Would Free Enterprise work in Ireland?

democrates

I'm planning to start a business, but I want to do something a little different.

Having been inspired by what Ricardo Semler has achieved with Semco, I'm looking at taking the idea a stage further. What do you think of this draft plan:

• It will begin life as single member limited liability company
• It will grow organically with minimal up-front investment, and that in the form of a loan (from me) that is repaid only when the business is established
• The very first few potential staff will be retained on a cashflow basis (you get paid when the money comes in) until cashflow is strong enough to support salaries
• It will operate in the IT/Web services sector (don't waste your time asking me to spill the bright ideas here
• There will be Industrial Democracy within a very flat hierarchy
  • Staff have access to the accounts, excepting other peoples private details
  • Staff can vote on decisions that affect them
• Staff can initiate new business opportunities, but that doesn't open the door to chaotic abandon, propositions must pass a vote so they must convince others of the risk/reward etc. case versus other contenders
• 360 degree evaluations - 'rate my supervisor'
• Result driven upskilling
• No dividends are paid to shareholders (me!)
• In the medium term the company will convert to a company limited by guarantee and having no shares (public companies require audited accts on the annual return, not a cost to bear in the startup phase)
• Net Profits are divided as follows
  • 35% to staff under a revenue-approved scheme
  • 10% to charity
  • 55% reinvested in the business
• Unions are recognised
• 30 days leave per year
• Flexible working hours and teleworking etc. where that does not damage the business

These working conditions are designed to bring out the best in people, they'll be theory-y rather than theory-x as per McGregors analysis.

But that's not enough, even with the removal of the owner dividend handicap, and when staff with a share in the profits avoid unnecessary costs because it is coming from their pockets, the business must be competitive. Ricardo pointed out in one of his books that Semco focussed on high margin businesses, and the corollary is obvious that competing with slave-operators on the price of labour is a dubious privelege for staff.

Steve Jobs once said that a small A-team can run rings around a much larger B-team. The above proposition should attract the type of people who can drive the business to success in high-margin sectors.

There are many bright people who have been frustrated by a lack of vision or freedom in their place of work, and it's not about the money so long as it's fair. Semco find that high achievers stay there and reject offers of more pay and share options from mega-corporations because they couldn't abide the culture now that they had tasted freedom and the rest of it. These people would like to have their own businesses for the freedom but aren't into the hassle of running one, and in this scenario they'd have the chance to be as close to self-employed as an employee can get.

There's a risk, but not a big one as it's starting small with mostly sweat equity, so why not give it a try? Do you think you would work better in such an organisation and make it a success?

But the first hurdle, who would be willing to be in the first wave on a cashflow basis (working in the evenings from home, or between IT contracts perhaps), with no guarantee of a job or even getting paid if the venture fails (as I'll be doing myself)?

The Corinthian

I appreciate your romanticism, but I really do think you should think this through a little more carefully. A few comments:

democrates wrote:

It will grow organically with minimal up-front investment, and that in the form of a loan (from me) that is repaid only when the business is established

That can work if you don’t need the cash flow - so, in short, it’s very difficult to pull off. For example, from prospect to a check in the bank is a very long time indeed, and you’ll find that good will and enthusiasm will have its limits, especially if you have to work a second job to pay the rent.

The very first few potential staff will be retained on a cashflow basis (you get paid when the money comes in) until cashflow is strong enough to support salaries

Good luck. Seriously.

Remember, there is a value to risk and what you are asking is that they risk that you get paid for them to do so, without your paying for that value. So, unless you give someone a real stake in a company or significantly increase in some other way their remuneration, they won’t be interested.

Well, they might if they’re really naïve, stupid and / or no one else will employ them. So, as I suggested, with some luck you may find some.

There will be Industrial Democracy within a very flat hierarchy

I’ve always liked the idea in principle, but have seen too many cases where it simply does not work. However, this is not to say it won’t work, only that the odds are stacked against it working.

Staff can initiate new business opportunities, but that doesn't open the door to chaotic abandon, propositions must pass a vote so they must convince others of the risk/reward etc. case versus other contenders

So if you grow to, say, 30 staff, they all must read every proposition and vote on it. When are they going to do any work?

360 degree evaluations - 'rate my supervisor'

So what happens if they rate you as crap and vote to fire you?

Result driven upskilling

What does that mean when it’s at home?

No dividends are paid to shareholders (me!)

