Working Backwards

Marton Trencseni - Sun 10 July 2022 - book

This is a great business management book. These are my notes of the book, which I recommend you should buy right now.

Leadership principles and mechanisms

Amazon established a set of principles and mechanisms, enabling the company to grow from a single founder to several hundred thousand employees while remaining stubbornly true to its mission of obsessing over customers to create long-term shareholder value. Per Jeff Bezos:

You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it—not creating it.

Working Backwards

Amazon’s 14 Leadership Principles:

  1. Customer Obsession: Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
  2. Ownership: Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that’s not my job.”
  3. Invent and Simplify: Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here”. Because we do new things, we accept that we may be misunderstood for long periods of time.
  4. Leaders Are Right, A Lot: Leaders are right a lot. They have strong judgement and good instincts. They seek diverse perspectives and work to disconfirm their beliefs.
  5. Learn and Be Curious: Leaders are never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them.
  6. Hire and Develop the Best: Leaders raise the performance bar with every hire and promotion. They recognise people with exceptional talent and willingly move them throughout the organisation. Leaders develop leaders and are serious about their role in coaching others. We work on behalf of our people to invent mechanisms for development like Career Choice.
  7. Insist on the Highest Standards: Leaders have relentlessly high standards – many people may think these standards are unreasonably high. Leaders are continually raising the bar and driving their teams to deliver high quality products, services and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed.
  8. Think Big: Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.
  9. Bias for Action: Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking.
  10. Frugality: Accomplish more with less. Constraints breed resourcefulness, self-sufficiency and invention. There are no extra points for growing headcount, budget size or fixed expense.
  11. Earn Trust: Leaders listen attentively, speak candidly, and treat others respectfully. They are vocally self-critical, even when doing so is awkward or embarrassing. Leaders do not believe their or their team’s body odour smells of perfume. They benchmark themselves and their teams against the best.
  12. Dive Deep: Leaders operate at all levels, stay connected to the details, audit frequently, and are sceptical when metrics and anecdote differ. No task is beneath them.
  13. Have Backbone; Disagree and Commit: Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.
  14. Deliver Results: Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never compromise.

Good intentions don't work; mechanisms do. No company can rely on good intentions. Amazon has put in place mechanisms to ensure that the Leadership Principles translate into action. Three foundational mechanisms:

Annual planning process: starts previous year summer and requires 1-2 months of managers' time. Executive team comes up with high level goals like "Grow revenue from $10M to $15M", which are then cascaded down the orgs. All goals are SMART goals. Each org builds its own goals and operating plan, which includes:

  • assessment of past performance, including goals achieves, goals missed, and lessons learned
  • key initiatives for the coming year
  • detailed income statement
  • requests and justifications for resources (hires, marketing spend, equipment, etc)

After the year completes, in January, the goals and plans are adjusted for what happened in Q4 in a phase 2. Once this narrative (goals and operating plan) is locked, changing it requires executive team approval.

Executive team's goals process: certain goals from orgs are selected by the executive team and elevated to company goal status, plus they come up with their own. Executive goals can number in the 100s at Amazon! These are mainly input-focused metrics that measure certain activities teams are performing during the year. Eg. "add 1,000 products to Store X" or "99.99% of API calls to service X are complete within 10ms". Executive team goals are tracked by the Finance dept and reviewed quarterly (red, yellow, green).

Compensation plan: re-inforces long-term thinking. The bulk of employee's compensation is always stock (vs base income or cash bonus) to avoid misalignment: (i) by rewarding short-term goals at the expense of the long-term and (ii) by rewarding localized department achievements irrespective of whether they're good for the company.

Hiring: Bar raiser process

When you consider the potential positive and negative impacts of an important hire, not to mention the precious time dedicated to it, it is shocking to consider how little rigor and analysis most companies put into their hiring process.

Bad hiring comes from:

  • personal bias: surround yourself with people similar to you
  • hiring urgency: filling headcount just to look good
  • relying on gut feeling, "I like him/her"

Good hiring: scalable, repeatable, formal process for consistently making appropriate and successful hiring decisions. Easy to teach to new people, has feedback loop to ensure continuous improvement.

Bar raisers: group of "senior" interviewers who must be involved in all hiring, and have veto power over the hiring manager. The bar raiser must come from outside of the team that is hiring.

