The Disruption Algorithm

I’ve observed that business processes tend to follow three phases.

  • innovation: an opportunity is found or a problem is solved.
  • refinement: improvements are made. The process becomes cheaper, more reliable, and generally better.
  • externalization: there are few identifiable improvements to be made. Value capture can possibly be increased, and opportunities to externalize costs are exploited.

In the refinement stage, there are still plenty of opportunities to reduce costs and improve value capture (or yield) without anyone getting hurt. A process that took six months, when performed the first time, might be reduced to two. Genuine waste is getting cut. It’s not zero-sum. However, returns diminish in the refinement stage as the process improves, and the available gains are made.

At this point, talented and creative people look for new opportunities to innovate. Average or risk-averse people look for other processes to refine, and that’s fine: we need both kinds. Vicious and malignant people, however, start making false refinements that externalize costs and risks. Pollution increases, companies become more brittle, and ethics decline. The world becomes sicker, because in the cops-and-robbers game that exists between cost externalizers and regulators, there are just far more of the former. That’s how one gets corporate processes like employee stack ranking and, in software, the bizarre cult that has grown up around two-week “sprints” (as an excuse that allows management to demand rapid but low-quality work). These appear to yield short-term gains, but externalize costs within the company, diminishing the quality of the work.

Most of the sleazy activities for which business corporations are (justifiably) despised are performed in the externalization phase, when the company starts running out of viable refinements and declines to innovate. It may not be (and probably is not) the case that true improvements cease to be possible, at this point. What seems to happen is that there is a shift in political power between those who seek genuine improvements and those who mercilessly externalize costs. Once this happens, the latter quickly and often intentionally drive out the former. They are often able to do so because genuine improvements to processes usually take time to prove themselves, while cost externalizations can be devised that show profits immediately.

It is, at this point, no longer novel to point out that venture-funded startups have ceased to back genuine technical innovation and have, instead, become a continuation of the process (starting in the 1980s) by which the staid corporations and bilateral loyalty of yesteryear have been replaced by quick gambits, degraded working conditions, and a lack of concern by these new companies for their effects on society. This is what “disruption” often looks like.

The realization that I’ve come to is that Silicon Valley, by which I mean the aggressive and immediate financialization of what purports to be technological innovation, is now deep into the third phase. It still “changes the world”, but rarely in a desirable way, and most often by externalizing costs into society in way that regulators haven’t yet figured out how to handle.

While Silicon Valley is marketed, especially to “the talent”, as an opportunity for people to break free of old rules and take on established interests, it’s actually better thought-of as a massive and opaque, but precisely tuned, genetic algorithm. The population is the space of business processes, up to the scale of whole companies. The mutation element occurs organically, due to inexperience and deflected responsibility– when rules are broken or scandals occur, a 23-year-old “founder” has plausible deniability through ignorance that a 45-year-old financier or executive wouldn’t have. The crossover component is far more destructive: corporate mergers and acquisitions. In this way, new business processes are generated in a way that is deliberately stochastic and, when seemingly cheaper processes are discovered, they’re typically snapped into existing businesses, with losses of jobs and position to occur later.

In the three-phase analysis above, Silicon Valley had its innovation phase in the 1970s and ’80s, when new ways of funding businesses, and looser attitudes toward risk, began to take hold. Business failure in good faith was destigmatized. No doubt, that was a good thing. The refinement phase began in the late 1980s, brought with it the golden age of the technology industry in the 1990s, and ended around 2005. Silicon Valley is now in the externalization phase, exemplified most strongly by Y Combinator, an incubator that openly champions the monetization of reputation, self-indulgent navel-gazing, disregard for experience (a polite way of saying “ageism”), and a loose attitude toward executive ethics. The genetic algorithm of Silicon Valley still operates but, in the Y Combinator era, it no longer produces more efficient business processes but, rather, those that are cheaper and sloppier.

The innovation and refinement phases of Silicon Valley are long gone. Cost externalization– the replacement of trusted corporations with good benefits by a “gig economy” culture of itinerancy, the pushy testing of regulations by founding billion-dollar companies that flout them, and the regression into a 21st-century Gilded Age– has replaced the old Silicon Valley and driven it out. This makes it the responsibility of the next generation’s innovators to come up with something entirely new. It is clear that Paul Graham and Y Combinator, as well as those who’ve subscribed to their culture of flash over substance, will have no place in it.

22 thoughts on “The Disruption Algorithm

      • I don’t, fortunately.

        From an external perspective, given recent events, the “do no evil” motto has been degraded to the point of being nothing but facade. Although I am talking more about business practices, seeing as you’ve experienced the degradation in culture first hand, I guess it was only a matter of time before the rot on the inside surfaced externally.

        • Even on the technical side, the degradation is clearly there, despite all the “talent” @ Google. Android is, on anything but a high-end phone, becoming slower and slower with each version. My phone today on Marshmallow feels a lot slower than my old phone used to be on Gingerbread.

          I can only attribute the cause to be relentless cost-squeezing and wrong priorities.

    • Well I know I risk I will be looking like an Apple fanboy, but who cares anyway…
      “The big overall takeaway here is that if Google’s leadership is willing and comfortable stealing from longtime personal friends and colleagues who have given generously to them and greatly helped them succeed at most every stage, Google could be expected to have no compunction stealing from people they don’t know.”

      This is previous decade story.

      • Google pubishes and open sources a lot of their own IP, as well… perhaps they just have a different definition of “theft” when it comes to those matters. Features have been copied in both directions.

        • I am not talking about IP property and open source and whatnot. I am talking about more important things from a human perspective, like, betraying a friend, for money and fame.

