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Strategic Choices Need to Be Made Simultaneously, Not Sequentially

April 3, 2017 - 10:00am

The CEO of a large Australian company called me to relay a particular strategy development problem his firm was facing, and ask for my advice. The company was an eager user of my “cascading choices” framework for strategy that I have used for decades and written about extensively, most prominently in the 2013 book I wrote, with friend and colleague A.G. Lafley, called Playing to Win.

 

My Australian friend explained that each of his five business unit presidents was using the Strategy Choice Cascade, and that all of them had gotten stuck in the same place. They had chosen a Winning Aspiration and had settled on a Where to Play choice. But all of them were stuck at the How to Win box.

It is no surprise, I told my friend, that they have gotten stuck. It is because they considered Where to Play without reference to How to Win.

I’ve heard variants of this over and over. Although I have always emphasized that these five choices have to link together and reinforce each other, hence the arrows flowing back and forth between the boxes, it has become clear to me that I haven’t done a good enough job of making this point, especially as it relates to the choices of Where to Play and How to Win.

The challenge here is that both are linked, and together they are the heart of strategy; without a great Where to Play and How to Win combination, you can’t possibly have a worthwhile strategy. Of course, Where to Play and How to Win has to link with and reinforce an inspiring Winning Aspiration. And Capabilities and Management Systems act as a reality check on the Where to Play and How to Win choice. If you can’t identify a set of Capabilities and Management Systems that you currently have, or can reasonably build, to make the Where to Play and How to Win choice come to fruition, it is a fantasy, not a strategy.

Many people ask me why Capabilities and Management Systems are part of strategy when they are really elements of execution. That is yet another manifestation of the widespread, artificial, and unhelpful attempt to distinguish between choices that are “strategic” and ones that are “executional” or “tactical.” Remember that, regardless of what name you give them, these choices are a critical part of the integrated set of five choices that are necessary to successfully guide the actions of an organization.

I had to tell my Australian friend that locking and loading on Where to Play choices, rather than setting the table for a great discussion of How to Win, actually makes it virtually impossible to have a productive consideration of How to Win. That is because no meaningful Where to Play choice exists outside the context of a particular How to Win plan. An infinite number of Where to Play choices are possible, and equally meritorious — before considering each’s How to Win. In other words, there aren’t inherently strong and weak Where to Play choices. They are only strong or weak in the context of a particular How to Win choice. Therefore, making lists of Where to Play choices before considering How to Win choices has zero value in strategy.

For example, Uber made a Where to Play choice that included China because it’s a huge and important market. But being huge and important didn’t make that choice inherently meritorious. It would have been meritorious only if there had been a clear How to Win as well — which it appears there never was. Microsoft made a Where to Play choice to get into smartphone hardware (with its acquisition of Nokia’s handset business) because it was a huge and growing market, seemingly adjacent to Microsoft’s own, but it had no useful conception of how that would be twinned with a How to Win — and it lost spectacularly. P&G made a Where to Play choice to get into the huge, profitable, and growing pharmaceutical business with the acquisition of Norwich Eaton, in 1982. While it performed decently in the business, it divested the business in 2009 because, in those nearly two decades, it came to realize that it could play but never win in that still-exciting Where to Play.

Moreover, no meaningful How to Win choice exists outside the context of a particular Where to Play. Despite what many think, there are not generically great ways to win — e.g., being a first mover or a fast follower or a branded player or a cost leader. All How to Win choices are useful, or not, depending on the Where to Play with which they are paired. A How to Win choice based on superior scale is not going to be useful if the Where to Play choice is to concentrate on a narrow niche — because that would undermine an attempted scale advantage.

Undoubtedly, Uber thought its How to Win — having a easy-to-use ride-hailing app for users twinned with a vehicle for making extra money for drivers — would work well in any Where to Play. But it didn’t work in the Where to Play of China. It turned out that Uber’s How to Win had a lot to do with building a first-mover advantage in markets like the U.S.; when Uber was a late entrant, the Where to Play wasn’t a simple extension, and it exited after losing convincingly to first mover Didi. Perhaps Microsoft felt that its How to Win of having strong corporate relationships and a huge installed base of software users would extend nicely into smartphones, but it most assuredly didn’t. As a Canadian, I can’t help but recall the many Canadian retailers with powerful How to Wins in Canada (Tim Hortons, Canadian Tire, Jean Coutu) that simply didn’t translate to a Where to Play in the U.S. Perhaps there is some solace, however, in retailer Target’s disastrous attempt to extend its U.S. How to Win into the Canadian Where to Play — turnabout is, I guess, fair play.

The only productive, intelligent way to generate possibilities for strategy choice is to consider matched pairs of Where to Play and How to Win choices. Generate a variety of pairs and then ask about each:

  • Can it be linked to an inspiring, attractive Winning Aspiration?
  • Do we currently have, or can we reasonably build, the capabilities that would be necessary to win where we would play?
  • Can we create the Management Systems that would need to be in place to support the building and maintenance of the necessary capabilities?

Those Where to Play and How to Win possibilities for which these questions can plausibly be answered in the affirmative should be taken forward for more consideration and exploration. For the great success stories of our time, the tight match of Where to Play and How to Win is immediately obvious. USAA sells insurance only to military personnel, veterans, and their families — and tailors its offerings brilliantly and tightly to the needs of those in that sphere, so much so that its customer satisfaction scores are off the charts. Vanguard sells index mutual funds/ETFs to customers who don’t believe that active management is helpful to the performance of their investments. With that tight Where to Play, it can win by working to achieve the lowest cost position in the business. Google wins by organizing the world’s information, but to do that it has to play across the broadest swath of search.

It doesn’t matter whether the strategic question is to aim broadly or narrowly, or to pursue low costs or differentiation. What does matter is that the answers are a perfectly matched pair.

How to Offer Support to a Grieving Colleague

April 3, 2017 - 9:00am

Over the last year, my brother, my mother, a close friend, and six relatives have died. A couple of weeks after my brother’s death, I felt terribly guilty. I suddenly realized that, until that point, I’d had no clue how to support colleagues and friends who had lost loved ones. While I had good intentions, I had done the very things that were not working for me now.

My colleagues also had good intentions. They wanted to support me, but didn’t always know how. The offers of support that were most challenging were targeted at taking action and moving things along before I was ready. Instead of feeling replenished, they left me feeling tired, confused, or anxious.

Broadly speaking, there are two ways you can support a grieving colleague: doing or being. Mourners need both.

We’re well-trained in doing through our work. We’re primed to leave every meeting with a set of action items. Activities like making a meal or picking up the kids from karate can make us feel valuable, demonstrably useful. Doing is familiar, easy, and comfortable.

But being can be uncomfortable, especially when you’re trying to support a coworker through loss. What does it look like to simply be with a colleague who is grieving? It looks like empathy.

Brené Brown, author of Daring Greatly, captures this idea well in her short video that distinguishes between the disconnecting properties of sympathy and the connection we gain through empathy. In the video, she refers to nursing scholar Theresa Wiseman, whose research shows empathy to be the capacity to recognize others’ perspectives as their true experience, to recognize others’ emotions and articulate them, and to avoid judgment. These are all active, not passive, qualities — but they’re a type of action that we don’t equate to checking things off a list.

Being might be as simple as allowing your coworker to cry in your presence with the blinds closed. Being with your colleagues through exercising empathy and compassion brings you closer to each other. It’s harder for some of us, because this type of action requires us to be vulnerable, and it also requires us to be comfortable with someone else’s raw, vulnerable feelings. This may not be for everyone, or even something you offer to everyone.

Both doing and being can be helpful, depending on the person and the timing. It’s all in how we position our support to our colleagues. Here are some ways to do so and to strengthen your relationship with a coworker when they’re grieving.

Don’t ask. The questions you ask a grieving colleague can be targeted at specific action. Don’t ask how they’re doing, how you can help, or what happened. Keep it short and simple. Asking forces your coworker to do something; they have to decide whether and what to share, which they might not be capable of at that time. Instead, try saying, “I’m thinking of you,” “I’m holding you in my thoughts,” or “I’ll check in from time to time.” Because they might need some practical help, simply offer specific tasks you could do for them, and let them decide what, if anything, they would like you to do: “I want you to know you can call on me to help at any time. I can bring over meals, organize volunteers to help, run errands, make phone calls that are hard for you to make right now, walk with you, talk with you, or make a mean cup of chai. Just let me know when you’re ready to make those kinds of decisions.”

Don’t compare. Mourning my mother is radically different from mourning my brother. After my brother’s sudden death, I wanted to be with my immediate family and curl up in a ball on the sofa, doing nothing but sleeping deeply at night. After my mother’s long battle with Alzheimer’s, I’m eager to seek out friends and go on daily walks, but I can only sleep a few hours at a time. We’re all different in how we mourn. And the grieving process for each person is different depending on whom we mourn. Instead of going into a long description about what was helpful for you when you lost a loved one, briefly let your colleague know whether you’ve also lost someone, and say, “I can’t imagine what this is like for you.” Your colleague might ask you how it was for you, or might just take comfort in knowing they’re not alone.

Don’t rush it. Just because you’re seeing your coworker for the first time since their loss, don’t feel compelled to blurt out your condolences right before the start of a business meeting. Make eye contact and notice they’re there. Afterward, send them an email letting them know you’re thinking of them or welcoming them back. Ask them when or how they’d like you to bring up your support and condolences in person. When in doubt, offer your condolences in private, during a lunch break, or when your colleague doesn’t have to set aside their raw emotions and get into business mode.

Don’t track their progress. While we know that the acuteness of grief will dull over time, many people in the throes of grieving aren’t ready to hear that, or to think about letting go of the grieving process. During brief pauses in their pain, they might feel guilty when they’ve managed to set aside sadness for a short time. Instead of saying, “Are you doing any better?” or “I’m glad you came to the party. It must mean you’re doing better,” simply try, “It’s good to see you” or “I’m glad you came.”

Don’t think of this as a one-and-done. Grieving will take many forms over time. Some days I want to be by myself and shut out the world. Other days I’d love time with a friend or I crave a hug. And still others I’d simply appreciate having help to sort through my brother’s paperwork. Let your colleague know that you’re around. Set a reminder to check in with them every two weeks or so. When checking in, keep it short. Try a simple text, such as “Thinking of you” or “Here to support you whenever you need it.”

Don’t ignore them. After reading all these don’ts, you might be nervous to do anything. But don’t let your level of discomfort lead you to say nothing. Ultimately, your support and intentions will come through. Simply focus on your colleague and take your cue from them.

Your bereaved colleague will appreciate your intent to support them. Give them the space to call on your support as and when they need it, without being too forceful. Make your intentions known, and then leave it up to them to guide you in how far to go.

Automation Makes Things Cheaper, So Why Doesn’t It Feel That Way?

April 3, 2017 - 8:05am

Many Americans have been experiencing massive economic insecurity and want to return to a time when they were able to earn a good living and create a decent life for themselves and their families. President Trump promised to deliver on that wish, to “Make America Great Again,” by reducing business regulations, fixing trade deals, and stopping the loss of manufacturing jobs.

Some of those policies will help, but they’re unlikely to fully address the challenges faced by the middle class.

The problem is that we are now living in a bipolar economy, with a traditional economy at one end and an autonomous economy at the other. The traditional economy is prone to inflation; the autonomous economy toward deflation.

Many middle-class Americans are earning their money in a deflationary economy where wages are falling, and spending it in a traditional economy where prices are rising. Those Americans trapped between the poles of the bipolar economy were among Trump’s most enthusiastic supporters.

Insight Center
  • The Age of AI Sponsored by Accenture How it will impact business, industry, and society.

The traditional economy provides us with most of the basic necessities of life: food, shelter, health care, clothing, transportation, and energy. Money spent on these necessities account for 70% of middle-class expenditures. The prices of most of those expenditures are rising faster than inflation.

Property managers forecasted an 8% increase in rents in 2016. From 2012 to 2014, the median home price rose by 17.3%. The U.S. Department of Agriculture reported that food prices rose 31% from 2005 to 2014. The cost of health insurance has risen by over 44% in the past five years.

The autonomous economy is where intelligent machines, robots, artificial intelligence, big data, and high-speed digital communication power production. Those processes produce high-quality goods and services, frequently with little human involvement. The autonomous economy is extremely labor and capital efficient, sometimes so much so that the prices of its products decline to close to zero. Often the markets they supply shrink in size. Most concerning, the value of human work declines as workers compete with robots for jobs.

The transformation of the movie rental and physical media businesses are examples of what happens when businesses move from the traditional to the autonomous economy.

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At one point, Blockbuster Video had 60,000 employees and 9,000 stores. Then it got absorbed into the virtual economy, replaced by Netflix and by Redbox kiosks. Netflix has around 2,450 employees.

This has been good news for consumers. Many movie watchers can now view their movies for free on ad-supported networks like Crackle, which is owned by Sony Pictures Entertainment.

In the meantime, the manufacturers and distributors of physical media are struggling. Blu-ray and DVD sales have suffered declines of more than 10% for the last two years. Even Redbox’s revenue plunged by almost 19%.

If you work in an industry transitioning from the traditional to the autonomous economy — say, if until recently you worked at Blockbuster — but most of what you buy is in the traditional economy (rent, food, health care), you’re probably not doing very well.

The shift toward the autonomous economy is happening in the services sector, too, which makes up 80% of the workforce. (For all our talk about manufacturing jobs, they account for less than 9% of the workforce). More and more services are delivered by computers transacting with other computers, such as when we make travel reservations, when machines manage our investment portfolios by trading stocks on electronic exchanges, when we shop online, and when systems generate our news feeds and negotiate with other computers over what ads will be presented to us.

While we have no good way of determining the precise amount of goods and services produced autonomously, we know it is very large. Brian Arthur, in his article on the Second Economy, or what he now calls the autonomous economy, estimated that, by 2025, autonomous production would produce goods and services equal to the country’s GNP in 1995, about $7.5 trillion.

The shift to the autonomous economy and the pressure it places on workers are likely to only get worse. For an idea of the effects that autonomous production might have, consider the potential impact of the Level 4 Autonomous Vehicle, a car that drives itself and never needs human help.

