We have Perry Marshall and Luke Hohmann here. Perry Marshall is the bestselling author of the 80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More. He has several other books. He’s one of the most expensive consultants out there and there’s a good reason for it and we’re going to find out. Luke Hohmann is the Founder and CEO of Conteneo and we’re going to find out what he’s been working on that caught Verne Harnish’s attention because it was such an unusual way of having people collaborate.
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The 80/20 Sales and Marketing with Perry Marshall
I am here with Perry Marshall, who’s been endorsed in Forbes and Inc. Magazine as one of the most expensive business consultants in the world. Clients seek his ability to integrate technology, sales, art, and psychology. He founded the $5-million Evolution 2.0 Prize with judges from Harvard, Oxford, and MIT. The prize aims to solve the biggest mysteries in biology. Harvard Business Review featured his 80/20 curve of productivity tool used by NASA’s jet propulsion labs at the California Institute of Technology. His Google AdWords book laid the foundation for the $100 billion pay-per-click industry and techniques. His pioneer are standardized best practices. The Ultimate Guide to Google AdWords is the world’s bestselling book on internet advertising. It’s fascinating to look at all of your work, Perry. I’m glad to have you here.
I’m glad to be here and we’re going to talk about some things that will shift your life if you can ingest them. I’m looking forward to talking to you.
You have quite an interesting background. I didn’t realize you had worked at Amway for a while.
Yes, I was a starry-eyed, enthusiastic Amway distributor for about five or six years. That was my street education of figuring out what’s not real and what’s real in the world. It’s a whole long story in and of itself.
What did you get out of that? What was the biggest takeaway?
Two things. First off, I learned the hard way that you only own something if you effectively control it. You can “own” something, but if you don’t have any real control over it, in that case, I didn’t have a unique selling proposition. I was doing the exact same thing that 100,000 other Amway distributors were doing. It took me a long time to understand that you can’t build a business that way. The other thing I got out of it though, which has served me very well, was I learned how to tell a good story. If I had to go through that to learn how to tell a good story, then it was worth the trouble.
One thing that’s true in business is that it’s not the person with the best technology or the best medical breakthrough or the best scientific advancement or whatever. It’s the person who tells the best story who wins. It’s even more true in the 21st century than it was in the 1990’s. I benefit a lot from that and I’m amazed at how many entrepreneurs cut their teeth in some form of a direct selling or multilevel marketing or something like that. I’d say especially prior to the internet was where people develop their chops and it’s extremely common.
It is interesting to look at the sales background. I’ve had 30 years or more in sales and thinking about what you’re saying about telling a good story, that was what we were taught to do is paint a picture in customer’s mind. Paint something that they can relate to and think about. When you talk about telling a good story, you have told some good stories in all your books. You help people so much with all of your work, but you’re focused on a lot of social media things. I’m interested in AdWords appealing to you. Story is such a big part of what appealed to you to learn about Google AdWords and some of the other advertising.
In Google AdWords, you have to tell a story in 130 characters or 95, not including the website address. What appealed to me, I’m an engineer by education and Google was the search engine started by engineers. It took a while for Google to get traction because nobody understood it. I remember reading this article in some airplane magazine about all the different search engines and then there’s Google. Then Google is the one with an all-white page and it doesn’t have any bling flashing. Yahoo! had all these little categories and things and banner ads and everything. What the Google guys said was, “We are going to engineer a way for people to find all the world’s information,” and they completely prevailed.
I was already a fan of Google before their advertising ever started. I was probably one of the first people start using it. Then their advertising came along and it only took about a day or two of playing with it to realize, “This is the biggest thing to happen to advertising in 50 years.” Google, more than anybody, turned the internet from a Wild West to an actual civilized place. You could get five cents on a keyword and the whole English language was up for sale and somebody clicks on your ad and now they’re on your website and you have a chance to engage them with whatever it is that you are doing. You could split that. It’s super easy and that was the thing that hooked me.