  1. I suspect that the corporations you mentioned were susceptible to capture by cost externalizers.
    To avoid cost externalizers, you can keep moving to new companies several times a year, but job search is exhausting, and I don’t want to have to spend much time on job search. If I was capable of creating and maintaining a financial entity that’s adept at neutralizing or expelling cost externalizers, I’d make such an entity rather than keep moving to new companies.

  2. Thoughtful post.
    “he world becomes sicker, because in the cops-and-robbers game that exists between cost externalizers and regulators, there are just far more of the former”
    A revolving door is a truer analogy . The relationship is more amicable than you might think

  3. Hi! I like your articles! However, one thing is not clear to me. You speak about Silicon Valley as a whole, as if innovation has totally ceased there. What about the iPhone? The iPad? Swift (as a language)? Better photo taking capabilities everywhere? Ability to store those photos? GPS navigation for everyone? e-books? etc.
    While cheap labor at the east that is part of the sauce is dangerous, these achievements really made/make many westerner’s life better.
    Let me know what you think!

    • Silicon Valley’s leadership is the problem. There are still a lot of talented people there. It’s just that, when you compare the resource footprint to what is produced, the latter comes up short.

      It’s not that innovation has stopped entirely. It’s that we’re now at a point where more of what’s in Silicon Valley makes the world worse rather than better.

  4. I’m wondering is it a chicken-and-egg situation? In other words, are we at this point because that’s the pattern and that’s the phase where we are? Or are we at the point because of the decade+-long influx and subsequent co-option of SV culture by MBAs, finance, and Wall Street veterans?

    Or of course perhaps the two causes are related. But I think it more likely that the externalization focus comes mainly from a takeover by those with a mindset that is exclusively focused on extracting value and shifting costs rather than on creating value. The end is predictable once the keys are handed to those indoctrinated in that mindset (MBAs) and those immersed in that mindset in their careers (Wall Street).

    Would we be in an externalization phase now had engineers not been subordinated to being solely a means of production and, essentially, very expensive blue-collar workers for high-tech industrialists? Perhaps more actual innovation would have occurred – thus lessening the need for externalization – if that change had not happened? An engineer’s natural mindset is opf course value creation rather than value extraction.

    • “An engineer’s natural mindset is opf course value creation rather than value extraction.”

      Is that even true any more? We’ve had nearly two whole generations of “Senior Engineers^W Developers” since Twitter “went viral”. Those generations have grown up in and been mentored in a culture of extraction and their development norms reflect that.

      Maybe that’s the essence of the difference between an “Engineer” (which we don’t hear much about these days) and a “Developer”.

      • Andy the Developers you talk about there are like the Elves who were corrupted by Morgoth. This problem is rampant in the tech industry and it’s a topic discussed often in my own inner circle of fellow engineers.

        The main idea is that we are trying to work via consumption rather than production. We consume third party api’s and libraries that help us take short cuts to appease the intense demands of extraction and cost externalizing handlers.

        The costs are externalized into the personal time of the Engineers, the client (in the form of slapdash quality) and the software industry as a whole suffers because young developers with less than 3 years of experience think quality is a joke (as they imitate the inclinations of those who they see as highly successful mentors within the organization).

        The worst part of it is the externalization of cost on to human life! We have so few years on this planet and we are expected to provide our very lives as capital to give success to cost externalizing behemoth corporations. The actual cost of this type of management to society is so horrifically monstrous as to be completely unquantifiable when you factor in the loss of human time, literally, people’s very lives. And that’s to say nothing of the opportunity cost of the best and brightest engineers having no time to start their own companies or write open source software that interests them and reinvigorates their sense of creation and love of the science. It prevents continued renaissance.

        • Yes! Thank sums it up quite well. I’ll have to have a think about that model a bit more tho’.
          Thanks for your thoughts.

  5. Michael, I really enjoy reading you blog. You tap into the latent anger that many engineers feel in SV (myself included).

    I do have one question: why did you remove your last post about being threatened by a bum (“Stay the fuck away from YCombiner!”). Something like that should be preserved for posterity.

  6. Michael, You seem to have a limited presence on Medium. What’s your trust level with that outfit? How tied is this organization to the wolves of SV? I ask because I recently saw a worshipful piece about Graham. It seems that there is a whole new class of writers on there who write nothing but SV propaganda, some of it edging on Randianism. Would you have any interest in providing a counter-perspective on that site?

  7. Good analysis.

    I would also add that it is often in the second of the three phases that people with technical skills are treated as most welcome.

    During the first phase, technical skills play a role, but sales skills often dominate because you need top sales skills to persuade people to become early adopters of an unproven but potentially disruptive or innovative technology. That takes great sales skills but it is sometimes acceptable in this phase if the technical skills are merely adequate. The technical solution can be improved in the second phase but you need the sales people to even get you to the second phase.

    The second phase is when the technical people really get a chance to shine. This is the phase when they are really treated as heroes. They are the ones who have a bit role to play in turning a five-person startup into a multibillion dollar company. It is during this phase that the careers of people with primarily technical skills are most likely to advance. It is generally understood by all that the technical solution has potential but that major technical improvements are needed to grow the company, and technical people are usually treated with respect in this phase.

    In the third phase the technical people may still be around, but they are no longer heroes. Instead they are treated at best as a necessary evil–as a cost center to be minimized to the extent possible. Reducing headcount among the technical staff and/or outsourcing it to lower cost countries will be the order of the day. The goal in this phase will be to reduce technical people to the minimum required to maintain the existing infrastructure, not to innovate.

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