Imagine that many consumers got rid of their cars and opted for driverless shared car services — a driverless Uber. If that displaced 20% of the 250 million cars Americans own, consumers would save $150 billion, $3,000 for every car displaced, and 1 million jobs would disappear in the automotive related industries — manufacturing, insurance, finance, etc.

There are 3.5 million professional truck drivers in our country, and about 8.7 million people are employed in the trucking business. If autonomous trucks displaced just 20% of them, another 1.75 million jobs would vanish.

The jobs of 200,000 cab and limo drivers, as well as those of 400,000 part-time Uber drivers, are at risk as well. If we could get by with 100,000 of them, the equivalent of somewhere around 250,000 full-time jobs would vanish.

Automated delivery vehicles would facilitate the deliveries from the Amazons of the world. Online retailers, like Amazon, employ about one-third the number of employees per dollar sold as conventional retailers do. If online retailers gained an additional 10% in market share, that would eliminate another 1 million jobs.

Under those assumptions, 4 million jobs would be displaced by the Level 4 Autonomous Vehicle.

Lost jobs have a multiplier effect. If jobs decline in the auto industry, jobs vanish in the automobile supply chain. People who lose jobs purchase fewer retail goods and eat out less often, so other jobs are lost as well.

Numbers vary dramatically about the size of the multiplier effect, but two is a pretty conservative guess. If a multiplier effect of two is used in the case of autonomous vehicles, a total of 12 million jobs would vanish in the scenario outlined above.

You might quibble with these numbers, but that is missing the point. The effects of the Level 4 Autonomous Vehicle will be very large. I personally believe these are conservative guesses.

Autonomous production exerts downward pressure on wages, as workers compete both with machines and with the new influx of job seekers whose jobs have already been replaced. And as we have seen, this process shifts many full-time jobs into the gig economy — places like Uber, TaskRabbit, etc. — where individuals work as independent contractors, without benefits.

It is easy to conclude in response to all of this that there will be a shortage of work in the future, and that we will have to consider other previously unthinkable solutions. Commentators across the political spectrum have proposed guaranteed annual incomes as a potential solution. Others have suggested that shorter workweeks would create more job opportunities. If coupled with aggressive earned income tax credits, these proposals could perhaps allow workers to earn a decent income. Some have proposed offering tax credits to people who perform socially useful work for which they receive no pay, such as someone who stays home from work to care for a child or elder.

Most of us, including myself, feel extremely uncomfortable with these types of ideas. But the autonomous economy is rewriting the economic rules, and so we shouldn’t constrain our thinking.

It is comfortable to stick with the old solutions, ignore the likelihood that they will be insufficient, and just hope. But hope is not a strategy. It will only make the long-term problem worse.

Autonomous production is already unleashing a bipolar economic system, and with it some very tough social challenges. If we are really serious about change, we will have to do radical things to address inflation in the traditional economy and deflation in the autonomous one, in response to a world where the value of human work is under pressure.

How to Improve Your Finance Skills (Even If You Hate Numbers)

March 31, 2017 - 12:00pm

If you’re not a numbers person, finance is daunting. But having a grasp of terms like EBITDA and net present value are important no matter where you sit on the org chart. How can you boost your financial acumen? How do you decide which concepts are most important to understand to your work and your understanding of the business? And who’s in the best position to offer advice?

What the Experts Say
Even if you don’t need to know a lot about finance to do your day-to-day job, the more conversant you are on the subject, the better off you’ll be, according to Richard Ruback, a professor at Harvard Business School and the coauthor of the HBR Guide to Buying a Small Business. “If you can speak the language of money, you will be more successful,” he says. After all, if you’re trying to sell a product or strategy, you need to be able to demonstrate that it is both practical and high margin. “The decision-makers will want to see a simple model that shows revenue, costs, overhead, and cash flow,” he says. “They need to see why it’s a good idea.” Joe Knight, a partner and senior consultant at the Business Literacy Institute and the coauthor of Financial Intelligence, says that an absence of financial savvy is “career-limiting.” If you’re unable to contribute to a discussion on the company’s performance, you’re unlikely to advance. “You are not going to be involved in running projects unless you understand the financials,” he says. Here are some strategies to improve your financial intelligence.

Overcome your fears
Stop avoiding finance because you’re afraid of numbers. It’s not rocket science, says Ruback. Think of it this way, “Finance is the way businesses keep score. It’s like counting balls and strikes in baseball,” but instead you’re “measuring progress through financial performance,” he says. “It’s not that complicated.” Besides, the math is easier than you might think, says Knight. “Finance and accounting are very simple. It’s mostly addition and subtraction and occasionally some multiplication and division,” he says. “There’s no magic.”

Learn the lingo
There may not be any magic to finance, but there is a fair amount of jargon. Fortunately, there are many ways to learn the terminology, says Knight. You “just need to take initiative,” he says. If your company offers internal finance training, take advantage of it. If it doesn’t, consider enrolling in an online or community college class. Of course, there are also myriad books and reference guides on the topic. The most important concepts to grasp are “how to measure profitability, EBITDA, operating income, revenue, and operating expenses,” he says. A finance textbook or reference guide is a good investment; but “Google works too,” he says.

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Tackle the balance sheet
Next, says Knight, you need to immerse yourself in your organization’s income statements. “Take an interest in the balance sheet and then do the due diligence to understand it,” he says. The best way to learn, says Ruback, is to “reproduce the numbers” either electronically or on a sheet of paper and then “group them into categories so you can start to see how much your company spends and where it makes money,” he says. Convert the numbers to percentages so you more easily visualize the breakdown of revenue and expenditures. “You want to see the big picture.”

Focus on key metrics
Boosting your financial expertise requires figuring out the metrics by which your company measures success. Your goal is to develop a deep understanding of the precise “link between profit and loss” and how that affects your organization’s performance over time, says Knight. That metric is often expressed in the form of a ratio. “There are four ratios common in every company: profitability, leverage, liquidity, and operational efficiency,” he says. And every organization has “two or three ratios within” those groups that are considered its primary measures of performance, in addition to “industry-specific ratios.” Paying closer attention to your company’s balance sheet and “listening to your company’s quarterly earnings calls” is helpful in getting a handle on these metrics. “They’re not hard to calculate. It just takes effort,” he says.

Play with numbers
Once you have a solid understanding of the balance sheet and what drives your company’s growth, try “experimenting and playing with the numbers” by going through a “series of ‘what if?’ scenarios,” says Ruback. For instance, What if prices were lower? What if revenue was higher? What if costs go down or up? “You’re not managing specific business decisions, you’re trying to understand and internalize how the models work” and the assumptions they make. That way, when you do need to “tabulate the consequence of a particular decision,” such as, whether or not to launch a new product or shut down a factory, you have the tools to do so. “People think budgets are static. But in most instances, you run the models to figure out what’s important and how much room there is for error.”

Find a financial mentor
Connecting with a “senior financial or operations manager” who can “teach you,” and “answer your questions one-on-one” is another way to get better at finance, says Knight. “It’s a very natural way to learn,” he adds. Ruback agrees. “Mentors are always helpful for someone who is not good with numbers,” he says. This person can both help explain concepts and serve as a sounding board for any financial decisions you need to make. Ruback suggests asking your colleague “to try to replicate” your projections and models when needed. “It sharpens your focus,” he says. “You find that Jane made certain assumptions, while you made others. One is not right and the other is not wrong, but [the differences] help you figure out what’s reasonable.”

Make it personal
Still lacking motivation? Make improving your financial skills “a survival issue,” says Knight. “Every time you are paid, your organization makes less profit. So you need to think about what you can do to help the company remain profitable or be more so.” The goal is to develop an understanding of how your day-to-day actions help your employer to “drive revenue or mitigate costs,” he says. “Think of yourself as a miniature profit and loss statement: How do you add value?” This can be a useful exercise, but don’t let it consume you, says Ruback. After all, it’s easier to determine your impact on the bottom line if you’re in sales, but it’s not as straightforward if you’re in, say, HR. “Integrate your role with the contributions of others,” he says, “and focus on the problems you can control, not the ones you can’t.”

Principles to Remember

Do:

  • Enroll in an online or community college class to learn about basic financial concepts and terms
  • Review your organization’s quarterly reports to help you understand the specific things it does to be profitable
  • Experiment with the numbers on your organization’s balance sheet by going through a series of “what if?” scenarios

Don’t:

  • Be intimidated. Business math is relatively straightforward
  • Go it alone. Identify a trustworthy operations or financial manager who can help answer your questions and serve as a sounding board
  • Overlook the impact of financial skills on your career; if you want to advance, you need financial acumen

Case Study #1: Partner with a colleague in finance and experiment with numbers
Larry Dunivan, the chief revenue officer at Ceridian, firmly believes, “All leaders should be able to talk about the numbers in a broad and sophisticated way.”

But Larry admits he wasn’t always able to do that. Earlier in his career, he worked as a product manager at a software company. As an MBA student at Northwestern’s Kellogg School of Management, he had taken basic finance courses and his skills were a good fit for the job. “I managed costs and supported the general business activities associated with the [products],” he recalls.

But, when he got promoted to work in a mergers and acquisitions role at the company, he felt in over his head. “Suddenly I needed to know things like EBITDA and how enterprise value was determined,” he says. “It was trial by fire, and I remember thinking, ‘How can I not look like a fool in this meeting?’”

He needed help. Fortunately, Larry had a good relationship with a peer — “Rick” — in the finance department. Rick’s job was to build the financial models that would inform strategic decisions about potential M&A activity. Rick was always willing to detail how the models worked and answer questions. “He was very patient and knowledgeable,” Larry recalls.

He was soon comfortable enough to start collaborating with Rick. “I’d say to him, ‘Show me the variables that have the most sensitivity,’ and then I would test different assumptions,” he says. “I still didn’t know how to do the underlying computation to create the model, but I had a solid understanding of the assumptions that went into it.

Larry says that Rick’s help and support was invaluable in improving his financial acumen. “A great partnership with a finance colleague will take you a long way,” he says.

Case Study #2: Learn the metrics your company uses to measure success
James Pieper, the chief accounting officer at TransUnion, the consumer credit reporting agency, says it’s “critical” for employees to have a “basic understanding of finance so they know how their company is doing financially.

“The great thing about accounting and finance is that it’s universal, so once you have the foundation you can go from there,” he says.

At the same time, James is well aware that each company monitors performance in its own way. James spent most of his career at publicly traded companies. But when he first arrived at Chicago-based TransUnion in 2014, a private equity group owned it. “So I had to learn which financial metrics mattered, why they were important, and how TransUnion measured success,” he recalls.

He did a lot of the initial learning and number crunching on his own. “Luckily in my position I have access to every number, so I rolled up my sleeves with an Excel spreadsheet and tried to re-create the statement,” he explains. “I spent time validating the numbers to make sure they made sense.”

He also sought guidance from a “finance buddy,” who at the time was a peer in the accounting department. “He’d been at the company for a while and he helped me understand the details of the calculations,” he says.

In 2015, TransUnion went public, and James had to help the company manage this financial transition. To boost his skills and knowledge, he looked carefully at the balance sheets of the company’s “25 closest peers to understand how they structure their earnings releases and what they put forth as their main financial metrics.”

James often leads in-house financial training sessions for his company. He says it encourages colleagues to “understand where they fit in the big picture” of TransUnion’s finances. “I don’t drive revenue — I am an expense,” he says. “As part of the cost basis, I try to make my organization run as efficiently as possible.”

The U.S. Cannot Be Run Like a Business

March 31, 2017 - 11:58am

Donald Trump ran his campaign with the promise to manage the U.S. government like a business. In fact, he just announced that his son-in-law, Jared Kushner, will head up a “SWAT team” dedicated to making this happen.

Trump assumes, as do many Americans, that the country’s major problem is too much government. In my view, the United States is not suffering from too much government so much as from too much business all over the government. This president came into office to challenge “the establishment,” only to ensconce the country’s powerful business establishment in his cabinet, at the expense of Washington’s weaker political establishment.

Should government even be run like a business, let alone by businesspeople? No more than business should be run like a government by civil servants. Each in its own place, thank you. Governments experience all kinds of pressures that cannot be imagined in many enterprises, especially the entrepreneurial kind run by Trump.

Consider this: Business has a convenient bottom line, called “profit,” which can readily be measured. What is the bottom line for terrorism: The number of countries on a list, or of immigrants deported, or of walls built? How about the number of attacks that don’t happen? Many activities are in the public sector precisely because their intricate results are difficult to measure.

Running government like a business has been tried again and again, only to fail again and again. In the 1960s, Robert McNamara introduced the Planning-Programming-Budgeting System as a “one-best-way,” businesslike approach to government. The obsessive measuring led to the infamous body counts of the Vietnam War. Later came new public management, a 1980s euphemism for old corporate managing: Isolate activities, put a manager in charge of each one, and hold them responsible for the measurable results. That might work for the state lottery, but how about foreign relations or education, let alone, dare I say, health care? People in government tell me that new public management is still promoted, though now it might better be called “old public management.”

Then there’s the question of customers. “Our hope is that we can achieve successes and efficiencies for our customers, who are the citizens,” Kushner told the Washington Post, echoing a misguided, overworked metaphor. (When he was vice president, Al Gore also referred to the American people as customers.) As I discussed in my Harvard Business Review article, “Managing Government, Governing Management,” I am not a mere “customer” of my government, buying some service at arm’s length. I am a proud and involved citizen of my country.

Business is essential – in its place. So is government, in its place. The place of business is in the competitive marketplace, to supply us with goods and services. The place of government, aside from protecting us from threats, is to help keep that marketplace competitive and responsible. In Washington, which government in recent years has been fighting vigorously for competition and responsibility?

A healthy society balances the power of respected governments in the public sector with both responsible businesses in the private sector and robust communities in what I call the plural sector — the clubs, religions, community hospitals, foundations, NGOs, and cooperatives with which so many of us engage. The plural sector, although the least recognized of the three, is large and diverse. Many of us may work in businesses and most of us may vote for governments, but all of us live much of our lives in the community associations of the plural sector. (The United States has more cooperative memberships than people.) This is the sector that can offset the destructive effects of the pendulum politics that keep so many countries swinging back and forth between public government controls and private market forces. Especially today, we may well have to rely on this sector to restore the balance that has been lost in the polarized, outdated politics of left versus right.