Does that mean if you sell the company, you won’t pay yourself anything either, ‘cos that’s what your employees will be asking?

These people would like to have their own businesses for the freedom but aren't into the hassle of running one, and in this scenario they'd have the chance to be as close to self-employed as an employee can get.

Sure. All of the risk of working long hours without any promise of even getting paid for them without the hope of selling the business in the future for a big wad of dosh. A real peach of a proposition.

If people want to have their own businesses for the freedom but aren't into the hassle of running one then they can contract.

democrates

It will grow organically with minimal up-front investment, and that in the form of a loan (from me) that is repaid only when the business is established

The Corinthian wrote:

That can work if you don’t need the cash flow - so, in short, it’s very difficult to pull off. For example, from prospect to a check in the bank is a very long time indeed, and you’ll find that good will and enthusiasm will have its limits, especially if you have to work a second job to pay the rent.

I'm there, I can dedicate my full time to this and don't need a salary from it. And you're right about the cashflow constraint, it kills most startups. I'm not going to take on any costs until the supporting revenue is there. Daft.ie started as a part time project by two guys, that proves the organic method and fair play to them and their staff.

The very first few potential staff will be retained on a cashflow basis (you get paid when the money comes in) until cashflow is strong enough to support salaries

The Corinthian wrote:

Good luck. Seriously.

Remember, there is a value to risk and what you are asking is that they risk that you get paid for them to do so, without your paying for that value. So, unless you give someone a real stake in a company or significantly increase in some other way their remuneration, they won’t be interested.

Well, they might if they’re really naïve, stupid and / or no one else will employ them. So, as I suggested, with some luck you may find some.

For a lot of people that's true, but look at all the intelligent people who work for free on FOSS projects or work in academia or charities rather than chasing personal fortune. They're happy with that risk/reward proposition and are not stupid or naive, they just have different motivations. These are the like-minded people I'd appeal to rather than attempting to alter the motivations of other types. This organisation presents the chance to realise our best potential in a way that accords with higher values - a fair deal, helping charities, freedom, democracy, and the fun and excitement that will permeate this enterprise.

There will be Industrial Democracy within a very flat hierarchy

The Corinthian wrote:

I’ve always liked the idea in principle, but have seen too many cases where it simply does not work. However, this is not to say it won’t work, only that the odds are stacked against it working.

The odds are vastly improved when those who join believe in it and want it to work. There are plenty of documented failures, particularly in ex-soviet countries and mostly involving greater participation in decision making but not equally in rewards. I also think it's a difficult restructuring to impose on organisations with that kind of history. Traditional autocratic managers may fight it, unions may be suspicious and fear being made unnecessary, and staff can be unconvinced because it is something new and haven't been properly sold on it or educated to make wise decisions. But Semco proves it can be tremendously successful if done right.

Staff can initiate new business opportunities, but that doesn't open the door to chaotic abandon, propositions must pass a vote so they must convince others of the risk/reward etc. case versus other contenders

The Corinthian wrote:

So if you grow to, say, 30 staff, they all must read every proposition and vote on it. When are they going to do any work?

If we neglected our work we'd lose our livelihood, the Semco experience is that when people have the choice of doing something stupid or something wise, they do the wise thing. With everyone on a share of the profits and knowledge of our accounts, activity will tend in the direction of success rather than self-destruction. I imagine if there were too many propositions arising, decisions would simply be deferred on all but the most immediately relevant and within our capacity, smart people will find the right balance.

360 degree evaluations - 'rate my supervisor'

The Corinthian wrote:

So what happens if they rate you as crap and vote to fire you?

That's a risk I'm willing to take. Where is it written that I'm the best person to be CEO for all phases of the organisations development? I'd like to think I'd be useful enough to take another job in the organisation in that case. I'm not motivated by playing boss, I actually prefer technical design work but I like to have a say and to have some lattitude in how I work, my motivation is to achieve something worthwhile with this.

Result driven upskilling

The Corinthian wrote:

What does that mean when it’s at home?

Nothing fancy, just that people would upskill for a good business reason, it must ultimately achieve a result of increasing revenue and/or decreasing costs. I've done courses in the past because the training budget had to be spent or it was part of the HR self-development policy, and some were of no tangible benefit to the company. Sad but true.

No dividends are paid to shareholders (me!)

