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October 17, 2007
Bye, Bye Matrix
Yesterday, October 16, 2008, AOL announced it would lay off another 2,000 employees. In an interview AOL CEO Randy Falco gave to the NY Times several weeks before the announcement of the cutbacks, he indicated that he wanted to streamline the management structure, including the eliminating the matrix organizational scheme. Falco is finally making good on that promise.
The matrix was a complicated management structure that AOL instituted in the mid- 1990s that had people reporting to and being responsible to several different “divisions” (translation: “silos”). As an example, in the NY Times interview Falco said that there were five people overseeing various parts of the e-mail service, one of the company’s most important products. “We ripped apart the matrix,” he said. “One person now runs the e-mail operation and is responsible for its financial performance,” he said. “Moreover, AOL now measures the profits of e-mail and other products, something it had not done before.”
So, here’s my take on what’s going on: First, the matrix organization never well worked at AOL and its demolition was well overdue. A May-June1978 Harvard Business Review article, “Problems of Matrix Organizations,” identified nine ills of the matrix structure: Tendencies toward anarchy, power struggles, sever groupitis, collapse during economic downturns, excessive overhead, sinking to lower levels, uncontrolled layering, navel gazing, and decision strangulation.
I worked at AOL from 1998 to 2002 and observed all of those problems, especially the power struggles. Only Bob Pittman’s strong, single-minded leadership was able to keep the problems from decimating the organization, so when he was elevated to become AOL Time Warner’s co-COO (with Dick Parsons) in January, 2001, AOL fell into anarchy and civil war. I suspect the reason the AOL matrix structure was put into place before Pittman arrived at AOL in 1996 was because founder Steve Case thought the Internet should be free and hated advertising. Therefore, he instituted his version of a matrix structure to control and limit the power of the advertising sales division, called Interactive Marketing at the time.
Second, Falco is moving AOL headquarters to New York because he hates to commute to Dulles, Virginia, where the AOL headquarters are now; he’s making the mountain come to Muhammad.
Third, the moves he’s making signal that the new power is with the Advertising.com sales approach—a commodity, bottom-feeding, remnant-inventory selling mentality. I suppose it’s to be expected because Falco came from network television sales, which has a lazy, commodity-selling attitude. Before 2006, online advertising was not in high demand. AOL salespeople had to create demand and create value for online advertising—a difficult and creative missionary sales approach that it executed well under Myer Berlow’s charismatic (and often chaotic) leadership. Since the 1970s, television has been a high-demand medium, and network TV sales organizations didn’t have to create demand, they just had to figure out how high to raise prices for a high-demand, limited-supply product.
Falco seems to believe he’s in a similar commodity selling environment now for online advertising. However, there is a difference between selling high-demand network television and, now, high-demand online advertising—there is a limited supply of network inventory and an almost infinite supply of online inventory. Furthermore, Falco has named Curtis Viebranz, the former CEO of the newly acquired behavior-targeting technology firm Tacoda, to be the head of its new Platform A sales effort. Platform A will sell a network of sites like Advertising.com did plus the AOL portal. Falco must believe that behavioral targeting will be AOL’s new magic bullet. Lots a luck.
However, Falco has been away from the sales trenches for some time and probably doesn’t understand the current exigencies, complications, and nuances of selling online advertising today, and a techie like Viebranz is not apt to have the Interactive agency and client relationships that will help the situation. Unless Viebranz has a team sales approach that has a single fairly high-level contact for agencies and clients and under that single contact two types of salespeople—one type that handles customized, integrated marketing solutions and another type that handles commodity, tonnage business—the new effort will fail to maximize revenue. Without solutions salespeople, it won’t know how to create value for branding advertising and, thus, will fail.
AOL’s problem is acerbated by the fact that current Time Warner CEO Dick Parsons has turned over the responsibility for overseeing AOL to his heir, Jeff Bewkes, who is a programming guy and knows little about selling, so he won’t know if Falco is making the right moves or not.
Therefore, I give Falco an A for ripping apart the matrix and for cutting down the bureaucracy, a B for combining the Advertising.com and AOL portal sales effort, but an F for putting a techie in charge of sales. All of the recent changes have left morale at AOL lower than whale shit and I don’t think AOL CEO Falco, COO Ron Grant, or new sales head Viebranz has any idea how to turn the situation around. Read Kara Swisher’s funny decoding of Falco’s layoff memo to see how bad it was.
