What is an innovation services firm worth? I had to answer this question when we started broadening the ownership of my company beyond its co-founders.
The traditional answer to the question of what a service firm is worth is, “not much”. All the assets walk out the door at the end of each day. Since talent is portable, a change of ownership could result in a mass exodus, destroying much of the purchased value. There are usually very few hard assets in a services firm. Who would buy such a thing, or if they did, pay very much for it?
Yet the last few years have seen numerous transactions in which software development consultancies have been purchased for significant sums. This is partly explained by the general shortage of software talent, and by the value which such talent can create in a product firm. Rapidly growing product companies buying their vendors, and private equity investments in services firms, exemplify these transactions. I was not interested in an outside investor, but I still needed to establish our value.
My goal was to transfer ownership in the company to our employees. I believed then, and continue to believe strongly, that ownership should be purchased, not gifted. Ultimately, my quest for the correct answer ended in the realization that there is no “truth” to be discovered here, and that my ownership is worth what I’m willing to sell it for, and what someone is willing to pay for it. The best way I could determine to find that mutually agreeable valuation was to calculate it from financial first principles.Read more »
We have very few rules at Atomic Object. Our employee handbook is intentionally labeled “Atomic Guidelines”, and is full of examples, expectations, and explanations but very few concrete rules. The rules we do have concern time tracking, start of the workday, and contributing to the blog. We favor guidelines over rules because it forces each one of us to engage with the spirit and intent of an issue, and leaves the responsibility for deciding on a course of action with the individual. (I am quite familiar with the folly of trying to create a perfect, complete specification, i.e. rules, for anything sufficiently complex, whether it’s a software system or a company.)
Nearly three years ago, Atomic started experimenting with a new form of governance. Today, our Board approves nearly everything brought in front of it. Does this mean we’ve created a rubber-stamping sham of governance? Is Atomic run as a dictatorship with a thin veil of employee participation? Has our experiment in renewable governance failed? I don’t think so. To the contrary, I think it’s been a huge success. In this blog post I’m going to explain our experimental governance structure, as well as why I think the high approval rate of decisions and initiatives is an indication of success.
The philosophy behind Great Not Big isn’t simply one of avoiding growth, or a hard limit on how large Atomic Object might eventually be. Instead, it’s a question of focus. Our focus and priorities have always been on being as great as we possibly can be. Growth is an unintended consequence of our achievement, such that it is, at greatness. We opened an office in Detroit last year to find out if we could replicate our model for a software product development consultancy. Doing so was a means of managing the pressure to grow that happy clients bring, while maintaining a size in Grand Rapids that kept us focused on being great. The experiment went well, and we’ve successfully bootstrapped an office in Detroit that has been serving clients, attracting talent, and engaging with the technical community for the last 13 months.
AO Seeks Managing Partner for Detroit Office
Atomic Object is searching for a managing partner to lead our Detroit office. The managing partner role at Atomic is a challenging and correspondingly satisfying one. It is an opportunity to build your own software product development office, supported by a proven model, strong brand, and active mentoring and training.
Our Detroit office currently employs five great developers, so this isn’t starting from scratch. What this office ultimately becomes, however, will be crucially dependent on our new managing partner’s skills, dedication, and ambition. This position is a rare opportunity for a developer or designer who relishes the idea of building and leading a team of dedicated, passionate makers.
We’re looking for someone who is excited about contributing to the revival of the city of Detroit and interested in doing the hard work to gain the entrepreneurial rewards associated with the creation of long-term, sustainable value for our clients, Atomic, and themselves.
Transparency in a company does a lot of great things. Perhaps first among them is it builds trust. Transparency also creates the potential for broader employee participation in the analysis and investigation that proceeds major strategic decisions. If you can share an opportunity and your ideas early, you can tap your internal brain trust and improve your odds of success, I believe. What I’ve recently figured out, through some painful experience, is that taking advantage of the potential that transparency creates requires more than openness from the leadership of the company. It also requires what I’ll call “positive engagement” on the part of employees.
There are easier places to work than Atomic Object. We don’t specialize in one industry or technology domain, so we’re constantly learning. We push hard to build the best app possible for a given budget, and ideas always exceed budget. We all contribute to our marketing efforts through the company blog. Everyone’s expected to understand the economics of the company and make smart decisions with their time. We push ourselves constantly to develop professionally. In short, we have high expectations of ourselves and each other.
So why do talented people with lots of employment choices choose to be Atoms? Daniel Pink’s three dimensions of motivation are part of the answer. We score high on mastery and autonomy, and we adopt our client’s purpose for the duration of each project. A serious commitment to sustainable pace keeps the intensity manageable. Lastly, and perhaps most importantly, we have strong bonds to each other. Those bonds were strengthened last year with an experiment I called “pair lunch”.
People are the only valuable asset of an innovation services company. While reputation, client list, culture, standards and tribal knowledge are also valuable, those all derive from and are maintained by people. Considering how important people are to Atomic Object, it seems crazy, when I think about it, that I don’t have a reliable way of measuring the state of our people. I’ve put more thought and effort into financial and technical measurements than people measurements.
We measure things like test coverage, project test status, billable hours and utilization, and we track revenue and profit margin. These are all strongly determined by or related to successful projects and happy clients. And happy clients, in turn, presuming you employ people with the right skills and expertise, derive from content, satisfied, happy employees. This might be the most important thing I should be measuring.
So what should I try to measure in people? Contentment? Satisfaction? Fulfillment? Joy? Happiness? — since I’m not sure, I decided to stick with the most general term, which is happiness.
Admittedly, measuring happiness of a group of people isn’t straightforward. But suppose I could reliably measure the aggregate happiness of my company. What would it tell me? Would it be reliable? Would it be helpful?
I have been aware for some time that my position and the demands of my job at Atomic Object isolate me, to some extent, from a complete and accurate understanding of how employees are feeling and what they’re thinking. Because it seems like an important thing to know, I’ve always valued receiving insights from Atoms willing to share their observations from “in the trenches.” I’ve recently come to see that this strategy of accepting secondhand feedback has significant downsides. In fact, I’m so convinced now that this is a bad idea that I will, going forward, avoid seeking it out. I will also politely decline when such information is offered to me. However, I think my original intention (attempting to gain an understanding of how employees are feeling) was good, and I have a new idea about how I might better achieve that goal.
Salespeople are most often compensated either fully or partially with commission. The conventional wisdom is that sales people need incentives to sell and should be kept hungry through at-risk compensation packages. I think this is a risky way for innovation service firms to pay the people who are selling their services.
Atomic doesn’t use a commission approach to compensation for the people who sell our services. But in the spirit of regularly challenging ourselves on closely held beliefs and business practices, we recently considered what using an at-risk model of compensation for our sales people would mean. Below I list some of the downsides I see with commissions. At the end I describe how we handle sales at Atomic Object.
Innovation service companies, like Atomic Object, sell their time and talents to help clients grow revenue or expand a market through the creation of software. Without products of their own, innovation service firms have no financial leverage: it’s an hour out, a dollar in. Like a shark that can’t stop swimming or it will drown, service firms need to keep moving through a steady stream of projects to remain in business. Lack of financial leverage means that to be sustainably successful, an innovation services firm needs to maintain an excellent track record, market-relevant skills, and a pipeline of future clients and projects. The inexorable pressure to find projects and execute them well, which I see as valuable, also inevitably inspires owners of such companies to think of ways to generate recurring revenue.