“Crazy thought experiment: Imagine a new type of company that decided to only do what it was really good at and essentially outsourced everything else.”
Because revenues of private companies tend to be secret, most venture-backed companies have historically bragged about how many employees they have. A CEO will say: “we went from 100 to 200 employees last year” as if fast employee growth is always a good thing.
But this is changing: there is a new status game brewing between companies concerning who has the fewest number of employees, centered around who is engineering greater amounts output with less staff. Indeed, the freedom to iterate quickly is status. More resources along with lower headcount means that they can dominate new markets. This is because they are tripling down on their strengths.
In the future, those who achieve the greatest results with the least number of employees will be admired above all others; the key statistic to look at is the go-forward net revenues per employee because it best encompasses the company’s leverage. What matters is each employee’s productivity and how the business itself can scale?
This statistic doesn’t just ring true for the technology space, rather any business should be aiming to maximize that metric. By doing so, every employee feels and acts like Warren Buffet; they’re investing their capital (time and skill) into the company. Every good CEO should be spending time trying to increase their employees’ productivity, which is the strongest form of leverage the company retains.
The Whatsapp Effect
Chris Dixon elaborates on this:
“WhatsApp was able to build a global messaging system that served 900M users with just 50 engineers, compared to the thousands of engineers that were needed for prior generations of messaging systems. This “WhatsApp effect” is now happening in AI. Software tools like Theano and TensorFlow, combined with cloud data centers for training, and inexpensive GPUs for deployment, allow small teams of engineers to build state-of-the-art AI systems.”
I’ve written about the various features that made WhatsApp special: at acquisition, the company had a record market value per employee of $400 million (only 55 employees in total!), something that would be unheard of even a decade ago.
“One of the reasons WhatsApp built such an amazing company is that they intentionally tried to have as few employees as possible. Having fewer employees reduces their communication burden and allows them to focus on only hiring all-stars. (note: This does not mean they have lower expenses as outside services are not cheap).
WhatsApp outsources many of the core functionality of its app — like telephony through Twilio. Most people think it is crazy to rely on an outside company like Twilio for something so core to the product … but it is actually genius. If WhatsApp brought telephony services in-house they might actually reduce cost but then they would always need to be investing in this area and have a good product. And they’d likely need to hire a few hundred people to replicate what Twilio does for them which would massively increase the communication burden on the company.
Today WhatsApp uses Twilio with a very clear API and very clear SLA (service level agreement) for uptime, features, and performance. If Twilio does not deliver, WhatsApp can move some (or all) of its needs to a competitor to Twilio. If WhatsApp instead had employees that were not delivering, it would be a massive burden to change.”
The rise of SOAs (service-oriented architectures) allow engineers to understand code better because it is in self-contained chunks. This feeds into the second step, SOCs (service-oriented companies) who specialize in being an API that plugs into a codebase. These new companies like Twilio (APIs as a service) change the game – they’re a significant reason why companies aren’t hiring as many full-time employees. Why spend the time and money when another business can do that task better? The opportunity cost of making an inopportune decision is devastating.
Using vendors is a win-win because resources are distributed more efficiently, making the product phenomenal overall. I elaborate on the importance of staying lean:
“Leaner companies perform better because they can move quicker, have less needs for bureaucracy/overhead, and can more easily have everyone rowing in the same direction…This world might lead to MORE employment (not less) and also make employees much happier because a higher percentage of people will be in the core function of what the company does.”
Another example of this is Instagram. At acquisition (and with no revenue), Instagram had a market cap of $77,000,000 per employee because it only had 13 of them. The fact that Facebook believed it was worth $1 billion at the time of acquisition says that Instagram had leverage; each employee was inherently providing immense amounts of value. In any industry, this is what companies should be prioritizing.
Some companies are hiring at all costs. Many SaaS companies have $100 million ARR with 1,000 employees and then reach $200 million ARR with 2,000 employees. They never achieve the leverage they need. So, how does one start to outsource non-essential tasks?
Tripling Down On Your Strengths
As I wrote in “Almost every company spends over 95% of its time doing what every other company does”:
“If you start stripping out everything that is not unique to your company, you’re left with just a few people who make the unique parts of the company. And then add a few people who need to explain its unique benefits to the market. Imagine your 100 person company going to 6 people. Imagine your 1000 person company going to 20. How much faster could you move?”
The key question is why haven’t companies adopted this mindset 25 or 50 years ago and how does one start to outsource non-essential tasks? Primarily, corporations of yesteryear were full-stack – they rarely used vendors and instead opted for adding many heads into the fold, creating a hierarchy and thus a stringent bureaucracy. This is changing: today, vendor selection is becoming a rare and prized skill as it frees up time and money that businesses can invest in higher ROI activities like R&D.
