Quality and the Tyranny of the Quarterly Dividend

How Larian Studios' Leadership Avoid Layoffs, Keep Quality High

Larian Studios’ CEO, Swen Vincke who is known for getting into character as a knight for launches and events. Credit: Larian Studios

THE AIM for today’s brief post is to share with you a short article in PC Gamer about the comments made by the Director of Publishing for Larian Studios, Michael Douse, makers of the wildly successful roleplaying video game, Baldur’s Gate III. If you’re not familiar with it, you probably have a younger sibling or relative who is. Suffice to say, it is very profitable company, earning over $600M on this latest release alone, and has accomplished this by astutely avoiding the management traps of their peers.

In this article, Douse explains his (and ostensibly those of his colleagues) view on the industry’s trend toward copy-cat layoffs, and how Larian avoids this by staying private to keep the focus on quality. It’s another example of where we can find aspects of Deming’s management philosophy being deliberately practised without invoking him by name.

The Social Contagion of Layoffs

I’ve written about layoffs several times before, sometimes invoking this passage from the Preface of Deming’s first book on his management philosophy, Out of the Crisis:

It is no longer socially acceptable to dump employees on to the heap of unemployed. Loss of market, and resulting unemployment are not foreordained. They are not inevitable. They are man-made.

Deming, Dr. W.E. Out of the Crisis. (p. ix)

Douse’s comments make it clear he’d concur with Deming on this, but with an added twist on why it’s happening: social contagion. It becomes socially acceptable to dump employees when everyone else is doing it and you’re afraid of losing market share to some other company who’s laying off people with wild abandon.

“They are an avoidable f-up," Douse said. "That's all they really are. That's why you see one after the other. Because companies are going: 'Well, finally. Now we can, too. We've wanted to do it for ages. Everyone else is. So why don't we?' That's really kind of sick."

However, it’s Douse’s subsequent comments where he knocks it out of the park from a Deming management view, linking the short-term thinking toward the quarterly dividend to quality:

"We should be humbled by this period. It doesn't feel like we're humbled by this period as an industry."

He also pointed out that there's an issue of competing incentives for publicly traded game companies, with concerns over stock price coming at the expense of both players and developers: "None of these companies are at risk of going bankrupt," Douse said. "They're just at risk of pissing off the shareholders. And that's fine. That's how they work. The function of a public company is to create growth for its shareholders... It's not to make a happy climate for the employees."…

"Creating the games that we wanted to make, going public might give us more money, but it would be antithetical to the quality part of what we're trying to do. So it wouldn't make our games better. It would just make us rushed."

This is the tyranny of the quarterly dividend, creating a forcing factor that seeds future problems with quality. Deming explained this relationship in the first two Deadly Diseases of Management:

1. The crippling disease: lack of constancy of purpose. Much of American industry is run on the quarterly dividend. It is better to protect investment by working continually toward improvement of processes and of product and service that will bring the customer back again (Points 1 and 5 in Ch. 2).

2. Emphasis on short-term profits. Pursuit of the quarterly dividend and short-term profit defeat constancy of purpose. Whence cometh the scramble for the quarterly dividend? What is the driving force that leads to the last-minute rush into a good showing on the quarterly dividend? Anyone can boost the dividend at the end of the quarter. Ship everything on hand, regardless of quality : mark it shipped, and show it all as accounts receivable. Defer till next quarter, so far as possible, orders for material and equipment. Cut down on research, education, training. A stockholder that needs dividends to live on is more interested in future dividends than simply in the size of the dividend today. To him, it is important that there be dividends three years from now, five years from now, eight years from now. Emphasis on short-term profit defeats constancy of purpose and long-term growth.

Deming, W. Edwards. Out of the Crisis (The MIT Press) (pp. 98-99). The MIT Press. Kindle Edition.

Why has this happened? Because:

Management has led stockholders to believe that dividends are a measure of management’s performance. Some schools of business teach their students how to maximize profits on a short-term basis. It may well be that stockholders are smarter than management. That is, stockholders, including managers of pension funds invested in industry, may be far more interested in growth and in future dividends than in today’s dividends. When will management learn that they have a moral obligation to protect investment?

Deming, W. Edwards. Out of the Crisis (The MIT Press) (p. 151). The MIT Press. Kindle Edition.

This is why Deming placed Constancy of Purpose as the first of his 14 Points (or Obligations) of Management, which when missing cascades into the others, particularly #12 on the removal of barriers to pride in workmanship for employees and managers alike: how can you take pride in producing a quality product if the aim is to subjugate that to making the dividend and fixing things later?

We’ve seen this happen to other video game companies who have released absolutely buggy products to very disappointed audiences, like CD Projekt Red’s Cyberpunk 2077, which actually caused a drop in the stock price, and a similar situation for Bethesda Softwork’s Fallout 76, which employees hung on a failure of management. And this is just to start — there are many more examples of game development companies choosing to release poor quality products that have unknown and unknowable consequences in terms of losing current and future customers.

Avoiding the Prison of Short-Term Thinking

Deming opens The New Economics by observing that the prevailing style of management, with its predominant feature of adversarial competition, is a prison created by the way we choose to interact with one another. He goes on to explain how this prison of interactions is defined with nine faulty practices, starting with managing by reactions, which is directly linked to the quarterly dividend and the behaviours it encourages, eg. sacrificing quality:

Source: Deming, Dr. W.E. The New Economics. 3rd Ed (p. 18), 2nd Ed (p. 24)

It would appear that top-management at Larian Studios intuit this, and have chosen not to go public in order to keep focused on making high-quality games that people want to play made by employees who enjoy making them. By doing so, they hope to avoid the tyranny of the quarterly dividend and the prison of short-term thinking. This demonstrates Deming’s guiding principle of constancy of purpose in Point #1 of his 14 Points:

1. Create constancy of purpose for improvement of product and service. There are two problems: (i) problems of today; (ii) problems of tomorrow, for the company that hopes to stay in business. Problems of today encompass maintenance of quality of product put out today, regulation of output so as not to exceed immediate sales by too far, budget, employment, profits, sales, service, public relations, forecasting, and so forth. It is easy to stay bound up in the tangled knot of the problems of today, becoming ever more and more efficient in them, as by (e.g.) acquisition of mechanized equipment for the office.

Problems of the future command first and foremost constancy of purpose and dedication to improvement of competitive position to keep the company alive and to provide jobs for their employees. Are the board of directors and the president dedicated to quick profits, or to the institution of constancy of purpose? The next quarterly dividend is not as important as existence of the company 10, 20, or 30 years from now.

Deming, W. Edwards. Out of the Crisis (The MIT Press) (pp. 24-25). The MIT Press. Kindle Edition.

There is no doubt that if Larian stays on this course, they will outlast and outclass their competition.

Reflection Questions

Consider how Larian Studios’ top-management has avoided going public to avoid the trap of the quarterly dividend which could cause short-term thinking that would then lead to layoffs and cuts in quality, as some of their publicly-traded competitors have done. Which model of management does your organization practice: private or public? Do you ship now, fix later? Have there been layoffs? To what do you attribute these behaviours? Does it matter whether a company is publicly-traded for them to demonstrate constancy of purpose?

In Out of the Crisis, Deming mentions the risks that could be borne by the leader who decides to try to direct the funds of a publicly-traded firm towards long-term plans of improvement, eg. losing their job at the first dip in the dividend. What examples of this have you observed?