I could write not just one ad but two, three, four, five, six ads. I could run them all against each other and maybe by 3:00 PM, I might already have a winner. That totally captured my imagination and I went on this binge. I’m writing a thousand ads and I’m testing all this stuff, and I could take a person to the exact page that I wanted to take them to on my site. I could create the exact experience that I wanted to, and I didn’t have to rely on happenstance or chance or anything because I controlled the conversation.
It was the ability to control a conversation, enter the conversation inside somebody else’s head, that set my mind on fire. Maybe a year and a half later, I found myself being the Google AdWords evangelist, if you could believe it, and teaching people how to do this because I had come around this bend and I realized what was going on, but I started to figure out the rest of the world has not caught up to this. They don’t know what’s going on at all. The world has shifted beneath your feet. Get with the shift.
I love all the A/B testing, all of the things you’re talking about. It’s confusing to a lot of people. I’ll give you an example. I’m writing a book on curiosity and so the word ‘curiosity’ could send you to NASA. How do you pick the right word? You said you were able to put the person right to an exact page. How do you pick a word? If everybody likes innovation or if everybody’s using curiosity or if everybody’s using certain words, how do you own that? What did you learn from the A/B testing that taught you what to put into it?
This is one of the tricky things about paid search advertising. Here’s an example of the first time I learned this particular thing. I was giving away a CD about how sales people could get rid of cold-calling. I wrote these ads and I had these landing pages and everything was all nice and nifty and I bid on the word cold-calling. It took me several months to realize that most of the people that typed in cold-calling where people that had gotten a cold call during dinner and wanted to figure out how to get rid of it, which was going to help me one iota. In fact, if Google AdWords hadn’t been brand new and if it hadn’t been the case that I was buying these clicks cheap, all those people would have wiped me out financially from all their searches.
This happens a lot. It’s funny you bring this up. I was talking to a lady who, back then, was selling scrapbook supplies and she bid on the word scrap booking. She blew through $2,500 in one day, which was I think three times the rent she was paying with her husband and her apartment. What happened is you’re not getting this money back. Scrapbooking to a beginner, that sounds perfectly reasonable, but the term ‘scrapbooking’ is such a broad term. They’re coming to her site and she sells all this stuff. It’s too broad, like a person who types in scrapbooking probably isn’t trying to buy something. They’re probably trying to find out what it is or starting to get into it, but they’re not sitting there with their scissors going, “I want some acid-free paper.”
There’s a whole entire psychology to how people search for things on the internet and which people are trying to figure things out, which ones are sitting there with their credit card in their hand ready to buy. It’s not nearly as obvious as it appears to be on the surface. It’s like playing the guitar or drums or the piano. Everybody understands how a piano works, but that doesn’t mean you can play one. I’ve always liked things like that. I liked things that are not what they appear to be on the surface. They’re much deeper than that. Fast forward and I’ve got this whole culture of customers who have learned all this stuff and they do this stuff for people. My job is to see where the puck is going, not where it’s already been.
It’s still very challenging if everybody else wants the same words to get. What’s the solution? If you can’t pick the word that sent them the wrong direction, how do you know which word is going to send them the right direction?
That’s a whole subject called keyword research. The general pattern is that people are going to start with general things like scrapbooking or scrapbooking supplies or something like that. It’s so easy to search and people would do so many searches. Many of us have done 100 searches in one hour looking for something particular. What people do is they refine it, it gets more and more refined. Pretty soon they’re searching for 11×14 acid-free paper. That’s the phrase that’s going to produce a buyer. If you’ve done this in one or two markets, you get it.
My friend, Glenn Livingston, defined something that he called the search continuum. First, we type broad things like scrapbooking, and then we narrow and narrow it. What he realized was, “If I can get in front of the general curious person and I can get them on my email list. If I know that it’s going to take them about six weeks to get into scrapbooking, then I can mimic their journey with the emails I send them in the blog post they put out. I can step them through this process so that by the time they’re ready to buy this stuff, I’ve not only had them on my email list and have been building a relationship with them, but they know me, like me, and trust me.
