Investile Dysfunction Readers. I'm happy to announce I'm moving my blog to a new address. The old blog entries will remain here as will the comments. Of course, all of these have been moved to the new site as well.
The new blog address is here and can be found at http://brilliont.com/blogs/id/.
So I recently spoke at a conference in Amsterdam where I heard an executive from Air France, (Marco Vd Poel), talk about their portfolio management effort. It was a refreshingly honest and well-articulated presentation. It was one of those presentations that only a practitioner can give because it was based in reality and showed the good and bad of their portfolio management efforts.
Marco had one line in his presentation that was simple, to the point and absolutely SPOT ON. I'm not sure if it's a line he came up with, but he's the first person I've heard say it so he gets the credit. He stated:
"Project Management is about doing projects right. Portfolio Management is about doing the right projects."
Now let that sink in for a second.
How money is that line, eh? It is absolutely 100,000% correct and elegantly simple. So the next logical question is why are project managers running portfolio management efforts within their organizations if it is a different skillset altogether. It's a bit like having Eliot Spitzer teach a class on abstinence. They don't go together.
Undertaking the right projects and investments is about measuring value, considering strategy, risk and financial returns, etc and optimizing the portfolio based on those inputs and factors. Plain and simple - this is not what project managers know how to do nor what they are trained/supposed to do.
Portfolio management in the corporate setting especially IT has basically evolved like this. If you have enough projects, they roll up into a program. If you have enough programs, you all of a sudden have a portfolio. Somehow having a portfolio defined this way gives you the skills to do portfolio management. Wrong.
I'm not sure when folks will realize this. When they do, it will let project managers do their job better because they won't have to do these portfolio exercises. And it will let organizations get the right people to head up their portfolio management efforts and actually get the value they can from such an effort - instead of the glorified project management that it currently is.
This is not meant to disparage project managers. I just think they're being asked to do things that they're not best-suited to do. Picking the right projects as part of a portfolio is a strategic, financial and risk discipline and very different than the skills possessed by project managers. If you are in the handful of project managers who can do it all, please don't write to tell me this. You are awesome and a rare gem. I'm talking about the average project manager who doesn't have the project management + strategy, finance, risk, etc skills.
Thoughts?
Today's Wall Street Journal had a blurb from their Business Tech Blog about Ramon Baez who has started a campaign against jargon within the company. Wow - this is a seemingly simple thing but something a lot of organizations with their own language, e.g., finance, IT, etc fail to do.
The blog posting which I've included below almost in its entirety is refreshing because of Baez's outlook.
Baez has tried to eradicate tech speak and acronyms since joining the consumer-goods giant a little over a year ago. He’s starting with the emails that the information-technology department sends out whenever it has to make changes to a system. You probably know these messages: They’re the ones that make your eyes glaze over for the three seconds it takes to find the delete button.
Baez tells the Business Technology Blog that these emails used to say things like the TFPS server will be unavailable on Saturday. “Even I don’t know what that is,” Baez says, adding that the information is useless unless it’s clear to people what a system does. When Baez sought out the source of the email, he found it was sent by the team that manages that server in India.
In order to make sure that his staff is sending out messages with information people can use, he’s brought in communications staffers to vet each outbound email. And he insists that the emails make it clear who a message is intended for, with language like “if you use this system please read on.” That way, people who don’t use it can delete the message immediately.
Baez also made sure he solved one other consequence of the dreaded email from IT: Tech staffers must coordinate maintenance schedules with the rest of the business. That way, no one will time a network upgrade for the one weekend when everybody has to work.
This last point is so incredibly key. How many times have I seen or experienced tech taking a system down because they had to with little no thought to the business needs for that system? With all of the talk of governance and the business value of IT and other rambling nonsense, it's nice to see a CIO who realizes that it can be simple things that can make a difference. And doing these basic little things can build a great deal of credibility with the rest of the organization.
Fortune's March 17 issue contains an excerpt from a book entitled The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation which is by P&G CEO, A.G. Lafley, and management consultant, Ram Charan, which has a couple of passages which are brilliont (nice, eh?). Before I share Lafley's awesome insights, it is worth looking at P&G's stock chart since he took over in 2001. So take a look at the chart below and notice the stocks dismal to pathetic performance until 2001 and then look at when Lafley took over. That is some chart, eh? So how did he do it?
Organic Growth
"We made sustainable organic growth the priority. Organic growth is less risky than acquired growth and more highly valued by investors...Adding a few points in market share can mean hundreds of millions in new revenue."
Instead of chasing inorganic growth through M&A, Lafley astutely realized that optimizing their portfolio of internal investments in product development, marketing, etc could drive significant value in a much less risky. And the price chart shows the fruits of this effort. This really is one of the best examples I've seen of the power of organic growth and the fact that it works. Managing your investments as part of a corporate portfolio really drives performance.