The Corinthian wrote:

Does that mean if you sell the company, you won’t pay yourself anything either, ‘cos that’s what your employees will be asking?

The next point covered that:

• In the medium term the company will convert to a company limited by guarantee and having no shares

This form of company has no share capital, and therefore no seperate owners. I don't want to be an owner, I don't see the need. The board of the guarantee company would provide oversight to ensure the companies activities are in accordance with it's stated goals as outlined in the Memorandum of Association. That is an expensive legal form however, and would hit cashflow too hard in the startup phase, jeopardising survival. Hence it would be a standard LLC with me as owner to start only, I wouldn't sell it, but get rid of ownership as above. I'll have that constraint written into the LLC governing documents so those I invite to join at the start don't have to take my word that I'll follow through.

These people would like to have their own businesses for the freedom but aren't into the hassle of running one, and in this scenario they'd have the chance to be as close to self-employed as an employee can get.

The Corinthian wrote:

Sure. All of the risk of working long hours without any promise of even getting paid for them without the hope of selling the business in the future for a big wad of dosh. A real peach of a proposition.

I'm not expecting this to be universally attractive, I have nothing to offer people who are chasing a 'big wad of dosh' by selling a company, but I don't need them. Many people work freely on FOSS projects, in acadmia and in charities, in this scenario the risk and rewards are shared, though the risk is greater in the startup phase and should diminish after that as capacity grows.

The Corinthian wrote:

If people want to have their own businesses for the freedom but aren't into the hassle of running one then they can contract.

Contracting gives some freedom but doesn't allow people to pursue new business opportunities, they must do only the job they were hired to do. That works fine for many people, but it's not the first option for people like me, particularly compared with what I'm proposing.


Appreciate your feedback, I want to kick lumps out of this to see how well it stands up, if anyone raises a point that proves it's destined to fail I'd prefer to find out now. As it sands I'm still convinced it can work and am looking forward to exciting rewarding challenges.

The Corinthian

democrates wrote:

Daft.ie started as a part time project by two guys, that proves the organic method and fair play to them and their staff.

I known the guys who started Daft a good few years now and you’re misrepresenting how they ran and grew the venture. Up until quite recently it was indeed a small venture run part time by two brothers, who also owned said venture. As they began to hire staff they also had accumulated capital to pay them salaries. That’s not what you’re talking about.

For a lot of people that's true, but look at all the intelligent people who work for free on FOSS projects or work in academia or charities rather than chasing personal fortune.

None of them are in the business of ultimately making someone else money and if you contribute to the growth of a company that is owned by someone else, that’s exactly what you’re suggesting they do. Neither are they supporting any higher venture - you’re not a charity and you’re not going to give your work away for free; you’re going to profit from it, pure and simple.

Ultimately, they can put their heart and soul into it and watch it grow into a major venture, but you can then sell it for a mint. You cannot say that of any of the examples you gave.

The odds are vastly improved when those who join believe in it and want it to work.

When you can define you proposition properly, then I may agree with you. Until then you won’t find them.

But Semco proves it can be tremendously successful if done right.

Semco demonstrates that on one occasion in one industry in one country at one time it can work. Hardly proof that the model is sound if applied anywhere and anytime else.

If we neglected our work we'd lose our livelihood, the Semco experience is that when people have the choice of doing something stupid or something wise, they do the wise thing. With everyone on a share of the profits and knowledge of our accounts, activity will tend in the direction of success rather than self-destruction.

As above.

I imagine if there were too many propositions arising, decisions would simply be deferred on all but the most immediately relevant and within our capacity, smart people will find the right balance.

Back to the hierarchical structure, I see.

That's a risk I'm willing to take.

And would you sacrifice your equity?

Nothing fancy, just that people would upskill for a good business reason, it must ultimately achieve a result of increasing revenue and/or decreasing costs. I've done courses in the past because the training budget had to be spent or it was part of the HR self-development policy, and some were of no tangible benefit to the company. Sad but true.

That’s a question of bad HR and not specifically linked to the model you suggested.

This form of company has no share capital, and therefore no seperate owners. I don't want to be an owner, I don't see the need.

OK which would invalidate the two rebuttals I made on you ownership of equity. However it is a rather radical move that would require a bit more research than I’m willing to give here for free. Also, you might want to look at the co-operative model as an alternative though.

Many people work freely on FOSS projects, in acadmia and in charities, in this scenario the risk and rewards are shared, though the risk is greater in the startup phase and should diminish after that as capacity grows.