They’re going to want to know what I have. I can create their entire scrapbooking career by having this relationship with them online,” whereas before you would have only gotten that at one of these scrap booking parties. That’s the real art of marketing is not just entering the conversation inside the person’s head, but actually guiding it to where you want it to go. It’s creating the relationship that you want to have with them from scratch.
I’m glad you brought up the email, because I saw you say that people like your email. You have something that somebody wants to buy into. I’m on everybody’s email list. If they’re on my show like that somehow, I am on their list or whatever. A lot of people are using AWeber or whatever they’re using to send you information. They’ve been taught you want to give people something of value, so they send what they think is valuable, but when you get a few hundred of these a day, I don’t care how valuable they are to me, I don’t have time. How do you get people to want to be on your list and provide them something of value? A lot of people want to be on CEOs’ lists and not the scrapbooking list necessarily. How do you go about that?
The first thing is that getting an email address is one of the most valuable things that there is in marketing, even with all of the social media and everything that exists. Email is the holy grail still and probably will be for some time. You have to have something very valuable to trade and exchange. You have to sell the person on the idea of being on your email list almost the way that you have to sell them on giving you $50 or $100 or something like that.
The second thing is it’s the Stephen Covey idea of the emotional bank account. You need to make more deposits in the emotional bank account than withdrawals and every email you send, at least the vast majority of emails you send, need to give more than they take or give more than they ask. If you give more than you ask, what will happen is the person will see your emails and be blind to everyone else.
It happens in 2/10 of a second when a person looks at their email box. Our brains are very fast at sorting information and if somebody has a positive feeling about you at a gut level, they will notice your email. They still have to decide if they’re going to open it based on the subject line. There’s a very important relationship that gets developed there and once it’s burned, it’s scorched earth. You never get it back. Most marketers burn their list after some number of weeks or months. People are like, “This person is just treating me like a walking ATM machine.” That doesn’t work. It always feels in the long run.
You’ve been successful with yours. I mentioned how you’re very well-paid a consultant. I saw you shared the stage with Zig Ziglar, Brian Tracy, Jay Abraham, Mari Smith, Harvey Mackay, and Les Brown. I want to know what your main focus is that you want people to know from your work and your ads. What’s your main focus at this point in your career?
The best answer I could give to a person who’s not familiar with me is 80/20. Most people have heard about 80/20, most people think they know 80/20. I discovered about fifteen years ago that I didn’t understand 80/20 at all, even though I knew technically what it was. I knew that this guy named Pareto in Italy figured out that 20% of the people owned 80% of the wealth and vice versa. I also knew that 20% of your customers give you 80% of your orders. I knew that, but what I didn’t understand is that 80/20 is not just this little business or economics rule of thumb. It’s a fundamental law of cause and effect. Nobody talks about it properly.
When there’s a fundamental law of cause and effect and nobody understands it, then if you understand that, you have a huge edge over everybody else. 80/20 also describes the dirt on your carpet and the traffic on the streets in your town and the size of craters on the moon, or if you go to the beach with a bucket get some sand. It’s absolutely everywhere. It’s in every spreadsheet in your entire business. It’s in the files on your hard drive, but nobody recognizes the pattern. What the pattern is that cause and effect are extremely unequal. Everybody treats it like it’s equal and everybody wants it to be equal. If you give 30 kids the science tests and the average is 75, everybody focuses on the average and the teacher gets their raises based on the average and all this kind of stuff. The truth is that one kid in that class of 30 people can and will do more science in his career than all the other 30 put together. That’s a fact.
It’s true, like software programmers. One good software programmer will accomplish more than the other 29 put together. It’s also true of clients. If you have 30 clients, odds are that a fourth to half of your business comes from one of them. That is a law of nature that will happen. You can harness this if you know what you’re doing. Here’s an example. If you like Perry Marshall at all, read 80/20 Sales and Marketing that would be the place to start. In that book, we have a software tool and it will tell you if a thousand people bought a $5 latte at Starbucks, one of them will spend $2,700 on an espresso machine. It is about a law of physics. In other words, for every thousand people who spend $5, that’s $50,000, one of them will give you $2,700 all at once in one day to buy a stainless-steel gleaming espresso machine.
