Tales of the headquarters effect

posted: May 6, 2018

tl;dr: HQ and the world look very different when viewed from a remote office...

It is going to be very difficult for Jeff Bezos to fulfill has stated aim of having two headquarters offices which are equal in stature and power (I discuss the siting decision here). The office where he spends the majority of his time is almost certainly going to become the dominant seat of power, as other Amazon executives will flock to be by Jeff’s side most of the time. The reason for this is sometimes called the headquarters effect.

It is human nature to, in general, treat the people physically closest to you the best. Communication is much better, you spend more time together, you get exposed to more of the same circumstances and issues, and you develop a greater sense of empathy. You’ll be more receptive to requests, more willing to help out, and less likely to react with surprise and dismay when problems are encountered. This applies in life as well in business. In business it leads to the headquarters effect, whereby people in the headquarters office are treated better than people in remote offices.

The headquarters effect was particularly strong at two of my previous employers, where I was working in a remote office in the Portland, Oregon area for companies headquartered elsewhere. Both of these companies have long ago been bought and sold and merged and restructured such that what remains in no way resembles what the companies looked like when I worked there, so none of these anecdotal tales apply today. As an aside, the headquarters effect is a somewhat endemic problem in the Portland high tech scene, as there are few medium to large technology companies headquartered in Portland. Intel, by far the largest tech employer in the Portland area, has its headquarters in Silicon Valley.

One Maritime Plaza is the best place to work in San Francisco if you commute by yacht

My introduction to the headquarters effect was also my introduction to Silicon Valley elitism. In 1989 I joined AT&E, a startup company developing what would today be called a smartwatch. I worked in the Portland-area development center, which was a Dilbert-esque suburban business park cubicle farm. The headquarters, which I was never invited to visit (few employees ever traveled between the two sites), was in the One Maritime Plaza building next to the Embarcadero Center in downtown San Francisco. The building overlooks a park and the water; supposedly the company’s CEO liked the building because he could see it as he piloted his yacht from Marin County to commute across the Golden Gate to work. At the time it was among the priciest real estate in the city.

The first strong indicator that life was different in HQ was when an all-employees memo was sent out stating the expected work hours. This was in the era before laptops, cellphones, the Web, and residential broadband Internet, so you pretty much had to be in the office to be productive. Employees in the Portland office were expected to be in the office from 8am to 5pm. However, the memo said, in recognition of the much greater traffic and commuting challenges in the Bay area, a full workday for San Francisco-based employees was 9am to 5pm. Left unsaid was the presumption that San Francisco folks were much smarter than Portland folks, so fewer hours from the San Francisco folks would still yield more output.

The next indicator came from another all-employees memo, a standard-issue new hire announcement. This new hire had a fairly specific role for a roughly 250 employee startup company: the new hire was a San Francisco-office based art director, whose primary responsibility was to ensure that appropriate artwork, aligned with the corporate image the company was trying to project, was chosen for the executive offices in HQ. This sent several messages to the cubicle farm dwellers in Portland: the San Francisco HQ had lots of executives; the executives had a sizable budget to decorate their offices with artwork; and so much artwork was being purchased that the company needed a full-time person to help buy all this artwork. One of my fellow cube dwellers reacted with the question “does this mean we have to take down our Def Leppard posters”? The art director didn’t last long, however: no one did, as the company went bankrupt within two years. But that is a story for another blog post.

I then moved on to ADC Kentrox, which was starting to building devices and systems for the newly commercialized Internet. Kentrox was a Portland-area division of ADC Telecommunications, based two time zones away in Minneapolis. The Minneapolis folks didn’t seem to know too much about Kentrox’s business, a point driven home when I received my first employee calendar featuring 12 photos chosen from employee submittals. ADC had recently started acquiring companies and they were proud of their growing geographic footprint. On the back cover of the calendar they had an outline map of the continental United States, and they colored in each state where ADC had a presence. They colored in Minnesota for the corporate parent, they colored in Connecticut and California where they had recently acquired companies, and for Kentrox, based in the Portland area, they colored in the state of Washington. No one caught the error, so thousands of employee calendars were printed and distributed with the mistake. I wish I had saved a copy.

Aside from that unintended slight, the hands-off attitude of corporate HQ paid off, as Kentrox grew independently to become the second largest profit center of the entire corporation, which acquired many other companies. But eventually the desire to centralize grew, and among other initiatives, corporate HQ decided to adopt the same bonus methodology across the entire conglomerate. This was the late 1990s, and Economic Value Added was all the rage. It claimed to be a completely objective way of measuring the increase in the value created by a company’s management team and employees.

In practice, EVA had several significant flaws. One flaw was that a major component of the formula is Weighted Average Cost of Capital (WACC), a financial term that is supposed to take into account the risk of a business. The calculation is actually subjective, and the corporate folks who came up with the number saddled Kentrox with a very high WACC by including costs that Kentrox had no control over, meaning that it was harder for the Kentrox to earn enough profit to overcome the WACC. The second major flaw is that it is much easier to produce positive EVA in an unprofitable division than a profitable division: all you have to do is shut down the unprofitable division and stop losing money. EVA may call this brilliant management, but it’s also a way to kill a company by ending all new product development.

ADC had a very unprofitable division at the time which they did not want to shut down: their Homeworx Hybrid-Fiber Coax product aimed at cable companies, which was still under development. The investment the corporation was making in this project was a bet-the-farm scale of investment. The project was based in the main corporate HQ building, the VP who ran it was a few doors down the hall from the CEO, and the CEO could easily wander into the labs and see all the people who were working very hard on the project. The project was behind schedule, and they were adding resources at a fair clip to deal with the unforeseen issues. When the numbers were tallied at the end of the fiscal year for the EVA calculation, the project had lost tens of millions of dollars more money than planned (exactly double, it turned out).

This meant that no one in the HFC division earned a bonus as per the EVA calculation. No one in the Kentrox division earned a bonus that year either, because of the WACC flaw. But the CEO felt sorry for the HFC folks. The VP who ran it was his favorite VP, he talked to the people on the project every day, and he knew they were working hard. He wanted to maintain their goodwill. So he exercised executive privilege as CEO and gave the folks in the HFC division a bonus anyway that year. Everyone else got whatever bonus the EVA formula said they had earned. This time the headquarters effect had a much more serious impact on me and my fellow remote workers than a silly calendar error. It was a strong sign to me that the headquarters effect had gotten out of hand, and that it was time to get out of this particular remote office.

I wish Jeff Bezos the best of luck in trying to manage the headquarters effect across two supposedly equal headquarters.