Monday, September 24, 2012

The Attrition Funnel

My post on the Recruitment Anti-Funnel touched on the idea that one of the worst things you can do for hiring is to lose good people. The downside of losing good people should be obvious, but let’s state it explicitly in terms of recruiting - when you lose someone good, you suffer multiple losses for your recruiting efforts:

  • you’re short one person (obviously) - however many people you were trying to hire before, now you need one more. Depending on how your funnel converts, this could require adding a few hundred more people to the top of the funnel.
  • you risk having someone out there in the market telling your potential recruits that your company is not a good place to work
  • more likely, even if that person isn’t telling people that your company is not a good place to work, LinkedIn makes it clear that they left; in the absence of information about why someone left, outsiders will assume the worst, taking any attrition as a sign that your company is not a good place to work.

Of course, this ignores all the other negative effects to your team and your company that come with losing good people, this is just how losing good people makes recruiting harder for you.

As with bad recruitment practices, I have spent enough time with startups over the past few years to see a number of common bad habits that lead to attrition among engineers - let’s call this your Attrition Funnel, the gradual sequence of steps you take to move people from “great employee” to “former employee”.

You’re managing down to people. Engineers in today’s market are less like traditional employees and more like free-agent entrepreneurs; each day they are making a conscious choice about whether to keep working at your startup, whether to return the phone call from the recruiter who has been hounding them, whether to IM a friend at a cooler startup to line up a new job, or whether to just quit and finally figure out doing their own thing.

An engineer in this mindset isn’t focused solely on the technical challenges that are directly required of them in their role - they are constantly evaluating every aspect of the company to assess whether the company is headed in the right direction. They are reviewing every metric they can get their hands on (which, by virtue of their access to internal datastores, is much more than someone non-technical might expect). They are asking questions about marketing strategy, product priorities, and sales compensation schemes.

In that environment, I am always flat-out gobstopped when a CEO asks me, “How do I get engineers to just stay focused on the technology problems instead of the always poking around the rest of the company?” In the pathological case, this comes out more like “No, I am not going to explain the company strategy to the engineering team, their job is to write more code and let me worry about the strategy!” 

For an executive dealing with engineers, this phenomenon is perhaps exacerbated because it is a behavior somewhat unique to engineers. I’ve rarely seen an individual contributor salesperson ask a CEO challenging questions about technology strategy, for example. This may be a matter of engineers flexing their market power (eg, “I need to know this to assess whether I can be at a company with better prospects”), or it could be a matter of a different perspective on the part of engineers, I can’t say. For executives in non-technical parts of the company, the glaring difference in behavior between engineers and non-engineers can lead to the conclusion that somehow the engineers at your company are just exceptionally difficult to deal with and intent on learning about areas you think they shouldn’t be concerned with. Trust me, engineers at every startup want answers from the executive team about every aspect of the business.

In any event, leaders in startups need to be prepared to handle the challenging questions that come from their engineers, regardless of the topic. Failure to address the questions from your engineers will make them feel like you are treating them with less respect and transparency than they are entitled to; this is a shortcut to stripping them of a sense of empowerment, and makes it very easy for another startup to recruit them away with promises of real impact and access to the executive team.

You’re churning on strategy. It’s become very trendy in the past twenty-four months or so to pivot, to make a radical change in strategy that redefines a company. Pivoting shows that you’re lean! You’re always learning! You’re nimble! Still, there are a lot of ways a pivot can work against you in terms of attrition. Sometimes, a pivot is really just flailing, as Steve Blank describes well here

I don’t want to get into the debate about how to avoid bad pivots, so, for sake of this discussion, let’s assume that every pivot you’re considering is a stroke of strategic genius that will set your company up to double growth rates, triple revenue, and give everyone a unicorn.

Even in the case of the perfect pivot, a strategy change can have a big impact on employee morale and hence, attrition. A large part of the decision to join startup, much more so than a big company, is subscribing to a vision of where that startup is heading and how it is going to change the world. When the strategy changes, employees can be left feeling like they were misled or, in worst case, lied to, about the prospects of the original vision.

In some sense, this issue is a concrete case of managing down to your engineering team - they want the opportunity to evaluate a new strategy, understand all the factors that went into it, give their input, and decide whether they are signed up for this new vision. In the best case, the CEO or their designee should take the time to meet with the engineering team as a group or individually and really sell them on the pivot. The pathological case I have witnessed too many times is the CEO who says, “This is the new strategy I’ve figured out, this is what we’re doing. Anyone who isn’t ready to sign up for this right now is just not a team player.”

You’re not paying market rates. This is the easiest mistake to avoid and the one that pains me the most to see. I’m on the record that I think engineering compensation has gotten out of control, but for the foreseeable future, at least, as you’re budgeting for your startup, you have to plan for the fact that engineers are expensive. If your financial plan depends on people being willing to work for you at a salary 20-30% below what they can make at a similar-stage startup, you are going to be in trouble.

I intentionally did not highlight this issue in the post on recruiting, because I have found that many great engineers are willing to take a below-market pay rate when joining a new startup, even as compared to similar startups. As such, paying below market doesn’t always hurt your recruiting efforts. This is a good thing for everyone involved - you hire new engineers, give them big equity packages, and incent them to make their equity worth gobs and gobs of money. In my experience, this situation can usually last for 12-18 months without issue. After that, if there’s no market confirmation that the equity is increasing in value, people naturally want to see an increase in their salary. If you’re not ready to bring salaries up to market rates, you can count on people starting to look around.

Figuring out how to assess the appropriate market rate can be a challenge, as good data on comparable startups is generally difficult to find. The recently-released Wealthtfront tool is the most credible and useful way I’ve seen to get a quick gauge for what you should expect to pay people.

Even the Wealthfront data is pretty broad though, making it tough to assess how your compensation compares to your immediate peers. The most pragmatic way I know to assess where you stand relative to the rest of the market is to collect data through the hiring process. When negotiating offers with engineers, many people are willing to disclose the details of their competing offers. Every competing offer you can learn about is a concrete piece of evidence showing how your offer compares to your peer companies for the same employee. Over time, enough data can help paint a pretty clear picture of the comp structure at your peer companies.

Of course, there are innumerable other ways to build a strong Attrition Funnel. The spirit here is not to be exhaustive, but these are the mistakes I have seen startup leaders making over and over again that are most easily avoided and most likely to build a strong path of good engineers walking out the door for better opportunities.

1 comment:

Matt said...

These points are just as valid for larger but still relatively young, post-IPO companies.