The most democratic nations in the world get closest to balancing themselves across these three sectors — for example, Canada, Germany, and the countries of Scandinavia. During the decades following World War II, the U.S. was closer to that balance. Recall the era’s prosperity and development, social as well as economic, despite high taxes and generous welfare programs.

Then the Berlin Wall fell. Arguably, it landed on the democracies of the West. That is because we misunderstood what brought it down. Western pundits, reflecting the bias that is now so prominent, claimed that capitalism had triumphed. Not at all. Balance had triumphed. While the communist states of Eastern Europe were utterly out of balance, in favor of their public sectors, the successful countries of the West retained a certain balance across all three sectors.

With this misunderstanding, a narrow form of capitalism has been triumphing ever since, throwing America, along with many other countries, out of balance the other way, in favor of private-sector interests. Seen this way, Trump himself is not the problem so much as an extreme manifestation of the larger problem: imbalance in favor of private interests, with too much business involvement in government.

In the United States, this problem has been developing for a long time. The Republic was barely a quarter-century old when Thomas Jefferson expressed the hope that “we shall…crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength.” In the last century, trustbuster Theodore Roosevelt spoke of the “real and grave evils” of too-powerful corporations, arguing that “it should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence.” A few decades later, Dwight Eisenhower warned that “in the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”

A skeptic might say, “If we’ve always been worried about something and it hasn’t happened yet, maybe it’s time to stop worrying.” But, in fact, the risks have been escalating steadily for some time, and they have sharply increased since capitalism’s triumph in the 1990s.

The Supreme Court granted corporations the right to personhood in 1886, and more recently extended that right to the funding of political campaigns — arguably a tipping point in two centuries of shifting toward private sector power in American society. Look around at the scandal of income disparities, at climate change, exacerbated by excessive consumption, and at the unregulated forces of globalization that are undermining the national sovereignty, and thus the democratic institutions, of so many nations. No wonder voters around the world are demanding change, even if some of the consequences are ill-considered. The valid side of their concerns will have to be addressed.

The relationship between business and government, a separation of powers no less vital than that within government itself, has become so confounded that it threatens American democracy itself. When free enterprise in an economy becomes the freedom of enterprises-as-people in a society, to paraphrase Abraham Lincoln, government of the real people, by the real people, and for the real people shall perish from the Earth.

How P&G and American Express Are Approaching AI

March 31, 2017 - 11:00am

There is a tendency with any new technology to believe that it requires new management approaches, new organizational structures, and entirely new personnel. That impression is widespread with cognitive technologies — which comprises a range of approaches in artificial intelligence (AI), machine learning, and deep learning. Some have argued for the creation of “chief cognitive officer” roles, and certainly many firms are rushing to hire experts with deep learning expertise. “New and different” is the ethos of the day.

But we believe that successful firms can treat cognitive technologies as an opportunity to evolve or grow from previous work. For firms that have been producing results with big data analytics, machine learning isn’t too much of a stretch. If firms had previous experience with expert systems, they are familiar with some of the necessary organizational and process changes arising from contemporary cognitive tools. These firms are likely to have already established the organizational structures needed to nurture and spread new technologies and business approaches. And they have well-honed approaches for developing the requisite new skills in employees.

Two good examples of combining well-established practices with cognitive technology to achieve business success are American Express and Procter & Gamble. Both firms are actively undertaking cognitive technology initiatives.  Both are well into their second centuries; they wouldn’t still be here if they weren’t able to accommodate change well and introduce new technology effectively. We spoke with top executives at each of these firms about the rise of cognitive in their organizations. Ash Gupta is President of Global Credit Risk and Information Management at American Express, and Guy Peri is Chief Data Officer and Vice President of Information Technology at P&G. Both executives have longstanding track records of success at their respective organizations, having seen business and technology change come and go for 20 years or more.

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Both organizations have a considerable history with artificial intelligence. Gupta at American Express reminded us of the Authorizer’s Assistant, which was one of the more successful rule-based expert systems of the late 1980s. As described in a popular Harvard Business Review article on that generation of technology, the system made recommendations to human authorizers whether to approve large purchase transactions by cardholders.

P&G also built and employed a number of rule-based expert systems. In addition to Peri, the current CDO, we also spoke with Franz Dill, a retired P&G IT manager who focused on AI during the 80s and 90s. He said that the most well-known expert system they developed was one that blended Folgers coffee (no longer a P&G brand). This system, Dill noted, saved P&G in excess of $20 million dollars a year in green coffee costs. The company also built an expert system that helped advertisers at P&G to use, modify, and reuse the company’s advertising assets.

Both American Express and P&G are companies that have explored artificial intelligence over the years, and while the technology may have changed, the established yet innovative approaches that these firms take to incorporating new technologies and capabilities continues to evolve. Their fundamentally sound innovation practices provide a foundation for evolution. The attributes of their respective approaches to cognitive technology include:

Build on your strengths. Both companies have long had a strong focus on analytics, and a focus on big data in recent years. Both firms view cognitive technology as an extension of that analytical focus, not an entirely new domain. They know that many cognitive techniques are based on statistics, and that the same analysts and data scientists who generate traditional statistics can also be trained to work with machine learning and other forms of AI. Gupta and Peri are responsible for cognitive technologies as well as big data and analytics at their respective firms.

Focus on the talent. Both American Express and P&G have long been known for their talent management approaches, and their work with analysts and data scientists is no exception. American Express has built up an organization of 1,500 data scientists (primarily in India and the United States), a growing number of whom are undertaking cognitive work. P&G’s staff of analysts and data scientists is somewhat smaller (several hundred or so), but well over the average for firms in its industry. P&G has a culture that emphasizes entry-level hiring and promotion from within, but in the data science and machine learning domain it made an exception and hired several people who already possessed the necessary skills.

Do most of the work yourself. Both American Express and P&G have a philosophy of building their own capabilities in cognitive technology. They both work with vendors, of course, but have a strong focus on open source tools for internal development. They believe it is both more effective and cost-efficient to develop in-house skills (as they did to a large extent with the previous generation of AI tools).

Address applications that benefit you and the customer. Both firms have a long history of customer focus.  Both are addressing cognitive applications that benefit customers and bring operational business value to their own organizations. For example, American Express is focusing efforts on credit fraud reduction, which delivers both customer value and internal business benefits.  By developing learning about the customer’s context (such as their current location), the company doesn’t need to bother customers with needless fraud alerts. P&G is addressing consumer needs with, for example, the cognitive technology-based Olay Skin Advisor app, which allows women to take selfies, have their skin age analyzed, and receive recommendations for the most appropriate Olay products. P&G also focuses on such applications as AI-based “bots” for customer service payment processing (which can also be used for IT support and operations), and machine learning for optimizing marketing spend, supply chain, and trade promotion (which benefits both P&G and its retailer customers).

Augmentation, not automation. Neither organization has the goal of eliminating large numbers of jobs with cognitive technology. Gupta observes “all of the data analyses that cognitive technologies can perform will help the business grow and ultimately require more people.”  P&G’s use cases for cognitive technology are also not based on reducing employees. Both firms believe strongly that humans and machines will work closely in a relationship of augmentation rather than automation.

We’ve both followed these companies for a long time—dating back to their early work with expert systems. We’re not surprised that they are among the early adopters of cognitive technology among large corporations, and also not surprised that they are weaving evolution and innovation to achieve business success. Their measured embrace of cognitive technology is just one more reason why American Express and Procter & Gamble continue to deliver an improved experience to their customers, decade after decade.

3 Small Things Every Person Can Do to Reduce Stress in Their Office

March 31, 2017 - 10:00am
Photo by Pablo Charnas/Illustration by Cat Yu

In a world of tight deadlines, it’s no wonder that some of your stress might seep out and affect your colleagues. But — because they’re under pressures of their own — you risk perpetuating a vicious circle, where you mirror and magnify each other’s frenzy.

You can’t control their behavior, but you can take charge of your own. There are obvious ways to tamp down the stress you inflict on others, such as refraining from yelling or making sarcastic comments. But those are only the most visible ways one risks alienating one’s coworkers; to truly stop the office pathology, you have to look deeper. Here are three subtle but powerful strategies to ratchet down the pressure and ensure you’re not subjecting your colleagues to undue stress and frustration.

First, stop being vague. If someone doesn’t know the full context of a situation, vague messages — which might be quite harmless — are often read like a Rorschach test, with fears and interpretations piled on. If you send a late-night email to a coworker that says, “We need to talk,” without further explanation, that can trigger an unhelpful cascade: Is there a problem? What did I do? Is she going to reprimand me?

I received a text message from a colleague this morning with exactly that framing. “Dorie,” it read. “Are you available today to talk via phone? Let me know when you are available…” Those ellipses seemed downright ominous. What did she need from me, so urgently? To share podcast referrals, it turned out.

Some people leave vague messages because they’re in a rush — tapping out a quick text or leaving a voicemail en route to the airport — and don’t realize the impact they have. Other people deliberately leverage vague messages as a power play, knowing they’ll make others wonder and worry. Either way, it inflicts an inexcusable psychic toll. If you want to be a better colleague, stop doing it.

You and Your Team Series Stress

Second, triage your responses. We all know email can be overwhelming — the average professional sends or receives 122 messages per day, according to one study — and in order to make progress on important projects, I’ll often go days without responding to emails. Usually, this isn’t a problem; most missives are informational and non-urgent. But there’s one glaring exception: messages that contain specific, time-sensitive inquiries. Can you come to the meeting Friday at 4pm? Do you approve the new draft of the presentation for tomorrow? Should we extend the job offer to Anika or Marco?

When you delay responding to these specific, targeted messages, it’s not you being “focused on what’s most important” (if we’re spinning it nicely) or even “slightly distracted.” It’s being obstructionist, which creates negative ripple effects throughout the organization. Even if you’re heads down and have sworn off email for days or weeks to accomplish a priority mission, spend at least 15 minutes a day tagging the most important, time-sensitive messages that have come in, so that you can respond appropriately. That marks you as a team player and makes everyone’s life easier — including your own, since you’ll earn the gratitude of your colleagues and they won’t keep pinging you relentlessly to badger you for the answers they need.

Finally, stop watching the kettle boil. Just as it’s damaging to neglect communication, as above, and let your colleagues languish without your necessary input, it’s just as bad to monitor them relentlessly. If you’re a perfectionist, or feel a keen sense of responsibility about a given project, you might feel tempted to watch their every move to ensure they’re performing, on time and on budget. That’s a laudable impulse, but the net result is that your colleagues will feel hounded, mistrusted, and micromanaged. In fact, scrutinizing them too closely is likely to make them perform worse, as demonstrated via research into the phenomenon of “choking under pressure.”

Monitor your own tendencies, instead. Recognize that responsible professionals thrive when they’re given autonomy, and work with them to establish a timeline and agreed-upon metrics of progress. That way, you can check in at appropriate intervals and they won’t feel blindsided. That takes the pressure off and allows them to do their best work.

When we’re stressed out, that feeling often spreads. It’s inevitable in a fast-paced workplace that some stress will be shared. But in order to create a better work environment, we need to take steps to contain this contagion as much as possible. By limiting vague messages, responding to specific requests in a timely fashion, and giving your colleagues a bit more leeway, you can do your part to stop the contagion of workplace stress — because we each already have enough of our own.

Using Blockchain to Keep Public Data Public

March 31, 2017 - 9:00am

In early February, President Trump’s administration made a change to the White House website. The site’s digital updates are often small and insignificant — updating a photo, fixing a broken link — and therefore may go unnoticed. But this one was different, and it could have an impact on every single American. The update eliminated the White House’s open data.

On the surface, those 9 gigabytes of data sets may seem inconsequential: They include White House visitor logs, the titles and salaries of every White House employee, and government budget data. But that information helps to ensure transparency in government. It helps reporters and citizens figure out who has the ear of the president and his staff, for example. In response to this very issue, Democrats have introduced the Make Access Records Available to Lead American Government Openness Act, or MAR-A-LAGO Act, legislation that would require the Trump administration to publish visitor logs for the White House and any other location where the president regularly conducts official business.

The Obama administration drastically increased the openness of government data, codifying it with an executive order that made open, machine-readable data the new default for government information, to ensure that we have transparency in government. So although the Trump administration’s moves are a return to the opacity of past administrations, it’s a move in the wrong direction. Perhaps most important is what this could mean for the U.S. government’s entire open data strategy, as the administration controls the information that so many businesses, organizations, and individual Americans depend on daily.

If you checked the weather this morning, you relied on information that was supplied by government open data. Used GPS to get to a meeting? That information was supplied by government open data. Received an alert that the baby crib you purchased was recalled? That, too, was supplied by government open data.

Unfortunately, it’s not just the Trump administration that has been caught deleting or altering important data. Companies are doing it too. Volkswagen cheated on emissions tests. Uber showed fake information about available drivers to government employees. And Airbnb was caught purging more than 1,000 listings, which were in violation of New York state law, just before it shared its data with the public as part of a pledge “to build an open and transparent community.”

Data is under attack. And it is the leaders of our government and economy who are waging this war. They have made it acceptable to manipulate raw data in a way that benefits them financially or politically — and it has lowered public confidence in the veracity of information. These are institutions we rely on every day to make the policy and business decisions that affect our economy and society at large. If anyone is allowed to simply change a number or delete a data set, who — and what — are citizens supposed to believe? How can we get our data back?

The answer lies with the public — public blockchains, to be specific.

How Blockchain Works

Here are five basic principles underlying the technology.

1. Distributed Database

Each party on a blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transaction partners directly, without an intermediary.

2. Peer-to-Peer Transmission

Communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes.

3. Transparency with Pseudonymity

Every transaction and its associated value are visible to anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.

4. Irreversibility of Records

Once a transaction is entered in the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (hence the term “chain”). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.

5. Computational Logic

The digital nature of the ledger means that blockchain transactions can be tied to computational logic and in essence programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.

A public blockchain, like the one bitcoin uses, is a ledger that keeps time-stamped records of every transaction. Recording a transaction on a public blockchain is the digital equivalent of writing something in stone — it’s permanent. More important, it’s publicly available for anyone to see and verify.

