Sunday, September 20, 2009

The High Risk of Being Employed

A few conversations have surrounded announcements about my start up business. There's one that keeps popping up: the "high" risk of starting a business. I'm continuously challenged by people asking why I'm not just looking for another employer.

My response is simple: there's too much risk in working for someone else!

Is that shocking? Do you disagree? Let me explain. From the onset of my employment 27 years ago at the age of 11 to now, I've seen the individual employee in the U.S. become more and more a free agent, but only in that he can be terminated or laid off at any moment. From time-to-time, depending on the market conditions for a particular service, expertise and how rare your they are, that person can also maneuver from one employer to the employer with continuous responsibility, salary, and benefit improvements. However, for the most part, professional free-agent business people don't get the same perquisites that professional free-agent athletes do.

In fact, the only perk that continues to pervade the space is the ability for the employer to decide when they need a person and when they don't. Rightfully, the employer makes the decisions when to hire or fire.

You can argue that as an employee you affect the employer's decision and can maneuver your way to success, insuring that you remain employed while others fall by the way-side. This often requires a certain amount of political sophistication and much energy that can be better spent.

In fact, the amount of effort and types of actions required resemble business lobbying in the political arena. They're both futile efforts that continuously reduce the total available expendable energy toward activities that detract from the main line of business of an organization. This effort can instead be used to earn profit or a better way of life. This process is what economists refer to as Rent Seeking and, in my opinion, it is one of the reasons for the economic inequities that we witness in our version of capitalism.

Even if we accept rent-seeking behavior, we're missing the obvious point. Assuming you're able to affect the decision to remain employed, you're still only an instrument that affects decisions and not one that makes them! The decision to retain employees is ultimately your boss's, not yours. What's more, even if you can affect decisions today, you may find someone else that does a better job of it tomorrow. And then you're falling off the way side.

Though I've not experienced this first hand, I've certainly seen the consequences in the lives of friends, family and neighbors who are in constant movement from employer to employer, even when their services and skills are not commoditized.

This constant change and our inability to control the risks highly resembles the risks of gambling. Our ability to affect some of the decisions doesn't detract from it. Sure, working as an employee is not like the throw of dice or betting on a roulette table. Those require just blind luck and a healthy tolerance of high risk. However, employment does resemble card-game gambling, like poker or blackjack, where you have more control of how much you win and loose. Heck, you can even change tables like you do employers, going from one dealer to the next and hoping for something different. Nevertheless, you're still gambling at a game where, as is well known, in the end the "house always wins." Even card games are high risk.

I'm not trying to promote gambling, I'm only arguing that working as an employee is a high-risk approach for generating income, much the way gambling is at a casino.

Compared to that, entrepreneurship is a substantially lower risk endeavor. Aside from the fact that you make all the decisions about keeping yourself employed , you also control the risks that directly affect your business and income. In fact, the idea that entrepreneurship is high risk is born of misunderstanding about start ups. Much of entrepreneurship is about focusing on risks and determining how they can be manipulated to help you increase your revenue, find customers or new markets to target.

Just as being an employee resembles a casino gambler, being an entrepreneur resembles being an engineer. Engineers in every field are taught to constantly weigh the risks and benefits of their particular designs. For example, when making a new circuit board an engineer my determine there are three different microchips he could use for his application. Each is able to process the type of data fed into it to deliver the desired results. However, each chip may accomplish this with different trade offs. Once may produce more heat than others, thus requiring a larger heat sink and better ventilation design, but its manufacturer may have limited production capacity. Another may require a particularly expensive housing or board connection, but it would require substantially less physical space. Yet another may calculate the results faster or more elegantly, but have a higher failure rate.

So, depending on the particular application of the board, the budget allocated for the board production, and how efficiently the board can be manufactured with each design, or what failure rates are acceptable for the product, the engineer will choose one of the chips. The decision will ultimately affect how well the product sells and how much profit the company realizes. What's important is that the decision is an intensive process of weighing benefits and trade-offs that focuses on risks and rewards of each design. It's certainly not a rent-seeking effort. All decisions ultimately affect the top and bottom line.

So, as you sit back and ponder your role and risk tolerance, ask yourself this question: are you a gambler or an engineer?