Southwest don't sound like the crew announcements at any other airline.

• 22:19Speaker 02

  Having the clarity of like, we are trying to enable people to express themselves. We're trying to create humanity in a category that dehumanizes. This created a culture that's worth billions and billions of dollars. It's completely unreplicable by anybody else because not only can't they, they don't want to make the decisions that produce a Southwest kind of culture. So should other investment firms be like Bridgewater? I don't know, but a lot more firms should. Emulate the higher level thought that they should be conscious of their beliefs

• 22:59Speaker 02

  about what kinds of cultural qualities will enable them to be better at whatever their core thesis about investing is, and absolutely resolute that figuring out how to be that way, even when it is expensive, in terms of effort that is directed what in the moment might feel like away from the pressing work at hand.

• 23:26Patrick O'Shaughnessy?

  Are there any other cultures, Southwest and Bridgewater are two fantastic examples, that pop immediately to mind when you think of a culture at the tail end of a distribution?

• 23:36Speaker 02

  So, one that's really interesting to me is Valve.

• 23:40Patrick O'Shaughnessy?

  Oh, yeah. Fascinating, yeah.

• 23:41Speaker 02

  They've written down an employee handbook that describes a complete absence of hierarchy. One of the things that they derive from that central choice is that they need to be incredibly focused on hiring, that is the most important thing. It's kind of intuitive when you think about it. If you aren't going to tell anybody anything about what to do, you really need to care about who they are. And then you start seeing some interesting things when you dive into an example like Valve. So, in a way, they seem completely structureless, but they also have a really elaborate system of how they combine different kinds of inputs

• 24:22Speaker 02

  to arrive at compensation numbers. And while that might seem counterintuitive at first, it's actually a consequence of the structurelessness, that they need to combine opinions in some way for people to be rewarded appropriately. They can't use the sort of managerial construct, have you agreed with a manager on your goals? Have you achieved those goals? And they can't use a leveling construct. Are you a vice president or director in their environment? So, what do you use? And they end up creating a very powerful vehicle for people to get feedback on how much value others think that they're creating.

• 25:06Patrick O'Shaughnessy?

  What do you think of their idea? So one of the things that I found so interesting about them was that naturally, for a given project, even with no corporate structure, hierarchies emerge. And that because they have no corporate structure, those hierarchies are the best ones for the thing they're trying to accomplish. And the key insight is that on the next project, the hierarchy might just be completely different. There's a different leader for a different reason. And by having this structure that sort of spins up and spins down hierarchies, you get more done better, more efficiently. Do you think that's true generally? Like, do you think that assuming the first part, which is you have great people in the business, let's say there's 10, 100-person businesses, they're all great people. Do you think that's generally true?

• 25:47Patrick O'Shaughnessy?

  Or do you think that having common hierarchy or project management, or whatever you want to call it, is better for outcomes?

• 25:55Speaker 02

  Something that I do believe is a kernel of the literature on self-management that I personally believe is very practical, even where I throw out some other aspects of the literature, is that decoupling role hierarchy from position hierarchy is really useful. That may sound like an abstract thought. Let me make it much more concrete. We have a tiny firm. There's 14 people at the moment. And in a kind of positional hierarchy, as the founder and CEO, I'm at the top of the hierarchy. And then there are various roles that exist under me.

• 26:37Speaker 02

  So for instance, we have a partner named John Rolander, who leads our work in financial services. So in a sense, he is accountable to me in that role. Suppose then that I'm going to do work with particular clients in that sector. Now, I'm in a role. That is, in a sense, subordinate to his. And if we're asking a question about should we invest in this particular piece of research that I'm interested in doing, or client that I'm interested in investing some time to see if we can serve, I should be getting his guidance because my work is fitting underneath his role.

• 27:20Speaker 02

  Suppose that then I want to bring him into that client because he has expertise on topic X. Well, he should now be taking my guidance because he's fitting into my particular endeavor with that company. And so the 14 of us can recombine in all kinds of ways that fit the work. Valve is combining that organic notion with a separate thesis that I think would work in almost no companies, even though it works beautifully for Valve, which is that you can completely release a kind of structure of a hierarchy of objectives, leveling any number of things. And yes, you can, if you're in Valve's business and you're as careful about talent as they've

• 28:05Speaker 02

  been in a number of other things, it's beautiful for them. But I would certainly keep that notion of organic recombination of roles, even in a company that is much more traditional in other respects.