On Innovation
"Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources. Innovation is all about connection, so get everyone we can involved: P&Gers past and present, customers, suppliers, even competitors. The more connections, the more ideas; the more ideas, the more solutions. And because what gets measured gets managed, we established a goal of that half of new-product and technology innovations have some contribution from outside P&G - such as licensing or buying a technology, finding a partner, or making an acquisition. We are already beyond that figure, compared with 15% in 2000."
I'm really beginning to like this Lafley guy. On the topic of innovation, he hits on so many key elements of innovation and the best part he actually did this in his organization - didn't theorize or pontificate on it. Let's dissect his most brilliont points.
I hope to meet Mr. Lafley at some point. In the meantime, I'll settle for his book. For more info on the book, check out it's Amazon listing by clicking here.
We launched a site today called Investile Dysfunction which details the problems organizations face in getting their performance up. It mainly comes down to their inability to select the best projects and investments to maximize strategic and financial performance.
Investile dysfunction impairs most organization's performance. The great news, however, is that it is 100% treatable and that treatment options are 100% safe. We're glad to launch on April 1. Because it is time the foolishness by which organizations manage their resource allocation needs to be stopped.
You can end Investile Dysfunction. Help is available.
I've been watching the Boeing Dreamliner saga for the last many months and am amazed at how such a big project in terms of its scale, strategic importance, and financial implications can go so terribly of course. The delays hurt sales prospects and in the short term, they hurt share price performance as The Street's skepticism of Boeing increases. It is 9 months late right now and most folks expect that Boeing will delay it further for a variety of technical and non-technical reasons. A brief perspective from TheStreet.com is given for those interested.
But alas, Boeing is not alone with its multi year project debacle. It is very common. Surprisingly and frighteningly common. R&D, product development, IT, infrastructure, etc projects are all prone to significant and often spectacular project failures. Failure is often on multiple dimensions with projects coming in over budget, under scope and over time.
And there are plenty of helpful tips out there on how to prevent project failure. Various books, websites, conferences, etc. And yet, all these tips and tricks and "best practices" make for interesting reading but still project failure continues at alarming rates. This results in a great business for consultants and other ecosystem players who profess to have expertise in project management disciplines.
But what is most unnerving or perhaps a better word is perplexing are the numerous project management certifications and practices that are out there - PMP, PMBOK, PRINCE2, etc. Here is why I'm perplexed, and I'd welcome comments from project managers out there or someone who can make sense of this.
So what I'm not arguing is that project management is not useful. Please don't send me hate mail as that is not my intention. Doing projects right is obviously important. What I am questioning, however, is the value of the standards that are established from these "accreditation bodies" if projects continue to fail as they do. The value seems marginal at best. A certification is only valuable if it helps you do the thing you are accredited to do better, right? Someone enlighten me if I'm way off the mark.
Before leaving American Express recently, I'd established and led the company's inaugural Chairman's Innovation Fund. I was glad to recently see that Fortune Magazine recognized American Express as the most innovative company in the Financial Services industry. The company's CEO, Ken Chenault, spoke about the organization's innovation efforts and the Chairmans's Innovation Fund in particular.
"A difficult economic environment argues for the need to innovate more, not pull back," says American Express CEO Ken Chenault. A few months ago he established a $50 million innovation fund to finance "employees' ideas for how to transform our business long term. We want great ideas to come from all over the company, not just the chain of command," Chenault says. AmEx (AXP, Fortune 500) (No. 13) has a venerable history of making risky moves during downturns. Back in 1958, despite a slumping economy, the company launched a little thing called the American Express card. "When I first came here, I saw a copy of a letter from an analyst that earnestly explained to our then chairman why the card was a terrible idea and how it would cannibalize our traveler's check business," says Chenault. "It was an impeccably logical argument - that couldn't have been more wrong."
We talk about strategy a lot in the business world. What is our strategy? How do we become more strategic? What are our competitors' strategies? When we don't know how to justify doing a project, we say it's strategic.
But a Harvard Business Review piece in their April 2008 journal entitled "Can You Say What Your Strategy Is?" rightfully asserts what we probably already knew. Many people can't summarize their company's strategy in 35 words or less. And that even if someone can, their colleagues may not put it in the same way.
The article states, "It's a dirty little secret: Most executives cannot articulat the objective, scope, and advantage of their business in a simple statement. If they can't, neither can anyone else."
This is a big problem. Most firms offer up nonsense like that given in the article of "maximizing shareholder wealth by exceeding customer expectations for _____ [insert product or service here] and providing opportunities for our employees to lead fulfilling lives while respecting the environment and the communities in which we operate."
This is not a strategic objective. I'm not sure what it is except a waste of space to be honest because I'm not sure as an employee or manager I know what I'm supposed to do with this or how this might inspire me in any small way.
So the strategy as the authors rightfully assert is having an objective, scope and an advantage. I'd encourage you to read the article as it has some interesting examples. The area where I think organizations should spend even more time once they have a strategy is on the resource allocation that accompanies this strategy. Ultimately, if your strategy says one thing but your allocation of resources doesn't match with that, your strategy is again just words on paper. Resource allocation drives strategy. This is why corporate portfolio management of the resource allocation process is so vital to executing strategy and realizing financial objectives.