I suggest you look at why people work freely on FOSS projects, in academia and in charities. This is central to your staff proposition.

Contracting gives some freedom but doesn't allow people to pursue new business opportunities, they must do only the job they were hired to do.

That’s rubbish. Good contractors are always on the make and always have a few extra ventures going on in the background.

jmcc

It sounds like a Nua mark 2 [1] or a lambs to the slaughter model to me. A company is not a democratic operation - there has to be someone in command. Someone has got to make the hard decisions and take responsibility for them.

Every newly minted business person has these ideas right up until the time that the first incoming cheque is late. The whole democratic industrial operation is going to attract a bunch of lazy tossers who will milk it for all it is worth. There has to be a way to eliminate anyone who becomes such a liability and the whole happy-clappy ethos prevents that. It is a serious loss of control that could destroy the company.,

The whole Semco idea did not start from scratch. From a brief glance at it, it was just corporate re-engineering. Something that is totally different from what you are proposing.

Now I wish you the best of luck with your venture. The reason I am so cynical about it is because I have written about a pile of similarly minded companies during the dot.bomb era (Nua, Rondomondo etc) where such similar, high-minded, ideals were espoused by people who did not understand that the basic principle of being in business is to make a profit. And it is this, fundamental aspect that is missing from your proposal. Before you start planning all this romantic corporate structure, work out where you are going to make money and how you will continue to make it.

Regards...jmcc
[1] One of the best dot.bomb headlines was about Nua: "Net visionary fails to forsee crash".

fintan

You keep referring to Semco and as Corinthian pointed out:

Quote:
Semco demonstrates that on one occasion in one industry in one country at one time it can work. Hardly proof that the model is sound if applied anywhere and anytime else.

So my question is, have you looked at other companies who have started with the same principles that you want to apply to your company? did it work? is there anything you can learn from them?

The Corinthian

jmcc wrote:

A company is not a democratic operation - there has to be someone in command. Someone has got to make the hard decisions and take responsibility for them.

Yes and no. The centralized model works well in SME’s, but begins to break down the larger and more complex the organization becomes. In an extended hierarchy, managers can take over the responsibility of these decisions as companies grow, but this is ultimately another form of delegation.

The whole democratic industrial operation is going to attract a bunch of lazy tossers who will milk it for all it is worth.

The democratic structure is not really what will attract the bunch of lazy tossers, but the motivation behind them.

For example, he cited FOSS projects, academia and charities as areas where people are driven by altruistic motives. This is actually incorrect as in all cases the motives are anything but altruistic.

In the case of both FOSS projects and academia, the motivation is ego and self-advancement. In fields where the mantra is “publish or perish”, authorship or contribution to your industry’s standard will add substantially to your marketability (not to mention your ego). Look at technical mailing lists - are people responding to your questions because they care or because they want to be seen as authorities on the subject? How much would your having written a tiny part of, say, the Mozilla engine, add to your prospective salary?

Charity is a little different in that the selfish motive is more psychological. Simply put, we do charitable things because it makes us feel good to do so. Sticking a monthly direct debit to some African relief fund gives us a warm fuzzy feeling that allows us to feel better about the embarrassingly low wage we’re paying the Nigerian girl who comes round twice a week to clean our home.

As cynical as it may sound, altruism alone does not motivate anyone for very long. As a result, while some may join this venture out of pure altruism at the start (assuming an impeccable screening process), it won’t last in the long or even medium term. So the one thing I would point to is that democrates has to work on this part of his proposition for it to work, before even thinking about the rest of it.

democrates

Interesting points.

In fairness I never said people working in FOSS, Academia and Charities were motivated by altruism, I just said they had different motives. I agree you can't tar them all with one brush, it's not that simple, each individual has their own mix and priorities change over time. All companies have to deal with that.

I want to join with broadly like-minded people rather than attempting to recruit on skills and experience alone and try to use HR to mould people into something they're not. Open discussion leading to consensus is one thing but indoctrination is quite another. I've no delusion or desire that my values will be stamped on everyone else.

Nor is the question of hierarchy black and white, for starters by law individuals must be nominated with certain fiduciary responsibilities, and you can't have responsibility without an appropriate level of control. Neither can you have anarchy with everyone doing as they please, there has to be co-operation and co-ordination. What I'm after is the most effective balance of control and freedom, hence a flat hierarchy, and I believe intelligent adults can democratically find this balance and accept that we can't all get our own way.