• 28:19Patrick O'Shaughnessy?

  I should have asked this question earlier when we were talking about eras, but I just love this post, so I'll return to it, which is the title and the topic of, I think what you called it was one of your unlikeliest favorite business books ever. Can you describe that book?

• 28:31Speaker 02

  Sure. So I think nobody who knows me well would expect that I would have read a book called Millionaire Real Estate Agent more than once. I certainly do not have an aspiration to become a real estate agent, and it's like exactly the kind of business book title that people would not expect an intellectual to read. But it is one of the best business books I've ever encountered. And part of what makes it so beautiful is that begins from some very conceptual strategic insights about what drives value in that particular business of being a real estate agent.

• 29:09Speaker 02

  And then it breaks down the path from starting to creating an agency that is so successful that is throwing off a million dollars or more in passive income to the founder as an owner. And there are a set of eras that you go through. And it's not helpful to try to solve the era three questions in era one. In era one, you need to be relentlessly focused on lead generation. You need to be especially focused on the seller. There are a number of very practical things that are broken down to a minute level of detail.

• 29:50Speaker 02

  And Keller, the author, then shows how, as you start solving those problems, you earn your way to a next set of problems. When it is just you, you are dealing with buyers and sellers. As you reach a certain volume of business that you can afford to invest, well, the very first person you hire is what I would call a leverager, somebody who's just helping you be more effective. Then you want to bring on a buyer-facing agent. Why? Because the value of an hour of your time is higher with sellers. So by creating specialization, division of labor, you're able to focus more of your attention on the highest value drivers.

• 30:35Speaker 02

  That's the kind of thing that you might be doing toward the end of era one. And it shows in this very specific form, which Keller can do, because there's a lot of standardization to how the real estate sales business works. Exactly what it looks like to build a company through multiple eras in a way that I think is very useful for founders and other kinds of businesses. They may not apply the same techniques, but they can aspire to the same level of clarity about what their business requires at each moment in its evolution and how that changes as the business grows.

• 31:19Patrick O'Shaughnessy?

  There are two other really great ideas that I found extremely useful for thinking about my own business, or just business more generally. The one is this idea of the red test. So I want to describe what the red test is, or how you do it. And the other, I'm forgetting the name of the post, but basically about the major things that a company should do to be successful. I think maybe it was 10 things. Everyone loves lists of 10 things. But let's start with the red test and what that is, how it can be usefully applied by businesses, and then we'll go to that longer list.

• 31:47Speaker 02

  Sure. So the red test was my attempt to distill, if I could only answer one question about a company, to make a determination of whether that company is well managed, what would that question be? And the question is, are they clear about and talking about the things that are red? What I mean by that is that in any given company, there are going to be some things that are working basically in the way that they need to for the company to shape its goals, and other things inevitably that aren't. Some of those you could describe as yellow in the sense that there's a fixable risk. Others are red in the sense that they are simply off track.

• 32:32Speaker 02

  And some of the reds, the owner of those particular goals is also stuck. It's possible to be red and not to be stuck. You have a pretty good idea of what you're going to do to turn the situation around. The most troubling situations are you're red and you're stuck. Now, often, in most companies, there isn't actually an explicit dialogue about what color things are. Probably there's some set of financial goals and everybody's clear whether those goals are being met or not being met, but a level behind that, there's great ambiguity. Are we... On track on our product innovation efforts?

• 33:16Speaker 02

  Or not on track on those efforts? Or if there's three strands of product innovation? Well, this one's green, that one's yellow, that one's red. And then when things are red, if that's ever synthesized at all, there often isn't an inquiry into, why is it red? What stance are we taking? Do we believe the owner can fix it? Are we willing to wait and see? Are we shifting around resources? Are we changing the brief? Brief being what outcomes by when, subject to what constraints? What are we doing about this thing not being on track? There's a beautiful story about Alan Mulally at Ford.