The first public blockchain was conceived of as a way to record financial transactions, but people have started using it as a way to timestamp the existence of digital files, such as documents or images. The public blockchain establishes that a specific person or entity had possession of a file at a specific date and time. Useful for patent or copyright claims, the blockchain could also ensure that a government agency or company verifiably published its data — and allow the public to access and confirm that the file they have is the same one that was signed and time-stamped by the creator.

The time-stamp and signature alone don’t prove that the data is accurate, of course. Other forms of checks and balances, such as comparing data against tax or SEC filings, can be added to ensure that there are legal ramifications for entities that manipulate their data. In the same way, government data, like employment or climate data, could be checked against local, state, or academically collected information that has already been time-stamped and signed by credible institutions.

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Using the public blockchain in this manner would not only address our data access and manipulation issues but also lay the groundwork for a better system to more efficiently and effectively regulate the fastest-moving startups. Some tech companies, with their near-instantaneous feedback loops, believe they can regulate their ecosystems more efficiently and effectively than governments can, with its antiquated, in-person inspection efforts. And there’s some truth to that. Right now, many local and state governments regulate ride sharing and home sharing in ways similar to how they regulate taxis and hotels, with a combination of police officers, signs, and consumer complaints through 3-1-1 calls. At the same time, governments have watched these startups manipulate their data, and are therefore reticent to trust a company that might put its financial motivations ahead of regulation.

With each party wary of the other’s motives and practices, it’s been difficult to settle on a compromise. But if governments and emerging technology companies used the public blockchain, both parties could achieve what they want. Companies could move fast, and consumer safety and rights would be protected.

As respected venture capitalist and author Tim O’Reilly says, “Regulations, which specify how to execute laws in much more detail, should be regarded in much the same way that programmers regard their code and algorithms — that is, as a constantly updated tool set to achieve the outcomes specified in the laws.”

Conceivably, companies would update their information to the blockchain, with secure mechanisms put in place to protect individual and corporate privacy, and the government would use this data, submitted in real time, to apply local laws to those companies, their employees or contractors, and consumers. The government agency responsible for overseeing the industry would then analyze data, such as consumer feedback ratings and other relevant information (for example, whether ride-sharing drivers take tourists on a longer route), to improve safety and better protect the rights of everyone involved. In other words, the government would use lightweight algorithmic regulation to protect local citizen rights and safety.

The public blockchain would fundamentally change the way we govern and do business. Rather than asking companies and consumers to downgrade their digital interactions in order to comply with the law, the government would create an adaptable system that would reduce the amount of paperwork and compliance for businesses and consumers. Rather than force emerging technologies and business models into legal gray areas, the government would use algorithmic regulation to create a level playing field for incumbent companies in their respective industries.

Unless we tackle our crisis of data now, distrust between government, businesses, and citizens will reach an untenable peak. The growth and innovation of our startup economy will be stunted, and the ability for local and state governments to effectively govern will simply erode. We need open data to keep making important business and policy decisions — and we need to put it back into the hands of the public. Our data problem doesn’t have to be a crisis. It can be an opportunity — a chance for our business leaders and policy makers to rebuild a foundation of trust in the critical data we all depend on.

The Tangled Web of Net Neutrality and Regulation

March 31, 2017 - 8:05am

Net neutrality is a basic, but notoriously squishy, principle. It means that a broadband internet provider should not block, slow, or otherwise unfairly discriminate against any websites or online services. Despite being a simple idea, net neutrality has proven difficult to translate into U.S. policy. It sits uncomfortably at the intersection of highly technical internet architecture and equally complex principles of administrative law. Even the term “net neutrality” was coined not by an engineer but by a legal academic, in 2003.

Since Donald Trump’s election, the rhetoric surrounding net neutrality’s imminent demise has been frenzied. Every move by newly appointed Federal Communications Commission (FCC) chair Ajit Pai generates a chorus of consumer advocates bemoaning the death of neutrality and the “end of the internet as we know it.” Businesses and consumers are being warned that Republican lawmakers are united in their determination to not just modify the FCC’s 2015 Open Internet Order, but to “kill,” “destroy,” “dismantle,” or “abolish,” the open internet, as soon as possible.

In the interest of exploring these issues, I’ve compiled some of the most important questions about net neutrality and the 2015 order, which grounded the rules in 1930s-era public utility law. To be clear, I agree with Netflix CEO Reed Hastings, who recently acknowledged that net neutrality principles have been and will continue to be strictly enforced not by regulation but by powerful market forces. My view is pretty simple: Most efforts to regulate the internet make things worse in the long term — or, in this case, much sooner. Here, the effort to transform Internet Service Providers (ISPs) into utilities is a cure far worse than the problem.

Let’s start with the key players. First, there’s the FCC, which along with other, sometimes rival, agencies, including the Federal Trade Commission (FTC), represents the main U.S. regulatory bodies for internet usage. There’s the president, who appoints the members of the Commissions, and Congress, which is solely responsible for delegating legislative authority to them.

Then there are the businesses in the internet ecosystem, often unhelpfully divided into “edge providers,” such as Google, Facebook, and Netflix, and “infrastructure” providers, including engineering groups, ISPs, and companies that support the backbone of the internet. (Increasingly, the distinction is meaningless.) And, as with other issues, there are D.C.-based advocacy groups, regularly quoted in the press, many of which have with strong pro- or anti-regulatory biases.

Next, it’s important to understand the 2015 Open Internet Order. This is an FCC rule, advocated for by President Obama, that based new net neutrality rules on old public utility laws originally written to regulate the former Bell telephone monopoly. The 2015 order mostly addressed a radical policy shift from competing private networks to public utility treatment for broadband, or “reclassification,” with authority to enforce net neutrality being a mere side effect.

The order passed, in early 2015, by a party-line vote of 3-2. (Pai was one of the commissioners who voted against it. More on that later.) At the time, advocates hailed reclassification as a necessary foundation for net neutrality. But reclassification, separate from the net neutrality rules themselves, was less popular with broadband providers, which, along with leading internet engineering groups and companies like Google and Netflix, were concerned that the FCC would use the broad public utility powers it granted itself to regulate the internet well beyond enforcing net neutrality.

If the FCC or Congress revises or even reverses the public utility order, isn’t that the end of net neutrality? No. The Open Internet principles (as the FCC has always referred to net neutrality) long predate the 2015 Order. When a court found in 2010 that the FCC lacked authority to enforce them, the agency formalized them as rules. The same court rejected that effort in 2014, however, concluding that the agency had failed to identify a source of legal authority from Congress, precipitating the 2015 Order.

Thus, for most of the history of the commercial internet, there have never been formal net neutrality rules. Still, during a decade of largely inside-the-Beltway squabbling, the FCC has only once identified a violation of the principles that might have been barred by any version of its rules.

That may be in large part because, even without the FCC, the kinds of behavior net neutrality prohibits are either counter-productive for broadband providers to engage in or are already illegal under anti-competition laws actively enforced by the Federal Trade Commission.

If the FTC was already the internet’s “cop on the beat,” why does the FCC also need to regulate? In part, the net neutrality fight has always been an inter-agency power struggle, with the FTC and the FCC each determined to establish new relevance in the emerging internet ecosystem. One (perhaps) unintended consequence, however, of the reclassification of broadband as a public utility is that the FCC explicitly cut off the jurisdiction of the FTC, which can’t oversee utilities. Reversing reclassification but preserving the net neutrality rules — an action now being considered at the FCC and in Congress — would restore oversight to both agencies.

But the internet is a “vital service,” isn’t it? Why shouldn’t it be a utility? Without doubt, our broadband infrastructure has become critical to business and consumers alike as a leading source of economic growth and productivity. But the legal designation of a “public utility” is more than just an acknowledgment of that importance. For over a century, economists have long cautioned that treating infrastructure as a quasi-public monopoly should only be considered a last resort to overcome severe market failings.

That’s because utility treatment comes at a high cost. A monopoly or municipal utility, by definition, doesn’t compete with anyone, eliminating incentives for investment, innovation, customer service, and maintenance. The sad state of most U.S. power, water, and mass transit systems painfully illustrates that point.

By comparison, private investors have spent nearly $1.5 trillion on competing wired and mobile broadband networks over the last 20 years, and are poised to accelerate their efforts if the utility classification is undone. Though consumers in rural and mountainous regions may not yet have the fastest speeds, and contrary to what utility advocates claim, U.S. broadband deployment and pricing is the envy of much of the rest of the world.

So if the public utility order is reversed, how will net neutrality be preserved? There are several options. The FCC could, for example, revise the 2015 order along the lines of a 2014 court ruling that even former FCC Chairman Tom Wheeler initially referred to as his “roadmap” — although that would only defer the possibility of reclassification until the next administration. Inconsistency would depress business investment, which nobody wants.

The better solution would be to make the net neutrality rules a matter of federal law. And that is exactly what House and Senate Republicans proposed in late 2014. The chairmen of the congressional commerce committees, with FCC oversight, jointly introduced a bill that codified much stronger net neutrality rules even than those the FCC approved in its 2010 effort. The Republican bill, for example, would have preemptively banned ISPs from blocking websites, slowing traffic, or offering prioritization for content as a paid service (so-called “fast lanes”).

That bill also made clear that Congress never intended the FCC to have the discretion to transform broadband into a public utility at will, and in doing so subject it to rate regulation and other micromanagement. But since Democrats expected to win the White House in the 2016 election, they showed no interest in the bill, confident that an FCC chaired by someone Hillary Clinton picked would support the 2015 Order. Even since Trump’s election, Republicans have made clear that a potential bi-partisan compromise on this matter is still on the table.

Broadband ISPs will never go along with such a law, will they? They will. ISPs are as unhappy about the endless uncertainty around net neutrality as anyone, and support a permanent legislative solution. While some providers have objected to the particular wording of some of the rules in the past, they don’t object to net neutrality. Indeed, they practiced it during nearly two decades when the FCC had no rules requiring them to do so.

Verizon was actually the only broadband provider to challenge the 2010 version of the rules, and then only on very technical legal grounds. In ongoing litigation over the 2015 Public Utility Order, other ISPs have challenged the substance and process of reclassification, but, again, not the rules themselves.

Verizon, whose business model has changed substantially since 2010, now supports aspects of the 2015 Order with which even some of the advocacy groups took issue. And both Comcast and AT&T remain subject to slightly different versions of the rules regardless of what happens to the 2015 Order, having committed to them as conditions for recent mergers.

This brings us back to President Trump: Didn’t he promise to end net neutrality? Not exactly. Some people are seizing on a single tweet from 2014, before Trump was even a candidate, in which he referred to net neutrality as President Obama’s “top down power grab.” That comment (his only one I’m aware of on the subject) came the day after a White House demand that led to the 2015 reclassification — the actual source of Trump’s objection. Since then, he has said nothing.

At best, Trump’s position on (and interest in) net neutrality is unclear. And having now appointed Pai as the new Chairman of the FCC, Trump has little direct influence over the Commission which, by law, operates as an independent expert agency. Pai, who has been involved with the FCC most of his professional life, is already working to improve the agency’s transparency and predictability.

But Chairman Pai is a net neutrality “foe,” isn’t he? Pai objected strongly to reclassification of the internet as utility, but he has always been a supporter of net neutrality principles. Before and since becoming Chairman, Pai has repeatedly pledged to protect the core ideas behind net neutrality, including, as he describes them, “The freedom to access lawful content, the freedom to use applications, the freedom to attach personal devices to the network, and the freedom to obtain service plan information.”

A frequently misquoted 2016 promise by Pai to take a “weed whacker” to outdated FCC regulations had nothing to do with net neutrality and, indeed, echoed multiple executive orders issued by Presidents Obama and Clinton requiring agency heads to retire obsolete federal rules that remain on the books.

Pai did vote against the 2015 Order, but his dissent was almost entirely devoted to the legal and economic risks of public utility reclassification, as well as the irregular process by which the agency substituted the White House plan for Wheeler’s original “roadmap.”

Don’t edge providers like Google and Netflix, as well as start-ups, rely on net neutrality? Advocates for expanded public utility regulation of broadband providers are busy conjuring worst-case scenarios for any change to the 2015 Order, insisting for example that ISPs will immediately begin charging content providers such as Google and Netflix special fees to deliver information to their subscribers, and otherwise destroy the equal playing field by which internet services can be accessed by consumers.

These predictions intentionally ignore technical, business, and legal realities, however, that make such fees unlikely, if not impossible. For one thing, in the last two decades, during which no net neutrality rules were in place, ISPs have never found a business case for squeezing the Open Internet. In part, that’s the result of intense competitive pressure among mobile providers and increasingly between mobile and wired ISPs. In broadband, it’s the content providers who have leverage over the ISPs and not the other way around, as Netflix recently acknowledged in brushing aside concern about any “weakening” of net neutrality rules.

This might be why neither Google nor Netflix thought the public utility reclassification was a good idea. Former Google CEO Eric Schmidt argued against it at the time, saying he was worried that reclassification meant “starting to regulate an awful lot of things on the Internet,” a concern shared by the Internet Society and other non-partisan engineering groups. Netflix, recognizing that public utility regulations for broadband could someday extend to their own non-neutral conduct, reconsidered its own advocacy after the 2015 Order was passed.

A frequently misunderstood point is that Netflix’s intervention late in the fight over the 2015 Order was not about avoiding future fees for last-mile delivery of its content. The company instead asked the FCC to mandate free interconnection for its wholesale traffic partners and its own content delivery networks embedded throughout ISP facilities — something the company confusingly called “strong” net neutrality.

Despite claims that Netflix traffic was being “throttled” by ISPs, slowdowns in Netflix traffic in 2014 (which gained extra attention following comedian John Oliver’s famous rant about the issue) turned out to be the fault of one of Netflix’s own transit providers. The transit provider was over capacity and had reduced service at peak times to wholesale customers, like Netflix, without telling anyone. Netflix actually pays below market rates for interconnection — costs so small they don’t even show up in financial statements.

The FCC declined to extend “neutrality” to the core of the network in its 2015 Order, and Netflix quickly lost interest in the debate.

Should business leaders intervene to preserve net neutrality? The kind of full-scale resistance that utility advocates are now calling for in a renewed net neutrality battle would be deeply misguided and counter-productive, especially if directed at the FCC and Chairman Pai. As noted, the agency bases its regulatory decisions on actual economic and technical analysis and not advocacy, no matter how spirited. Admittedly that hasn’t always been the case, particularly in the last several years, but Pai has committed to restoring the commission’s own neutrality.