Amazon hiring process:

  1. Job description: You cannot hire the right person for the job if you don’t have a clearly defined job description. This is an essential point-of-reference for interviewers. A good description must be specific and focused.
  2. Resume Review: Resumes should meet the requirements spelled out in the job description.
  3. Phone Screen: 45-60 minute call with the hiring manager (once resumes are screened). Based on initial data, hiring manager decides if they would be inclined to hire the candidate based on preliminary data. If so, the candidate will be invited to the next step.
  4. In-house interview: No participants will be more than one level below the position of the candidate’s position. Pool of interviewers should not include the prospective boss.
  5. Written Feedback: Interviewers generate detailed notes as close to a verbatim record as possible. Written feedback must be thorough, detailed, and specific. The report should be written shortly after completion of the interview. Oral feedback is unacceptable. Written feedback includes hiring recommendation based on four possible options: strongly inclined to hire, inclined to hire, not inclined to hire, or strongly not inclined to hire. Interviewers do not discuss their feedback until submitting their own report (to avoid bias).
  6. Debrief/Hiring Meeting: After written feedback is submitted, the interview team meets to debrief and make the hiring decision. Team reviews interview feedback and has a chance to change their vote based on the cumulative information.
  7. Reference check
  8. Offer

Every new hire should “raise the bar,” that is, be better in one important way (or more) than the other members of the team they join.

Behavioral interviewing: The process of evaluating a candidate’s past behavior and their compatibility with Amazon’s Leadership Principles. Each interviewer is assigned one or more of the 14 Principles to focus on in their interview (in order to learn how specifically the candidate aligns with the assigned principle). Questions are mapped to assigned principles.

Example: “Can you give me an example of a time when your team proposed to launch a new product or initiative and you pushed back on their plan because you didn’t think it was good enough?”

STAR questions (Situation, Task, Action, Result):

  1. What was the situation?
  2. What were you tasked with?
  3. What actions did you take?
  4. What was the result?

Organizing: Seperable, Single-threaded leadership

Velocity, a measure of speed and direction, is critical for a business. With all other things being equal, the organization that moves faster will innovate more, simply because it will be able to conduct a higher number of experiments per unit of time.

Dependencies can slow down innovation and the rate at which corporate teams operate. When a team cannot operate independently, its progress slows to whatever or wherever the gating dependency resides. As organizations become more interdependent and complex, an inordinate amount of time is spent on internal communication and coordination.

Too much of any kind of dependency not only slows down the pace of innovation but also creates a dispiriting second-order effect: disempowered teams. Amazon determined that improving coordination and communication doesn’t resolve the problem of dependencies. Amazon instead looked to eliminate dependencies. Per Jeff Bezos: Eliminate communication rather than encourage it in order to make Amazon a place where builders can build.

Single-Threaded Leadership: is Amazon’s mechanism whereby individuals are responsible for single, focused initiatives. These leaders have specialized responsibilities rather than a broad set of responsibilities. They run teams that are largely autonomous.

Two-Pizza Teams: An early Amazon approach to creating more autonomous teams. Teams were no bigger than the number of people who could be fed by two large pizzas (no more than 10 people). Amazon’s software architecture was highly influenced by this approach (e.g. modular APIs for services and data).

Autonomous teams are built for speed. Autonomous teams should have a clearly defined purpose, clearly defined boundaries, and useful metrics for tracking progress.It’s up to the team to figure out the specifics of how they will achieve their goal. The most successful teams made initial investments in removing dependencies and building infrastructure and instrumentation before adding new features (aka they laid the groundwork for future innovation).

Per Jeff Bezos: Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow...if you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure. Be stubborn on the vision but flexible on the details.

Single-Threaded Leaders: Leaders whose focus is to get a specific job done. They don’t work on anything else. Separable, single-threaded teams have fewer organizational dependencies than conventional teams. The best way to fail at inventing something is by making it somebody’s part-time job.

Communication: Narratives and the 6-pager

Amazon relies far more on the written word to develop and communicate ideas than most companies, and this difference makes for a huge competitive advantage. Unlike most companies, Amazon does not use PowerPoint (or any kind of presentation software). Better informed people make higher-quality decisions, and can deliver better, more detailed feedback.

Written narratives are the primary communication tool used for proposals, plans, and process documentation. The company uses two main types of narrative:

  • The six-pager: A document used to describe, review, or propose an idea, process or business.
  • The PR/FAQ: A document used to develop and iterate on product ideas.

Per Jeff Bezos: The reason writing a good 4 page memo is harder than writing a 20 page PowerPoint is because the narrative structure of a good memo forces better thought and better understanding of what’s more important than what, and how things are related. PowerPoint-style presentations somehow give permission to gloss over ideas, flatten out any sense of relative importance, and ignore the interconnectedness of ideas.

Benefits of an effective six-pager:

  • Six pages is optimal for a 60 minute meeting where the meeting participants spend the first 20 minutes collectively reading the document individually (in silence while taking notes).
  • Document contains all essential information. Participants can review presentation, uninterrupted, in its entirety. The document is standalone and doesn’t require a presenter to fill in the blanks.
  • The document is portable and scalable. It can be circulated easily and read by anyone at any time.
  • Anyone can edit or add notes to the document.
  • The document serves as its own record.
  • Written narratives contain 7-9 times the information density of a PowerPoint.
  • People read three times faster than the typical presenter can talk.