In January, former chief executive of Bear Sterns, was worth nearly $1 BILLION when Bear Shares hit an all-time high of $171.51. He recently sold his entire stake in the investment bank for a little more than $61 million.
$61 million ain't anything to sneeze at, but that's a huge drop. I'm not sure what it says. Was it hubris that made him think it would go up even more? Or even a greater arrogance that made him not sell on the way down cuz he thought it might rebound? Or was it just cluelessness? When the top dog doesn't know how bad things are, I do feel bad for Bear employees who probably had little to no clue things were so dire and then saw their nest eggs decimated. And I'm sure the vast majority were not falling back from billions to millions.
CFO Magazine's March 2008 issue has an article titled "Thriller: The Federal Government's Annual Report is Not for the Faint of Heart" which paints a fairly frightening story of our government's fiscal condition based on its issuance of a 2007 Annual Report. And the government seems to know this as evidenced by David M. Walker's comment that "If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company's management and directors needed a major shake-up." What's notable is that Walker is the Comptroller general of the United States and head of the U.S. Government Accountability Office (GAO).
The government ran a budget deficit of a mere $163 billion which is 1.2% of GDP. This is supposedly good news as it is 1/2 of the forty-year average which stands at 2.4% of GDP. But let's not let forty-year averages make us feel good. The story gets scarier as the article details. The most alarming thing is that "For the 11th year in a row - that is, for each year the federal government has prepared consolidated financial statements and submitted them for an audit - the GAO could not express an opinion on the government's books, primarily because of material weaknesses in financial reporting.""Of the 24 federal agencies that fall under the aegis of the CFO Act of 1994, 19 did not produce a clean set of books...The worst offender by far is the Department of Defense. The GAO said that the agency could not accurately account for its property, plant and equipment, which make up 69% of the government's total." Walker who seems to be a straight-talking sorta guy adds, "It seems clear that our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time." And finally, the article's author, Edward Teach, concludes by saying, "What the Financial Report of the United States Government makes crystal clear is that the growth of federal mandatory spending - now more than 62% of the total budget - is unsustainable in the long run. The same clarity about the government's discretionary spending, however, won't emerge until the Pentagon drains its financial-management swamp. Who knows what horrors lurk therein?" So here are some thoughts based on this pathetic situation:
When I talk about portfolio management, I'm not talking about the software and other consultant elixirs out there which are mostly or almost all bunk. I'm talking about portfolio management in the context of an overhaul of resource allocation practices with the aim of creating a discipline to consistently and continually making better decision-making. It is not an easy 6 month journey where some simplistic scoring framework or software panacea will save the day but one which will require many if not all of the following:
While much of the above may seem to be a pipedream, I'm encouraged by discussion about portfolio management which is going on with the public sector at least in small parts. If the conversation veers towards better decision-making as a means to optimizing resource allocation, the government may benefit over the medium- to long-term and we might all know where and why the government is doing what they do. That might be wishful thinking but maybe we'll begin to at least understand where our money is being wasted to start. Ultimately, we might actually make the spend more efficient.
I'd previously written about Aberdeen and their "paid research" model which the Wall Street Journal slammed several months ago. Now we can add HP and the Gantry Group to the list of those churning out useless research.
In this blog posting entitled, "ROI Study: Project Portfolio Management Yields Results", Michael Krigsman writes, "Project portfolio management (PPM) software is receiving growing attention from CIOs. Riding this wave, HP sponsored The Gantry Group to analyze key ROI measures for PPM software. Although the results are somewhat coupled specifically to HP PPM Center software, the research is useful to anyone studying the PPM category."
Why on earth would this research useful or believable at all? Let's explore the logic that goes into sanctioning such research with top-secret transcripts that have been uncovered by the Brilliont team of conversations between HP and the Gantry Group.
HP: Hi Gantry Group. We need you to do some research about how Project Portfolio Management yields ROI.
Gantry: Sure. We'd be happy to do that. We are known for our best-in-class, paradigm shifting, web2.0, eco-friendly rigorous research reports which are always 100% objective (wink wink)
HP: Yes we know. That is why we'd like you to do this analysis. We will pay you a great deal of money once the findings are revealed and reveal the impacts of PPM.
Gantry: We look forward to receiving the large check and you can rest assured that our findings and its potential impacts on future business will not be influenced by this at all (wink wink)
Give me a break. Are we all that dumb or do you just think we are? If anyone believes this type of research, I have some real estate in Phoenix which I've just released a research report on which confirms it will go up 20% per year indefinitely for the next 30 years. Please email me if you are interested in purchasing this property from me.
BusinessWeek's March 24, 2008 issue has an article about Comcast CEO, Brian Roberts, entitled "Deal or No Deal" and the supposed "fork in the road" that he is at. Wall Street and numerous significant stockholders are hoping and pushing for Roberts to stick to Comcast's knitting (content distribution) and not go for media mogul-dom. I'm sure investment bankers are pushing for the big sexy acquisition of a large entertainment company. As you may remember, Roberts did make an unsuccessful overture to Disney several years ago.
