Dotcoms and Organisational Issues

Shipra & Sidarth R.

XLRI, JAMSHEDPUR

Abstract

Dotcoms are the heralded doyens of tomorrow’s economy. There have been enough views expressed on the survival of Dotcoms and the exponential growth possibilities. One thing is sure - for Dotcoms to survive or to grow, people strategies are the most crucial and essential. In this respect, we have conducted a prescriptive and analytical study into the dotcom firms in India. We have targeted close to 65 dotcom companies in India spreading across the three business models B2B, B2C and C2C but the responses did not match our expectations. We believe that the prescriptions offered are in conjunction with different organizational variables. Our strategy hinges on the following factors:-

Structure: We have proposed a functional model for the B2B dotcoms and a divisional model for the B2C dotcoms. At the same time, we propose that an organic structure should be built across the formal core to ensure sustenance in the long run.

Rewards and compensation: the compensation is visualized to be flexible in the initial stages. However, as the organisation matures, we visualize the coming up a more structured compensation system based on regular appraisals of performance.

Retention: We haven’t proposed any retention strategy as such, since it is very hard to visualize the retention of these employees for a period exceeding 3 years. However, we have prescribed certain factors that can be taken into consideration by companies while designing their retention policies, short term though it may be.

Introduction

The new economy seems to be the buzzword of the day. Its arrival has also heralded innumerable number of new business concepts. Needless to say, an oft-repeated phrase in business circles is the non replicability of highly charged and motivated people. At all levels, companies need people who can deliver at the frontier of performance. They must understand where the company is going and be able to influence its path. They must be willing to share in its fortunes and be motivated to push for greater achievements. They are the ones ultimately entrusted with the competitiveness of the corporation. They are the repositories of much of the knowledge and skill base that makes the firm competitive. No company can be successful with a detached and unmotivated work force.

So here we go, delayering, retrenchment, lean organizations, flat organizational structures…. the list is never ending. Each item is depicted as the universal panacea for all the ills plaguing the modern organization. As with the solutions, so with the problems. Here we have a new breed of organizations that are lean, flat, and relatively less bureaucratic, with people who work like perpetually charged batteries. These organizations seem to be satisfying most of the criteria for the cures suggested by the management gurus- still for them too there seems to be no dearth of people problems. They are the Dotcoms.

In the past few months they have presented before us a plethora of success stories as well as failures. An analysis of these proves beyond doubt that most of them seem to be struggling with people problems. These small organizations present a new challenge for the HR Executive who now sees new concepts of employer employee relationship defined- or more realistically a rather non employer employee relationship, where there is more of a peer to peer relationship rather than the traditional master servant one.

Methodology:

There have been very few publicly documented previous studies dealing with people strategies in Dotcoms especially in India. Hence secondary data on this issue were of not much help. Questionnaires were used for our data collection. These were open ended and qualitative surveys mailed to the HR managers and senior management of Dotcoms of different models. In all 67 dotcoms were mailed spread across the three business model – B1B, B1C & B2C. Most of the companies were reluctant to part with any information especially those in which 15 were through contacts. The total number received was much less in spite of repeated attempts to enable response.

Organisation Model For Dotcoms

Competitive trends of the global business environment are causing executives to rethink traditional design configurations and work design. One of the key challenges for managers and organizational scholars in the 1990s is to ensure an adequate business response to global competition. Early indications are that the response includes movement from mechanistic to organic forms of structure, from functional to interdisciplinary project work, from individual worker to team-based structures and towards self-management and experimental network organizations. Increasingly, these innovations are being utilized with knowledge workers and non-routine organizations like the Dotcoms.

The importance of modifying organization designs to fit and support new business competitive strategies is a familiar theme in management. Increasingly, management and organization consultants are being asked to participate in improvement efforts that focus on organization redesign. A variety of models, design principles and change processes can be found in the management literature.

