On April 20, 2018, Source Code Capital’s 2018 Annual Code Class Conference themed “Opening Sources, Decoding the Future” convened in Beijing. ByteDance founder and CEO Zhang

Yiming delivered a speech named “‘Bring Outside in’ and Avoid ‘Managing up’ — How to Protect the Company from Diseconomies of Scale”.

Yiming thinks that as a company grows big, it will likely see diseconomies of scale which could lead to issues such as misfocus of information, “manage up”, and inflated ego. The direct outcome of diseconomies of scale is the internal misfocus of information, where outsiders may know more about the company than its CEO and leadership. Solutions to the diseconomies of scale are: bring outside in, build up internal culture and tools, and reduce the CEO and leadership’s ego.

Zhang Yiming’s full speech is as follows:

Hello everyone. Every year I’m here for the Code Class of Source Code Capital. The main purpose is to summarize the key takeaways from my own learnings and improvements in the past year, and share them with you guys. We are all in different industries here, so it won’t do you much good if I share things about one certain product or business line, which is why I’ve chosen to share on a more common theme: management and talents. Last year I talked about ways to address management challenges after a company goes big. I shared a practice we have at ByteDance: “Context, not control.” This year I’d like to talk about the “diseconomies of scale” for a company.

This topic first occurred to me last year, when I was talking with Cao Yi about how there could be a number of economies of scale for an enterprise — the bigger the enterprise, the stronger its capabilities. But to think about it, could there also be diseconomies of scale for companies as well? In fact, there are. And the bigger a company, the bigger these diseconomies. There are different kinds of diseconomies for different enterprises. For example, for some companies, the environmental capacity can lead to their diseconomy of scale. There are some diseconomies that share common characteristics; for example, the most fundamental diseconomy of scale is the organization itself. Cao Yi just said that from a 11-person team to a 50-person team, Source Code Capital has grown in size, so they might as well start looking into the diseconomy of scale for a company.

On this topic, I’d like to discuss with you these questions:

What is the diseconomy of scale for a company, and why does it happen?

How should CEO and leadership fight the gravity of an organization, break through the information siege, and safeguard the capabilities of acquiring authentic, significant information?

How should a company avoid the diseconomy of scale after it goes big, and establish an efficient information feedback system?

Neglected Organizational Effectiveness (CEO and Leadership Lost in Information)

The most direct consequence of the diseconomies of scale of a company, is reduced organizational effectiveness, or in other words, crippled internal information sharing within a company.

Before we get into the issue, I’d like to explain what “organizational effectiveness” is. According to Drucker, all results of an organization (i.e., its effectiveness) come into being outside of the organization. An organization exists to produce external results, not to organize an internal party. However, after an organization goes big, its effectiveness is very often neglected; people shift gears from the external results to the internal affairs, which consume most of their energies.

A CEO, by its role, easily falls prey to the problem. I started to notice it from my own case. I wonder if this happened to any of the CEOs and leaders present here:

First, your work is driven by the internal parties. At the early stage of a startup, if you want to do something, you just do it. It’s that simple. But as a company grows big, as a CEO or a leader, your schedule is set up by people reporting to you. You spend hours and hours on all kinds of internal day-to-day tasks. Sometimes, at the end of a day, I’d be like: wait, I didn’t do much today. I probably just replied to a bunch of messages, or met a lot of people, but I didn’t actually get anything done.

Second, your time is occupied by others. Shortly into your startup, your schedule is 100 percent your own. But as the company grows, you spend more time on management, and your time becomes other people’s time. Your reports will come to you anytime anywhere, interrupting your train of thought. What you plan on doing ends up giving way to “what other people are doing”. Now that we have instant messaging tools, it’s even more convenient to message people whenever and wherever you are. I wonder if anyone has done the math — how many messages do you get every day? If you read every one of them, think, and reply, how much time will it take? The bigger your company, you are surrounded by more people, and you spend more time in replying to messages.

Third, your information input is passive. In the past, you probably conduct your own surveys on the market and the users. But with a bigger company, you read the reports, listen to the briefings, review the PowerPoint decks, and communicate with your employees. Your way of information acquisition becomes indirect, and in this way, what you get could be tremendously different from what actually happens out there, for you do not acquire direct, first-hand knowledge. Also, your input becomes fragmented, and no one would make it systematic for you.

In such cases, CEO and leadership become part of the gravity of their company, and drag down the organizational effectiveness.

“The Outsiders May Know More about the Company than You”

When a company markedly scales, one of the bad consequences could be: inefficient information feedback, and the outsiders know more about your company than you.

