Google's Eric Schmidt — Innovation is managed chaos

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1:29And right now, you can get six months of Rippling free when you sign up at rippling.com slash scale. That's R-I-P-P-L-I-N-G dot com slash scale. Don't get sad. Get Rippling. Terms and conditions apply. My first office at Google was an 8x12 office, just enough room for me and my desk and my little chair. And one day I walked in, and I have a roommate. He said, hello. And he says, hello. I said, hi, I'm Eric. And he goes, hi, I'm Amit. That's Eric Schmidt. This story happened on his first day as Google's CEO in 2001. Now, as a new person coming into the company, it's very important to not create a cultural faux pas.

2:15Like, it would be incorrect to say, I'm the CEO, get the heck out of my office. I looked at my secretary and said, did you ever think about this? She said, no. And I said, well, who said you could move in? And he said, the VP of engineering. And I said, ah, they're playing a joke on me. And I said, well, why did you move here? Well, because I was in a six-person office. It was very crowded, and your office was empty. So we became colleagues. So was Amid playing a joke on Eric? Oddly enough, Eric doesn't say. He drops the investigation. Omid offers no further explanation. They settle into the work and do a fine job of ignoring one another.

2:52He would put his headphones on and I would talk on the phone. I'm calling the vice president of sales. And at the time, the revenue was estimated at about$120. And I said, don't you think you could do better? And he said, well, I think we can get to$123,$124. Well, come on, push harder, push harder. And as I hang up the phone, Omid takes his headphones off and said, I can tell you what the revenue is going to be. And I said, I knew you were listening into my conversations. And so I said, what's the revenue going to be? He said, it's going to be 138. I said, how do you know that? Because I build the analytics that predict this.

3:27And so I didn't tell the salespeople. And I watched. And they kept moving their forecast up and hit 138. It was a really easy lesson to understand the power of data analytics, plus having a great roommate. Amit eventually built a tool that accurately predicts how much revenue the company had at any given time down to the second. Pranks and productivity tend to blend together at Google, which is why Eric doesn't dwell on the question of why Amit moved in to begin with. We were roommates and literally office mates for years. We became such good friends. I would argue that a dash of insubordination is the secret ingredient to Google's success.

4:08Ideas emerge organically through conversations like the one Eric and Amit had in their cramped executive suite. There's only one way to keep those unruly conversations going. You let them unfold chaotically, anywhere and everywhere across the organization. And you listen for what bubbles up. If you want your company to innovate, your job is to manage the chaos. You've got to have incredible talent at every position. It's like this huge push. There are fires burning when you're going home. Can you believe it? Such an idiot. and then you go back to, this is totally going to be amazing. There are so many easy ways.

4:43I have no idea what to do. Sorry, we made a mistake. But you have to time it right. Oops. Working as a three-bedroom apartment. Stuff that just seems absolutely nut balls. Ten years later, we're like, well, that's just how you do it. We haven't made it just how you do it.

4:59This is Masters of Scale.

5:06I'm Reid Hoffman, co-founder of LinkedIn, partner at Greylock, and your host. In this episode, I'm going to make the case that the best managers of the most innovative organizations don't tell their employees how to innovate. They manage the chaos. I'll prove that to you with stories from some of the smartest entrepreneurs that I know. If you want an innovative company, your job is to manage the chaos. Managing chaos may sound like a contradiction in terms. Shouldn't it be the opposite? Isn't the manager's job to wring order out of chaos? Not always. If you want to invent something new or reinvent something at a spectacular order of magnitude, you have to suppress management.

5:46Let your employees pursue wild ideas that may raise your eyebrows. It's not for you to judge whether their ideas are good or bad. It's for your employees to prove it through freewheeling experimentation. I wanted to talk to Eric Schmidt about this because he pushes the anti-management philosophy to its outer limits as CEO of Google and now as chairman of the parent company Alphabet. He's an unlikely proponent of chaos because he came to Google from a company that nearly crashed due to lax management. Before Google, he was the CEO of the software company Novell. We'll start the story on his first day at Novell when he discovered the company's financials weren't all that they were cracked up to be.

6:24The reality, of course, hit on the first day because I was presented with different numbers for revenue for the quarter than I've been told when I was interviewing. And by that Wednesday, third day in the job, we were in a real crisis. We had a month which we called the worst month where everything was failing. And it was clear that the business was in very different trouble. And there was a moment in that month where I remember saying to my colleague, I just want to get out of here with my integrity intact. There's only one way to take your mind off a disaster of this scale. Flirt with scarier disasters.