All businesses are like this. If you’re a small business and you have a product that you sell, if you sell some product for $1,000 and you sell a few of those every week, there is somebody that would buy the $100,000 version of that and the money is burning a hole in their pocket and they want to buy it. In other words, you might have to make a new product. You don’t have to get any new customers. Once you already have somebody sitting there going, “I bought this little graphic design service from this company and I paid him $1,000, but I would pay them $100,000 to make me an entire catalog.
How do you know that one that would be willing to spend that money?
You’re going to have to put it out there and you don’t know, but there are indications. First of all, if you asked all of your customers, one of them will jump through the hoop. Secondly, there are always signs. They are fluent. They’re much bigger than all of the other ones. They’re already known to buy. Here’s the way buyers behave. There are people that when they order a soft drink, they’ll always order a small. That’s how they are. There are other people where any time they’re presented with something, they will always buy the best version you can get. They’ll always buy the Rolls Royce. They’ll always buy the Cadillac or they’ll always buy the Mercedes.
I had this conversation with a guy. This guy called him and he said, “I heard you speak of the seminar.” The guy goes on to tell him, “I consulted with this high-level famous person.” What the guy was communicating is, “I pay big money to consult with the best of the best and I think you’re one of the best.” My friend, she quoted him a bigger package that she normally quotes everybody else and the guy says, “Then what’s next?” He said, “We’ll take your credit card details and we’ll run you through the program.” The guy goes, “Okay.” It was done. It was the highest paying client he’d ever had. He follow all the signals and they usually do it, but the 80/20 marketer, his attention to those signals where most people don’t.
That hit on some important things. I was looking at some of your videos that you talk about how to reach at scale. I’ve ran into your Rosetta Stone seminar recordings and some of the stuff that a lot of people could learn so much from what you talk about in those. I know your work has been referenced in dozens of marketing books and there’s so much that we can’t cover it on this show. I was hoping you’d be able to share some things, either websites or some information of how people could find out more about your work in case there’s any possible way they haven’t had a chance to read it.
The simplest thing you could do that would be very easy is to go to Sell8020.com. It will take you to our website. We sell 80/20 Sales and Marketing for $7 in the US and $14 international. You can buy it in Amazon for $18 if you want and that’s fine, but you’ll get a couple more goodies if you buy it from our site. Read that book and read the emails we send you. I had people telling me for fifteen years, “I read your emails when I get them every day.’ We have a real magic with email. The 80/20 book will change your life and it’ll be a gateway drug to all kinds of other interesting things that you’re so inclined.
Thank you so much. I am fascinated by your work.
Harnessing Collective Wisdom with Luke Hohmann
I am here with Luke Hohmann, who is the Founder and CEO of Conteneo, the author of four books, numerous articles, and cited as an inventor of more than a dozen patents. He is an internationally recognized expert in agile software development. He co-founded the first Agile Conference in 2003 and served on the Board of Agile Alliance in partnership with the Scrum Alliance and produces Collaboration At Scale, the world’s largest monthly webinar devoted exclusively to the challenges faced by organizations with ten or more Scrum teams in two or more locations. I told you I have had Verne Harnish on the show and you are interested in a lot of the work that he does and what you do. I want to start with that because you started to explain what you do with Agile. Can you talk about that?
When you look at some of the work that people like Verne do, Verne creates an opportunity for people to learn how to make better choices of their business and gives them guidance in how to scale their business. I met Verne a few years ago at a conference. I was one of the keynote speakers at Alexander Osterwalder’s Business Model Summit and Verne came up after my talk and we started chatting. Then I realized that I was talking with Verne Harnish and said, “I use your frameworks in my business. It helps me grow and I love what you’ve done in the Rockefeller habits in scaling up.”