When Safegraph selects software vendors, we “look for products that get better quickly. Look for products that fix bugs and performance issues quickly. Look for products that add new features. Look for products that keep delighting customers.”
The reason for this foundational shift is that abundant amounts of capital seeking strong financial returns have flown into the software sector, which has seen enormous levels of productivity growth. Productivity growth is about generating greater output with less input; why companies are obsessed with finding “10x” engineers. Utilizing vendors frees up time to focus on employees who can operate in all markets.
The intersection of powerful software tools and cheap capital means that companies can build higher-quality products with fewer people as the capital can go to acquiring the best talent for more experiments. Basically, companies should be spending time on what makes them unique.
We’re seeing this play out as the ability to select vendors becomes more important than even the ability to recruit great talent. Not every worker should be an employee. Great companies like Apple and Google (who both have incredibly high revenues per employee) understand this by choosing to hire contractors to work on peripheral projects rather than meaninglessly add headcount: the tech industry has added surprisingly few jobs since 1990. Over the last 24 years, direct employment in tech products or services companies has grown by 31 percent, which comes out to an average growth rate of 1.1 percent.
Who the full-time employee is matters more so now than ever before. As Peter Thiel states: “The best start-ups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful start-up are fanatically right about something those outside it have missed.”
The best companies are obsessed with boosting their leverage whenever possible. Scale is a massive factor in what helps companies upgrade from good to great.
As I have written about in the past, the best CEOs are looking for leverage:
“Most Fortune 500 companies today have ten times the number of vendors that they had ten years ago. Yet these same companies have, collectively, roughly the same number of employees. So vendor management is becoming more important over time. Market cap per employee is going up dramatically as vendors leverage not just the CEO but all employees.”
Companies with higher revenue per employees are more productive because their workforce is doing more with less. Conversely, lower revenues per employee probably means that the employee isn’t generating much output and might even be unnecessary – they could be trapped in a “BS job.” The author, David Graebar wrote a fantastic book on the modern prevalence of BS jobs. He defines them as: “A form of paid employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though, as part of the conditions of employment, the employee feels obliged to pretend that this is not the case.”
Companies in the past made do with thousands of employees because they needed to. Today, vendors help alleviate this problem. Over time, these “BS jobs” should go away – people can work in jobs that need greater creativity and empathy – what humans excel at. This would be a great burden removed for the world. Getting the same, if not better results, with fewer employees is the way to win for both the employer and the employee. They both see greater levels of freedom and as we know, freedom is status.
One of Safegraph’s core values is tripling down on employee leverage. We wrote:
“Because we hire only the most talented people, SafeGraph team members must constantly seek leverage. We put an extremely high value on our own time. A team member rarely does a repetitive or mundane task more than a few times before she automates it (through engineering, outsourcing, selecting a vendor, etc.). SafeGraphers should spend over 75% of their time doing things that are really hard and that only they can do. We know that the more we can leverage ourselves, our teams, and our organization, the bigger SafeGraph can scale.”
Every employee should think of themselves as a capital allocator because in a nutshell, all of our jobs are to allocate the company’s capital (physical and financial) for the highest return possible. Time is the one thing you cannot buy more of; therefore, we have to spend it wisely and on the highest ROI activities. The ideal goal is that everything else is outsourced.
I wrote in “Almost every company spends over 95% of its time doing what every other company does”:
“As an example, when I was at LiveRamp — we owned metal and actually had to deal with servers. It was a LOT of work. Now LiveRamp is in the cloud (they use Google Compute) and a lot more time can be spent focusing on the business. Thousands of other companies went through this exact same process. When we started SafeGraph (in 2016) we, of course, decided to have compute-as-a-service (we use Amazon Web Services).”
Imagine turning the other spokes of your business into time-savers like AWS? How much more could you accomplish as a team and how fast would you go? The sky’s the limit.
Special thanks to Anirudh Pai for his help and edits.
Makes a lot of sense; enjoyed reading this, especially because we’ve been so focused on building a solid business without being distracted by hype.
Very Interesting. I wonder at what point transaction costs overtake the advantages of specialization? I also wonder whether the leverage created must be at least partially of direct benefit to employees for the productivity gains to be longer lasting.
Pingback: Company Culture Is How You Are Different, Not How You Are The Same - Summation by Auren Hoffman
Pingback: A Recession Is a Perfect Time To Kill Off Parts of Your Company That No Longer Work - Summation by Auren Hoffman