I’ll give you one example. A few years ago, for recruitment-related purposes, I would often run into employees of a certain company, including its mid-level managers. I suspected many problems with that company, and they all proved to be true. But what puzzled me was this — how come they were not aware of those problems themselves? You’d think that they must have more information channels from within the company, access to all kinds of databases, and convenience to talk to different insiders, while I only knew what I knew as an outsider. However, the managerial team of that company seemed to know less about their own company than I did.

From then on, one question was stuck in my mind: Will the same happen for my company? Turns out it did. Outsiders, such as peer companies, competitors, and new startups, know more than I do in some aspects. Also, according to my observation, it is a prevalent phenomenon. I’ll give you another example. Investors would always conduct a due diligence (DD) before they make an investment. Usually, after the DD, they would share the results with me. I read their report, and found what took the investors one month to learn actually outran my own understanding of the company to some degree. Back then I thought that didn’t make any sense. I fed the investors most of the information, and the rest came from interviews with outsiders. How come they knew more about the company than I did?

At the early stage of a company, CEO and leadership basically know about everything that goes on in the company. But as the company grows, its businesses become complicated and requires more roles. Then it would be impossible for you to know about every single position. I made an attempt once, to do everything myself and see what it’s like so I could know all about their skills. But I couldn’t go through with it. Before I learnt half the know-how, new roles were added, and there was no time for me to try everything. If this doesn’t work, then what do I do?

I summarized a framework to analyze the reasons. My conclusion is: with complicated businesses come a larger organization and three problems—misfocus of information, “manage up” and inflated ego.

Misfocus of Information

Like I said before, the effectiveness of a company lies outside of the organization. However, to make a company effective, its internal members need to do one thing — break down the external objectives and instill them into the internal roles. Insiders are quite often constrained by their own job titles and roles. They can’t see beyond the work done by their peers, or people above or below their job grades. What they are given is the work itself, not the effectiveness in the external market. The gap between could lead to a misfocus of information. The more of an “insider” you are, the harder it becomes for you to objectively look at the external results of your job.

Of course, the break down is not easy. For some roles it is, because they have relatively direct objectives and key results. For example, you hardly need to evaluate a salesperson’s performance beyond the sales they landed. For a product-related role, you may need to look at the retention and DAU of their product. It’s harder to evaluate the work achievements of a technical position and the external effectiveness they create. And It’s going to be even harder when it comes to the finance and internal audit roles.

“Manage up”

The second thing I want to talk about is “manage up”.

“Manage up” is usually referred to as a positive term in management scenarios. It means how employees position themselves, how they locate potential requests from leaders, how they deliver better performance, and how they gain recognition from leaders. Yet ByteDance quotes this phrase as a negative example of corporate culture and value. How so?

To start with, I would like to go back to the logic behind “manage up”. Just now I mentioned that, as a company grows big, the information at hand blurs as a company sizes up, and you can’t evaluate performance with external indicators alone. Then how would you assess the output? There’s this tendency of relying on comments from leaders, particularly those on short-term performance. I’ve come to notice this phenomenon: employees with less contact with the outside world tend to have stronger motivations to leave good impressions on their leaders. They are inclined to work as per requests from leaders, rather than business targets. Why is that? If we look at jobs that are more outward-facing, like sales, we easily notice that they have a very clear-cut evaluation standard, which is sales volume. In comparison, the performance evaluation of those who take more inward-facing positions is less closely hooked to external indicators. This is when their leaders’ impression comes in, playing a predominant role in the performance evaluation. And this is what incentivizes these employees to establish a good track record in their leaders’ books. In fact, almost everyone has strong motivations to “manage up” and influence the short-term impression.

Managers and CEOs in particular tend to find it hard to obtain 100% authentic and effective information as they are overwhelmed with organizational issues and information that’s mixed up with “manage up” motivations flooding in from all directions. As CEOs and leadership, you should develop an immune system to the “manage up” behaviors.

I would like to shed light on some examples of “manage up” that I’ve personally come across. I wonder if they ever happened to you as well. The first typical example that comes to mind is the PowerPoint deck used at presentations. Why are people so obsessed with putting lots of tables and figures on the slides? I reckon it’s because PowerPoint decks largely decide the impression you leave on people when there’s no other way to evaluate your performance. Some people falsely believe that they demonstrate a good job as long as they fool the audience into believing mesmerizing nonsense. Actually, it’s very easy to find that the listed figures are based on inconsistent indicators that the presenters change secretly. They may juggle between DAU (daily active users), MAU (monthly active users) and revenue. Or even if they followed the same indicators consistently, they would switch over on a daily or weekly basis. Anyway, the angles are purposely manipulated for the presentation to be delivered in the best possible way and hard to track in the long run. This is not an individual case as I’ve found it a common problem at most presentations.