What business leaders inside and outside the internet ecosystem can and should do, however, is to encourage Congress to act once and for all, protecting the open internet while preserving an investment environment essential for continued broadband expansion and improvement. It’s hard to imagine anyone disagreeing with that objective, or with a lasting solution to a problem that has plagued regulators and industry alike for too long.

Congress and the FCC are already working to determine the most effective steps both to undo the public utility reclassification and put the net neutrality principles on solid legal ground once and for all. Watch for FCC action and revised legislation that would do just that sometime in the next few months.

How Personalities Affect Team Chemistry

March 30, 2017 - 4:40pm

Deloitte national managing director Kim Christfort talks about the different personality styles in an organization and the challenges of bringing them together. Her firm has developed a classification system to help companies better understand personality styles and capitalize on their cognitive diversity. She and Suzanne M. Johnson Vickberg coauthored the article, “Pioneers, Drivers, Integrators, and Guardians” in the March-April 2017 issue of Harvard Business Review.

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What a Bipartisan Approach to U.S. Health Care Could Look Like

March 30, 2017 - 4:23pm

As a friend once told me, “Government is about compromise.” That friend was Tommy Thompson, a four-term governor of Wisconsin who went on to serve in George W. Bush’s cabinet as secretary of health and human services.

With the failure of the American Health Care Act, recently proposed by Republicans in the U.S. House of Representatives, it is clear that the Affordable Care Act (ACA) will continue to serve millions of Americans for the foreseeable future. Of course, the ACA (or Obamacare) remains a flawed law. But rather than allow it to “implode” or “collapse,” as some suggest it will (e.g., President Trump), a group of Republican and Democratic leaders in Washington should take action and fix the broken elements of the ACA for the good of the millions of Americans who depend on it. It is time for a compromise.

What might such a bipartisan agreement look like? Here are some ideas.

Encourage Competition

In most industries, more competition lowers cost. Not in health care, which is not structured for true market competition. With the advent of mergers and acquisitions, the big have gotten bigger. In many markets, there is only one main provider, at the most two, and they shadow-price each other, meaning they make sure prices charged to insurance companies are similar. This sounds like monopolistic behavior because it is. It is one reason why commercial health care premiums are so high.

The same lack of true competition plagues the health insurance industry. Many states (Michigan, Massachusetts, and Iowa, to name a few) have one dominant health insurance payer. What’s more, the primary insurer in each state dictates insurance coverage rates no matter what prices they negotiate with health care providers. And insurance companies write discounted price “deals” with large companies that employ thousands of people, leaving smaller companies and individuals left to pick up the tab in various ways (e.g., by paying higher monthly premiums).

If any one player tries to disrupt this monopoly, it is punished in the marketplace. For example, in Pittsburgh, the Blue Cross plan (Highmark) decided to fight back against the exorbitant prices the provider UPMC was demanding. UPMC terminated the Highmark contract. HighMark had no significant provider network and was forced to purchase components of the former Allegheny Healthcare, a provider system of hospitals and clinics that was in financial trouble. But this left many patients with huge bills and no access to their doctor. In the wake of intense media coverage of the dispute, the governor intervened and required UPMC and HighMark to renegotiate.

To solve the problem of ever-increasing premiums, lawmakers are going to have to take a lesson from actuarial science. This means creating a risk pool for insurance coverage that is large enough and diverse enough to spread the differences in health costs across the entirety of the population, lowering the average cost and making big insurers and big providers willing to negotiate lower prices. Given that it is unlikely that Republicans and Democrats can agree to increase the penalty for those who choose not to purchase insurance, thereby eliminating the possibility of populating the risk pool with needed healthy individuals, we need another idea. One is cross-border risk pools.

In states where a large number of people use the health exchanges, the exchanges have worked well. One example is California. Its exchange, Covered California, selects the plans it sells and standardizes the deductibles and other elements of the offered plans, making it easier for consumers to compare competing plans. Insurers want access to this large pool of new customers, and those insurers negotiate better deals from hospitals and doctors because they can guarantee more patients. In 2016 the California exchange saw a modest 4% increase in premiums.

Compare that to how the federal health insurance marketplace and other state exchanges work. Instead of selecting the health plans offered on these exchanges, they take all comers, and do not require insurers to improve health plans to get their products onto the exchanges.

Because Covered California has a large pool of patients, it can negotiate directly with health insurers on prices. In other states where numbers are smaller and have federal exchanges, which are more passive, insurers can essentially charge what they want.

One way to enable other states to do what California has done is to allow states to create cross-border risk pools. This is different from simply allowing insurers to sell across state lines. States would pool patients. If Minnesota, Iowa, and Wisconsin pooled their patients, it would be possible to create a large number of patients in the exchange. This would get the attention of big insurers and big providers. A multistate risk pool such as this would potentially create more price competition, which could put a lid on premium increases.

Continue to Reduce the Cost of Care

Health care in the United States is the most expensive in the world, but it doesn’t result in the best health outcomes or longevity of its citizens. Studies estimate that from 30% to more than 50% of health care spending is wasted. The fee-for-service payment system contributes to the problem, rewarding health care providers for the quantity of procedures they perform and paying for medical errors as well.

Under the ACA, there is a movement to abandon fee-for-service payments and to transition to pay-for-value, which rewards care providers for improving patient health outcomes. These payment changes should be accelerated so that providers have a clear direction on where financing of health care is heading.

As care providers make this shift, a dramatic change in operational and management systems will need to happen. Hospitals and clinics must reinvent how patient care is delivered — and they must do it as a team. This means enabling frontline workers to make cost-effective decisions that are best for patients. This change will help hospitals identify and reduce errors and design new, innovative care models.

Cover the Poorest Americans

It’s clear that the moderate factions in the Republican Congress are not supportive of reducing the federal commitment to Medicaid expansion, which has added 15 million to its rolls since the ACA went into effect. The argument rages around who is going to pay for it, not whether people should be covered. But the two are inextricably linked. The remedy, which might be palatable for both Democrats and moderate Republicans, is to provide the poor with sufficient tax credits and other financial help to afford insurance.

If the federal government defunds Medicaid or provides reduced block grants to states, states will increase eligibility requirements, and coverage will be dropped. Presently, the law says that if your income is below 138% of the federal poverty level (FPL), which is $12,000 for individuals and $24,600 for a family of four, and your state has expanded Medicaid coverage, you qualify for Medicaid based only on your income. If your income falls below 100% of FPL and your state hasn’t expanded Medicaid coverage, you won’t qualify for either income-based Medicaid or savings on a health exchange insurance plan. You may, however, still qualify for Medicaid under your state’s current rules. You do in Wisconsin.

Wisconsin did not expand the federal Medicaid program, but it has experienced a drop in uninsured rates, from 9.1% to 5.7%, the sixth best in the nation, and similar to that of the states that did expand Medicaid coverage. In 2013 the state expanded eligibility for the BadgerCare Plus Medicaid program (the state’s safety-net health plan) to include adults who previously were not always eligible (those who did not have dependent children) and who have incomes below 100% of the 2013 FPL, or $11,770 for an individual. This expansion was offset by adults who had accessed BadgerCare Plus Medicaid in the past, who now were eligible for subsidies under the ACA to purchase health plans sold on the federal insurance marketplace.

One aspect of the ACA that works, and that Wisconsin has leveraged, is to give people who qualify a tax credit to help them pay their health care premiums. This year, more than 80% of those purchasing health plans on the insurance exchanges received tax credits. The credits are used to make insurance premiums affordable. In some cases, individuals can purchase a health plan for as little as $100 per month.

But a study by the U.S. Department of Health and Human Services found that about 2.5 million people bought their health plans on the independent market rather than on the exchange in 2016. These consumers were not eligible to get the available tax credit. A subset of this group, 1.1 million people, could also receive financial help to pay for out-of-pocket health costs because of their income levels, but since they enrolled in off-exchange health plans, they weren’t eligible to get this benefit.

Clearly, more education needs to happen across the country so that Americans can take full advantage of tax credits and financial help available to them when they purchase health plans on the exchange. One size does not fit all, and lawmakers should think about creating flexibility, not rigidity, so each state can manage the insurance expansion in the way that is best for that state. But it should be made clear that each state must reduce the uninsured rate. Texas and Florida stand out as two that haven’t — and they also haven’t expanded Medicaid.

Legislators can go one of two ways. One is to leave the ACA as it is — and have Americans lose their health coverage and let premiums skyrocket. The alternative is to do something better, as I’ve outlined above. Improvements to the ACA will lead to expanding coverage, containing premium and Medicaid costs, and providing security for all Americans. The choice is clear.

How to Get Your Team to Follow Through After a Meeting

March 30, 2017 - 1:00pm

Any team leader knows that it’s what happens between project meetings that makes or breaks a project. And yet it’s often challenging to keep a team motivated and focused on getting agreed upon tasks done. Ideally you’ve checked that everyone is aligned and agreed on next steps but assigning tasks and deadlines is usually not enough.

After all, once you’ve left the meeting, things come up. Circumstances change. Priorities shift. Most people are working more hours than they want to work and still taking work home. And in many places, it’s generally accepted that people won’t do everything they’ve agreed to in a meeting. People don’t use “my dog ate it” as an excuse, but close to it. Just in the last week, I’ve heard, “My morning got away from me” and “Something else came up.” It’s hard to buck against this kind of culture but it’s possible.

Start by ending the meeting with clear agreements on specific actions and completion dates for each item. I love the phrase: Do thing X by time Y or call. Don’t automatically default to your next meeting date as the completion date for each action item. Choose a date that makes sense to the project and creates a sense of urgency. Remind people that they can negotiate on dates until they feel comfortable being able to deliver as promised.

Then ask people communicate if one of their action items becomes at risk of non-delivery. This is not about perfection in delivery, it is about perfection in communication. It’s important to deliberately cultivate and coordinate commitments if you expect people to follow through.

Get a one-page summary of the meeting out within an hour if possible so the discussion and next steps stay on everyone’s radar. Then assign someone to track and follow up on action items between the meetings. This is not about micromanaging or not trusting — this is simply good project management.

You and Your Team Series Meetings

Keep a running tally of which items get done. How many of the agreed-upon action items are completed by the dates agreed upon? This record of your action item completion rate — your say/do ratio — will tell you how you are doing. Set a target. In my experience, a 60% completion rate is about average. Getting to 85% will give your team an incredible sense of accomplishment. But don’t expect perfection — it’s the overall pattern than matters.

Don’t let the tracking turn you into a task master. Be compassionate. Each person on your team has a complex life — much of which is unknown to you. You are not the only person asking for their time. People are usually on multiple teams and often have more than one person to whom they report. By being interested in each of your colleagues, finding time to chat, and working to understand their current reality, you can gain their respect and permission to ask them to do what they say they will do, reliably — almost every time.

Of course, when someone does drop the ball, don’t let non-performance go unchallenged but make it a gentle conversation when you discuss it. You shouldn’t think less of the person because they didn’t keep their word — it’s usually a cultural thing not an individual flaw. Remember that you are establishing a new norm. Role model the desired behavior and continually remind people of what is expected.

If all of the above isn’t working and you’re not hitting a completion rate that you’re comfortable with, you may want to address the issues head-on with your team. An open and honest conversation about keeping the agreed-upon commitments is constructive.

Here are the questions to ask of yourself and your team:

  • Is each action item essential to completion of the project?
  • At the time we commit, do we fully intend to do whatever it takes to deliver?
  • Are we clear about what needs to be done, who will do it, and when it will be done?
  • Do we have the ability to say no or negotiate when we can’t fully commit?
  • Is it OK if someone follows up to check on our progress?
  • Do we have a system to keep track of action items and their completion?
  • Do we have an agreement to communicate if something comes up that might interfere with our completion of the task?

This problem-solving discussion will increase everyone’s level of awareness for making and keeping commitments as well as surface problems that keep them from doing so.

Getting to a higher level of completion on action items leads not only to exponential progress toward goals, but also to a tremendous sense of accomplishment — both personally and for the group.

Making Government Reorgs Work

March 30, 2017 - 12:00pm

When governments attempt to reorganize themselves, the changes they make have a huge bearing on the effectiveness of the public sector. But, just like their corporate counterparts, government reorganizations have a poor record of success. Results from a survey on HBR.org on the effectiveness of reorganizations (covering over 1,000 reorgs across all sectors and geographies, of which 87 were government institutions), provide pointers for how to get them right.

Looking at the government institutions data, while 75% delivered some benefits, only 13% delivered the planned objectives in the planned time. About the same proportion (14%) actually hurt the organization. According to the survey, the three biggest challenges faced by government reorganizations are (in order): unforeseen issues that slowed the process (e.g., failing to rewire the IT systems); that leaders actively resisted the changes; and that employees actively resisted the changes. (Politicians should remember those last two, when they start whipsawing around intelligence services who hold all the secrets!)

For these reasons, my last boss, David Cameron, the previous UK Prime Minister, was strongly opposed to “machinery of government changes,” as governmental reorgs are termed in the UK. But seismic political events can demand such changes. Hence, his successor, Theresa May, has taken a different tack: creating two new departments (Trade and Brexit) and merging two others (Business and Energy/ Climate Change). The full extent of Donald Trump’s departmental changes is not yet clear, but it is likely to be much, much greater than in the UK.

Understanding why public sector reorganizations produce such derisory results is the first step to tackling the problem. The main explanation is that the benefits of public sector reorganization are harder to nail down. In the private sector, improved outputs are typically easy-to-measure things like revenues or profit, but in the public sector the benefits may be harder-to-quantify things like reduced carbon emissions, greater military preparedness, or better health outcomes. This makes it even more important to define tangible benefits that can be measured before embarking on a reorg; but this happens very infrequently. Only 8% of the government reorgs in the survey had detailed unit-by-unit targets. Now, if the desired outcome is cost reduction, this is easy to measure in any sector. But perhaps surprisingly, despite all the talk about ballooning public sector budgets, only 15% of the government reorgs in the survey were focused on cost reduction.

