Thursday, December 11, 2008

New Business Models in the Same Old Environment

To say that the recent downturn in the economy has gotten many to think about how businesses are run would probably be an understatement.  However if there is one principle that seems operative in this environment, it is that the more things change the more they stay the same.  In the past week we have seen stories highlighting Merrill Lynch's CEO, John Thain,lobbying to receive his $10M bonus.  The reasoning seems clear, he wanted to receive adequate compensation for orchestrating the sale of the 94 year old firm to Bank of America, widely considered to have been the only reason Merrill will continue to exist, at least in some form, for more years. Nonetheless that deal was made after Merrill had already lost about $11 bilion in 2008, though most of that loss has been attributed to Thain's predecessor in the job, Stanley O'Neal.   Thain had already received a $15M signing bonus upon taking the position.  Thus, argued New York Attorney General Andrew Cuomo, in a letter sent to Merrill's board of directors, "Clearly, the performance of Merrill's top executives throughout Merrill's abysmal year in no way justifies significant bonuses for its top executives, including the CEO."  But the same old ways of doing business, whether they are outdated or inappropriate approaches to the marketplace still seem to be the most widely practiced.  


According to the Corporate Library, the nearly 2000 CEOs of major corporations will still receive about a 7.5% raise overall in 2008.  Although this is far smaller than the double digit gains in previous years, this still seems out of step with the experience of employees of many corporations who are seeing unprecedented numbers of layoffs.  Indeed the average raise for a U.S. households routinely falls below 3%.   Ironically, after the CXO-led financial scandals at Enron, WorldCom and Adelphia, the Sarbanes-Oxley Act was passed in 2002 to, among other things, hold senior executives at companies accountable for the accuracy of financial statements. One of the provisions also highlighted what was thought to be one of the significant causes of these abuses--options compensation and large bonuses that were contingent upon good financial performance that, it was claimed, pressured executives to commit fraud.  Though Sarbanes-Oxley has been widely credited for the elimination or reduction of stock options as a means to provide incentive compensation, the increasing gap in CEO versus line employee pay as highlighted by this continued divergence in salary increase percentages as well as continued evidence that boards of directors have not really changed compensation practices at the highest levels of companies, reinforces again that companies are managed  no differently than they ever were.  And add to that the result of these compensation practices in 2008--scores of major investment and retail banks collapsing, economic recession and the loss of many jobs.  But there is more to this story than simply that outdated compensation practices continue and corporate malfeasance of a sort continues to have a negative impact on the economy.  Outdated practices for running business, what we'll call "operating models," also continue.  Peripatetic executives and location-locked line employees continue to be the rule, even as technology should be changing this model. Like outdated compensation packages, outdated approaches to running businesses will not improve our productivity and the work experience that most employees have, leading to unprecedented levels of job dissatisfaction.  

Other changes to operating models and incentive compensation could be adopted as common practice.  Businesses no longer have to be relegated to giving total credit for the accomplishments within companies to single individuals like CEOs.  In fact one could argue that the average CEO is getting too much credit for what amounts to creating the proper environment for great products to be created, for example.   How often can one directly attribute the performance of a company to the direct actions of its CEO?  With our abilities to now collect and analyze data it should be more possible than ever to quantify the actual contribution every employee makes to the success of the company and to reward the highest contributors accordingly.  

Likewise other aspects of business might also be improved through re-engineering operating models to accommodate a workforce that now actually has the ability to work in virtual environments without the loss of access to data or to corporate information systems, thus leading to reduced commuting times, better work-life balance, more satisfied and fulfilled and therefore more effective employees.  This is a direct result of the accessibility of broadband and mobile technology.  We are no longer in a world where a 1.5 Mbps data connection costs thousands and on-the-go access to email and business applications is costly or unprocurable.  So why haven't more companies adopted virtual workforces and eliminated capital costs associated with providing most employees with on premise office space and data connectivity?  Because the market has not yet had a competitor that outcompetes other similar businesses though the use of these new technologies.  Most businesses are still doing business the old way-by emphasizing face time, rewarding employees who have more of it under the delusion that that equates to more productivity. 

