Thoughts of The Week #61 (10 May 2020)

Thoughts of the Week is a review of the most interesting thoughts I encountered on Twitter and on other mediums during the last week. It is free, but if you like it, you can support me on Patreon.

1/5: Causality

“I am in Atlanta where restaurants have been ALLOWED to open. The ones I know are closed. Nice to blame local governments. It was bottom up.” – Nassim Nicholas Taleb

It is always tempting to attribute causality to the top-down. Instead, the arrow of causality is most often bottom-up. Regulation often formalizes what has already been happening on the ground. Flight traffic and restaurant reservations plummeted before regulations kicked in.

It’s not that all change is bottom-up, but:

long-lasting change usually is (here is why)
it’s always worth asking yourself if what looks like a top-down change was initiated the bottom-up way.

This phenomenon applies to many contexts: companies pivoting to what others (the bottom-up) proved working, managers promoting those employees who demonstrated deserving it, gatekeepers opening up once someone demonstrated having a (bottom-up) following.

The top-down usually follows the bottom-up. More precisely, it goes as follows:

The bottom-up initiates change, locally.
If it sustains over time, the top-down formalizes it.
The rest of the population adopts it, even if it lives far from who initiated point (1).

The implication is: if you want change, do not live under the illusion that you need to wait for the top-down to give you the green light. The top-down will give you the green light once it is shown that your idea works (and it’s on you to show them).

2/5: Barriers to Exit

“One of the most interesting seldom mentioned concepts in business is the barrier to exit. You decide to buy a truck and start a trucking company. Oh shit, it’s harder to make money than you anticipated. If you don’t make it work, you’re losing your house. So you “make it work” and eek out small profits, ruining the profitability of the entire industry. You launch some product and it fails. So you discount it, hurting not only your bottom line but those who compete with you indirectly. Barriers to exit. Few in software!” – Molson Hart

Some other examples in which lowering barriers to exit introduces good outcomes.

Career management: if you deliberately lower your barriers to exit your company (by developing valuable skills, building up some savings, connecting with people who could facilitate your search for another job), you will be more confident in your salary negotiations and will take the kind of career risks that can bring great results. This is true even if you have no intention of leaving your current company – simply knowing that you could will lead to better outcomes at your current role.
Contract management: similarly, lowering the barriers to exit from a contract, from a meeting, from an engagement will allow you to qualify customers and partners better and to pull out from projects which would end up in a huge resources sink.
Product management: lowering the barriers to exit from a project or a product (by making it tentative, using stage-gate budget and pilots, etc.) will lead to you and your company working on better projects and products.

3/5: The Marginal Buyer

“An important thing I’ve learned from Keith Rabois: you should ask yourself “why me?” before investing. VC is extremely competitive, why do you have an edge on this? Could be knowing the founder from work/personal or knowing the industry or their geography. Must have an answer before investing.” – Delian Asparouhov

“‘Why am I the marginal buyer?’ is a very useful lens on a lot of things that aren’t strictly speaking finance. Two interesting examples: Company believes it needs X done. Why are you the marginal person whose efforts would cause X to be achieved? Why is X sufficiently high in priority to be the marginal task you take on in a given interval of time?” – Patrick McKenzie

I love this lens. It’s especially effective in zero-sum games (which should be participated only by those with a certain advantage and only after careful consideration).

4/5: The Marginal Builder

“Build systems with components that self-improve over time. Managed services should be used wherever possible in order to avoid diverting attention from building differentiated functionality. The goal is no proprietary systems other than business logic and core IP.” – Zach Kanter (link, worth reading)

This is a variation of the previous lens, in a way. Only build what you can build better than everyone else, and outsource the rest.

However, Zach Kanter highlights a point seldom mentioned. Outsourcing is not only resources prioritization. It is also an implicit “automatic R&D”, as suppliers do the Research & Development for you.

Of course, there are dangers in outsourcing: the loss of independence, which manifests to exposure to supplier risk (which can be managed, for physical goods, by having multiple suppliers subject to uncorrelated risks) and barriers to exit (if they are high, the supplier can rise prices or degrade quality almost at will).

Another consideration is scale. It might make sense for a small company to outsource everything but the core business. It makes less sense for a country to do so. The former can quickly pivot / reorganize / liquidate / etc; the latter cannot.

5/5: Status signaling

“CEOs often brag about their employee headcount. Companies should START bragging about how MUCH they do with so FEW people.” – Noah Kagan

Showcasing the ability to sustain high costs has always been a strong status signal. Inefficiencies are a signal of past strength – but not necessarily of future ones.

Just like with loans, the discriminant is whether the costs being displayed are assets or liabilities. Do they generate future strength or future weakness? During the next moment of difficulty, will they help or hinder? Do they enable or prevent adaptation? These are the questions worth asking.