In fact, the two most frequent reasons for government sector reorgs (accounting for more than half of them) are responding to a change in the political environment and a leader’s desire to reshape the organization. We are seeing this second one playing out in the U.S. right now. Unfortunately, the statistics show that these are the least successful reasons for launching reorgs, perhaps because the tangible benefits of these objectives are difficult to pin down and translate into a series of actions. Of course, politicians will always want to change things to suit their policy objectives or political calculations, but, even in these cases, it helps to clearly define and quantify the benefits before launching the changes. Otherwise, there is no objective way of judging between the pros and cons of different organizational options, and, ultimately, no one will know if the reorg has succeeded or not. For example, the UK government’s desire to merge the Business and Energy Departments was clearly an attempt to avoid too many ministers around the Cabinet table, following the creation of the two new departments. But, after this decision, significant effort went into working out the synergies between the two departments in a way which is now yielding fruit: for example, in developing a new strategy around energy storage and electric vehicles.

So, beyond being clear on the objectives, what are the other success factors in retooling the machinery of government?

The first is using the reorganization to change not only the reporting lines, but also mindsets and behaviors. It’s essential to get officials behind the objectives of the reorg. Worryingly, while almost all government reorgs in the survey involved moving around the lines and boxes, only half precisely defined the number of people needed per unit, and none (yes, none) changed the skill requirements or job profiles for roles. Unless you change people’s day to day activities, nothing really changes. In a government reorg, the median number of top positions changing is 20% to 30%. But even when all the top political appointees have been removed (in the current case of the U.S.), it does not mean that someone deep down in the department, whose boss’ boss’ boss’ boss has changed, will do anything differently. While politicians may believe that the machinery of government is simply there to implement his or her own wishes, the fact is that taking the time to explain to officials why a change is being made and, if possible, engendering excitement around it, will reap benefits in terms of changing behavior. We are all human, after all, and courtesy goes a long way. (Although, it is fair to say that some changes, such as those envisaged in the EPA, may be so extreme as to make this near to impossible for people who have committed their careers to the institution’s prior goals.) If politicians don’t do this, the machinery of government is likely to undermine the changes, and good people will probably leave (in 45% of government reorgs, personnel the department wanted to retain exited the organization).

The second success factor is to redesign work processes to link outcomes to the activities needed to deliver them. Dispiritingly, only one in six public sector reorgs redesigned the processes for how work gets done. One excellent example of how to do this well is the use of “pathways” in hospitals to provide clear guidance on who does what and when. Pathways might focus on how to detect and treat cancer or broken bones. They have both reduced variability and improved outcomes in patient care. Similarly, in the military, by improving the process across the logistics supply chain, units can ensure that front-line soldiers have access to exactly what they need. This process-based thinking has the additional benefit of addressing the links in the chain where information is passed from one person or group to another. It’s typically at these handover points, rather than within teams, where organizational delivery falls down. In cases where the outcome is not solely or directly delivered by the department (e.g., creating more jobs, building more houses, reducing deaths from lung cancer, signing trade deals, or stopping terrorist attacks), it can be more difficult to link processes directly to outcomes. But that just makes it even more important to define activities that contribute to those outcomes. Beware the government reorg that tells employees their new role is to “maintain a watching brief on [subject X]”.

The third success factor is accelerating the pace of implementation to make the reorganization deliver benefits as soon as possible. It should stand to reason that the improved outcomes that leaders want will not come about until the new organization is in place to deliver them. If the right outcomes have not been defined, this can be tricky. Despite this, government reorgs take on average 14 months to deliver, versus 11 months in the private sector (which is still way too long, incidentally). Not only does this delay the improved outcomes, it also drags out the misery for employees: academic research suggests that while people hate change, they hate uncertainty even more, and the longer the uncertainty, the more there is to hate. One cause of this is the unforeseen bottlenecks, highlighted above. Another is the notion of fairness within the public sector (in the private sector, you know life is unfair the moment you first encounter a slump, commodity crash, or other financial disaster). While, on balance, an admirable quality, it can lead to government reorg leaders taking too much time to ensure that everything is done fairly and people are happy (they aren’t: no one would vote for a reorg; they will only be happy once it’s done). The success of public sector reorganizations would be dramatically improved by having a good milestone-by-milestone plan and to deliver it in half or a third of the usual time, maximizing outcomes and minimizing misery.

So, will the new generation of populist politicians deliver on their plans to make life better for those left behind by globalization? Will others get the public sector working for those left behind to fight off the threat of the populists? It obviously depends on how good their plans are. But even if you have the very best plans, they’ll count for naught if you can’t get the machinery of government working for you. I was heartened to read in Civil Service World magazine that the head of the UK’s Ministry of Defence said: “There is a book on my desk called Reorg which I am going to start reading as I think about the department.” That’s the book I co-authored for HBR Press last year.

If your organization (public or private) has recently undergone a reorg, take our HBR survey to find out how successful it was.

How to Win with Automation (Hint: It’s Not Chasing Efficiency)

March 30, 2017 - 11:00am

In 1900, 30 million people in the United States were farmers. By 1990 that number had fallen to under 3 million even as the population more than tripled. So, in a matter of speaking, 90% of American agriculture workers lost their jobs, mostly due to automation. Yet somehow, the 20th century was still seen as an era of unprecedented prosperity.

In the decades to come, we are likely to see similar shifts. Today, just like then, many people’s jobs will be taken over by machines and many of the jobs of the future haven’t been invented yet. That inspires fear in some, excitement in others, but everybody will need to plan for a future that we can barely comprehend today.

This creates a dilemma for leaders. Clearly, any enterprise that doesn’t embrace automation won’t be able to survive any better than a farmer with a horse-drawn plow. At the same time, managers need to continue to motivate employees who fear their jobs being replaced by robots. In this new era of automation, leaders will need to identify new sources of value creation.

Identify Value At A Higher Level

It’s fun to make lists of things we thought machines could never do. It was said that that only humans could recognize faces, play chess, drive a car, and do many other things that are automated today. Yet while machines have taken over tasks, they haven’t actually replaced humans. Although the workforce has doubled since 1970, unemployment remains fairly low, especially among those that have more than a high school level of education. In fact, overall labor force participation for working age adults has risen from around 70% in 1970 to over 80% today.

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Once a task becomes automated, it also becomes largely commoditized. Value is then created on a higher level than when people were busy doing more basic things. The value of bank branches, for example, is no longer to manually process deposits, but to solve more complex customer problems like providing mortgages. In much the same way, nobody calls a travel agency to book a simple flight anymore. They expect something more, like designing a dream vacation. Administrative assistants aren’t valuable because they take dictation and type it up on a typewriter, but because they serve as gatekeepers who prioritize tasks in an era of information overload.

So the first challenge for business leaders facing a new age of automation is not try to simply to cut costs, but to identify the next big area of value creation. How can we use technology to extend the skills of humans in ways that aren’t immediately clear, but will seem obvious a decade from now? Whoever identifies those areas of value first will have a leg up on the competition.

Innovate Business Models

Amazon may be the most successfully automated company in the world. Everything from its supply chain to its customer relationship management are optimized through its use of big data and artificial intelligence. Its dominance online has become so complete that during the most recent Christmas season it achieved a whopping 36.9% market share in online sales.

So a lot of people were surprised when it launched a brick and mortar book store, but as Apple has shown with its highly successful retail operation, there’s a big advantage to having stores staffed with well trained people. They can answer questions, give advice, and interact with customers in ways that a machine never could.

Notice as well that the Apple and Amazon stores are not your typical mom-and-pop shops, but are largely automated themselves, with industrial age conventions like cash registers and shopping aisles disappearing altogether. That allows the sales associates to focus on serving customers rather than wasting time and energy managing transactions.

Redesign Jobs

When Xerox executives first got a glimpse of the Alto, the early personal computer that inspired Steve Jobs to create the Macintosh, they weren’t impressed. To them, it looked more like a machine that automated secretarial work than something that would be valuable to executives. Today, of course, few professionals could function without word processing or spreadsheets.

We’re already seeing a similar process of redesign with artificially intelligent technologies. Scott Eckert, CEO of Rethink Robotics, which makes the popular Baxter and Sawyer robots told me, “We have seen in many cases that not only does throughput improve significantly, but jobs are redesigned in a way that makes them more interesting and rewarding for the employee.” Factory jobs are shifting from manual tasks to designing the work of robots.

Lynda Chin, who co-developed the Oncology Expert Advisor at MD Anderson powered by IBM’s Watson, believes that automating cognitive tasks in medicine can help physicians focus more on patients. “Instead of spending 12 minutes searching for information and three with the patient, imagine the doctor getting prepared in three minutes and spending 12 with the patient,” she says.

“This will change how doctors will interact with patients.” she continues. “When doctors have the world’s medical knowledge at their fingertips, they can devote more of their mental energy to understanding the patient as a person, not just a medical diagnosis.  This will help them take lifestyle, family situation and other factors into account when prescribing care.”

Humanity Is Becoming The Scarce Resource

Before the industrial revolution, most people earned their living through physical labor. Much like today, many tradesman saw mechanization as a threat — and indeed it was. There’s not much work for blacksmiths or loom weavers these days. What wasn’t clear at the time was that industrialization would create a knowledge economy and demand for higher paid cognitive work.

Today we’re seeing a similar shift from cognitive skills to social skills. When we all carry supercomputers in our pocket that can access the collective knowledge of the world in an instant, skills like being able to retain information or manipulate numbers are in less demand, while the ability to collaborate, with humans and machines, are rising to the fore.

There are, quite clearly, some things machines will never do. They will never strike out in Little League, get their heart broken, or worry about how their kids are doing in school. These limitations mean that they will never be able to share human experiences or show genuine empathy. We will always need humans to collaborate with other humans.

As the futurist Dr. James Canton put it to me, “It is largely a matter of coevolution. With automation driving down value in some activities and increasing the value of others, we redesign our work processes so that people are focused on the areas where they can deliver the most value by partnering with machines to become more productive.”

So the key to winning in the era of automation, where robots do jobs formerly performed by humans, is not simply more efficiency, but to explore and identify how greater efficiency creates demand for new jobs to be done.

Teams Solve Problems Faster When They’re More Cognitively Diverse

March 30, 2017 - 10:00am

Looking at the executive teams we work with as consultants and those we teach in the classroom, increased diversity of gender, ethnicity, and age is apparent. Over recent decades the rightful endeavor to achieve a more representative workforce has had an impact. Of course, there is a ways to go, but progress has been made.

Throughout this period, we have run a strategic execution exercise with executive groups focused on managing new, uncertain, and complex situations. The exercise requires the group to formulate and execute a strategy to achieve a specified outcome, against the clock.

Received wisdom is that the more diverse the teams in terms of age, ethnicity, and gender, the more creative and productive they are likely to be. But having run the execution exercise around the world more than 100 times over the last 12 years, we have found no correlation between this type of diversity and performance. With an average group size of 16, comprising senior executives, MBA students, general managers, scientists, teachers, and teenagers, our observations have been consistent. Some groups have fared exceptionally well and others incredibly badly, irrespective of diversity in gender, ethnicity, and age.

Since there is so much focus on the importance of diversity in problem solving, we were intrigued by these results. If not diversity, what accounted for such variability in performance? We wanted to understand what led some groups to succeed and others to crash and burn. This led us to consider differences that go beyond gender, ethnicity, or age. We began to look more closely at cognitive diversity.

Cognitive diversity has been defined as differences in perspective or information processing styles. It is not predicted by factors such as gender, ethnicity, or age. Here we are interested in a specific aspect of cognitive diversity: how individuals think about and engage with new, uncertain, and complex situations.

The AEM cube, a tool developed by Peter Robertson, a psychiatrist and business consultant, assesses differences in the way people approach change. It measures:

  • Knowledge processing: the extent to which individuals prefer to consolidate and deploy existing knowledge, or prefer to generate new knowledge, when facing new situations
  • Perspective: the extent to which individuals prefer to deploy their own expertise, or prefer to orchestrate the ideas and expertise of others, when facing new situations

Having run the strategic execution exercise over 100 times and observed such big differences in the performance of teams, we decided to use the AEM cube to measure the level of cognitive diversity in groups undertaking the exercise. Our analysis across six teams who recently undertook the exercise shows a significant correlation between high cognitive diversity and high performance, as shown in the table below:

 

The three teams that completed the challenge in a good time (teams A, B, and C) all had diversity of both knowledge processes and perspective, as indicated by a larger standard deviation. The three that took longer or failed to complete (D, E, and F) all had less diversity, as indicated by a lower standard deviation.

Intuitively, this makes sense. Tackling new challenges requires a balance between applying what we know and discovering what we don’t know that might be useful. It also requires individual application of specialized expertise and the ability to step back and look at the bigger picture.

A high degree of cognitive diversity could generate accelerated learning and performance in the face of new, uncertain, and complex situations, as in the case of the execution problem we set for our executives. Based on these indicative findings, we are continuing our research with a larger sample.

These cognitive preferences are established when we are young. They are independent of our education, our culture, and other social conditioning. Two things about cognitive diversity make it particularly easy to overlook.

Cognitive diversity is less visible.

First, it is less visible than, for example, ethnic and gender diversity.

Someone being from a different culture or of a different generation gives no clue as to how that person might process information, engage with, or respond to change. We cannot easily detect cognitive diversity from the outside. It cannot be predicted or easily orchestrated. The very fact that it is an internal difference requires us to work hard to surface it and harness the benefits.

We worked with a startup biotechnology company. When its R&D team members tried our strategy execution task, they performed terribly. The team, mixed in terms of gender, age, and ethnicity, was homogeneous in how it preferred to engage with and think about change. These were PhD scientists who had been attracted to biotech to explore their specialties. But, with little cognitive diversity, they had no versatility in how to approach the task. They never finished.

On another occasion, we worked with a group of IT consultants on the same exercise. If we had not called a halt, we would have had to cancel dinner. All activity ceased, as each individual tried to work out a solution in their own head.

Conversely, we have observed siblings of the same sex, generation, and schooling, typically considered a low-diversity group, demonstrate a high degree of cognitive diversity and solve the task at speed. Recently, two teams of European middle-aged men went head-to-head on the challenge. One failed to complete it; the other succeeded. The difference? The successful team had much higher cognitive diversity.

There are cultural barriers to cognitive diversity.

The second factor that contributes to cognitive diversity being overlooked is that we create cultural barriers that restrict the degree of cognitive diversity, even when we don’t mean to.