However that doesn't have to continue to be the case; but it will take rare leaders with the vision to challenge traditional approaches to business and who can win in the marketplace to change businesses everywhere.  

Wednesday, September 24, 2008

What Makes a Great Leader?

In the midst of the investment banking meltdown and a proposed $700B bailout some thoughts on great leadership seem timely.  All too often we assume, perhaps because Keynesian economics postulate that companies operate to benefit themselves, that corporate leaders are destined to react to financial incentives like Pavlovian dogs--eager to perform tricks of decision-making that will result in the highest possible compensation--for themselves.  I don't believe this has to be the case, though often, expectations lead to a self-fulfilling prophecy.  Rather, great leaders are able to overcome these impulses and simply lead, rather than be at best, average managers.  So how does one become a great leader?  The following list of behaviors and attitudes represents my personal observations of those I considered great leaders from over a decade of observation in Fortune 500 companies.  Your thoughts on this list are welcome.  

1)  Frankness -- Great leaders value frankness within their teams and practice it themselves.  This is not to be confused with being inclined to be critical.  Rather, this is a willingness to tackle difficult things, whether business results or personnel problems, openly.  Businesses cannot improve without a clear recognition of what is the problem that prevents excellent performance, and what is the clear path to the solution.  Those inclined to only be critical, perhaps at others' expense, make major problems out of minor ones; and new leaders who are prey to being critical are quick to highlight the mistakes of past leaders or the teams they managed, often with detrimental results.  Being willing to acknowledge that there is a problem and to approach the solution in the most direct manner possible constitutes frankness. 

2)  Understand and address the real issues -- All too often real results within a company are obfuscated by a bewildering array of data.  Executives love to obtain data, to the point where this activity might supercede actually running the business in importance.  Frequently, the vast amounts of data that are generated are used to demonstrate that there is no problem, even if business results are poor.  There should be a clear delineation between what is actually important to know or to do to run the business and those low-value-added activities that are designed to explain.  Don't let the former overwhelm the latter.  

3) Transparency -- Great leaders do not fear scrutiny, either of their decisions or of their process for reaching decisions.  They don't have ulterior motives that cause them to "game" their employees or peers to obtain hidden goals.  

4) Selflessness -- Leaders can't be great if they only serve themselves.  Great leaders focus on the success of the business because it leads to the greatest level of success for all.  They are not troubled if their decisions cause the demise of their own careers, if that is the right thing for the business.  They focus on their teams, peers and superiors before they focus on themselves. Great leaders also don't simply work to maximize the results within their area of responsibility, rather they focus on having the broadest possible impact with their activities.  They abhor succeeding at the expense of others working for the same company. 

5) Thought leadership -- Great leaders have great ideas and are willing and able to create a vision that compels others to follow.  Leaders constantly seed the organization with great ideas and are untroubled about whether they receive credit for it or not.  

6) Empathy -- great leaders can sense how their teams feel and make decisions differently because, not in spite, of it. 

7) Intuition -- great leaders have enough experience to avoid common mistakes, but they also have intuition based upon experience that results in the correct decision being made more often than not.  There is nothing worse than a leader with poor intuition. All of the data analysis in the world can't salvage an unerring aim for the worst of all possible decisions when an array of choices exists.  

8)  Common sens-- Too often common sense is the least trusted approach for making a decision in business.  Managers who love data are quick to adopt nonsensical approaches that defy common sense.  In the corporate world, teams sometimes speak metaphorically of those who seemed to wear "two hats."  That is, the same people who exhibit great common sense when making decisions for themselves become irresponsible or exhibit poor judgement when making decisions for the company.  