The purpose of this section is to analyze the various strategy options that are present before Dotcoms taking into consideration the non-routine nature of the job they are doing and the high uncertainty in the environment being faced by them.

Non-Routine jobs

It has been often repeated that we are in an era of post-industrial society, with a new emphasis on computers, telecommunications and other information technology innovations. New information technologies, such as groupware, change the nature and dynamics of the work organization. Organizations depend on more non-linear transformation processes in core work areas, and have more departments that can be classified as non-routine. Non-routine organizational units face a high number of exceptions (unexpected situations, with frequent problems) in the course of carrying out work, and problem resolution is complex or unknown at the outset (Perrow, 1967). The combination of high task variety and complex or unanalysable conversion processes are the hallmarks of non-routine work. The Dotcoms invariably subscribe to this non-routine category.

At the most basic level, we found that the Dotcoms are composed of a social sub-system (the people with knowledge, skills, attitudes - all that is human), a technical sub-system (the inputs and the technology which converts inputs into outputs - or

Product-in-becoming) and an environment sub-system (including customers, competitors and a host of other outside forces). Organization design seeks to pull the three sub-systems together through a better strategy, conversion process, and structural Configuration and organizational support processes.

Since these Dotcoms are mostly small in size and perpetually face circumstances that require fast decision-making, an apt strategy for their structural design would be to form more flexible, decentralized, team- and alliance-based organizations that enable employees to respond immediately to opportunities and competitive advantages around the globe. It is extremely difficult to visualize a proper structure for an organization, which has only 4-10 employees. However, as any organization does, a dotcom also evolves in structure with the passage of time and increase in the number of its employees. To ensure sustenance in the long run successful Dotcoms have evolved form a totally flat structure when a few entrepreneurs started it to a slightly formal structure. The following figure illustrates this concept. An organic structure is built atop this formal core. This is to ensure a relatively structured base to tackle uncertainty and competition outside.

Before going into the e-extended enterprise model the Dotcoms should realize that owing the uncertainty in the environment, they should not go for a predesign option. The organization should follow the principle of minimum design specification which facilitates changes in structure by encouraging systems designers to specify not more than is absolutely necessary for a system to begin operation, so that a system can find its own design. The minimum conditions are what might be understood as "enabling conditions" - conditions that enable a system to initiate key processes necessary for its continued existence.

Just as the value chain has been disintermediated, so too has the traditional organization. The Digital Age organization is no longer a single corporate entity, but rather an extended network consisting of a streamlined Global Core, market-focused business units and shared support services. The transformation to what we call an "e.org" is taking place along seven key dimensions, structure being one.

The new e-extended enterprise model is built around a-

Strategic Global Core,

Shared-services business units, and

Market-facing business units.

The Global Core is a revolutionary overhaul of the old corporate center or headquarters. It is a bare-bones operation consisting solely of the C.E.O., his or her team, and only those services necessary to add value to the corporation - strategic leadership, corporate identiity, capital-raising, management control and the ability to deploy world-class capabilities.

For example, one of the Global Core's key responsibilities is to provide strategic leadership. This is exerted through the encouragement of "out of the box" thinking and behaviors that promote it. This core removes the Dotcoms from a lock-step system of policy and measurement, and encourages people to use their imagination, knowledge and common sense in pursuit of new opportunities.

Traditional overhead functions such as finance and human resources can increasingly be managed as shared services - business units providing services that are often transaction-oriented or consultative. Shared-services units operate with market dynamics by "selling" services to other business units and to the Global Core. They compete with outside vendors, and any division within the organization has the choice to buy a particular service internally or externally. Benefits are realized through economies of scale, focus of expertise and the natural tension of market forces.

In order to compete with outside vendors and offer pricing comparable to that of other business units, shared- services units must aggressively pursue alternative delivery models to reduce costs continually and improve efficiency. These units can form shared-services units that are integrated not only with other business units, but also with suppliers and customers. These regional, national and global service networks capture world-class expertise throughout the company, while lowering overall costs.

