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Case Study: Web agency

Background

Founded in 2004, the web agency started as a product company within the newsreader business. It developed content related Really Simple Syndication (RSS) solutions that enabled the information exchange within internal networks. The web agency provided multiple applications for desktop, web, portlet and mobile phones. The mobile applications, in particular, latch to a profile server that tracks the streams of information a user chooses to receive.

However, the company pivoted into the web agency business in the year 2008 when the newsreaders market took a big hit and plummeted. By early 2013, it nearly went broke after losing 70% of its revenues. Although the numbers did pick up steam by mid-2013, the company lost many of its employees and reduced from an overall headcount of 19 to 7 employees. By the end of 2013, one of the founding members decided to resign – but the company’s board didn’t accept his resignation. The founding member agreed to stay on if the company committed to changing its operational and organisational model.

 

Challenges

At the end of 2013, the company faced two major challenges.

  1. They were accountable to the customer, instead of offering them solutions as an expert.

    When companies aim at short-term profitability, they tend to focus on asking the customer what they want. However, it’s just a smart tactic to play it safe and distance yourself from the solution when you create “exactly” what the customer says they need.

    This ensures the company stays profitable by delivering products or services according to what’s been agreed upon with the client. Should it turn out to be something that the client didn’t need (because they didn’t know better), they couldn’t blame the company. In other words, it helped the company play it safe.

  2. The company was stifled by a plethora of rules that revealed a lack of trust.

    Even though it was a small company with just 19 employees, the web agency in 2013 had more rules than necessary. The founding member recalls an incident where an employee wanted to work during a bank holiday and take a compensatory off the following week. His request was rejected based on rules that said, “We can’t do that”. He remembers wondering what sort of a company they were if they couldn’t trust their people to work on the days they wanted to work on. “What were we afraid of?” he asks.

 

Strategies

The founding member stayed in the company on the condition that it would embrace radical transparency and self-structure. This was when holacracy was coming up, and Ricardo Semler received lots of media attention for his book and documentary. Applying the lessons from Semco, the web agency started radically changing their mindset in the following areas:

  • We are the experts

    The company was embracing an “ask the customer what they want” mindset but realised the customers didn’t know what they were buying. This approach was not working for the company.

    Instead of saying “We will solve your problem with technology or with a website or X,” the web agency embraced the mindset “We are the experts.” Working together with the customers, the web agency started telling the customers what they needed. By investing in a solution that both parties contributed to, the solution’s quality drastically improved.

  • Be radically transparent

    Over the last five years, the web agency has created an operative financial system which is entirely open. When it opened up the books and started being transparent, it realised that nobody could read a balance or understand profitability to the level of detail like amortisations. This made financial information very complex to share.

    By simplifying information for transparency, the web agency helped everyone in the company know how their basic finances worked and have regular conversations about it. Once everybody understood the information, they knew how to play their role within the company to make sure everybody earned what they deserved.

    The web agency also abolished the traditional way of looking at profit. Traditionally, profit is turnover minus cost. At the web agency, profit is a percentage of the revenue. This percentage is agreed upon depending on market benchmarks, what the competitors do, and how they wish to minimise their capital exposure. By fixing the profit margin, the company is wholly aligned as most of its capital belongs. A portion goes to the shareholder, but everything else is for the employees to split. So if they do well, they get paid better.

    By also making this number visible to an employee, they become aware of all their work whichshould add up to more than what they cost. Otherwise, they are not a profitable asset to the company and will create a debt. When the employee is profitable, they are free to do as they wish with the money – whether it’s to buy leave or upgrade their equipment as long as they are within legal boundaries.

  • Simplify the complexity

    The web agency embraced simplicity in two major areas: organisation of teams and company information.

    The team is organised around a rhythm of activities and not around projects. There are three big teams made up of multiple project groups that come together and separate as needed. The rhythms don’t have to be of the same intensity, but there needs to be consistency. The rhythm is co-created by everybody. For example, a marketing project group is likely to have a monthly status meeting, with an improvement session scheduled once every 4 or 5 months. Developers, on the other hand, are likely to have a daily status meeting, a bi-weekly status update and a half-yearly hackathon as an improvement session.

    To organise their company information, the web agency developed a to-the-point company handbook known as the Source Code. For all practical purposes, it is the company’s operating system and is only 19 pages long. It covers everything from:

    • How much everyone, including shareholders, gets paid what the company shared values and behaviours are
    • What happens when you start working there or leave the company the company coaches its employees
    • And how the company is run.

    It is a living document that gets reviewed and upgraded once a year by a dedicated project group – a group that’s open to anybody who feels the need to contribute. People can decide to include a rule or revoke a rule making the Source Code a reflection of the company’s constant flow.

    The company also prioritised simplifying complex concepts to make them more accessible and boost organisational transparency. A specific example is the shunning of traditional financial terms that made embracing transparency difficult.

    Instead of using complex terms like “solvability ratio,” which is the ratio of loans versus capital, the web agency introduced the “Drop-dead Ratio.” How many months of no new contracts can the company survive? Depending on the number of months left in the runaway, the internal system indicates green, yellow, red or purple. This way, everyone knows they need to step up and watch costs when things are a certain colour. This is a concept that everybody could understand.

  • Flatten power structures

    Managers believe their key goal in life is to make decisions. But, it’s more important for them to get better at facilitating the decision-making process.

    Instead of making decisions, managers are responsible for setting a timeline for the decision-making process. At the web agency, the managerial role has been replaced by team coaches who help groups get things done and act as warning signals when they spot an issue. Instead of expecting managers to onboard new employees, the web agency has developed a coaching model where every new employee selects an existing employee to be their coach in the company and to help them with their onboarding.

    The web agency has made the shareholder’s voice more objective by divorcing the shareholder’s variable profits. By never having to negotiate on the profit, the shareholder is free to state things they are concerned about without worrying about people misunderstanding their motivations.

    For instance, the founding member cites the time when an employee invoiced the company 150 euros for restocking the office pantry with some high-quality tea.

    Here’s a little background: The rule at the time at the web agency was that employees could charge the company (like they would a client) if they did work for the company – like developing the company website or buying things for the company’s use and so on. The rationale behind it was that it incentivised people to do their best for the company.

    Since it took the tea buyer about 1.5 hours to fetch the tea, they charged the company on the basis that client work costs 90 euros per hour. But, irrespective of how good the tea was, it was costly and a choice that didn’t make any real sense. Were he a traditional shareholder, the founding member might have gotten angry because he was worried the employee cost him his profitability. However, that wasn’t the case at the web agency. During a meeting called to discuss the issue, the founding member was able to be a bystander without any hidden agenda, and discussed the cost of the tea freely and transparently.

 

Results

At the end of 2013, the web agency was doing about 600,000 euros in turnover. Today, they:

  • are making five times the revenue, twice the revenue per person, and reported a wage growth of 70% which is remarkable considering it’s directly connected to a higher turnover
  • have 34 employees, one of whom has been with the company for the past 12 years
  • also boasts a low turnover rate for its key positions like developers where the market is extremely competitive.

They also actively invest in all their employees, each of whom has access to personal coaching, a structured education program and leadership development.

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