The Future: bigger companies, faster deaths

There are more huge companies than ever before.  That may surprise you, but if you count the number of companies in the Fortune 500 with $5 billion or more in revenue, you’ll find the number has been growing for decades (even when adjusted for inflation or population growth).

While there are more huge companies every year, they’re living ever-shorter lives.  For example, the average lifespan of companies on the S&P 500 has shrunk by around 78% in this century alone.

This graph is one way to illustrate the two trends.  While it hasn’t been drawn to scale or precise slope, it’s meant to convey the gist – we live in a world with more huge companies that die faster than ever.  While the trends aren’t linear (ex. there are short-term wobbles), the long-term course is unlikely to change any time soon.

Company volume and lifespan

These two trends probably can’t extend forever.  For example, it’s hard to imagine a world producing thousands of new $5 billion companies every second, all of which die seconds later.  However the world has indeed entered a new age of business unlike any it’s seen before.

What does it mean to live in a world with ever-more huge companies that live ever-shorter lives? 

1.  The end of “lifetime employment” – for those few who still believe in it.

The idea of going to college, getting a good job, then retiring from that (single) job decades later with a pension has become a punch line instead of an expectation.  With the average lifespan of an S&P 500 company shrinking from 67 years to less than 15 years, even the most steadfast, loyal employees should expect to have two or three employers during a +30-year career.  In reality, the median time US employees stay with any one company has dropped to 4.1 years (7.8 years for government employees).

imgresHuge companies don’t just go belly up in a single gasp.  As they wane, there are often years (or decades) of layoffs, restructurings, desperate share buy-backs, efficiency initiatives, industry consolidations, more layoffs, and even more reorganizations.  The idea of a “safe” job has become a joke.  In reality, there’s a generational realization that everyone’s an independent contractor, whether they know it or not.  You could be laid off at any moment, and everyone needs to look out for themselves.

2.  Greater incentives for entrepreneurism. 

Take away the superficial sex appeal of founding the next unicorn and what you’re really signing up for is a tightrope walk, without a net, where 70% – 90% fail.  Seen this way, entrepreneurs are nuts.  You certainly wouldn’t expect to see people leaving companies like Google, Facebook or Amazon to go on a penniless mission with scant odds of survival.  You wouldn’t expect to see people dropping out of Harvard, MIT and Stanford to do it either.  Yet that’s what’s been happening for nearly two decades.

In a world where huge companies rise and fall with increased frequency, the illusion of “job safety and security” are pulled away from big companies.  So if you’re just as likely to end up jobless, you might as well pursue something you’re passionate about where you’re at least in control of your fate rather than being a cog in someone else’s machine.

As the relative downside of doing a startup versus taking a corporate job approaches par, it also makes sense to take bigger swings with more upside potential.  No “job” is likely to make you a billionaire, but founding the next Silicon Valley unicorn just might.

3.  More independent contractors (vs employees).

In this new world, becoming an independent contractor becomes an increasingly attractive way to mitigate income risks.  Everyone used to want “employee” status while “contractor” status seemed inferior.  Yet today, if you’re an employee, 100% of your income depends on a single source – your employer.  You’re at the mercy of being fired.  However as an independent contractor with marketable skills, you can spread this risk across multiple clients.  With multiple clients, no overlord can cut your income to zero with a single chop.  Independent contractors can also give themselves raises, by signing new clients on their own, rather than begging for raises from a corporate boss.

4.  Successful big companies will operate less like fiefdoms and more like networks.

Once upon a time, the best and brightest looked for lifetime employment at huge companies and few started their own businesses if they had a choice.  In this world, it made sense for huge companies to try and monopolize the best talent, ideas and capabilities.

However in today’s world where the brightest people are increasingly finding better risk-reward tradeoffs outside big companies (rather than within them), the idea of “hiring all the brightest people and ideas” becomes a little more absurd every day.

imagesThis means huge companies need to create masterful networks of distributed talent, ideas and capabilities rather than trying to shove it in-house.  This trend isn’t new – it’s been happening for decades – but if you think it’s bad now, it’s only going to get worse.  When there’s something to be done, instead of companies asking “how can we do this?” they need to start asking “how can we find someone to do this, and entice them to do it with us rather than without us?”

Along these lines, physicist Geoffrey West has been analyzing cities and companies.  Cities, on the one hand, live for thousands of years despite all manner of problems (ex. plagues, war).  Huge companies, on the other hand, are dying at ever-faster rates.  What’s the difference?  Can understanding why cities are so resilient help build better companies?

Yes – and it’s related to everything else in this blog.  In summary, West found a mathematical relationship between city size and productivity:  when cities double in size, each person in the city becomes 15% – 20% more productive.

In contrast, as huge companies grow they end up with diseconomies of scale; productivity per employee drops.

The reason cities become more productive with scale, and huge companies become less productive, is that cities evolve as self-organizing networks (while huge companies are dictatorial fiefdoms).  Cities emerge through decentralized, diverse activities that are driven by people acting to maximize their self interests.  Overall, it’s in everyone’s self interest to be more productive so the city’s structure evolves to maximize that result.  For example, in cities nobody tells you where to live, where to shop or who to make friends with, so individuals find multifaceted, robust structures to accomplish those goals for themselves.  In contrast, companies tell you where to sit, what to do, who to work with and grant little latitude to exercise individual judgment.[i]  Structures and pathways don’t evolve to produce an ideal result, rather they’re dictated from overlords.  In a world where a company’s longevity depends on its ability to create multifaceted, robust networks of talent, ideas and capabilities, companies might consider learning a thing or two from cities about how to thrive in the long-run.

Huge companies love to trumpet their friendly ecosystem activities and collaborations, however the reality of working with huge companies can be quite different.  For example, just ask anyone who’s navigated a huge company’s purchasing department.  There can be onerous contract clauses and absurd requirements that are “non-negotiable.”  Payment terms can be insanely hostile, with frequent “missteps” that delay payments even further.  Decisions and paperwork are often tortured and slow.  In other words, it’s easy to talk about building fluid networks of talent, ideas and capabilities, but transforming a huge company from a fiefdom to an attractive network is harder than it looks.

While a lot more could be said about this topic (and said in better ways), the point is to call out two trends that are fundamentally redefining what it means to have a job, a career, and to be a business.

The days of lifetime employment are bygone.  There are increasing incentives for the best and brightest to strike out on their own.  This means huge companies need to figure out how to transform into masterful networks of talent, ideas and capabilities rather than oppressive fiefdoms.  Meanwhile, huge companies resisting these trends can increasingly look forward to swift and certain death.

 

 

 



[i] See Kallokain, Why Cities Live and Companies Die, <http://kallokain.blogspot.com/2012/11/why-cities-live-and-companies-die.html>, Sunday, Nov. 11, 2012.

This Post Has One Comment

  1. Jeremy K.

    Smart engineers find a new job every 5 years at higher pay. Only suckers are loyal to corporations that will never be loyal back to them. This is true.

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