Price’s Law Is Going to Kill Your Company

Have you noticed how, in every group, team or organization, a small number of people seem to be dragging everyone else forward? Whether you’re in a group chat organizing a trip or in an office building a startup, do you sometimes feel that a few people are pulling more than their fair share of the weight?

Well, there’s a name for that. Physicist and historian of science Derek John de Solla Price penned a law that states, I paraphrase: in any area of science or enterprise, half of the total contribution is made by the square root of the total number of participants.

In Price’s original writing, the law applied to scientific papers, but it has since been shown to be valid in other areas as well. So, what does this mean for your business? Let’s do the math.

If you’re a new startup of 4 people, there’s a very good chance that you’re all pulling your weight. Half of the work is being done by the square root of the number of people which is, of course, 2 — splitting the work evenly across your little dream team. But then you start to grow. You hire an extra 12 people, bringing your total to 16. Now half of the work is being done by 4 people, while the other 12 do the remaining half. Your company is doing great and you grow to 100 people. Out of these 100, 10 are doing half of the work and the other 90 are schlumping around and splitting the remaining half. By the time you’re at the top of a behemoth of 1000 employees, about 30 are doing half of the work.

This, by itself, isn’t a problem for you. You are sitting at the top, watching the company churn out profits. But, from your high vantage point, you can’t see which 30 people out of 1000 are keeping your company afloat, and this ignorance holds potential disaster. What happens when there’s a downturn in the economy, or you need to downsize, or cut salaries? Disaster comes in 4 stages:

  1. The 30 people who are pulling all the weight become increasingly disgruntled. Each one of them was already aware that he is the driving force in their department, and felt underappreciated. Now, you’re going to give them the same treatment that you give Andrew that spends 75% of his work day playing fantasy football.
  2. Your competitors start eyeing your employees. Which ones do you think are the most likely to take initiative and look for a better job elsewhere? Of course it’s the ones that show the most initiative and ability in their current job.
  3. A few of these people leave your company. You think nothing of it, since you only lost some 0.1% of your workers, but you don’t realize that you have lost perhaps 10% of your productivity.
  4. Loss of productivity means it’s more difficult to set your company’s course straight again, which leads to more austerity measures, which brings us back to step 1 above.

This cycle spirals out of control so quickly that the people at the top often don’t manage to react before they find themselves selling the company that they put so much work into for scrap, without even understanding how things got so bad so fast.

I know what you’re thinking: I have a great recruiting process, so this can’t happen to me; my company isn’t that big, so it can’t happen to me; I will be all set by the time something like this can happen, so que sera, sera. I’m sorry, but it’s not so simple.

No matter how good your recruiting process is, the moment you start expanding the company beyond the founding members and their immediate circle, you start to employ people whose goal is to get the best ratio of pay to effort, and that’s it. That’s just human nature.

The company in the example above is so large for illustrative purposes, but this truth holds for smaller companies as well. Sure, small teams are more nimble and can’t crumble under their own weight quite so quickly, but imagine this: you have a software development company of 16 people. If any 2 employees leave, you get problems with assigning tasks, sharing responsibilities, finding and onboarding new members, not to mention appeasing clients who are now dealing with delays and excuses. Now imagine those 2 people were doing 25% of the work! I’ve seen a similar situation destroy a company from the inside out within six months, and the downward spiral started with two guys arguing about desk orientation.

In the long run, it doesn’t look like it’s possible to avoid this problem. Just take a look at how quickly giant companies rotate in and out of the S&P 500. The current average lifespan of an S&P 500 company is about 18 years. Some recent estimates state that, by 2027, 75% of the current companies on the list will no longer exist. With that said, you can do a few things while your company is still small to mitigate these negative effects:

  1. Be as modular as possible. In software development, the ideal program has its responsibilities split up in such a way that, if one module fails, nothing else fails with it. The same concept can be applied to business: if your entire tech division were to suddenly disappear, you should be able to replace it with a brand new team while keeping all the interfaces between that division and all others. This means clearly delineating responsibilities and clearly defining communication channels.
  2. Choose team managers wisely…and then let them manage. Startup founders tend to have a problem letting go of control as their company grows. We know, it’s your baby, and nobody knows it like you do. But you have to eventually choose a nanny in order to keep your focus on the bigger picture.
  3. Don’t sacrifice quality for growth. It’s tempting to keep growing incessantly in the early days of a company, but if you want to hire 10 people, and only 2 candidates really satisfy your criteria, hire 2 candidates and keep looking. In the long term, spreading out the hiring of these 10 people over a few weeks or months can save your company’s life.

Some of you might be thinking that this is nonsense and there are a dozen ways it doesn’t apply to you. Well, perhaps. I think there is a very good basis for Price’s law, but laws of social science are tricky. They are difficult to prove, easy to misunderstand and very easy to ignore. But some, like Price’s law, help you bring about the sort of change that is positive even if the law didn’t apply. Even if none of what Dr Price wrote was true, you would still be well advised to follow the pieces of advice that one can derive from his law.

So you should be alert, try to reward achievers, keep your organization’s pieces as independent from one another as possible, and keep a long-term perspective.

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