9) Don't wait for permission -- Great leaders don't wait to be told to address any issues that might exist.  They constantly identify and solve problems, whether others ask or not.

10)  Recognition of Accomplishments -- Great leaders are quick to recognize the efforts of the many that contributed to success when it is achieved.  

11) Ethics -- Great leaders have strong ethics and will avoid even the appearance of impropriety.  

Tuesday, August 19, 2008

To Invest Capital or Not to Invest?

Businesses contemplating the deployment of new technology have always struggled with a fundamental question:  will they be better positioned by extracting the greatest use out of existing technology or will capital investments in new technology actually yield better results? The answer to this question is not easily determined, primarily because all benefits of new technology deployment cannot be quantified.  Take for example, Verizon's investments in FiOS.  From investors to other telecommunications carriers, there has been mixed opinion on the value of deploying fiber optics to the home.  Initial skepticism of FiOS is apparently waning for some with Verizon trumpeting unexpected advantages from their initiative.  Others who are more financially oriented and who favor Economic Value Added-based approaches to investment however, might favor the more conservative direction of "no new capital before it's time" and that time seems to be well after the asset is deemed obsolete.  The most appropriate direction is perhaps one that focuses on the nature of the investment.  Is the investment a strategic one or not?  If one considers a carrier's network investment strategic, in other words, a differentiator from competitors in every sense of the word, and Verizon certainly seems to have taken that view with both wireless and wireline networks, then the investment is warranted since it delivers against customer desires and internal objectives.  If, on the other hand, a carrier's network is simply another undifferentiated part of their business, perhaps the wisest approach is to defer the investment or redirect it toward those things that are strategic.  There is no clear "correct" answer to this question and more will be written on it in the future.  Comments are welcome.  

Wednesday, July 16, 2008

Business Natural Selection

When scientists talk about Natural Selection, they refer to the process through which certain heritable (passed on via DNA) characteristics are favored by the environment at a given time, leading to the proliferation of organisms that carry these characteristics.   The organisms are said to be "selected" by the given environmental conditions.  Likewise one can think of similar principles in effect governing the success of a given business under specific economic or business conditions.  Algorithms have been proposed to explain the success or failure of a business based upon certain financial performance metrics.  But one can also think about this at a more general level.  The existence of Business Natural Selection (BNS) can explain quite a few things.  For example, when the latest genius CEO is profiled in the media, one is often struck by the uncanny insightfulness of decision-making that led this individual to success when many others failed.  Time and time again, when poor decisions were made by many, the "genius" makes the right call.  In fact that is because we are scrutinizing the chain of decisions after the fact.  How many business leaders are convinced when they are faced with choices, that their ultimate choice was the wrong one?  Does it make more sense to assume that the majority of business leaders make what they consider to be the best choice for a given situation?  Sometimes that choice is arrived at more confidently than other times, but no one knowingly opts to move in the wrong direction, or to make the wrong decision.  Rather, the best decision is generally thought to be selected and time proves whether that decision was a good one or a bad one.  If one creates a chain of decisions over a given span of time that might have been made by a given business, with thousands if not millions of decisions made, certain ones are favored under a given set of business or economic conditions.  Over time, with millions of businesses counted, a few might have made a series of decisions that ultimately favors them over other businesses for that timespan.  These are the companies that "win" in the marketplace and who thrive despite downturns or other failures within their industry.  This then, may be an explanation for the common observation that the CEO that is profiled today in a prominent periodical is also the one fired next year.  In an environment where Business Natural Selection governs failures and successes, that executive, if not possessing of statistics-beating insight, will quickly regress to the mean and perform no better or worse than others.  In the case of companies that are struggling however, average performance might not sustain a career.  Likewise those leaders with true insight and who have not benefitted from BNS, will exhibit a record of statistics-beating performance year after year.  