We got to chatting and he said, “What do you do with my frameworks, Luke?” I said, “Verne, what we do with your frameworks is we use them ourselves, but more importantly, our software platforms take frameworks that business people use, and we put them into an online format so that multiple distributed teams can use them at scale. Creating a digital data set, if you will, a collaboration cube of data, that allows them to make better decisions.” That was a lot of gobbledygook language that MBA types love. Let me break it down to a common framework. Many people will know SWOT analysis, the strengths, weaknesses, opportunities, and threats. I suspect you might even teach SWOT in your MBA class.
More than a thousand times, I bet.
I want to paint a picture of one of my clients. One of my clients is a world’s top ten car company. They make a luxury car out of Germany and they’re pretty darn successful. One of the divisions we’re working in has about 1,000 people in five locations around the world. How are they going to use SWOT as a team? They can’t go up to a whiteboard because they’re in five locations. They don’t need 1,000 people using SWOT, but they probably would like the insights of maybe their top 60 or 80 leaders, their senior managers or directors, their senior directors. If we can harness the collective wisdom of that organization, we’re going to make a better decision. We know what the framework is, it’s SWOT, and how do I scale it? That’s what our software platform does. it allows you to take what you would normally think of doing on a whiteboard, but doing it as a collaborative tool online, generating a common data set that you can use for analysis.
You would have all these people basically doing their version of a SWOT. They would all go in together and you would overlap and look almost like a qualitative study where you look for similarities.
Exactly, except I’m going to give you two variations of that. One variation is for solitary decision making and this is in the literature, in the field of organizational behavior known as sense making. This is like the Carl White line of thinking, which is, “How do I make sense of my world?” It’s for myself. What’s interesting about sense-making and in the modern world is that sense-making is a consensual activity among a group of people. It’s not what I think, it’s what do I think I think. I see it this way, how do you see it? Then through that pair-wise collaboration of, “Here’s what I see, what do you see?” Then you would say, “Here’s what I see,” and we start to make a shared understanding of the world that we’re living in and what we want to do about it. How do we want our company to evolve or change?
What we find is that human behavior is optimized between five and eight people in decision making. If you wanted to have 80 people collaborate online, you can’t, because 80 people as a broadcast model, there’s too many people involved to collaborate well. What our platform does is it parcels out people based on algorithms that you give us or algorithms that we’re aware of in terms of how they perceive problems. This gets into the Myers Briggs that you and I were talking about. Let’s say I had 80 people around the world that I’d like to get into this strategic analysis, the platform would parcel them out into eight-person forums for you automatically. Instead of one 80-person forum, you’d have ten, eight-person forums, but now we’re optimized for collaborative behavior.
How much similarity are you seeing? I want to throw in some buzzwords of groupthink and outliers. Those are the things that came to my mind is you’re saying all these.
Similarity would be the post analysis of the identification of a common pattern. We would assert, the data is the data. You and I would look at the data and we’d say, “Everyone has identified this is an opportunity, or these forums identified that this is an opportunity. We assert that there is a pattern based on the data.” That’s what you want. You want the data to identify those patterns. Groupthink is a problem, but it’s a problem associated with the framework here that you’re choosing. Any SWOT framework may lend itself to groupthink because someone could be talked out of an idea or talked into an idea.
The way that we would recommend addressing groupthink is to use a framework that is designed to come back groupthink. I’m going to switch to a different field and then we’ll come back to this question. If you think about market research, any market research method has an inherent bias. You’ve mentioned qualitative research and our and our getting to know each other before this line. Any qualitative research method has its own bias and most of the time the design of qualitative market research is with an understanding of the bias that the method has. There’s method bias and there’s participant bias and there’s facilitator bias. There’s framework bias. Frameworks have biases. You can choose a framework if you’re worried about groupthink as an alternative mechanism to get out of groupthink or what we’ve done for some clients.