For once, I think the Street is really getting this right. There is no reason aside from ego or shear boredom for Roberts and Comcast to go after an acquisition especially one so outside it's core business. Every few years, the distribution vs content debate emerges with people arguing that one is more important than the other and then people rushing to buy whatever is "hot" at the time. AOL Time Warner was an attempt at this, right? Wildly successful, eh?
But the main point here is not that these deals don't work. No actually, that is the main point. M&A really doesn't work esp when trying to smash two businesses together that aren't that similar and for which the rationale for the smashing are ever-elusive "synergies". So I hope Mr. Roberts continues to focus on his 'core' business and grow that and not give into the temptation of becoming a media mogul.
The other assertion made in the article is that the cable business is a low-growth utility. Ultimately, there should be plenty of room for Comcast to develop new, innovative ways to distribute content. Pursuit of these efforts would serve to strengthen Comcast over the long-term and at considerably less risk.
If Comcast does pursue the mega-deal by acquiring a content play, does anyone want to bet it will destroy shareholder value? Any takers?
If there is any group in the corporation which seems to have a chip on its shoulder, it is IT. Marketing and finance are two others who complain a good amount as well, but if there was an Olympic medal given for complaining, the gold would seem to goto IT over any other functional group.
Common complaints include:
The list of complaints is a mile long. And the worst part is that the popular media seems to reinforce these beliefs constantly. The most recent example comes from Alan Cane in the March 19, 2008 Financial Times. Cane's article entitled, "It's much too early to write off the role of the CIO" opens with stories from Boots, the UK high street chemist (aka pharmacy) and retailer, House of Fraser, which "did away with the position of chief information officer, a move which heightened speculation that this animal, only recently evolved from less exalted creatures, was on the way to becoming an endangered species." Per Cane, the "apparent logic behind their decision was that the company's computer systems could be managed perfectly satisfactorily by a data processing specialist. The job of aligning IT strategy with the objective of the business would fall to the chief financial officer."
So I don't want to argue whether what Boots and the House of Fraser did was appropriate as that is not the point. I'll just say that I think it is quite a bad idea.
The more alarming point is that Cane seems to extrapolate the removal of CIOs from these 2 organizations as some sort of trend which it really is not. Who is arguing for the end of the CIO? Is this a common trend? Cane then goes onto talk about the history of CIOs, assert the competence of most of them and closes with the advice that CIOs should "concentrate on finding ways to use technology to expedite business change appropriate to today's trading environment." I have no idea what that actually means but oh well.
In any case, why is there so much conversation in the media and within IT departments of this type? Has IT never heard of the power of positive thinking. These types of constant "IT as a victim" rants serve to make the organization territorial, paranoid and probably do nothing for the morale of the people within the organization.
Anyone work for a positive IT organization that doesn't feel victimized by the "business"? I'd love to hear from you and hear what your organization has done to achieve this.
So are we in a recession? Or aren't we? Who knows? Economists have a different view, and despite a track record as good as your local weatherman, we still listen to them for some reason.
But now a whole host are coming out with their wisdom after the fact not adding much to the dialogue but somehow their "insights" get picked up by the media. The first one is Lakshman Achuthan. Achuthan is the managing director of the Economic Cycle Research Institute and feels the Fed didn't act quickly enough when it begn cutting key interest rates last fall. The economic stimulus package also came too late, he said. (article link)
"If they had done all this in the fourth quarter … we might not have had a Bear," he said in reference to investment bank Bear Stearns which collapsed last week.
"I think we'd be having a different discussion," Achuthan said.
Achuthan pointed to the end of 2007, when inventories were low, as the time to act. A boost to the economy then would have spurred consumer spending and resulted in increased productivity, he said.
"There was an opportunity that was wasted by policymakers because they didn't understand those dynamics," he told CNN.
Thanks Lakshman. Where were you about 15 months ago?
The other economist who is also crying is John Ryding of Bear Sterns economics squad. In a note issues last Thursday, Ryding and team suggest "that the failure of the Federal Reserve between 2003 and 2006 to adequately raise the federal-funds rate to a more normalized level in part contributed to the downturn the market is experiencing - and by extension, the collapse of Bear Sterns." (quote from 3/22/08 Wall Street Journal)
While I understand that it must suck to be a Bear Sterns employee these days, I doubt Mr Ryding was arguing too much with the Fed's actions when money was cheap and Bear Sterns stock price was above $100.
Being a Monday morning quarterback sure is easy, ain't it?
So everyone knows that Al Gore invented the Internet, right? Well, if you didn't know that, now you know.
But not to be outdone, AOL wants you to know they're the trailblazing pioneers in another technology movement. With their recent acquisition of Bebo, a social networking site, AOL is stepping into the latest web2.0, paradigm shifting, synergistic space. But don't think they are new to the space. AOL chief Randy Falco states, "Social networking was really invented here at AOL. We let it get away from us." So now you know who to thank for the countless hours you've spent on Facebook, LinkedIn, MySpace or Friendster (for those who remember this has been).