I seem to have a stronger conviction here about how well a share of the profits and accounting information can focus peoples minds on the important tasks. Everyone has pet projects they'd like to pursue, but if you're getting exposure to weekly costs and revenue figures are you going to sacrifice your monthly bonus for it? And how do you think you would react if your paycheck is depleted because some of your fellow workers neglected their jobs to go on flights of fancy? Albeit within the law, how would you vote?

So far from it being just 'happy-clappy', if there's too much cash going out and not enough coming in, it won't be long before the group takes action. With freedom comes responsibility, and 'a bunch of lazy tossers' if they ever infiltrated would ignore that at their peril. Though the proposed working conditions are good, democracy is accepted as fair but can be as effective as autocracy when a minority do not perform adequately, so assuming we can avoid recruiting a majority of slackers who don't care about their plummeting remuneration and security of tenure, it most certainly does not present any opportunity for a free ride. The highest principle is justice, and with all staff paying for the wrongs of the few it will be swift.

As for Nua or Rondomondo jmcc, I had interactions with both of those operations and I have to say the criticisms I've read over the years are let alone justified, but didn't even uncover the full horror of what went on behind closed doors. Madhouses. And the spectacle of media lick-spittles idolising self-absorbed navel-gazing squandering incompetants as visionaries was staggering. They should have been named Interslice and Cutco as per that Simpsons episode. However, though you may get a partial pattern-match on the 'vibe' here, I'm pleased to report that their structures or 'business models' (?!) have nothing in common with what I'm working on.

There are plenty of examples of successful operations along the lines I describe, and Corinthian hit the nail on the head in suggesting I consider the Co-operative structure. What I'm aiming at is in effect a Workers Co-operative, but that's a term I'm not really happy with because it has communist overtones that are at variance with and could dilute the 'brand' image of the agile innovative profitable enterprise I aim to catalyse.

Aside from Semco (which has owners who are paid dividends so it didn't completely re-engineer into a worker co-op), worker co-operatives have been hugely successful worldwide, but principally in places where tough economic conditions made it a practical necessity. The free-market economy had failed to deliver so people began to organise themselves and take control of their own livelihoods, even taking over abandoned factories and making a successful living with them again. Avi Lewis and Naomi Klien made a documentary 'the take' covering examples in Argentina. But aside from these industrial 'phoenix' operations co-ops are mainly agricultural.

Ireland is in a very different economic and ideological situation broadly speaking, and the sector I'm entering is not typical co-op territory (excepting the Phillipino Asiapro worker co-op which acts like a job agency providing workers to clients accross different sectors including IT). This environment is going to make the recruitment job very difficult, it represents the biggest challenge, but it's not impossible. God loves a trier and fortune favours the brave.

Precisely because this approach is unusual here, I'm taking some time to learn more about how it operates and putting it up for criticism well before I jump in. But take the paper 'Why has the Labor-Managed Firm Failed' from the Cato institute. It's based on the premise that the concept is wrong and uses only failures as evidence while putting any successes down to the populist ideological preferences of opportunistic social engineers. Sadly much of the material around the topic is polarised and little more than left or right wing propaganda. I want to focus on the nuts and bolts of making it work, and to that end I'll need to network with others who have been successful as fintan advised.

The structure is important to the business plan, but by no means the only link in the chain. It's taken over ten years to get into a position where I am available full time, have no need for a salary, modest start-up capital, the technical capacity, and the business knowledge to go from concept to market. In that time it's been sickening and frustrating to come up with business models only to watch others prove them right repeatedly. But it would have been premature to attempt them and risk my home until I was properly equipped to execute.

Thankfully one thing has remained constant, the flow of new ideas. There are too many to try now and they keep coming so I record and stash, but I have picked one that I can focus on and get right, it can start small and grow to meet currently unfulfilled customers wants and needs. Once I commence operations and have accounts to back up the business plan, that will make it easier to find individuals who share the same general view on what kind of environment gets the best out of them and are in a position to avail of the opportunity. Then the other plans can be evaluated for deployment, and God willing throngs of gladly paying customers will wonder why no-one thought of it before.

Thanks for the useful feedback. I'm coming around to the idea that I should just bite the bullet and simply call it a Workers Co-operative from day one. Keep it clear and simple. What do you think?