Finally, the dotcoms should organize around natural business units (N.B.U.'s) that are agile and configured from the outside in - from the perspective of customers rather than senior management or organizational structure - to focus on unique and natural markets.

N.B.U.'s have identifiable capabilities, operations, customers and/or competitors. They have strategic partnerships with their suppliers, even when some of those suppliers are divisions of their own corporations. Yet there are no sweetheart deals or cross-subsidies that can't be justified in economic terms.

For eg Barnes & Noble Inc. created Barnesandnoble.com to compete with Amazon.com in reaching readers who prefer to purchase books over the Web.

The three components of the developing organization structure need to move nimbly. The Global Core must accommodate a more complex extended enterprise and manage value from growing partnerships and alliances. Shared services need to leverage the Internet to provide a greater variety of services at substantially lower cost and with higher levels of service, sometimes by outsourcing work that cannot be provided competitively in-house. Business units must hone their unique value propositions in the rapidly evolving electronic marketplace. And the entire organization must reorient its focus to deliver speed, global reach and superior service.

An example of a successful e-Organisation that has followed this structural model is Cisco systems. Although this is not a dotcom, the principles followed are very much relevant to the dotcom world particularly if it intends to expand and sustain in the long run. Cisco maintains a strong web of strategic partnerships and systems integration with suppliers, contractors and assemblers. This network of alliances provides a flexible structure that enables the "e-stended" Cisco enterprise to shift toward new market opportunities, and away from old ones. Although it outsources functions, including a large part of its manufacturing, it also leverages its innovative human resources and I.T. departments as shared services to the benefit of all its business units.

Systems Based View

Systems rule. And most Dotcoms do not have any. True, instituting systems takes time (time that a dot.com can ill afford to spare) but, over time, a dot.com without systems is certain to falter and fall. The solution to this seemingly impossible problem is balance: dot.com biggies like Rediff, Mantra, and Satyam have adopted this middle path which requires building an organisation around employees arrayed in three-to-four levels-with standard designations like associates, managers, and editors-and working in cross-functional teams with aligned development, appraisal, and reward systems. The presence of an established way of doing things-which is what a system is-weeds out ad-hocism. It can also make life a whole lot easier: questions like who do I report to? or how do I go about this? don't usually get asked in an organisation with systems.

Rewards , compensation and retention

Candidates with the right skills are in demand and they’re not willing to settle for just any work environment. A strong management team, bright colleagues, and good customers, and growth potential are critical. Finding the candidates is one challenge, the other is cutting through the noise of four other competitors and dotcom companies that also present great employment opportunities to these candidates. At a time when knowledge has been identified as a prime competitive advantage, the industry rocks under the scarce availability of skilled human resource, compelling HR managers to reinvent policies and tools to retain this valuable resource. Life for an HR manager is not much of a comfort when it comes to managing these netpreneurs in Dotcoms. The people in question are the usual bunch of émigrés, who abandoned secure real-world jobs for the excitement and quick-bucks that dotcoms promised

In USA and other developed economies, the trend in dotcom executive compensation is turning north in terms of cash. Newly hired Internet executives are demanding money, and plenty of it, even as they collect the hefty stock options that have become a dot-com staple (Reuters, 00). Christian & Timbers surveyed across

section of its clients and found that, at the CEO level, the average cash salary range is now are up about 25 percent from six months ago and are in the range of $300,000-350,000. But cash is just part of the package. Equity is also a significant factor in attracting top-tier talent. Owning seven to eight percent of the company is typical for CEOs.

Opportunity –this is a factor that weighs heavily on the minds of employees. If a company or sector is perceived as having tremendous growth potential -- such as infrastructure and B2B e-commerce -- compensation levels tend to be higher. The same is true if the company is talking to highly regarded investment bankers or if an IPO is already being discussed.