The company that provides software for auto insurance, CCC Information Services in Chicago. They are pretty big, more than half a billion-dollar provider of backend insurance software. Their leader, Pete Morowski, was concerned about groupthink. What he did was he had each individual in his leadership team do an individual version of a strategy framework. Then once they got clear amongst themselves, they did a collaborative forum.
I had both sets of data. I had the individual perspectives of the leaders and I had the collective wisdom and then you can compare and contrast to identify outliers and see if we create one of three things. Did we create consensus? If I look at the field of a holacracy or sociocracy, did I create the ability to live with the decision, which is not the same as a consensus, or did I squash an outlier that I need to look at and amplify because it is an outlier?
The outlier thing interests me a lot because how do you determine? Do you completely disregard it if it’s so far out or do you analyze each one?
The way that we’ve constructed the Weave software platform is that every single thing that you do in the platform is recorded as a discrete event. That’s going to sound scary given some of the social media giants who’ve exhibited very bad behavior. The difference between us and them is in social media, they’re selling their users as a product to advertisers. We’re building a tool for leaders at companies to make better decisions. We’re also fully European GDPR compliant, which means the participants in our forums have access to their data, they own their own data. They can invoke their right to be forgotten and all the necessary legal privileges that are associated with responsible data management.
Going back to this notion of why we built the platform this way. If you look at traditional communication platforms, you and I are on a phone call. It’s a communication media, which we desperately need, and TheWebex, GoToMeeting, and BlueJeans and those things, those are all great communication tools. Communication tools are typically constructed as a stream of information. What we’ve done in our platform is we’ve looked at it from a data warehousing perspective. Everything you do in our platform is a discreet event like a purchase in a Visa card transaction or a Mastercard. The reason this matters is when you are using your credit card, you’re actually building to the credit card company a profile of your normal behavior. They use it for fraud detection and I’m sure given your background, you might have had once in your life one of those fraud warnings from your credit card provider.
That’s because the credit card company has a record of what makes you a normal you versus what makes you an atypical you when you’re looking at your behavior. What if we could do that for decision making? We know that you listed your MBTI type, but there are other psychographic instruments like the Kirton Adapter Innovators Scale or the Torrance Creativity Rating. What if we could look at your decision-making performance when you’re given a divergent framework or a conversion framework? SWOT is a sense-making framework, but there are frameworks out there that help you generate ideas and there were also frameworks that have helped you prioritize or converge on ideas. What if we started to look at how people behave within those frameworks? I do this with senior executives. I’ll say to a senior executive, “Do this with me.”Imagine Diane, you’re the CEO of some big multinational. I walk up to you and I say, “Diane, do you have creative people in your company?”
Do you have some of your people who are good at taking your existing products and taking them from version two to version three?
Not as good as I’d like.
Not as good as you’d like, but you have some. Do you have some people that are good at building new products, like listening to maybe a new market need and creating a new idea?
Who are they?
I got a guy named Luke who was pretty smart.
That’s what’s making people crazy because we know if a company is successful that they have to have people who are extending their products and we know that they have to have people who are building new stuff, but we don’t know who they are. By building a model of human performance based on decisions, we can start to identify who those people are.
In my book that I’m writing on curiosity, I’ve developed an instrument to determine the things that hold people back from being curious. That will come out when my book comes out in the next year. As you were talking about the MBTI and some of these other personality assessments you mentioned, I’m wondering how you could use that data as part of this. Are you saying you’re tying into these personality assessments to find out more about people? Are you putting that data in or is this an example you had for this?
That’s part of I would say our internal R&D effort. We haven’t yet released anything in our offerings. We’ve got one client who is working with us and we did a controlled study of some employees where we ran them all through the StrengthsFinder from Gallup. Then we started to mix and match people based on strengths and forums to see if we get patterns of better decisions made. There were some promising results there. I’m not at liberty to disclose the client. We also did a research study with Karlsruhe Institute of Technology in Karlsruhe, Germany, where we took 250 participants and we started to mix them and match them on prioritization activities based on their Torrance creativity rating.