6:59My friend said, you need a distraction. And if you're flying planes, you won't be able to think of anything else. It was the best advice ever. I eventually figured out it made a big difference, shockingly to me. Because in aviation, they teach you to make rapid decisions. And they, over and over again, decide, decide, decide. And it's better to make a decision than just takes up the consequences. And that discipline helped me in the hard times when I was at Novell in a real hardcore turnaround. So I approached aviation the same way I approached the company, which is try to figure out how it actually worked.

7:30And once you figured it out, if it's a well-defined system, it has a certain logic and a certain beauty in it. I want you to notice two things in this story. The first is the way Eric thinks about companies. If it's a well-defined system, it has a certain logic and a certain beauty in it. He thinks of a company as a system that he has to understand. The other thing I want you to notice is what flying taught him about decision-making. In aviation, they teach you to make rapid decisions, and they over and over again decide, decide, decide. It's better to make a decision and just takes up the consequences.

8:05Both of these habits will serve Eric well as he lands in Google's chaotic system, and he's about to land. That opportunity came in the form of a fateful phone call. I got a call from John Doerr, a good friend and venture capitalist, who said, you should come over and talk to Google. And I said, oh, it's just a search engine. He said, well, you'll enjoy it. And I said, probably not. But I figured I'd go visit because I'm curious. And I walked in and here's Larry and Sergey. Larry Page and Sergey Brin are the founders of Google. Two young men. They had my bio all on the wall and they had food on the table in front of them.

8:40I thought this is very odd. And they proceeded to spend an hour and a half grilling me about what I was doing at Novell and deciding that it was foolish. that the products we were building made no sense. And I, of course, provided a blistering counterattack. And as I left that day, I realized that I hadn't had such a good conversation in years. And that was the moment I knew this was a special company. You might find it odd to hear a blistering counterattack described as a good conversation. But I'm not surprised by Eric's reaction here. He knew how rare it was as an executive to find a team that's willing to challenge you.

9:15And this feisty, free-thinking team just might push him to the top of his talent. Not every CEO is cut out for this kind of insubordination, but the most innovative ones welcome it. I asked Margaret Heffernan to give us a perspective on this. Margaret was the CEO of five tech companies, and she gave a TED Talk called Dare to Disagree. So I thought she might have an opinion on Eric's reaction. Any CEO worth their salt is starved for argument and debate. So I'm not incredibly surprised by Schmidt's response. because one of the big problems with power is that most people won't argue with you if you're in a powerful position.

9:54They mostly try to second-guess you. They try to figure out what is it you want me to say. And, of course, that's no use at all because being told what you think you want to hear doesn't give you any options. You're kind of stuck in your own head. You have to be able to butt heads, but there's an art to disagreeing well. High-speed, high-AQ conversations often have the rhythm of point-counterpoint. That's how you move across the intellectual space quickly. I say something, and you say, well, actually, this part of what you're saying isn't quite right. Here's the better version. Some people naturally excel at this kind of conversation.

10:32For others, it takes practice. Technical people, for example, usually need to learn that you don't have to start the conversation with, you're wrong, or that's the stupidest idea I've ever heard. far better, you can say, that's interesting. Here's a challenge to that point of view. And if you do it that way, you frequently make more progress because then people are less hung up on whether I'm right or whether I'm wrong and stay focused on the idea. This is Mike Nicholas, Capital One business customer and co-founder of Ansett Uncles, a plant-based restaurant and community space in Brooklyn, New York.

11:04And he's telling us how they started a product line. We already had a space in the community. The food was an extension. of our lifestyle and our values. So we know we wanted to create something that was an offshoot to that. Our pepper sauce. That's my grandmother's recipe. That's like a liquid gold, right? If someone wants to approach us and ask us, what do we do? We provide flavor. Growing a product line is no small investment, but Mike and his wife and co-founder Nicole were able to manage with the help of their Capital One Business card. Working with Capital One Business, we're able to leverage our limits and utilize those points, making sure we can continue the scale at the speed that we needed to go.

11:45To learn more, go to CapitalOne.com slash business cards. Every company wants to grow, but anyone who's scaled knows the truth. Growth creates complexity, and complexity kills growth. Bureaucracy creeps in, culture frays, and suddenly the energy that built your business starts working against it. I'm Jeff Berman, host of Masters of Scale. And when you want unfiltered insight on fighting that drift, turn to Founders Mentality, the CEO Sessions, with executive advisor Jimmy Allen. Each episode, leaders from companies like Audible, Walmart China, and AWS reveal how they stayed fast, focused, and human, even at massive scale.