There is a familiar saying: “We recruit in our own image.” This bias doesn’t end with demographic distinctions like race or gender, or with the recruiting process, for that matter. Colleagues gravitate toward the people who think and express themselves in a similar way. As a result, organizations often end up with like-minded teams. When this happens, as in the case of our biotech R&D team, we have what psychologists call functional bias — and low cognitive diversity.

Functional bias is a problem for teams facing new uncertain and complex situations because, with little cognitive diversity, the team will have limited ability to see things differently, engage in different ways (e.g., experiment versus analyzing), or create new options. Similarly, when organizations initiate change programs, they often seek out and identify advocates or change agents to support activities. Those selected often have a similar approach to change. This lack of cognitive diversity has two impacts. First, it reduces the opportunity to strengthen the proposition with input from people who think differently. Second, it fails to represent the cognitive diversity of the employee population, reducing the impact of the initiatives.

To overcome these challenges, make sure your recruitment processes identify difference and recruit for cognitive diversity. And when you face a new, uncertain, complex situation, and everyone agrees on what to do, find someone who disagrees and cherish them.

If you look for it, cognitive diversity is all around — but people like to fit in, so they are cautious about sticking their necks out. When we have a strong, homogenous culture (e.g., an engineering culture, an operational culture, or a relational culture), we stifle the natural cognitive diversity in groups through the pressure to conform. We may not even be aware that it is happening. The chart on the left below shows, according to the AEM cube, the self-assessed cognitive diversity of a group of 32 managers from an organization executing a new strategy. The chart on the right shows how the same managers were perceived by their direct reports. A lot less diverse!

 

If cognitive diversity is what we need to succeed in dealing with new, uncertain, and complex situations, we need to encourage people to reveal and deploy their different modes of thinking. We need to make it safe to try things multiple ways. This means leaders will have to get much better at building their team’s sense of psychological safety.

There is much talk of authentic leadership, i.e., being yourself. Perhaps it is even more important that leaders focus on enabling others to be themselves.

How to Develop Leaders Who Can Drive Strategic Change - SPONSOR CONTENT FROM KORN FERRY

March 30, 2017 - 9:55am
Image courtesy of Korn Ferry.

Developing leaders to drive financial performance and operational excellence has always been important. However, given the unrelenting pace of technological change and globalization, plus an anemic world economy, organizations now need leaders who can effectively respond to constantly evolving business opportunities and threats, and chart a path to sustainable growth.

In a new global survey of 7,500 global leaders by Korn Ferry, executives identified accelerating innovation and improving profitability among the top three business priorities in their organizations. Yet these same executives questioned whether their current leadership is up to the challenge: Only 17 percent of those surveyed were confident their organizations have the right leadership to deliver on their strategic business plans.

Read more from Korn Ferry: Lack of leader engagement throughout the organization is jeopardizing strategic change initiatives, the survey found. Respondents said they perceive that 62 percent of first-level leaders, 47 percent of mid-level leaders, and 41 percent of high-potential leaders do not actively drive strategic change in their organizations. Put another way: On average, half of the leaders below the senior executive level are more involved in “business as usual” activities than in efforts to make strategic change.

Faced with this challenge, executives listed the need to develop leaders who can drive strategic change as the most important leadership development priority for their organizations.

But another challenge emerged: Survey respondents said they were unhappy with their current leadership development plans. More than 50 percent of executives ranked their leadership development ROI as “fair” to “very poor.” These organizations said that if they could start over, they would retain only half of their current leadership development approach.

What needs to be adjusted? Developing leaders to drive strategic change requires a different focus on leadership development, survey respondents said.

In general, they said they need more development that deals with the contemporary issues they are facing in their organizations as opposed to a more abstract, top-down, conceptual approach. And many indicated a preference for “journey based” development using experiences inside the organization as opposed to time-bound or event-based programs outside the company.

So what gets in the way of launching better leadership development? The survey respondents identified “lack of executive sponsorship” as the top barrier to successful global leadership development, followed closely by “lack of budget” and “lack of alignment between stakeholders.”

But the need for top leadership to focus on and invest in new forms of leadership development is clear: Successful leadership development will be a major factor in differentiating the winners from the losers in the years ahead.

The survey respondents said the problem is threefold: First, confidence in current leadership to drive change is low; second, there are gaps throughout the leadership pipeline; and finally, engagement in strategic change among leaders outside of the C-suite is lacking.

The first report in Korn Ferry’s “Real World Leadership” global report series makes four major recommendations for leadership strategy:

  1. Connect leadership strategy with business strategy: Organizations need to identify the kinds of leaders required to execute their strategies and then build their development/recruiting approaches around those profiles. Part of that exercise is to include a greater variety of voices and perspectives in the leadership pipeline.
  2. Embed change throughout the organization: The entire organization needs to be enlisted in change initiatives. Effective and significant organizational change and growth happen only when a large number of people collectively align and engage.
  3. Make leadership development programs contextual and relevant: Organizations should orient programs around current business and strategic issues. This will generate engagement and fresh approaches to business challenges.
  4. Encourage a sense of purpose and mission: Individuals and organizations are far more motivated and energized when they are connected to a higher purpose or feel they are providing a service to the world, their customers, and their community.

Adapted from Korn Ferry’s “Real World Leadership” report. To learn more about how to develop leaders who can drive real change, click here.

Inequality Isn’t Just Due to Market Forces — It’s Caused by Decisions the Boss Makes, Too

March 30, 2017 - 9:30am

In 1980, Jim Baron, now a professor at the Yale School of Management, and William Bielby, now a professor at the University of Illinois, published a seminal article on firms and inequality. In it, the authors, both sociologists, made a compelling argument that, to understand labor market outcomes like inequality, it wasn’t enough to look at the supply and demand for individuals’ skills. We should also look, they argued, at the decisions made by firms.

In his recent Harvard Business Review article, Stanford’s Nicholas Bloom presents research on the role that firms play in explaining rising wage inequality in the U.S. Both the article and the research are revelatory in a number of respects, and I applaud Bloom’s efforts to return firms to the inequality conversation. I also agree with many of the arguments he advances. However, any discussion of firms and wage inequality must not be limited to discussion of market forces. Consideration must also be given to the decisions made by executives in those firms.

Related Video The Other Kind of Inequality, Explained Pay gaps are rising between companies more than within them.

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Borrowing from the foundational insights from Baron and Bielby, as well as other scholars such as Jerry Davis, Arne Kalleberg, and Jeff Pfeffer, my research contends that although market forces play an important role in rising wage inequality, firms are not passive recipients of these forces. Rather, executives make decisions about how to organize work, how to reward individuals for their labor, and where the boundaries of their firm should be. In aggregate, these decisions play an important role in determining how much each of us gets paid.

Companies can be divided into two types, in terms of how they approach hiring and compensation: organizational oriented and market oriented. The main distinction between the two types is the extent to which they rely on internal (organizational) or external (market) criteria in the structuring of employment relationships. An organizational focus is associated with stable employment with low turnover, extensive use of training, and the dominance of internal considerations, such as a desire for equity in pay. In such a system, employers protect workers from many of the vagaries of market forces; they take a longer-term perspective on firm performance, and favor corporate strategies that necessitate a stable, well-trained, and loyal workforce.

A market focus, on the other hand, is characterized by flexible employment relationships with higher turnover, fewer opportunities for training, and pay and allocation decisions based on market forces. The shorter-term orientation discourages employers from bearing risks on behalf of their workers and encourages them to use employment practices that lower direct costs and increase flexibility.

In practice, firms fall along a continuum between these two ideal types.

When a society is composed of a greater number of firms holding an organizational orientation, wage inequality in that country will be lower. Such an orientation tends to lift wages for low- and middle-skill workers relative to high-skilled ones, which compresses the wage distribution inside the firm relative to what we would expect from market forces alone. In aggregate, such dynamics would operate in a similar manner as unions, systematically raising the wages for low and middle earners relative to high-earners, such that the wage gaps between them are narrowed, thereby lowering wage inequality. In the post–World War II era up to the late 1970s, employment systems in the U.S. were frequently characterized as being more organizationally oriented. Since that time, however, the U.S. has transitioned to a market-oriented system of employment.

Scholars from a number of fields have offered explanations for this transition, including globalization, technological change, declining unionization, heightened product market competition, and the rise of finance. Each of these factors likely has played a significant role in the shift from a predominately organizationally oriented system of employment to a market-based one. Yet despite these changing market and institutional forces, we still observe important and significant variation among firms in their employment practices and strategies.

For example, Costco has long been recognized as a “high road” employer that pays above market wages, offers good benefits, and provides workers opportunities for advancement. Despite these significant labor investments, from 2007 to the end of 2016, Costco’s stock price increased over 200%, far outpacing the overall growth of the S&P 500 (58%) and that of competitors like Walmart (45%) and Target (26%), which is known to pay workers low wages and offer relatively meager employee benefits. Of course, this is just one example, and there are a number of reasons why these firms’ performance varied during this period. But research shows that firms that pay workers higher wages, provide better benefits, and offer predictable working hours attract workers who are more productive and more committed to their employers. And improved worker productivity and lower turnover frequently more than offsets these firms’ higher labor rates.

Furthermore, research has found that whether or not technology is “skill biasing” — whether it mostly benefits high-skilled workers — depends in large part on how it is implemented and used by firms. Take, for example, computer-aided design software, which has greatly transformed the organization of work in many industries. Firms varied in the extent to which frontline operators were responsible for programming these machines, versus engineers maintaining control. There was also variation in whether these capital investments led to workforce reductions. Thus, when confronted with the same market constraints and opportunities, individual firms frequently make different choices about how best to organize work and reward their employees.

It is clear that most corporate executives face a daunting set of challenges in dealing with the pressures of globalization, technological change, heightened competition, and financial performance targets. However, the examples above highlight the fact that, when facing a similar set of conditions, corporate executives often come to different conclusions about the best way to organize work at their firms. In particular, they make very different decisions about whether to utilize a more organizational or a more market-oriented system of employment. In other words, even given the pressure CEOs are under, there is room for them to do more or less for their workers.

And although I support the idea that executives maintain some discretion, it stands to reason that as a society we may be able to provide a helpful nudge to these executives so that they are incentivized to organize work differently and in ways that may reduce wage inequality.

Presently, many U.S. public policies do little to incentivize firms to take a longer-term view of their workforce. What if we changed some of those incentives? As my colleague Peter Cappelli recently argued, automation technologies are profitable, in part, because they are considered an asset on a firm’s balance sheet that can be depreciated. Could we treat workforce training and other investments in employee skill and well-being similarly? Might executives be more willing to make such investments if they received more-favorable treatment in our accounting and taxation policy?

Additionally, there have been a number of proposals to curb the detrimental impact of short-term decision making on corporate strategy. For example, lowering capital gains taxes for longer-term shareholders or providing longer-term shareholders with greater voting rights, an initiative that has generated interest in Europe, might encourage equity holders to take a longer-view of corporate strategy. In fact, my colleague Brian Bushee has shown that firms engage in longer-term strategies when their equity is owned by institutional investors with a longer-term orientation. Corporate boards could also change the compensation structure of CEOs and other executives to reward longer-term performance (e.g., three to five years). Requiring CEOs to hold onto a significant proportion of their exercised stock options for longer durations might motivate these individuals to take a longer-term view of firm performance.

With incentives to invest in their firm’s labor force and absent pressures to cut costs to make quarterly earnings targets, corporate executives might be motivated to engage in longer-term strategies. These changes may provide a powerful incentive for corporate organizations to forge longer-term commitments with their workers. These practices may be particularly beneficial to low- and middle-wage workers, who have been hurt the most by the shift from an organizationally oriented employment system to a market-oriented one.

We know that much of the rise in wage inequality is due to growth of the highest earners, and these proposals are not going to directly tackle that concern. But as Bloom mentioned in his article, boosting incomes for low- and middle-wage workers and creating more equality between the 10th and 80th percentiles of wage earners would clearly be a benefit to society, while also making inroads toward lowering wage inequality.

What I have suggested here is just a sample of the types of proposals that could potentially motivate firms to take a longer-term, organizational approach to their employment relations. But if we believe that market forces alone do not determine firm strategy, and if we believe that executive decision makers have some discretion to make choices about things like whom to hire (versus contract), and how much to pay, then we can design policies and incentives that encourage executives to use practices that will provide greater benefits to workers and thereby reduce wage inequality. This is undoubtedly easier said than done, but the consequences of inaction seemingly warrant the effort.

Is It Too Late for Sears to Save Itself?

March 30, 2017 - 8:05am

Sears Holdings has indicated that “substantial doubt” exists about its ability to continue operations. While the announcement, made in the company’s recent annual report, seems to be a white flag of surrender, it could just be a yellow warning light. Analysts say that Sears may still have time to stage a turnaround. The company says it is taking action to ensure its future viability. So what should Sears do now? Its number one priority should be to protect and restore its brand.

Some of the company’s moves in recent years have generated cash and kept the business afloat at the long-term expense of its brand. Strong brands like Lands’ End gave customers a reason to shop at Sears and cast a positive halo on the Sears brand. Selling off those brands may have had short-term benefits, but it eroded the brand in the long term. The company also sold off many of its best store locations, which means brand perceptions are now being shaped only by the customer experiences in older, shabbier, and poorly located stores.

Sears needs to reverse this trend. Its brand still has clout; its name is as steeped in American culture as Coke and Levi’s. Once a lifeline for customers in rural areas with few shopping options, Sears has played an important role in many people’s lives. The company can tap into this goodwill if it insulates its brand from further hits and invests in restoring it to prominence.

It should start with its internal culture. CEO Eddie Lampert’s alienating management style and lack of retail prowess has prompted a mass exodus of executives and has left the company with few leaders who really care about the brand. At the store level, the company has fired employees, cut worker hours, and failed to make investments to improve the store environment. As a result, store employees are bitter, embarrassed, and unmotivated.

The company must restore brand pride, alignment, and engagement throughout its ranks. Alan Mulally led the turnaround at Ford by restoring a “One Ford” mentality throughout his company and championing pride in the Ford name. Lampert and his executive team should adopt a similar effort. It would encourage managers to make strategic decisions that build the Sears brand and frontline employees to provide exceptional customer service and restore customers’ esteem of the brand.