A complete narrative should also anticipate the likely objections, concerns, and alternate points of view that we expect our team to deliver. Writers will be forced to anticipate smart questions, reasonable objections, even common misunderstandings—and to address them proactively in their narrative document.

The six-pager can be used to explore any argument or idea you want to present to a group of people—an investment, a potential acquisition, a new product or feature, a monthly or quarterly business update, an operating plan, or even an idea on how to improve the food at the company cafeteria.

Meeting format:

  • Presenter does not verbally repeat the document.
  • 20 minutes of reading the narrative.
  • 40 minutes of discussion.
  • Someone (not the presenter) should be charged with taking notes on behalf of the audience.

Start with the desired costumer experience

Amazon's approach is to product and business development is to start by defining the customer experience. Once the desired experience is defined, Amazon works backwards from there to figure out how to realize said experience.

PR/FAQ is a document that imagines a product release has occurred. The employee writes a press release that details the product, its features, pricing. rationale, and more. The FAQ portion answers questions that both customers and outside observers will have as well as questions that internal peers and managers might have.

Most companies work forward: leaders define the product and try generate consumer interest. This is the classic “a solution in search of a problem” mentality. PR/FAQs are less expensive product experiments. Teams can determine whether a project is worthwhile or not without spending precious R&D money in advance.

Basic format (follows the 6-page rule for 1-hour meetings):

  • 1 page press release.
  • 5 pages or fewer for frequently asked questions.

Press release format:

  • Heading (one sentence): “Blue Corp. announces the launch of Melinda, the smart mailbox.”
  • Subheading (on sentence) describing the benefits: “Melinda is the physical mailbox designed to securely receive and keep safe all your e-commerce and grocery deliveries.”
  • Summary paragraph: Give a more detailed summary of the product and benefit.
  • Problem paragraph: Describe the problem the service solves from the point of view of the customer.
  • Solution paragraph: Describe how the product solves the customer problem.
  • Quotes and getting started paragraph: Describe how a customer can obtain the product and how much it will cost. Include one quote from a company spokesperson and one quote from a hypothetical customer.

Sample FAQ questions:

  • How many consumers have this need or problem?
  • How big is the need?
  • How many consumers are willing to spend money to solve this problem?How much money will they spend?
  • What are the unit economics of the device?
  • What is the rationale for the price point?
  • What is the initial up-front investment required to build the product?
  • If 3rd party adoption is needed, how will they be induced to use the product?
  • Are there 3rd party technologies required?
  • What are the challenging engineering problems to solve?
  • What are the customer UI issues?
  • How can we manage the risk of the up-front investment needed?

Most PR/FAQs never make it past the exploration stage. This is a feature not a bug. Rejecting projects via the PR/FAQ process is far less expensive than actually developing failed products.

Metrics: Manage your inputs, not your outputs

Focus on the controllable input metrics, the activities you directly control, which ultimately affect output metrics such as share price. Output metrics show results. Input metrics provide guidance.

Working Backwards

DMAIC (Six Sigma process improvement method) is as follows:

Define the metrics you want to measure. Amazon tracks things like selection, price, and convenience. These input metrics drive output metrics like orders, revenue, and profit. Amazon uses the “flywheel” concept from Jim Collins’ Good to Great. “You inject energy into any one element, or all of them, the flywheel spins faster.” The goal is to find the things that matter the most (but the process of identifying the optimal inputs is iterative).

Measure: Data must be collected and presented in a usable format. Align the metrics with the customer experience. Make sure you are able to regularly audit the metrics.

Analyze: The objective in this stage is separating signals from noise, and then identifying and addressing root causes. When Amazon teams come across a surprise or a perplexing problem with the data they are relentless until they discover the root cause. Use the “Five Whys” method developed by Toyota. Keep drilling down with “why” questions which may sit layers down a chain of probing questions.

Improve: This step can only happen once sufficient investments in the first three stages have occurred. Example: If you reach a weekly 95% in-stock rate for products, figure out how to get to a 98% rate.

Control: Ensure that processes are operating as expected and maintain performance levels. This is an opportunity for identifying automation opportunities.

The Weekly Business Review (WBR) is a tactical operational meeting to analyze performance trends of the prior week. At Amazon, it was not the time to discuss new strategies, project updates, or upcoming product releases. Amazon’s internal reporting that allows for effective input management. Unlike the Six-pager or PR/FAQ, this data package is heavy with graphs, tables, charts, and visuals. The document may include explanatory notes for the metrics. The deck represents a data-driven, end-to-end view of the business. Emerging patterns are a key point of focus. Graph plot results against comparable prior periods, this is critical for trend identification. A consistent format is maintained for ease of use and efficient interpretation. Anecdotes and exception reporting are woven into the deck. Highlight unusual situations or developments.