Commitment Counts

Of every million ideas for a high-tech business, it is estimated that only six become public companies. But adopting the right organizational model and employment practices can help improve those odds, according to a group of researchers at Stanford and MIT.

The findings are based on data gathered by the Stanford Project on Emerging Companies (SPEC), which has tracked 167 young high-tech companies in Silicon Valley since 1994. The SPEC team, headed by Stanford professors James Baron and Michael Hannan and MIT's Diane Burton, began by identifying five organizational blueprints based on employers' ideas about how work and employment should be organized: specifically, the nature of employee attachment, the processes used to coordinate and control work, and the best criteria for selecting employees.

1. The engineering model describes companies that attract employees by offering challenging work, that emphasize informal peer-group control, and that hire people for specific skills. (Of the 167 companies surveyed, 31% were founded using this model.)
2. The star model refers to companies (8% of those surveyed) that expect employees to internalize a strong professional commitment to excellence and require relatively little control. In this model, employees are selected according to their long-term potential.
3. The commitment model depicts companies in which strong emotional bonds are the basis of employee attachment. Commitment-model companies (7% of those surveyed) believe in informal peer-group control and emphasize cultural fit in hiring.
4. The bureaucracy model (seen in 5% of the surveyed companies) covers organizations with formal control procedures that attract staff with challenging work and focus on specific skills in selecting employees.
5. The autocracy model references the organizations (3% of those surveyed) that motivate employees primarily with financial rewards. Such companies emphasize the importance of close personal oversight for control and coordination — and also make hiring decisions based on specific skills.

The remaining companies in the sample had founding models that differed in one or more dimensions from the five basic types.

Because of the importance of technical talent in Silicon Valley, the star and engineering models might be expected to prove particularly effective. But when it came to predicting the likelihood of an initial public offering, the commitment model —commonly associated with large companies in stable industries — turned out to be the winner.

In a paper co-authored with Stanford doctoral students Greta Hsu and Ozgecan Kocak, Hannan and Baron report that companies founded under the commitment model had a five- to six-fold advantage over engineering-model organizations in terms of their “hazard of IPO” — a measure reflecting how long it takes a company to go public. The star model came in a close second; enterprises with mixed or “nontype” founding models finished last. What's more, as of Jan. 1, 2000, the cutoff date for the survey, none of the commitment-model companies had failed — none disbanded, disappeared or were acquired in distress — whereas the failure rate in the rest of the sample topped 13%.

The results may tempt entrepreneurs to adopt the commitment model midstream. But moving from one blueprint to another can be destabilizing, the authors found. Changing the founding model increased a company's hazard of failure by a factor of 3.5.

Moreover, in order to reap the full benefits of the commitment model, company leaders must put their values to work. In a detailed study of a subsample of SPEC companies, Burton and co-author Charles O'Reilly of Stanford's Graduate School of Business concluded that much of the model's value lay in its ability to enhance the impact of high-commitment employment practices, such as sharing rewards, sharing information and hiring for fit. In addition, they found evidence suggesting that companies may be penalized for espousing commitment values without backing them up.

Although the importance of aligning values and practices may seem obvious, it's common to see slippage between the two in fast-growing businesses, according to Dan Grace, an executive-in-residence at the Kauffman Center for Entrepreneurial Leadership, Kansas City, Missouri. The problem arises, he explains, because company founders typically overlook the importance of organization building in the startup phase. Ideally, says Grace, entrepreneurs would be thinking about such issues at the outset.

But they also need to be aware that the process doesn't stop there, cautions Gary Mueller, founder and CEO of New York-based Internet Securities, a leading online provider of information on emerging markets. “Organizational culture is like reputation,” Mueller observes. “It's something that you build up over a long time.”

The first of the papers cited is “Staying the Course: Early Organization Building and the Success of High-Technology Firms.” The second is “The Impact of High Commitment Values and Practices on Technology Startups.” Both papers are from February 2001. Additional information on SPEC.