One trend observed only recently is how compensation tied directly to performance. In a dotcom when the industry metrics for valuation and performance itself are so fluid and undefined, it was a difficult proposition to introduce these initially. However considering the devaluation and clamour for profits it has become extremely important to establish performance based compensation system. Our survey revealed a healthy trend of most Indian companies opting for this. Firms are offering options based on specific milestones or an ability to achieve specific goals. According to the Internet Compensation Survey 2000, released today by the accountants PwC, an increasing number of Internet companies are rewarding top executives with salaries and bonus plans linked to performance.

The pay practices of 123 Internet companies were compared in the study and these were the results:

CEOs will earn base salaries that are 15.3 percent higher than last year and cash bonuses that are 31.3 percent higher.

COO’s will earn bonuses 85 percent higher than last year, as more Internet companies have added the position and have been forced to pay sign-on bonuses to compete.

The average total direct compensation for CEOs at the firms surveyed soared from about $1.7 million last year to about $4.8 million this year, a sign of the substantial increase in the values of the companies late last year and early this year.

The study also shows executives at Web-based businesses are being paid 13 percent more in cash than last year, which reflects a tight job market and more focus on profitability. Stock options only had an increase of 1 percent given to these employees.

Another trend notices in this survey is the return of executives from internet companies to bricks-and-mortar companies establishing online divisions.

The survey found that many internet companies had begun issuing stock option grants on a quarterly basis rather than annually, allowing companies to average the strike price of the stock options over the year, which added some advantages for staff.

The most important thing that was touted by Dotcoms apart from an entrepreneurial and challenging environment was the chance to ride the stock market wave and boom along with the share prices. This was too big a lure for many a big corporate executives to reject. The market’s recent downturn and the many dotcoms going out of business faster than they sprang up have rubbed away the luster of stock options. Gone are the days when working for a scrappy startup often meant quick and substantial wealth. Job seekers in dotcom firms are quickly realizing that stock options probably have about as much chance of making them rich as a lottery ticket. However, instead of fleeing the Internet sector in search of a safer harbor, job seekers can now benefit from this industry reality check and take advantage of the significant opportunities still available. The good news is that they can also learn from what others have gone through. They now expect something more than the promise of wealth, like a competitive salary, even from a struggling dotcom startup. Some employees have even took salary cuts in exchange for options packages. The promise of options – and eventual wealth -- was a key selling point for dotcoms. That’s not the case anymore. Employers and employees know now that the real key to this is taking a longer-term view. Christian Timbers study has revealed the perception that wealth creation through stock appreciation is an important consideration in the overall view of compensation, but is not the driving force.

In addition to the all-important cash component of a job package there is growing relevance that the "content of the job" is also incredibly valuable. "Professional growth is an important driver in the overall picture. This is because if an employee is experiencing significant growth in his experience, then it is much easier to ride out the fluctuations in the market.

Proposed Strategy

Structure

From our analysis of the structure of dotcoms we see some trends emerging in terms of new and old dotcoms. In its inception stage a dotcom is too small to have a formalized structure. It should be understood that skills required to see an organisation through the inception stage, and those required to see it through the growth phase are different: In the inception phase, the company requires individuals with a high level of creativity; in the maintenance phase it requires employees who have the ability to focus on details, and ensure that the organisation maintains a high level of operational effectiveness. Thus, they should budget for the fact that a sizable part of the team that helped create the organisation will leave once it is up and running. And focus on the ones who stay behind.

For a newly initiated dotcom we find a very non formal structure with a few specialized jobs in the B2B dotcoms. In this stage, some of these experts are indispensable to dotcom The roles that we see in each of the two models in their initial phases are those of the business developer, site manager and the ad manager. However as the dotcom grows in size we visualize more of a functional structure for B2B dotcom and a divisional structure for a B2C dotcom. Since the uncertainty in the environment is equally high for both the dotcoms, both should have an organic structure built atop the formal divisions that they make at the core.

An example of a fairly large B2C and extremely successful dotcom is Amazon.com. It evolved from a highly unstructured organisation of a few entrepreneurs to a huge organization with a divisional structure.