We were able to start to see some differences. The hypothesis that a given group can be constructed to be more optimal about a certain decision appears to be a holding enough water to continue to pursue it. We’re at the stage of crude chemistry where we know. For example, what would be the frameworks that would promote curiosity? I don’t think SWOT is a framework that would promote curiosity, but you could create frameworks and then structure collaborative groups so that they would be more curious as opposed to less curious.
What I’m doing with the assessment is determining the things that hold people back. Once you recognize that, then you can develop ways to improve it. Their fear of their assumptions, technology, and environment were some of the main things that hold people back from being curious. As we mentioned, you’re going to have people who fear an environment, if somebody tells them they can’t, they might go the opposite direction. Some of the stuff is you got to look at it at a one on one basis. How did this impact you? It’s not necessarily inhibitors to curiosity as it is impactors.
That makes sense to me based on my own limited understanding of that line or that vector of research about what curiosity, how to promote it, and its incredible benefits.
It ties in because you’re into decision making and all the stuff you’re interested in is fascinating. I was interested in hearing what you’re doing with your software, but you also said something about a partnership with the Kettering Foundation that you’re dealing with social problems from obesity, net neutrality, and immigration reforms.
This is a fascinating life changing story of what happens when you’re sitting in row fourteen on a plane. In 2010, I was on a plane flight with Kim Walesh, who is the head of economic development for the city of San Jose. We started talking and I started talking about what we do with corporations. She starts telling me that the city of San Jose is $100 million dollars in debt. That’s an unfathomably large number. Out of the blue, I said, “Kim, we help corporations make priorities about budgets and they have to be staying on budget. We could do it for the city.” She said, “Really?” I said, “Yes.” It took about a year and a half to convince them, but we pioneered a technique in San Jose that’s known as participatory budgeting.
It’s a specific framework. It’s a different framework. The way this framework works is you take a list of items of projects in your project portfolio or services that a city would fund and you’d give them a price. That’s going to add up to say $80 million dollars, but your budget is only $60 million. This is a very common problem in business. We have it in business and we have it in life. I have these many ideas and I have this much money. The current process for making those decisions is fraught with peril for any company because it’s the one time where you take leaders who are supposed to work together and make them adversaries.
One of the deeper psychological reasons why everyone despises the annual budget process is it’s the one time, if you’re a VP and I’m a VP, we’re supposed to collaborate except in the annual budget and we fight. The cognitive dissonance of how most companies manage their annual budgeting processes is almost astonishing. The same happens with the city budget. The residents have to learn how to make these choices. What we do with San Jose and other cities around the world is we assemble these huge events where we bring in hundreds of citizens, both in person and online, and we run through a forum where we give them the list of projects. We give each person in the forum and equal portion of the available budget. Going back to my example, if I had $60 million of budget, I would give each person $10 million. Then we as a group make the decision. Instead of a competitive process, it’s a collaborative process. If there’s a project that costs $2 million and I believe in it, I can solo fund it. If there’s a project that costs $15 million, I have to convince at least one other person to join me.
I was at the Rice University and we were talking about millennials and how they no longer want hierarchical levels, they want a flat organization. Is this in response to the need for younger generations to collaborate? Is that what led to your interest in this or did you see it through some other means brought this to your attention?
I would say that for me, that’s icing on the cake. I’m not a millennial, so I can’t claim something like, “I’m a millennial and I created this for millennials.” My training, again going back to Michigan, it was how do groups make decisions. What was always making me personally crazy was that you read endless Harvard Business Review in MBA groups in studies, and everyone’s always talking about frameworks, which are the tools of knowledge workers. Frameworks are the screwdrivers, pliers and wrenches of knowledge work. No one’s created the power tool, and that’s what we’ve created. We’ve created the ability and that’s what I was after. I’d go to my MBA class and I’d be like, “I get it. We’re using SWOT, but how does a distributed team of 80 people use SWOT?” That was what I wanted to solve. The bonus on the cake for me and this is actually one of the reasons that we’ve been growing as a company, is progressive leaders are using this platform to engage in their millennials.
