Paul Graham has an excellent write up on why Yahoo went bust. The full article is worth the read, but here are two choice quotes:

I remember telling David Filo in late 1998 or early 1999 that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn’t worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn’t worth doing better.

And later Paul goes on to say:

If circumstances had been different, the people running Yahoo might have realized sooner how important search was. But they had the most opaque obstacle in the world between them and the truth: money. As long as customers were writing big checks for banner ads, it was hard to take search seriously. Google didn’t have that to distract them.

First, a disclaimer: The opinions I am about to express are my own. They do not represent, or have any association with any organization I have worked with in the past, present or future. If you see a lack of innovation within your organization, know I’ve done work for you, and think these opinions are about your organization, I can assure you they are not. They are observations regarding a completely different organization.

Paul’s article really hit home for me. Thinking back over the years I’ve spent consulting for different organizations, I noticed a distinctive pattern. The Internet space is littered with companies that had some cool innovation, made inroads into their market share, but then lost their way in pursuit of higher profits. You could see it within the organization’s internal culture as well as their front facing interaction with the public. Once the focus changed from long term technology development to short term profitability, the organization began a downward spiral.

Probably one of the earliest most public examples was Lotus. For the folks with as much gray hair as myself, you probably remember that programs like 1-2-3 and Notes put the PC on the map as the choice business class system. In the early 90′s everyone was running Lotus software. For that time in history it was extremely innovative and functional. There was a number of years where literally every company I did work for had a large deployment of Lotus software.

Then around the mid 90′s it all changed. New releases fixed bugs rather than pushed the technology forward. A draconian copy protection system was implemented. Costs for phone support and patches went through the roof. I remember the exact moment I decided I would do what ever I could to get away from Lotus software. I was sitting on hold for cc:Mail support (the datastore had corrupted itself again) and realized they had hired a disk jockey to play music and announce queue wait times (usually 30-60 minutes). This said to me that Lotus knew they had support problems, but rather than address the root cause they took the cheap way out and hired an entertainer. While I’m sure this increased their short term profitability, it sent folks like myself running into the Microsoft camp.

Of course Louts was not the last. We even watched Microsoft grow in leaps and bounds till the focus changed from innovation to copy protection and marketing slicks. SCO changed their business model from being an SMB solution to being litigators, and quickly slid into oblivion. We may even be seeing it again with Oracle. Some are claiming that Oracle purchased Sun not to forward their innovation, but specifically to litigate against Google. Hard to argue this point as from the outside it appears that the only other thing they’ve done with Sun is kill OpenSolaris, thus cutting off a wealth of innovation provided by outside programmers.

In Paul’s article he blames the root cause on Yahoo not hiring the best programmers. In my experience the problem goes deeper than that. When a company enters this self destructive phase they focus less on hiring innovators (like programmers) and more on hiring bean counters. The focus changes from fostering new ideas to squeezing out every last penny for short term gain. The first sign is usually absurd policy changes. Cubes can only be decorated in some cookie cutter fashion, engineers must empty their own trash, you spend more of your day accounting for our time rather than actually accomplishing anything, etc. etc.

While I’m sure some accountant can show on a pretty bar chart that these kinds of policy changes increase profitability, they miss a very important point. The changes create an environment that is detrimental to innovative thinking. The culture shift all but guarantees that innovative ideas are going to fail, and innovative thinkers are going to move on to other opportunities. Paul’s interaction with Yahoo is an excellent example. Think of it as being synonymous to investing in food at the grocery store. Buying cheap food will result in short term profitability, but long term it will probably dramatically increase your healthcare costs. When you are counting pennies it is easy to loose sight of the long term goal (like living a long healthy life).

So is the problem big business? Is the mantra that only small hungry companies can innovate while large companies are destine to fail? Personally, I do not think this is true. I have seen large companies that are smart enough to create internal think tanks to foster innovation. Mechanisms are put in place so that new ideas get floated to the top and failure does not become synonymous with termination. While profitability is still important (and IMHO it should be), creative risk taking into potential technology verticals are supported by upper management. A great example of this is probably Apple. Moving from computers to phones was a major change in their vertical market but it paid off in spades.

In the end, I think it really comes down to the corporate culture. What kills a company is not its size, but its ability to foster long term instead of short term thinking. Quick sanity check, if you notice your organization hiring more bean counters than innovators, you may already be on the downward spiral.