Sears should then turn its attention to improving the customer experience. Perhaps most at risk is vendor support. Suppliers that are already under tremendous pressure from the changing demands of the retail industry are probably especially leery of extending themselves with Sears. As vendors start shipping smaller quantities and being less responsive, the inventory and selection at Sears stores is going to get even worse than it already is. To ensure that a strong product assortment can draw people into its stores, Sears should work on buttressing relationships with the vendors of its top brands. Of course, there are many other aspects of the customer experience that need to improve, but Sears would be wise to start with what made its brand great in the first place: a great selection of products.

Sears can take a cue from Marvel. After it filed for bankruptcy, back in 1996, Marvel leveraged its portfolio of popular brands, including Captain America and Iron Man, to stage a comeback. By tapping into the fan bases of individual character brands and producing movies that used a tried-and-true formula of superheroes being pitted against evil forces while dealing with real-world issues, the company was able to restore the Marvel brand to popularity. In the same way, Sears should draw on the equity of product brands such as Kenmore Appliances, DieHard batteries, and Sesame Street products. The company should also void the recent deal to sell off the Craftsman brand, if possible. Sears needs to promote these brands more strongly than ever before, and draft off the demand and appeal they enjoy.

Most important, to restore its brand value and power, Sears needs to make some sort of big, bold, visible move. It can’t simply tweak a few things and set its sights on surviving. That’s what happened at RadioShack. After that company declared bankruptcy, its new owners promised to reinvigorate the brand. It signed up hip celebrities as endorsers, closed some stores, and adjusted its assortment strategy. But to most people, RadioShack didn’t seem all that different.

Sears must make a substantive change that not only gets people’s attention but also dramatically improves the customer experience. Consider Delta Air Lines’s merger with Northwest Airlines. After declaring bankruptcy, Delta was looking for a way to emerge as a leader in the industry — to get ahead, not just level the playing field. So it made what was a foresighted decision at the time and significantly expanded its routes by merging with another airline. CEO Richard Anderson has described the move as a deliberate choice to break away from the fray: “Our company decided that we would be different.”

Lampert and his colleagues must make a similarly calculated and courageous move, whether that’s to merge with another retailer, integrate vertically, change the Sears store format, slash its apparel offering, or something else. Whatever it is, the objective should be to strengthen the Sears brand (i.e., don’t acquire another retailer and operate it separately) and to create more value for its core customers.

It might be too late to save Sears. The company has drained the brand of so much equity that it’s difficult to envision a recovery. But if the company remains committed to reviving the business, its brand should be the top priority.

Figuring Out Which Companies and Industries Will Be Most Damaged by Brexit

March 29, 2017 - 3:51pm

Now that Theresa May, the British prime minister, has announced that the UK will invoke Article 50, triggering a two-year countdown to withdrawal from the European Union, some things have become clearer. Though it is hard to predict how a bargaining game involving strong emotions as well as economics will play out, we can offer some conjectures about what will happen.

These conjectures are mostly based on what I have called the law of distance — the observation that the interactions between two countries are proportional to their sizes (GDPs) and inversely proportional to the distance between them. Distance, in this sense, is not just physical distance but also cultural distance (e.g., whether two countries have different/similar official languages) and administrative distance (e.g., the absence or presence of a historical colony-colonizer link between the two). The law of distance has been associated with some of the most robust results in international economics, which is why it underpinned the UK Treasury’s generally well-regarded analysis, a year ago, of the long-term consequences of Brexit.

The UK’s Natural Markets

First, think of the claim, made repeatedly by the UKIP and other pro-Brexiteers: that the UK’s “real friends” (in Nigel Farage’s words) are better targets for British commercial policy than the EU. Or, as UKIP’s spokesman for the Commonwealth poetically put it, “Outside the EU, the world is our oyster, and the Commonwealth remains that precious pearl within.”

How realistic is the assertion that the UK might be able to gain more from a free hand in negotiating with the Commonwealth — former British Empire states such as Canada, Australia, India, and South Africa — than it might lose in terms of access to the EU? Note, first of all, that the GDP of the rest of the Commonwealth is only 55% as large as that of the rest of the EU — a difference that seems to disfavor the assertion — as captured in the circle on the left in the graphic below. The middle circle shows this adjusted for the effect of physical distance, since the economic mass of the EU is 8.4 times closer than the Commonwealth. The blue circle in this part of the graphic uses a more generous estimate of distance-sensitivity, while the dashed line uses a more conservative one (drawn from hundreds of studies of merchandise exports). Using that more conservative measure reduces the estimated market potential for the Commonwealth versus the EU even further, to less than 2%.

Of course, we also have to account for the cultural and administrative respects in which the Commonwealth might be intrinsically closer to the UK and the EU. The UK has a common official language (English) with 91% of the rest of the Commonwealth (on a GDP-weighted basis) and a colony-colonizer link with 99%, versus only 2% on both factors with the rest of the EU. Based on my estimates that a common language normally boosts trade by 2.2x and that a colony-colonizer link has a multiplier effect of 2.5x, the joint effect of the two (5.5x) in boosting market potential in the Commonwealth is substantial, as the blue circle on the right-hand side of the figure above shows. Even so, the predicted market opportunity in the rest of the EU remains several times larger. (Again, the dashed line is the more conservative estimate.)

The joint effect of a common language and colony-colonizer link would have to be much larger than in any previous study of which I am aware to reverse the conclusion of a larger natural market in the EU. Additionally, it holds well beyond the realm of merchandise trade: It also applies to services trade and by extension foreign direct investment (FDI), which are particularly important for the UK.

The snapshot nature of this analysis also skips over some of the dynamics of actually negotiating trade agreements with the 52 other countries in the Commonwealth — at a time when Britain has very few experienced trade negotiators (as of last summer, roughly 0.5 per Commonwealth country).

Will the UK on its own really have the leverage to achieve better terms with the Commonwealth countries than it currently enjoys with the EU? Consider that Britain accounts for only 16% of EU GDP. One pessimistic perspective on the hope of real friendship trumping all else is provided by the generally disappointing results of Theresa May’s visit to India last November. While the British wanted more trade and investment ties, Narendra Modi, prime minister of India, explicitly linked that to relaxation of British visa conditions for Indians intent on studying the UK. Like the EU, India has problems with British insistence on stringent controls over people inflows.

Moreover, the tenor of the relationship between the UK and the EU is not good: Compare Britons insisting that the UK could exit without paying a “brass farthing” versus the EU’s claims for £50 billion or more. Consider the combative personalities of some of the key negotiators. Add in the consideration that Brexit, even if accomplished with a maximum rather than minimum of goodwill, will hurt Britain’s trade with the EU for purely technical reasons, and it seems safe to predict that there will be a deterioration of trading relationships with Britain’s largest natural market; the only question is to what extent.

Industry Implications

Given that relatively safe prediction, the natural next question is which industries and companies are likely to be hurt the most and therefore face the greatest need to reconsider their current operating models.

In this context, what Brexit is likely to change the most is the administrative distance between the UK and its former partners in the EU. This suggests that industries with a high degree of sensitivity to administrative distance are likely to be affected the most — unless, of course, the provisions under which UK-based operations can access EU markets happen to be eased the most for them (which, at least from the perspective of EU concessions, looks implausible right now).

Note that (correlated) indicators of administrative sensitivity include industries that are subject to high levels of regulation, produce staples or “entitlement” goods or services, are large employers or suppliers to the government, include national champions, are construed as vital to national security, control natural resources, or require large, irreversible, geographically specific investments. No wonder financial services firms with extensive cross-border operations, for whom the EU “financial passport” is very important, are rethinking the extent to which their European personnel are based in the UK or on the continent (e.g., Goldman Sachs’ announcement, earlier this week, that it would be will shifting jobs away from London while adding several hundred in Europe—during just the first stage of Brexit).

Other markers of industry sensitivity to Brexit include high levels of scale economies that need to be amortized over (international) regional markets, rather than just by national markets (BMW’s discussions of whether to move the manufacture of the Mini outside the UK despite the very British image of that brand); high levels of trade-dependence on either the export or the import side (the EU is an even more important source for the UK’s imports than it is a destination for the UK’s exports); and belonging to the service sector (a sector of particular importance to Britain but one in which overcoming barriers often requires investment treaties as well as trade agreements).

Company Implications

At the company level, there are some additional attributes that seem likely to be associated with high degrees of exposure to Brexit. Companies with particularly high levels of export or import-dependency in relation to their competitors are likely to be hardest hit (think, in the U.S. context, of the asymmetric responses of New Balance and Nike to Trump’s scrapping of TPP — the former had stayed focused on local manufacture whereas the latter had built up international supply chains). Small firms that aren’t yet exporters or importers are also likely to be hurt more, at least in terms of a narrowing of their opportunity sets: Such firms typically look nearby for their first international transactions. And even where products or services aren’t flowing across borders, companies that use Britain, particularly London, as their regional headquarters for serving all of Europe (e.g., many U.S. multinationals) are likely to need to reconsider basing that role there — as may, for that matter, companies that use London as their global headquarters, especially if most of their business is outside the UK (e.g., Vodafone, which derives some 85% of its revenues from outside the UK, according to Bloomberg).

The British companies that may have private reasons to cheer are those focused on the UK that are trying to hold off regional or even global competitors at home. Which is a reminder of the importance of granularity in forming such assessments — not all companies within the same industry, let alone all industries, will be affected in the same way. Similarly, in terms of what is to be done, once again, the appropriate response will be predicated on the specifics of a company’s situation.

But given the separate tracks down which the UK and the EU seem to be moving, there is more cause than not to consider making changes to your strategy.

Trump’s Climate Rollback Will Hurt the Economy, Not Help It

March 29, 2017 - 2:35pm

Yesterday, President Trump signed an executive order to dismantle President Obama’s climate legacy and policies. The White House claims that these actions will help the economy in general, and coal workers in particular.

It’s wrong.

This administration has utterly bought into the false narrative that the economy and the environment are at odds. As a senior spokesperson said, “I think the president has been very clear that he is not going to pursue climate change policies that put the U.S. economy at risk. It is very simple.”

Yes, it is simple. These backward-looking policies will damage our economy, place us well behind other major economies, and put the planet at risk (a planet, by the way, that supports the economy and society, not the other way around). The president and his team seem to hold outdated views that tackling climate change is economically damaging, or that we can stop progress in energy technologies and markets. It’s absurd, and factually wrong, for many reasons. Here are three big ones.

First, tackling climate change will create far more jobs and economic growth than looking back to fossil fuels. There are already a lot more people working in the clean economy than in fossil fuels, with renewable energy jobs outnumbering coal and gas jobs 5 to 1 in the U.S. (where there are only 66,000 coal miners). A recent report from Advanced Energy Economy, a national association of businesses advocating for a clean energy system, estimates that the clean economy — which they define broadly to include not just electricity generation but also energy and water efficiency, alternative fuels, and clean transportation — is a $1.4 trillion global market. The U.S. market alone is $200 billion, on par with the pharma industry, and closing in on consumer electronics.

Second, coal is not coming back. Ever. The demise of coal, until very recently, has had little to do with policies of any kind. For example, the Clean Power Plan that Trump is trying to eliminate has not really gone into effect anyway. In reality, coal is in a death spiral because of the economics of both capital and labor. On the labor side, the coal industry has gotten very good at automating and eliminating jobs. On the capital front, the energy companies and the banks know that coal is a bad bet. Here’s Nicholas Akins, the CEO of the $16 billion utility American Electric Power (AEP), back in December 2016: “The industry is moving forward with cleaner energy. We will not be building large coal facilities. We’re not stopping what we’re doing based on the new administration. We need to make long-term capital decisions.”

So the only discussion we should be having about miners now is how to help them as the world quickly transitions away from coal. It would be nice if our politicians prioritized job retraining, education, health benefits, pensions, and relocation services instead of making empty promises to bring back jobs that even coal bosses don’t think are realistic.

Third, unchecked climate change will be incredibly expensive and disruptive. This should be blindingly obvious, but the economy is not at risk from excessive regulations on fossil fuels. No, the real systemic risk comes from climate change. The costs of extreme weather, like floods, droughts, and superstorms, include both money and lives. There are countless reports — from sources including the U.S. government, environmental groups, the World Bank, Citi, and former U.S. treasury secretaries and Michael Bloomberg — calculating the trillions of property and economic value at risk.

But, apparently, this administration is not aware of any of these economic estimates, which is terrifyingly ignorant — especially given the entire supposed basis for this major policy action. Or else those at the top just don’t care, as long as the story they’re telling plays well and gets votes.

Policy Can’t Beat Economics

But there’s some good news: Companies won’t stop reducing carbon. As important and powerful as government policies are, they can’t beat economics. Companies make most decisions based on where they get the best returns. AEP is not alone in prioritizing clean energy. Hundreds of the world’s largest companies have committed to moving toward 100% renewable energy and setting science-based carbon goals (which mean making dramatic cuts in emissions over the next 30 years). Clean energy is just too cheap now, creating enormous opportunities for entrepreneurs and big business alike. In fact, smart energy strategy should now be a C-suite priority.

Companies are too far along to go back. I’ve been asking company execs for months whether they think their sustainability efforts in general, or their energy work in particular, will slow down. So far, the answer is no. Sure, we’re seeing some short-sightedness and weakness in resolve, as business leaders get giddy at the prospect of tax cuts and deregulation; auto companies rushing to weaken fuel efficiency standards stands out as a sad example. But by and large, the sustainability train has left the station. Given the improvement in clean technologies and rising expectations from customers and employees, going clean is good for business.

But the other thing I’ve heard loud and clear from companies is that leaders want to lay low and avoid conflict. Thus, unfortunately, we may not see many CEOs take a public stance against the latest anti-climate political moves. It seems they’re afraid of being attacked in public by the Tweeter-in-chief. So even though a surprising number of companies have been willing to take a stand on immigration, LGBT rights, or other social issues, they’ve been pretty quiet on climate policy.

I hope this relative silence ends soon. This administration’s attack on pro-climate policies is an attack on our economy and our well-being. It’s slowing progress toward a more profitable, cleaner, and healthier future, and, yes, putting our economy at risk.

Business leaders and citizens should not stand for it.

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