It just got away from them. I like that. Thanks for social networking AOL. We owe you.
Time Magazine's March 10, 2008 issue had an article about the Presidential Race and whether experience or expertise drives performance. The article had some interesting findings which are applicable to the business world especially given the number of experts that are out there professing their wisdom on some particular topic. If you're not sure where to find business 'experts', turn on CNBC, attend a conference or look for consultants who maybe sitting in your building now selling you their 'expertise'.
The main findings revealed in the article were as follows:
"Experts tend to be good at their particular talent, but when somthing unpredictable happens - something that changes the rules of the game they usually play - they're little better than the rest of us."
Implication - When an expert is offering up some one-dimensional solution for some intractable organizational problem, see how they'll react to a curveball. One-dimensional solutions don't work for multi-dimensional problems.
"Primary finding is that rather than mere experience or even raw talent, it is dedicated, slogging, generally solitary exertion...that leads to first-rate performance. And it should never get easier; if it does, you are coasting, not improving. Ericcson (author's study) calls this exertion 'deliberate practice,' by which he means the kind of practice we hate, the kind that leads to failure and hair-pulling and fist-pounding."
Implication - If an expert is selling you something they've never practiced, built, etc, their expertise is dubious at best or even on non-existent. Sitting in a room and looking at numbers and coming up with frameworks is easy compared to actually practicing something in reality.
"The number of years of experience in a domain is a poor predictor of attained performance." - Anders Ericsoon, co-editor, The Cambridge Handbook of Expertise and Expert Performance
Implication - If someone has been trying to solve the same problem for many many years, that doesn't mean they're experts. It can often mean they're clueless or selling snakeoil. Don't mistake years for wisdom or expertise. (Note: The clueless comment doesn't apply to scientific research generally, but I'd say is often applicable to the business consultants out there who continue to pitch the same solution, dressed differently, for many years with no real improvement in client performance.)
Remember to test the experts. See that they've practiced what they preach, their solutions work even if a curveball is introduced and don't think that someone who has been coming up with 'solutions' to the same problem for many years is an expert. You're interested in progress they've made - not their activity.
An article that appeared on Next Generation Pharmaceuticals cited my efforts at American Express while leading their corporate portfolio management (Investment Optimization) effort. The article goes on to talk about how what we did at AmEx would be leverageable and should be strived for in a pharmaceutical organization. Check it out by clicking here.
Given the vast amounts of unproductive complexity (UC) that resides within organizations, it is amazing how prone we are to believing silver-bullet strategies will transform the company and miraculously grow revenues, shareholder returns, profits, customer and employee satisfaction.
When I talk about unproductive complexity, I'm talking about the absurd matrixed organization structures, transfer pricing issues, overly-detailed budget processes, steering committees, infighting due to silos, bizarre short-term oriented incentive structures and other ridiculous processes and practices organizations adopt. Managers would have you believe that this complexity is an unfortunate consequence of being big and global or multinational, and to some extent, that is true. But unproductive complexity is often a result of territorial and suboptimal behavior. It's end result is slow and often poor decision-making. Unproductive complexity is the enemy of innovation. It is good, however, at creating job security for a host of mediocre and incompetent people who can sneak by while they shuffle papers from left to right and churn out PowerPoint presentations and Excel spreadsheets. And given their accomplices in the leadership ranks, this activity over accomplishment method becomes acceptable. If you want to change organizational performance, focus on stamping out unproductive complexity. This should be the focus on reengineering efforts - not knee jerk cost cutting and layoffs.
So with that rant about unproductive complexity out of the way, let me get back to the subject I wanted cover. Given this UC, it perhaps makes sense that leaders are drawn to consultant, software, academic elixirs that are simple. With all the day to day b.s. they have to put up with, it's probably comforting to think that if they just do "this one great thing", they'll have changed company performance and arrived. There is probably some psychological basis so I'll just assume that there is some school of psychology that says "when people are overwhelmed, they take comfort in something that doesn't overwhelm them."
And as a result, consultants, academics and many software vendors who've realized this bring elixirs and other alchemy-in-a-box solutions to management and with great success, they sell them and make lots of money. In fact, entire industries emerge around some of these practices. This enables the leaders to not think too hard for a bit because the solution is just right in front of them. It also often serves the dual purpose of making the leader seem bold, visionary, strategic, etc. These are all nice appelations that we like.
Here are some of my favorite elixirs that appear to be hot these days. Some actually have value but given everyone is hanging out their shingle and professing expertise in many of these areas, I worry that organizations will end up with a whole lot of nothing after investing in these efforts with these dubious experts.
Here is my list which I hope to revisit over time and get input on. The top elixirs, hot topics, etc are: business intelligence, IT portfolio management, innovation (always hot), corporate social responsibility, anything green, web2.0, social networking.