This phenomenon has crawled into pitching scenarios where you may find entrepreneurs deploying the same strategy when they brief investors on their progress.

Apart from the PowerPoint redundancy, there’s another problem which I call “masking problems with achievements”. Think about this — every department says “we are doing quite well” whereas you find no actual growth or not-up-to-par growth speed. It makes no sense at all, isn’t it? Why do you see a generally negative picture when everyone seems to give you a good feedback? There must be something wrong.

Another typical loophole of “manage up” is that it often incurs unnecessary one-on-one meetings. You may not agree with me on this but that’s alright. So what do I mean by “unnecessary”? Put it this way — if someone can explicate an issue with a text message of around 100 characters, they wouldn’t need to set up a one-on-one with me. In fact, I would rather they post it in the group chat so that I wouldn’t have to pass on the information. But the reality is that I’m quite often dragged into one-on-one meetings on such issues.

Why do people prefer one-on-one dialogues in person? I’ve found two main reasons. Firstly, a one-on-one dialogue creates information asymmetry that helps to “manage up” as it prevents potential critics from a third person. But if you post the same issue in a group chat, it’s very easy to see different opinions. Actually I don’t think most issues require one-on-one communication so long as it’s not classified. Secondly, one-on-one dialogues in person or over phone calls help to navigate negotiation strategies constantly. For example, if the person observes that you are pissed off by what he/she said earlier, they tend to pull back or tone down a bit.

There are many other cases of “manage up”. I used to hear this — a PR employee probed into the WeChat and Toutiao channels that his/her boss subscribe to and posted PR contents on those channels for the boss to notice.

I’m not sure how you feel about this. But I would feel that CEOs and leaders are quite troubled if they were to soak in an “manage up” environment where information is “retouched”. Suppose the information that directs to you is specially angled, or what we call “SEO-ed (search engine-optimized) information” at ByteDance, you will have to verify the information via other channels. That would be very counter-efficient.

Inflated Ego

Misfocus of information and “manage up” easily lead to a third problem: CEO and leadership’s inflated ego.

CEOs sit at the pinnacle of a structural pyramid. They differentiate from other positions mostly in that they have no one above them to report to. You might say there are boards of directors. But I reckon board meetings are not held as often. One problem that occurs thereafter is you don’t easily get feedback. If a CEO is caught in the misfocus of information and “manage up” all the time, it’s very easy for his/her ego to grow wild. You often hear a CEO tell off employees. It goes like, “Why haven’t you finished this work?” “This does not represent your best work.” “Have you forgotten the standards we pinned down?” Even when the team does a great job, the CEO never forgets to remind them not to feel too proud. For example, when Douyin was coasting down on its sound momentum, I thought I might need to give them a heads-up. But you never hear people say anything like that to a CEO no matter what. This is especially true when business turns up.

Of course, it’s not just the CEO whose ego might inflate. The same happens to managerial levels as well. As I mentioned before, as CEOs or leadership, your chance of getting authentic or helpful feedback diminishes easily. Anything you say that makes the slightest sense gets applauded, and any decisions you make that have minimum logic get agreed on. Gradually, you become intolerant to different opinions, ignorant to external good practices, and even impatient to negative feedback.

Inflated ego can be reflected when leaders keep hiring the same kind of people or people one knows well, are unwilling to get to know more diverse talents, or are incapable of passing fair judgment or comparison between talents in and out of the company. In fact, just like how a good recommendation engine needs to access wider content pools to find the best creators, company managers need to keep open-minded to find the best talents.

To put it simply, misfocus of internal information, “manage up”, and the CEO and leadership’s ego are the diseconomies of scale for a company. This is a disadvantage that big companies have over smaller ones. A stereotypical response goes “it is what it is as a company grows”. To me, it shows the attitude to do nothing to reverse the situation because you make no efforts to fight the gravity of organization.

To wrap it up a little, the above mentioned problems trickle down to one thing — getting carried away with one’s work.

We never fall short of examples where companies hit bumps on the road as a result of CEOs getting carried away. For example, the CEO of Nokia didn’t give it much thought when Steve Jobs released the first iPhone in 2007. He said, Apple would pose no threat to Nokia because Nokia had been dedicated to mobile phones for so many years that its product lines covered mobile phones of all prices and demands whereas Apple had only one product. Allegedly,  he never even used an iPhone. In 2007, Nokia stood as the biggest mobile phone manufacturer in the world. But it fell off the altar in just 3 years.

I believe “the carried-away mindset” exists more or less in every company. How do we address this? Here are the three points I would like to make. Each corresponds to the above-mentioned problems respectively.

Bring Outside in

The first approach aims at misfocus of internal information.