Rewards and compensation

Compensation can be evaluated as being provided for two main reasons - the equity function and the motivational function. The former servers as a standard for evaluating the individual’s past performance and current effectiveness thereby links wages with ability and enthusiasm shown on work. The latter serves as a motivator to future initiative.

Our research has validated that there are many variables that impact the compensation package. Even in the US experts agree that employees look at the market opportunity, what stage the dotcom is at, its track record, what type of funding it has, etc. Definitely an important consideration is the candidate’s track record. Another factor that can effect compensation is the type of funding a company is getting whether it’s from an angel investor, VCs, or top-tier VC. There is also an impact of IPO especially with the case of rediff.com and sify.com whose salaries are much higher that other competitors.

Based on our study, we can propose a compensation strategy based on the seven elements offered by Beach:

1. Pay Levels which link to competitive executive salaries or industry compensation rates

2. Internal pay structure relating to hierarchy of pay rates, grades and classification

3. Individual pay system relates to classification of individuals into job titles and pay grades

4. Payment by time seen with a few specialized knowledge workers

5. Qualification and performance based pay to salesman, managers and professionals compared to intrinsic job content for other personnel.

6. Control of wages and salaries

7. Fringe benefits and pay supplements, eg ESOPs

These elements can be mapped on to a dotcom and the compensation strategy is clear in consonance with the environment and the industry.

Retention Strategy for Dotcom Employees

Retention is the most important aspect of any industry specially in the knowledge sector. Dotcoms are also facing a severe attrition rate. Of late with the increasing drop in value of new economy stock, this trend has only grown. We have not found any of the firms agreeing or divulging any details about attrition. Retention is an extremely difficult and complicated aspect of HR strategy. We propose that especially in dotcoms, one should work backwards to find out how best to retain an employee. There are a few main factors, which attract an employee to a dotcom.

One of the reasons why people do join a dotcom is the challenge and freedom that the jobs provide. Employees get to enjoy the much talked about 'employee empowerment' which most organizations promise, but do not provide. Working for a dotcom can definitely be a very satisfying experience if one is interested in pioneering projects dotcom.

Some of the other temptations are quicker promotions and convenient flexi-timings. The work atmosphere plays an important role in employee happiness.

It is true that freedom and challenge at work is everybody's dream come true, but there is the other side of this coin. Employees experience tremendous time pressures all the time. Since the business is on the net, any new scheme that one develops can be duplicated by competitors in a matter of few hours. Employees have to put in long hours of work and churn out new and better ideas on a continuous basis.

Burnout is another issue, which demands attention. The employees are unable to sustain the hectic pace of work for long and are experiencing physical as well as mental burnouts. The role of the management becomes very crucial here. They have to think young and give their employees the right to work in whichever way they are comfortable. There should be minimal interference so that creativity stays alive.

However, the future for dotcoms is bright and employees feel that this new trend is sure to go places, with many ready to take a ride.

As we see, the above mentioned reasons can play a crucial role in the retention of employees and should be the prime considerations while planning a retention strategy.

However dotcoms should realize that shorter employment tenures will be the norm. Tenure in any one position will likely be less than three years as employees seek new ways to develop and market their experiences. Markets, technologies and requirements change so rapidly that 100 percent retention is not only futile, but also potentially damaging. Enterprises must learn to manage for shorter tenure — hence for more frequent and rapid turnover — rather than to assume retention. In fact, Gartner analysis reveals that knowledge-intense enterprises should anticipate turnover of 10 percent to 15 percent, especially if they create assignments, rotations, projects and other opportunities only sporadically. (One leading networking company, growing about 40 percent annually, has staff turnover of 7.5 percent, a figure that the company's HR executive suspects may be too low for the company's fast pace of growth.) Shorter tenure demands fast integration into the workflow, tight monitoring of the workforce supply channels, job rotation, well-defined roles and responsibilities and managers who are prepared to find and offer opportunities to employees.

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