• 33:59Speaker 02

  When he stepped in as CEO, Ford was losing, I forget the exact number, I think it was something like $18 billion a year. And he reorganized the management team and created basically a matrix. There were people running the geographies and people running functions and created a management meeting that he then continued throughout his tenure as CEO. And he asked the leaders to bring in a scorecard of what were their major goals? And what color were people? And at first, everybody was green. Here's this company, they're losing $18 billion a year. All the colors are green. And eventually, Mark Fields, who at the time he later became CEO of Ford,

• 34:44Speaker 02

  at the time was running North America, brought in a scorecard that showed that a particular vehicle launch program was red. There were a set of supply chain issues. The launch was getting delayed. To Mark, it was straightforward, objective. This thing is off track. And everybody thought, he's toast. And then Alan just starts applauding when he sees the red and there's a discussion of who can do what. And actually, there are a couple of people in the room who could help Mark with the particular supply chain issues. And they gained a few days. And those few days are actually material when you're talking about launching a new auto model. More importantly, that started creating a culture of you could talk about the colors.

• 35:29Speaker 02

  So I think it is impossible to overstate the value of the intentionality that comes from saying, what are all the things that we're trying to do? What color are those things? Or use a number or whatever scheme you want, but something that forces synthesis about where you stand. Why? And what stance do we take? Just because something is off track doesn't compel you to prioritize fixing it, but it should compel you to have a perspective on, am I going to keep doing the same things? Am I going to try something radically different? Am I willing to fail on this particular dimension?

• 36:12Speaker 02

  That thinking and the dialogue around it is the really valuable.

• 36:16Patrick O'Shaughnessy?

  It's such a simple system, but also I imagine almost everyone listening can think through the things in their business or their personal job they're trying to do and very quickly assign one of those colors. It's a good question to ask yourself, what's red? And am I doing something about it? It's pretty simple.

• 36:32Speaker 02

  Yeah. And am I putting a lot of effort into things that are green? That might be redirected? Are there reds that I'm willing to let go of? And useful in other domains of life? I'm a parent of a soon to be five-year-old daughter and a soon to be four-year-old son. There are streams in my personal life. How much do I really understand what my children are learning in school to be able to encourage and reinforce that? So do I have such and such a bar on which I'm failing? Or is a lower bar, okay? And if I hold the higher bar and I'm failing, like, okay,

• 37:15Speaker 02

  what am I going to do about that? I think people often, in every facet of their lives, don't define and therefore skate by rather than saying, hmm, I actually don't need to hold myself to an especially high standard on this. And now I'm going to avoid the psychological drag of thinking, maybe I'm missing something. Or it is important, in which case now I have a design problem about what am I going to do to achieve whatever standard I believe is important?

• 37:47Patrick O'Shaughnessy?

  So if the red test is one great Way of understanding if a business is well managed. I'd also love to hear, now I'm remembering the title was the 10 principles for how to run a company or something close to that. We don't have to go through all 10, but which of those pops to mind as especially important, you think, or useful to those listening, those principles?

• 38:07Speaker 02

  So because it relates to a number of things that we've been talking about, let me focus in on the delegation of responsibility. It's like, this is a thing that doesn't happen in the Valve culture because all responsibilities are formed organically by people or groups deciding to do things. But for most companies, they want to commit to goals. And that then requires responsibilities be delegated to different individuals or teams. And one of the principles is about a construct for delegation that we call sponsor-owner-brief.

• 38:48Speaker 02

  And the idea is the sponsor has a higher level of responsibility in the organization. They are appointing a person or a team, let's take a person, to be the owner of a responsibility. And that delegation requires a meeting of the minds on what I've been calling the brief, what outcomes, by when, subject to what constraints. And those constraints could be follow this strategy, stay within certain principles, come to me for agreement on these decisions, don't overspend this budget, don't hire anybody new, make sure that Joe agrees with you, whatever it is.