Where is Bob Pittman now that AOL needs him? Flying his airplane with a big, relaxed smile on his face.
Posted by Charles Warner at October 17, 2007 05:00 PM
Comments
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at October 24, 2007 10:34 AM writes:
Jay - Thank you so much for the thoughtful, intelligent comment. You have expanded the dialogue about the matrix organizational structure and the current and past ills of AOL. The goal of my blog is to provoke thinking and discussion of media management and strategic issues, so your comments have certainly done that in addition to adding some insight. Great.
One issue you bring up is the level of tolerance for online advertising, which you claim AOL tried to push--and I agree--but I don't think it was a negative. It was a learning exercise. Facebook seems to minimalize advertising, but isn't making any money yet. Many sites are struggling with finding the right balance.
I think the NY Times website has found a pretty good balance, but that's my view.
Jay Levitt at October 20, 2007 04:34 PM writes:
(Apologies for the book-length comment.)
Well, it's obvious you're a big Pittman fan, so I won't try to sway you. But I can't say I've ever heard Steve say he wanted the Internet to be free. He's a marketing guy. He comes from PepsiCo. He built a huge business out of selling people access to AOL and, later, the Internet. Where did you pull that one from?
Hated advertising, perhaps; at least when it's obnoxious. Pittman's scheme, brilliant as it was brutal, was to use our extensive analysis tools (best in the industry at the time) to measure exactly what the pain point of advertising was. If we could throw an ad on a popular screen, and we could guarantee that the money lost from any cancellations was exceeded by the ad revenue, then why shouldn't we do it? We could optimize our ad-serving to maximize profits, pushing people right to the edge, but not over it.
The problem, of course, is that this sort of scheming, which succeeded so well with price-testing registrations, fails miserably in the long term, because it's too myopic, and ignores the cumulative effect of advertising: direct annoyance (at the ads), indirect annoyance (at the perceived slowness of the network), dilution (of attention to the very ads you're selling), and conflation (of ads, which AOL sells, with spam, which AOL fights).
We tried to game the customer base, and as always, it failed in the end. As one original developer points out, AOL went from laughing at Prodigy (with its third-of-a-page ads) to emulating it.
As for the matrix, I'm afraid you're dead wrong on the reasons. I don't even remember if Interactive Marketing existed at the time; there certainly wasn't a concern about them becoming too powerful. Rather, the problem was the typical one that I assume leads companies to form matrices: We couldn't agree on an organizational structure.
For good reason, too. There's a mentality that says you want to group employees by product; e-mail will have its own HR, legal, development, QA, and marketing folks over here; online commerce will have its teams over there. You form a very tight-knit team, and because you're "smaller" you can innovate much better. The downside is that there's little knowledge-sharing among teams, and infrastructure has to be rebuilt for each one; you lose economies of scale and waste time reinventing the wheel and rediscovering what other teams already know.
There's another mentality that says that employees should be grouped by skillset. Developers in this department, marketing in that one, tech support over there, etc. The advantages and disadvantages are exact mirrors.
AOL tried each scheme repeatedly, both before and after matrixing. Sometimes the dotted line went to your team lead and the solid line went to your VP of Development/Marketing/etc; sometimes they switched. Matrixing was just an attempt to acknowledge that both sets of dependencies exist.
And they never fully committed to the matrix; products never had their own tech support team, for instance, or their own (non-product) marketing teams.
In the end, all that really matters for product development is not what dotted lines you have, but whether the process prevents you from innovating. There were years before the matrixing when Technologies had an excellent process for estimating, selecting and delivering projects. Unfortunately, that process meant AOLT had to say "sorry, we're full" to a lot of people. Some didn't like that, and that executive (oops! I mean process!) was fired. Later, matrix or not, there were times when teams couldn't focus on their primary goals because stakeholders kept introducing secondary ones. Like I said - the lines don't matter. A web of dotted lines isn't what's strangling you; it's the strings of influence.
Given that the layoffs apparently affected very, very few middle managers and now-teamless VPs, I don't see much hope that Falco has ripped apart the real source of strangulation. From what little I've read, he's the one pulling the strings.
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