I read a quote recently in a business book that I wanted to share: "Life is like a dogsled team / If you ain't the lead dog, the scenery never changes."
Basically, being a follower sucks. There is no such thing as a world-class follower. Who remembers the loser in the last 5 Super Bowls? Exactly.
So with that rant out of the way, I was heartened to see new proof of the lameness of being a follower as it relates to M&A. For those who have read my blog before, you know my relatively low opinion of M&A. It is a great vehicle to destroy shareholder value, get bankers rich and feed the ego of some wanting-to-be-visionary management person or team.
The February 26, 2008 New York Times had an interesting article entitled "Mergers in a Time of Bears" which generally affirms my distaste for M&A and fully proves my stance on followership.
Excerpted portions of the article are below:
"Most mergers fail.
If that's not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it's true. Harvard, too. Booz Allen Hamilton, KPMG, A.T. Kearney - the list goes on. If a deal enriches an acquirers' shareholders, the statistics say, it is probably an accident.
But a new study puts a twist on the conventional wisdom. It's not that all deals fail. It's just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It's the rest that fall flat.
Deals struck in the first 15% of a consolidation wave tend to do well, at least as measured by the acquirer's share performance against that of the broad market. The duds come later, when copycats jump on the bandwagon. Even in the merger game, there is a first-mover advantage."
Do we need more proof that followership is not the way to go. Yes, being the first requires guts and a certain risk tolerance in any endeavor including M&A, but why would you buy when the best targets are taken and the remaining ones are being valued higher because of a perceived supply-demand imbalance? If you think M&A is the way to go (I'd advise against this), at least ensure you're not following the lead of others. Be the best practice - don't follow it.
The one thing that finance and IT organizations constantly are complaining and moaning about is their inability to focus on strategy or become strategic. These aspirations are never really well articulated but being strategic or better "a partner to the business" seems to have become the rage so everyone is constantly pursuing this. It's not a bad thing, but it doesn't seem everyone understands why they're doing this or how to do it.
And in line with this, CFO Magazine ran an article entitled "Are We Strategic Yet?" which describes a study by our friends at McKinsey which found that 72% of new CFOs wanted to spend time on corporate strategy and 45% on M&A/business development but instead spent a lot of time on FP&A/reporting/performance management (56%) and accounting/audit/compliance (42%). Typically, I'd be skeptical of research like this because a strategy consulting firm, McKinsey, issued it so it would seem a bit self-serving. But I speak at numerous conferences and "how do we become a more strategic partner?" is invariably a topic
For those who read CFO Magazine, it is customary they run an article describing this issue at least 2 or 3 times a year. And this is not their fault. It's just that CFOs and finance organizations continually complain about this but seem to do little to tackle the problem. They seem to be afflicted with the disease that Rose Macaulay nicely articulated when she stated,
"It is a common delusion that you make things better by talking about them."
So what seems to be the problem?
If the finance organization wants to be strategic, at least in part, they should focus on utilizing the information they have to impact resource allocation decisions. To see an article discussing how to do this (and stop whining about it), please click here.
As reported in Entrepreneur Magazine, a 2007 report by Group and Organization Management found that "women have a positive stock effect on a firm's short-term performance, three year stock price growth and growth in earnings per share."
Now you know.
I'm always amazed and perplexed by companies who somehow believe that they can follow their way to glory. Basically, they seem content to follow "best practices" instead of becoming the "best practice". But as everyone has probably realized, there is no such thing as a world class follower, and if everyone is following the same best practice, isn't everyone just in a race to keep up with each other?
And that is why I find clothing retailer Zara so refreshing. They pioneered "fast fashion" which essentially lets them get the newest, latest fashions to stores more frequently. To do this, they made changes to how they manufactured, handled their supply chain, marketed their products, etc. It was a multi-dimensional approach which worked and made Zara the best practice. They didn't listen to the conventional wisdom and did things their own way.
As a result of their success, others followed their established best practice. And as the Wall Street Journal reported stated, "Inditex (the parent company of Zara) is responding to a predicament shared by other companies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. (Please see related story on page B9.) Low-cost carrier Southwest Airlines Co. is making big changes to fend off rivals that have copied its efficient operating model. Inventory-control methods at Wal-Mart Stores Inc. are being mimicked around the world, and Google Inc. is updating its search engine to keep users loyal."
So now that others are catching up, Zara figured it was time to push ahead again (instead of resting). And there efforts come at a time of economic uncertainty where many organizations are worried about their performance and cutting costs instead of innovating. Zara continues to forge ahead with efforts as reported in the Journal including:
"In another move to cut costs, Mr. Isla [Inditex CEO] installed software in store computers to schedule staff based on sales volume at different times. As a result, more salespeople work at peak times such as lunchtime or the early evening. Inditex says the more flexible schedules shaved 2% off the hours staff work."
Zara's ability to zig when everyone else zags is commendable and counter to what most organizations do. And they don't just innovate hoping for one large intervention which will save the day. Instead, they make small and large innovations to constantly improve their business.