12:34Founders Mentality, the CEO Sessions, business should be simple. Listen wherever you get your podcasts. The business world moves fast and you don't have time to wait for your AI to turn into ROI. Because any business can use AI. The real breakthrough is how you use it. IBM helps you turn AI into more than potential. It helps you turn it into smarter ways of working and ultimately scaling. Let's create smarter business, IBM. As Eric ventured outside the executive suite, he found idea-generating conversations unfolding across the company. I think a fair statement is that the founders built the company in the image of what they saw at the Stanford Graduate School.

13:17So the offices, for example, if you had them, would have four people in them, which is the number of graduate students that are in an office. And, of course, everyone's very crowded and it's very casual. And, of course, there's free food and everybody's sort of hanging out all day. And that graduate student culture, that sense that somehow we're about to discover something new, permeated the decision-making. So they were able to invent some new ideas. So the culture of food and benefits and being quirky came from the founders trying to recreate that feeling. Amid this creative ferment, his job was simple.

13:50He just had to give employees a slight nudge to deliver on their promising ideas. The first thing I did is I went to the staff meeting, and the staff meetings were long, and they were like being in graduate school. What do you think of this? What do you think of that? But a real lack of business procedures and that kind of thing, which were easily remedied. When you're surrounded by bright young minds, you don't have to push too hard for interesting ideas. They tend to tumble out of conversations or shared challenges and take you in unpredictable directions. But not every manager is comfortable with this type of chaos.

14:21It requires a particular kind of leader who can embrace both humility, the uncomfortable notion that you don't have all of the best ideas yourself, and uncertainty because you can't always schedule innovation on a predictable timeline. I'm going to come right out and say it. If you're a control freak, you're going to have a hard time with this.

14:53And if you find yourself relating to the song, it's Jamie Leonhardt, by the way, you're probably at least part control freak. And the hardest part for control freaks is when your team suggests an idea that you find utterly reckless. And that's exactly what Eric thought when his team suggested a radical new way to set prices on advertisements. What I'm about to describe may sound crazy to you, and it sounded that way to Eric too. Eric's team made an argument for a type of auction in which bidders name their price without seeing competing offers. The highest bidder wins, but only has to pay the second highest bid.

15:27This is effective because it allows bidders to go high, knowing they will only pay true market value. And there are plenty of academic papers explaining why this type of auction would actually work wonders on revenue. But companies rarely put it into practice. I was absolutely convinced that this would bankrupt the company. And I was so convinced that I ordered a cash restriction period where the only thing that you could do was spend money on Friday mornings at 10. You had to come to my office and you had to convince me that you needed to buy those pencils or those computers or whatever. You heard that right.

16:01Not only was he convinced it was a bad idea, he was convinced that it would bankrupt the company. So he forced all purchases to be brought into his office in person. And as we pushed this thing through, we turned it on and we had no data analytics because no one had bothered to get that working yet. And we went into full crisis mode for a week, meeting every day at 4 o 'clock to try to figure out what to do. At the end of the week, we realized we were making far more money, and we were able to go from there. It was that moment that I realized that both this team was magical, but also that the scale of the search ads opportunity was immensely larger than even we had thought.

16:45Notice how Eric is stunned by the success that emerged out of this chaos. He calls it magical. And to harness this magic in an organization, you have to understand where ideas come from, not just from individuals, but from networks of people. And this runs contrary to the popular myth about innovation. We tend to tell the heroic story of innovation. This is a story that credits a single inventor, the founder, the creator. The genius has an idea. Everyone else executes on the idea. And then everyone waits for the genius to have another idea. But that's a false story of innovation, and it breaks in at least two ways.

17:21First, while it's true that some people are much better at idea generation than others, it's always better to have a number of people working on ideas simultaneously. The best idea may come from person number 89, and you can't always predict where the good ideas will come from. And second, very rarely do ideas spring perfectly formed, like Athena from the brow of Zeus. To turn a good instinct into a good idea, you have to talk to a lot of smart people and ask them for feedback and criticism. So having networks, both within and outside the company, to improve on ideas is key to success. Margaret Heffernan, former CEO of Five Tech Companies and advocate of Frank Conversations, has a great example of a time this worked.

18:03I asked her to tell the story. Early in my career running high-tech startups, the piece of software we were running had a very specific problem, which was what I would call a load balancing problem. So it just required too much processing power. And the more customers we got, the more acute this problem became. And because it's such an existential threat, everybody knows about it. and one Friday one of my marketing people came to me and just said you know I'm not an engineer but I just had this idea so I call in my CTO and say Harry what do you think about this and he thinks about it for a minute he thinks I think I know how we could do that so it was a really thrilling, not to mention a kind of life-saving moment.