• 39:29Speaker 02

  When you have clarity about who is the sponsor, who is the owner, when you're disciplined about is there truly a meeting of the minds around the brief, now you have the fundamentals to be able to talk about things like the red test. The owner has sufficient clarity about the brief that if they're not seeing themselves on track, they need to, as Mark Fields did, call out the red. And the sponsor can, I think of it as like in the Odyssey, sailing between Scylla and Corybdis. On the one side, the sponsor wants to avoid micromanagement, which may be the only person

• 40:12Speaker 02

  to have attempted a technical definition of micromanagement in the Harvard Business Review. Technical definition I'd offer is, micromanagement is when the sponsor tries to do the owner's job. The owner is responsible for shaping a path to the goal. The sponsor can offer advice, the sponsor can change the brief, they can change the owner, but the sponsor shouldn't tell the owner prescriptively how to get to the goal. Otherwise, they might as well not name the owner in the first place. So that's one of the monsters. The other monster you could call abdicating management, which is essentially magical thinking, that just because I've delegated the responsibility to somebody, that confers the ability to achieve the goal.

• 40:55Speaker 02

  The founder goes to the new head of digital marketing and says, I want you to achieve such and such CPA at these volumes by this time. Okay. At that moment, that's a wish. It may or may not be an achievable goal. Even if it is an achievable goal, the owner may or may not be able to do it. And when sponsor and owner are both really clear about the brief, able to talk in a direct, clinical way about where on the field they stand with the brief, when the owner is understanding their ultimate responsibility, including the responsibility to escalate

• 41:39Speaker 02

  if it's red and they can't see how to make it not red, and the sponsor is sort of aware of Does the owner know how to do this? Don't they? Am I? How am I avoiding abdicating? How am I avoiding micromanaging? If it's red, am I changing the brief? Am I changing the owner? Am I changing something about the context? Am I letting it play out? That kind of exchange is what causes most good management to happen. And especially if you combine that with another principle, which is separating out the evaluation of outcomes from the evaluation of people, that you can have a truly genuine exchange.

• 42:20Speaker 02

  And going back to everything that we said about evaluating candidates, all those same points apply, but even more strongly when the people actually work in the organization. And so people are producing some mix of successes and failures, and there could be lots and lots of causes behind those successes and failures. When there's a genuine attempt to unpack, okay, what have we learned about both the person and the circumstances? What inferences from what data? Now, all of a sudden, there's a really rich basis on which to make decisions about what people should be doing.

• 42:58Patrick O'Shaughnessy?

  I know this framework is good because of how quickly it makes me imagine some obvious mistakes that I'm making in both directions. It raises for me an interesting nuanced question, which is, I'm very interested in this idea of customer-led innovation, that by being very, very close and intimate with our customers in a, for us, it's in software, in a flexible kind of product environment where the costs to refine product are very low, we can afford to be really close to customers and almost let them design the product. We're more like fulfillment. Creates like this weird problem in the brief part of this, which is the micromanagement seems like it's a problem because the brief constantly changes. So how would you recommend dealing with kind of this sponsor-owner brief in the world

• 43:43Patrick O'Shaughnessy?

  of software, where what you're trying to do changes as you do it because you realize it isn't perfectly built for the customer based on their feedback?

• 43:52Speaker 02

  Sure. Part of what comes out in that example is the question of what is the level of abstraction of the brief? And sometimes a brief should be more like commitment to a process. Execute well, the process of engaging these customers in a way that takes us to this place. Something that comes up on this question of customer-driven innovation is when that's your business, choosing your customers matters quite a lot. And you talk about the flexibility of software.

• 44:32Speaker 02

  The most beautiful examples that I've ever seen around client-driven innovation is at the other end of the scale in the aviation equipment industry. And Jim Collins writes about in his passage on B-hags and Built to Last, Boeing's development of the 737. And there is a spec. This is a plane that needs to hold this many people, this seating configuration, able to land on this runway at LaGuardia Airport. It's a very, very specific spec. And that spec came from Boeing choosing to focus on a couple of customers who wanted

• 45:17Speaker 02

  different things from a bunch of other customers that Boeing could have listened to. But Boeing's strategic insight was that these customers, if Boeing could give them a jet that would enable them to fly to regional airports, would unlock a lot of growth in the American aviation market. Boeing was right, and that created a leading, almost an impregnable position in their industry for decades. All of that came down to choosing which customers and then being really, really serious about that spec was like a brief on which they bet the company.

• 45:57Patrick O'Shaughnessy?

  How then does one choose the right customers?