What do I mean by “bringing outside in”? I understand it as treating subjects as objects. To put it simply, an individual sees him/herself as an outsider, and a company considers itself as the other company. For example, forget your identity as the CEO or leader of a company and imagine yourself only as a user of your product and feel it. This allows you to get a first-hand experience.

The second approach relies on user feedback. We know that Jeff Bezos of Amazon highly values users’ email feedback. They call it “customer obsession”. This is intrinsically what I call “bring outside in”. Most companies have user feedback mechanisms, but most of them just make collected feedback into a report and stop there. But I don’t think that’s enough. Why? Because this kind of reports are usually quite abstract and float on the surface of a summary of problems.

According to a book I once read, user feedback is only relevant when they come in a direct way — face-to-face in the best case scenario, or video-chatting. For example, when we are told our products are not user-friendly, we tend to say, alright, we might as well change that. But if we learn the problem through a video where a user is so pissed off after failing again and again while using our product, everyone is immediately alerted and feel the urge to fix the problem.

Other “outside” perspectives may come from other players in the industry, media, competitors, etc. Competitors are a particularly good reflection of problems as they are more likely to keep picking holes in your system and exposing your problems. That actually provides you with external perspectives and keep you on your toes. Attack from outside in fact counter attacks internal “manage up”.

In a book about Huawei, Ren Zhengfei says he has no intention of giving his competitors a difficult time. I very much agree with him because a company tends to be carried away with arrogance and accumulate problems if there are no competitors. So I think competitors actually do good to your company.

Outgoing employees can also be a mirror of problems. This is because employees tend to “manage up” while they still work for the company. But they no longer bother to do that when they decide to leave the company. This is when you hear the most complaints. I think these are all effective ways to hear the real voice.

Company Culture & Tools

Secondly, we should use our company culture and tools to avoid “managing up”.

I just mentioned that one way to resolve undermined information efficiency is to get in direct contact with outsiders. As for insiders, if we can adopt a more efficient approach, we may be able to acquire the outside information more smoothly. Therefore, we made it a rule in our company culture to “directly express what one truly thinks, own up to one’s mistakes, be true to oneself, and not be afraid of ‘losing face’.” At our company, I made it very clear no one should “manage up”, that they should expose the problems, and stay true to realities. If we can hold fast to a company culture like this, outside information will be able to pour right in, instead of being blocked out.

Another way would be the internal tools. For example,  I mentioned that one exhibit for “manage up” is to change the way of presenting data in one’s reporting slides so their performance looks better. To address problems like this, one of our methods is to establish an efficient BI (business intelligence) system, and install all SDKs (software development kits) to the frontline of our products. There should be no mid-department, and no one to modify the data. The CEO will have direct access to the results. Generally speaking, if someone deliberately “picks out” data for their leader, the data won’t be reliable. This sounds like a minor issue, but it’s actually quite common. A BI system links all the information together, and does away with the manipulatable middle chains. It’s a solution, which, of course, only works if there’s little internal data. There are a number of other operation activities that can’t be structured or directly linked together.

Apart from the BI system, other internal communication tools are also important. Efficient tools could help anyone within the company to bring in external information in an appropriate way. For example, we have an internal ByteMoments platform where colleagues can post any comments for the CEO, business leaders and stakeholders to see. Improve the internal information flows and transparency, and reduce the possibilities of information being twisted to “manage up”. This is how we can address the communication issue using our company culture and tools.

Less Ego

My third piece of advice is addressed at CEOs and leadership: reduce your ego. The best elaboration of this theory is from Wang Xing (founder of Meituan): shrink your ego to the size of an atom. An atom is tiny but rock hard. If you have an ego the size of an atom, it won’t block your vision, and it would be hard for others to shoot a bullet through. On the contrary, if you have a huge, inflated ego, it will block your vision. You miss a lot of truths when the first thing you see is your ego. If a competitor publishes an article that trashes you, you’d explode.

A small ego is the foundation for CEOs and leadership to receive information to the fullest. Otherwise, he or she would just shut the negative feedback away. Especially as the company grows big and businesses are looking up, an organization creates a powerful platform effect, meaning that both the team and the CEO easily over-attribute success to themselves, neglecting external factors, which add up to their ego.

Let me summarize how to break down the diseconomies of scale for a company: on the outside layer you have “bringing outside in”; one layer in, it’s your company culture and tools, and further in, you have the CEO and leadership’s ego, which is the most significant layer that may otherwise incur a chain of major problems.

Of course, apart from the methods I mentioned, we have an even simpler one – stay small. But I believe that all of you at Source Code Capital want to become unicorns or super unicorns, so I guess “staying small” probably won’t work for you.

That’s it from me. Thank you all.