One of my clients is Guy Duncan and he runs the digital products and services for BMW. One of his users of the platform is in fact who engaged his software development teams through a software development process known as the retrospective. This is part of Agile software development at the end of a development cycle that’s called a Sprint. We do a little retrospective as a team. What Guy has is he’s got dozens of teams around the world. He came to me and he said, “How can I get the insight of my organization through this retrospective process?” It was rather easy in our platform. We had every team do their retrospective in our platform and I have the data of more than 50 teams to analyze. I can look for the enterprise patterns. The platform wasn’t explicitly designed for millennials, but millennials are certainly a driving a lot of our growth in companies that are progressive enough to realize that the older forms of decision making are no longer working.
There’s something else I got to add to this. We worked with a company in Europe, Bwin. Party, they’re a gaming company. They call themselves a gaming company. They’re a gambling company. They do poker and sports betting and things like that. I want you to think of more than a billion-dollar company. They’re big and they’ve got three main divisions, a casino gambling, like slots, poker, and sports bet. Traditional thinking in business is that these divisions are going to be competitive because they’re competing over shared resources and that leaders in those divisions are not incented to collaborate with each other for the greater good. Would you agree that that is a reasonably common perspective that divisions are going to fight?
We did an experiment with them and their annual budgeting process. We said, “Let’s take the projects that you need to prioritize against the limited funds, but let’s do it this way. Let’s mix up the people from the divisions and mix up the projects so that when they go into a forum, the set of projects they see is selected from the overall divisions and the participants are randomly mixed up from the different divisions. Let’s tell the leaders, the managers, directors, senior directors, give them the following guidance. Fund the project that you think is best for the company, not fund the project that you think is best for your division. The data would show if the group was acting in a parochial manner. We saw the exact opposite. In the chat logs and some of the other things, you could see.
One of the more memorable sequences was a woman Katarina who worked in the casino division and she was making this very impassioned argument about why a certain sports betting initiative should be funded even more than her own division because it was such a good thing for the company and it would provide such other benefits. The data is overwhelming, especially with millennials that if you structure the context to let them rise up, they will.
I’m sure you have a lot of other examples. I’m sure a lot of people are going to be interested in this because this is unique stuff and I was excited to have you on the show again. I enjoyed having Verne on as well. If you could share how people can reach you if you have websites or information you can share because I’m sure they’d like to know more about this.
This has been so much fun. Thank you for being on the show.
Thank you to Perry and to Luke. What a great show, enjoyed having both of them on.
About Perry Marshall
Perry Marshall is endorsed in FORBES and INC Magazine, and is one of the most expensive business consultants in the world. Clients seek his ability to integrate technology, sales, art and psychology. He founded the $5 million Evolution 2.0 Prize, with judges from Harvard, Oxford and MIT. The prize aims to solve the biggest mystery in biology. Harvard Business Review featured his 80/20 Curve, a productivity tool used by NASA’s Jet Propulsion Labs at the California Institute of Technology. His Google AdWords book laid the foundations for the $100 billion Pay Per Click industry, and techniques he pioneered are standard best practices. Ultimate Guide to Google AdWords is the world’s bestselling book on internet advertising.
About Luke Hohmann
Luke Hohmann is the Founder and CEO of Conteneo, Inc. The author of four books, numerous articles and cited as an inventor on more than a dozen patents, Luke is an internationally recognized expert in Agile Software Development. Luke helped co-found the first Agile conference in 2003, has served on the Board of the Agile Alliance and in partnership with the Scrum Alliance produces “Collaboration at Scale”, the world’s largest monthly webinar devoted exclusively to the challenges faced by organizations with 10 or more Scrum teams in 2 or more locations.
- Perry Marshall
- 80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More
- Evolution 2.0 Prize
- Ultimate Guide to Google AdWords
- Collaboration At Scale
- Verne Harnish – previous episode