• 45:59Speaker 02

  I wish I had a decision role, and I think the answer is probably very different in different kinds of businesses. But going back to maybe the single headline word for this discussion that we're having could be intentionality.

• 46:19Speaker 02

  Intentionality about like, okay, what, what am I hiring the customer to do? And if I'm hiring the customer to create a breakthrough innovation with me, that's probably different than hiring a customer to generate small refinements, both of which are different from hiring a customer to be a great reference to me and prove the value of what I'm offering to others. So getting very clear about just what it is that you want from the customer selection probably gives you a lot of clues about at least who the shortlist might be and a good feedback loop as you make imperfect choices to see whether those choices are delivering what you'd visualized or not.

• 47:05Patrick O'Shaughnessy?

  So I want to put a cherry on top of, this has worked itself nicely into like a web of interesting ideas. And there was a passage that you sent me, which I thought was absolutely awesome that I'd love to have you describe, which was Bill Hubbard. I'm curious if you could describe what it is, basically, not without too much detail, and why you're such a big fan of this passage of writing.

• 47:24Speaker 02

  Bill Hubbard is an architect and an architectural theorist. And he wrote a book with the unappealing title, A Theory for Practice. Who knows what that would be about, but I'm the kind of person who would read a book like that. And he writes very early in the book about his visits to Charles and Ray Inz's house. And he describes vividly what that experience of visiting them was like, the environment that they'd created in which everything there in their house had a particular meaning and feeling. It wasn't conceptual, it was visceral and organic.

• 48:07Speaker 02

  And he came to realize through that experience of seeing

• 48:12Speaker 02

  Charles and Ray Eames live, what it meant to be a designer. And what I saw in Hubbard's passage was the idea that we can choose our influences, that we can choose who our teachers are, whether we ever have the opportunity to meet them or not. And we can hold up the examples of those people and try to decompose. What did those people know about becoming a more perfect instrument of something that I might wish to be an instrument of?

• 48:56Speaker 02

  What did Charles and Eames know about how design could infuse every element of life? And then what could that example show me, teach me? And what is the very next thing that I could do based on that thought? That might take me just a little further, a little deeper into that expression of an ideal.

• 49:21Patrick O'Shaughnessy?

  Wonderful closing idea. I love that it's architecture and sort of something totally different. But again, when I read the passage, I'll post the passage as part of the show notes for the podcast. It instantly draws to mind some similar place that you've been, physical or other, where you just see the system at work and it'll make you want to build one yourself. So a wonderful sort of closing idea. My closing question for everybody is to ask what the kindest thing that anyone's ever done for you is.

• 49:48Speaker 02

  One of the things that comes to mind as I think about my own version of the Charles and Ray Eames experience is, while I was an economics major in college, I wrote poetry on the side and was editor of the, poetry editor of literary magazines, spent a lot of my time writing. And when I was going into my senior year, my main teacher, a woman named Lucy Brock-Broida, was leaving Harvard for Columbia. And she asked me, what did I want to do with poetry the next year? And could she help me? And I said, well, if I could do anything at all with no constraints, I'd love to be a student of a man named William Alfred, who was, wrote First Place.

• 50:34Speaker 02

  And I'd taken his last class, his last lecture class when I was a freshman. He'd retired a few years before. But if I could study with William Alfred, that would be my ideal. And she called him up and William said, yes. And invited me to his house in Cambridge once a week. And he would prepare me lunch and make me tea. And we would talk about poetry that I was reading. And I would bring him one of my poems and we'd discuss that. There was a moment when we were reading Elizabeth Bishop, and he cried because he missed her. And just the chance in the late years of Bill's life

• 51:15Speaker 02

  to have been able to see how he thought and see how he lived. It was very much like what Bill Hubbard experienced with the Eameses. And just a total gift.

• 51:31Speaker 03

  Well, this has been such an interesting conversation, so different. And I'll listen to it often as a reminder to take a step back and think more broadly about what I'm trying to accomplish, what the strategies might be to make that happen and therefore be a lot more productive in life. So I appreciate all of the interesting writing and insights here today. Thank you for your time.

• 51:52Speaker 02

  Thank you.

• 51:55Speaker 03

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, at Patrick underscore Oshag, O S H A G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.