If you wake up in the morning to work for an organization that aims to be the best follower the world has ever seen, continue to follow the supposed best practices. For the rest, Zara's efforts to innovate and willingness to take risks, big and small, may be worth closer examination.
File this posting in the irreverent file but thought I'd share because this is great. WSJ's money blog had a great post called "Great Scott! A New GE Metric" which talked about a great 'study' by Morgan Stanley stock analysts where they noted a correlation between CEO Jeff Immelt's use of the word 'great' or 'greater' and company performance. Dubbed the greatometer, they found that as the "use of 'greatness' rises during the company's conference calls, so does GE stock". How great is that? I know - it's too great.
To give you a sense for just how great the Greatometer is, the blog author provides some great statistics which I'd presume were provided by the great guys at Morgan Stanley.
"In the third-quarter 2002 call, Messrs. Immelt and Sherin said "great" more than 20 times. By the second quarter of 2005, the word appeared about 70 times in an hour-long call. Over that period, GE shares rose 37%, to $36.38, from $26.65.
Then, Messrs. Immelt and Sherin cut back on using "great" for a while. In the call following the third quarter of 2006, the word was uttered only 37 times. GE stock fell 10% over the period.
Following the drop came a great rebound. On Jan. 18, when GE reported its results for the fourth quarter of 2007, there were roughly 80 incidences of greatness, including the "great company," the "great quarter," the "great momentum" and the "great risk management," according to a transcript by Thomson Financial.
Shareholders were feeling great, too: GE shares traded at an average of $40.16 in the fourth quarter.
So how should investors play the greatometer in 2008? The eruption of greatness in the most recent call would seem to be a bullish sign.
"If share prices do really correlate with management optimism, then GE's one-year outlook could be looking up," says Scott Davis, Morgan Stanley's lead GE analyst."
Given the great fascination with GE and its management practices & metrics, I would also suggest that a consultant deem this a great best practice and begin marketing some sort of great offering around this.
If you've read my blog before, you know that I think M&A is generally a collosal waste of organizational resources (money or equity for the purchase + the time wasted to 'integrate' and synergize) and it is driven generally by ego and empire-building visions. It serves to enrich investment bankers and consultants for the most part.
And in my view, companies should focus on the more controllable dimensions of growth, e.g, organic growth, innovation, etc.
But if there is one thing that I am, it is fair (or at least I think so). And so an article in yesterday's Wall Street Journal entitled "Yahoo Might Long for M&A Do-Overs" was a bit misguided with its Monday Morning quarterback'ing. The column basically looked at the bad deals that Yahoo has done over time and offered it's 20/20 hindsight wisdom. Let's take a look.
This type of second-guessing is fun perhaps, but not necessarily fair or productive. Overall, you have to have a real strategy and then these deals could have done somewhat better or maybe they wouldn't have been done. The problem is that Yahoo hasn't evolved its strategy over time. Just trying to add eyeballs and buying something because its growing quickly and people think it will be worth something is not a reason to buy.
At the end of the day, if Yahoo had innovated its search platform, it would need none of these. Look at Google's profits and revenues. They're still wildly dominated by search which was Yahoo's biz model. Again, innovating and growing organically would have served them much better than their past M&A activities. This holds for most industries.
I just did a post featuring some commentary by Ram Charan in which he talked about the need to not cut back on investments in product development, marketing, innovation, etc when the economy worsens. Basically, don't sell your children as they are the future.
But nevertheless, companies invariably do this. Spend like crazy during the booms and cut back (somewhat arbitrarily and across the board) during the troughs. The latest research reports on this seem to validate this phenomenon again.
Keep an eye on those organizations that think in a contraries manner and actually spend more on R&D now. They will be positioned for good things down the road.
More generally, companies should focus on re-engineering non-customer and non-innovation oriented activities all the time so that they can keep investing in those activities which sustain and ultimately grow the franchise - R&D for example.
The February 2008 issue of Fast Company has an article entitled "Mad Scientist" about Jeong Kim who heads up Bell Labs. The article begins "Can legendary Bell Labs--and its struggling parent, Alcatel-Lucent--be saved by a "crazy risk taker" who's betting that innovation can be captured in a mathematical formula?"
The article is pretty interesting and Jeong Kim who heads up the group is undoubtedly a great innovator. He sold one of his companies (Yurie Systems) to Lucent Technologies for $1B and pocketed $500 million. Some of Kim's interesting insights & actions as the head of Bell Labs include
The use of a venture capital type approach to innovation as "Kim has grouped the Labs' more audacious research efforts under what's now called Alcatel-Lucent Ventures, or ALV. By his estimation, Bell Labs' value is in its critical mass--a lot of researchers in close proximity, sharing insights and expertise. But he also points to two earlier Bell Labs inventions: "Remember, the transistor was invented by three people, not 30,000. The laser was invented by two."