The Problem of Corporate Transformation

"Business Transformation" is increasingly in vogue as businesses look for ways to deter the inevitable decline that occurs when their core products become commodities or worse. Telecommunications, financial institutions, computer and network hardware manufacturers have all struggled recently.  Companies (Lucent, Nortel, etc) in these industries in particular have goals to dramatically re-engineer themselves to reinvigorate growth.  This then becomes an archetypal transformation:  cut costs, eliminate non-performing product lines, enter new or adjacent markets, offer new products and change the corporate culture. 

One oft-cited example of successful transformation was IBM's change from being the world's largest mainframe computer manufacturer to the largest technology services provider in the world.  But most often dramatic re-engineering does not lead to success.  Corporate Strategy Board research, the most comprehensive to date on the topic, cites a 1 in 36 chance that businesses are able to create a model for sustained revenue growth.  Of these only about 5% are effected through business transformation.  None were the result of entering wholly unrelated lines of business.  The pitfalls are many, lack of core competency with proposed new business lines, loss of strategic direction and the challenges of developing new technology infrastructure or  to support an unfamiliar business. 

In addition, there is a natural tendency for people throughout an organization to reject a new culture.  Corporate change experts talk about the "ten percenters."  The ten percent of the employee base who will never embrace the change.  

With these issues in mind, here are some suggestions based upon experience on how to successfully transform a business, given these challenges:

1) Ensure that a suitable culture change plan is in place prior to undertaking the change. Hire seasoned experts.  There will be no time to "learn while doing" with this type of venture and one cannot afford to fail because employees weren't receptive.

2) Obtain funding for the undertaking before starting.  When beginning extensive technology re-engineering efforts, not having sufficient funding to complete the re-engineering leads to costly redesigns.   It is best to obtain prioritized funding that remains in the funding portfolio for the requisite number of years to complete the project successfully.

3) Create a dedicated transformation organization to lead the effort and an appropriate governance process to manage it across the enterprise. Include both business and technical architects that will lead platform re-engineering and business model re-engineering efforts. 

4) Define concrete measures of success for the transformation that cross the business.  Be aware of interdepartment metrics tradeoffs--e.g. when cost is reduced in one area of the business only to increase in another unnoticed as a result of a process or system change.  Attach the appropriate incentives to these measures to drive their attainment.  

5) Identify empowered executive advocates or sponsors.  It is often best if the sponsor is the chief executive officer or another similarly senior position.

6) Don't underestimate development timelines and costs for the project at the onset and ensure it generates an appropriate return even under these conditions.  In fact a rule of thumb would be to double or even triple informed cost estimates.  Also, don't underestimate benefits that accrue as a result of the change, however. 

7) Engage and involve the highest performers in line functions to assist with the process of transforming the business. It will take that caliber of talent to realize success.  

8) Don't try to do too much all at once.  Engineering such complex changes is best tackled via understanding interdependencies and properly sequencing activities.  

Friday, July 11, 2008

Net Neutrality Imminent?

The Wall Street Journal reported today that FCC chairman Kevin Martin intends to force Comcast to change its practices related to slowing down certain types of data traffic.  This is certain to be viewed by Net Neutrality advocates as a victory. However as indicated by the article, it may hasten the adoption of new approaches toward pricing of broadband data services by service providers.  Most carriers today will argue that capital costs to build high speed broadband networks cannot be recovered under today's "all you can eat" pricing models and increasing use of high-bandwidth services like streaming video and that application providers like Google are benefitting from these low prices without incurring any of the costs for construction of broadband networks.  Ultimately whether Net Neutrality advocates' or broadband service providers' arguments prevail at the FCC, consumers will no doubt be the ones paying for the information superhighway.  

Sunday, July 6, 2008

The Role of Emotions in Trading

Why does the average individual investor have a reputation for buying high and selling low?  If you use a financial advisor, you might have been given the talk on the need to "control your emotions" when trading.  The July issue of SFO Magazine outlines the role of emotions in trading and how to overcome their pitfalls.