19:02But what I think is especially interesting is in very siloed organizations or fearful organizations, you wouldn't share that problem. But actually, everyone knowing the problem was what allowed us to solve it. Margaret is right. No one in your organization has a monopoly on good ideas, particularly when you've hired thousands of smart creatives. What's equally important to recognize as a leader is that you, personally, are not the source of all good ideas. My friend Mark Pincus learned this the hard way. He's co-founder of the gaming company Zynga, which pioneered the idea of blending games into social media.

19:43Before Zynga, he built one of the first social networks, a little-known website called Tribe, that didn't quite make it. I asked him to tell me that story. It's pretty amazing, if you think about it, that I started one of the first three social networks in 2003, and I managed to fail. That at a time when everything worked, I actually managed to fail. And the lesson from Tribe that came resoundingly out for me and still stands out, I like to say is that as entrepreneurs, part of the journey that we're on is learning how to separate our winning instincts from our losing ideas. I think as a rule of thumb, if you're a good entrepreneur, you can assume that your instincts are right 95 % of the time and your ideas might be right 25 % of the time.

20:30By the time Mark launched Zynga, he was acutely aware of the dangers of stubbornly sticking to his ideas. He started to draw the distinction between his usually great instincts and his not always great ideas. I'll try anything and I'll kill anything and I'll kill it quickly. And I'm not going to let killing an idea kill a winning instinct. And so that was a really core idea that I'm still thinking about and learning as an entrepreneur. And I can see it playing out so often in people's companies. Mark separates specific ideas, which must be killed when they don't work, from underlying instincts.

21:05And this willingness to kill ideas is essential to making innovation work. A freewheeling, idea-generating climate of open inquiry, like the one Schmidt cultivated at Google, has to be matched with disciplined decision-making in order to thrive. The most important thing to do is to have quick decisions. And you'll make some mistakes, but you need decision-making. We ultimately adopted a model of a staffing on Monday, a business meeting on Wednesday, and a product meeting on Friday. And this was organized so that people could travel in the right ways. And the agenda was everybody knew which meeting the decisions were made at.

21:42And so as long as you could wait a week, you knew you would get a hearing on your deal. I cannot tell you how many people have told me that at Google, decisions are made today quickly in almost every case, even at our current scale. And that's a legacy of that decision. Most large corporations have too many lawyers, too many decision makers, unclear owners, and things congeal. They occur very slowly. But some of the greatest things happen very quickly. We made the decision to purchase YouTube in about 10 days, right? Incredibly historic decision because we were ready. People were focused. We had a board meeting.

22:21We wanted to get it done. So I always tell people, somebody is running your company. What are they doing? Why don't they just make this decision? Even if it's the wrong decision, a quick decision is better than, you know, almost every case. This combination of inventive bottom-up ideas and focused top-down decision-making has guided Google's growth over the past 16 years. But the two forces don't always live together comfortably. Eric took some radical steps to keep ideas flowing within the organization. This means empowering engineers and keeping management in check. For instance, product leaders can draw in as many engineers as they'd like on any given project, so long as they can convince engineers to join their team.

23:03I've talked to other managers at Google who are frustrated with this because they argue, we agree that my project is strategic. Why don't you just assign some engineers to me? And the answer is, no, no. You have to persuade the engineers that your project's a good one to work on. And then, by the way, you can have all of the engineers that you can persuade to work on that project. And that's central to Google's culture for making progress. Eric took this idea one step further. He granted employees the freedom not only to choose their projects, but openly define their managers along the way. Google famously instituted a rule that any employee could devote 20 % of their work week to any project they'd like.

23:4220 % time was in some ways a logical extension of Google's graduate school culture. Managers, like research advisors, can set timetables and budgets for experimentation. But the staff, like the students, pick the research agenda. Many, many initiatives in the company have come out of 20 % time ideas. Much of the mapping work, many of the search ideas, many of the advertising, many of now the AI work have come from people working and practicing in new areas. As Eric says, many of the products people know best, Gmail, Google Maps, Google News, AdSense, grew out of ideas generated by employees during this 20 % time.

24:21But why exactly does it work? And while the rule says you can do anything you want to with your 20 % time, these people are computer scientists and engineers. They're not going to veer too far away from their core business. And that is the genius of 20 % time. The tendency of high-performing employees to use their 20 % time productively is the well-documented genius of the program. But there's also a hidden genius of 20 % time. It allows reasonable employees to defy unreasonable managers. And this institutionalized defiance can help balance the power and keep high-performing employees engaged during challenging times.