ALV is essentially a venture-capital fund for scientists within the Labs--"intrapreneurs," as business theorists sometimes call them--whose ideas might have previously ended up as stranded assets because they were too far ahead of the curve or not relevant to Alcatel-Lucent's current customers. So far, Kim says he has considered about 150 proposals, routed to him through a semi-annual companywide "call for ideas." He has green-lighted fewer than 10. Each one, in his view, has the potential to recoup six times its initial investment and expand Alcatel-Lucent's reach into entirely new businesses"
This skunk-works for innovation makes a lot of sense. And several interesting ideas are emerging from these efforts which the article details including a project called Evros which unfortunately has now been labeled "OmniAccess Nonstop Laptop Guardian."
But the article is prone to a few flights of hyperbole including:
First example of hype
The author writes about Kim's theory on innovation as follows:
"He envisioned a cube. One dimension, or one axis, could represent the impact of a particular innovative effort: Would it be incremental or revolutionary? Another axis could represent the process of innovation: Would it be achieved through painstaking analytic work or through artistic inspiration? The third axis was time itself: Was the innovation driven by the market today or in the distant future? None of this would tell his audience what or when to innovate--small inventions could be as lucrative as big ones and ideas for next year as disruptive as products for five years hence. Nor would this offer a foolproof strategy for how to innovate, since hiring an eccentric genius could prove as valuable as an overcaffeinated entrepreneur. But it did suggest to Kim that, for any company, innovation required visualizing the whole future, perhaps within something like this cube, a 3-D box where every idea in your portfolio was judged and plotted in relation to its potential impact, time to market, and creative process."
So although calling it dimensions and visualizing it as a 3-D box sounds impressive, there is nothing particularly amazing about this. This is a framework that many management consultants have come up with and hawked to their clients or that strategic venture groups have come up with. It's a simple matter of setting up a x, y, and z axis and putting each dimension down and then plotting points to your heart's content. It's a slight variation on some long-held views of innovation and not innovative into itself. The idea that innovation needs to be managed as a portfolio of options is spot on but again, nothing particularly earth-shattering about that. It seems the author was a bit enamored with this framework, but again, pretty standard stuff.
Second example of hype
Kim is enamored with the idea of developing a formula to quantify innovation in a mathematical formula. The author comments:
"Lately, Kim has been thinking about the Black-Scholes model, a set of mathematical equations formulated in the 1970s that forever changed how markets operate by providing a way to price options. In simplest terms, Black-Scholes helps financial institutions reach more precise calculations of risk and reward. Kim may have developed his innovation cube as a nifty visual for a speech, but he soon realized that by plotting Bell Labs' innovative endeavors in the three-dimensional box--based, again, on impact, time to market, and process--he could understand whether his bets were sensibly distributed. Perhaps the cube could do for innovation what Black-Scholes did for the financial markets.
There's no proven model, though, for a well-balanced innovation portfolio. Is your company pursuing too many near-term projects? Is it overestimating their impact? How much should you spend on internal research as opposed to buying new technologies? Research dollars are increasingly limited, and prioritizing ideas is crucial. So Kim has asked his best scientists to address what he calls "a really, really tough problem": quantifying innovations in a mathematical formula. "It doesn't have to be perfect. But if we can create a model that is used by a lot of people as a common tool, that would be a great contribution." "
This sounds like a nice luxurious pursuit when you have a bunch of mathematicians on staff, but the portfolio view that a framework would offer is probably enough to help prioritize innovative opportunities. I see little to no prospect for a generally applicable mathematical formula for innovation coming to light, and I'm not sure this makes much sense to pursue. For innovation, the old adage that "it is better to be vaguely right than precisely wrong" seems to be pretty spot on. Management and innovation as science is inherently impossible no matter how interesting/alluring the prospect of this is. There is no way to say "Add this + this" and you'll have a great company or an innovation. I'm sure such a formula will result in a book which will sell thousands of copies because this type of mathematical elixir is what some are hoping for. But its value is dubious.
I've written numerous times about how the government needs a portfolio management discipline to evaluate all the resource requests it gets and fund those which provide the most compelling value. I've generally talked about this discipline as it relates to funding, e.g. dollars. And whenever I write a posting involving the government, I need to make it clear that I'm not taking a political/party viewpoint here. I'm merely pointing out the inefficiencies apparent and suggesting a solution.
But now it appears, that a resource allocation discipline may also be needed to help our government "leaders" manage their time. Today, numerous congressmen wasted their time and presumably taxpayer money by questioning Roger Clemens about steroids. Hmmm...
Let's think for a little bit: Iraq, sub-prime crisis, Al Qaeda, recession, steroids in baseball. Which one doesn't fit? I presume this was an opportunity for a bunch of old-timers to get on TV and get pictures with a juiced-up (or maybe not) baseball pitcher.
Since most probably know what Roger Clemens looks like, I thought I'd put a picture of the Congress idiots involved in the questioning. If you recognize any of them as your Congressperson, you know what he/she is spending their time on.
I still hope portfolio management maybe adopted for project decisions the government undertakes as the only real hope of making better decisions comes from using such a discipline. Intelligence and the ability to prioritize seems to be in short supply.
I just posted this note about IT and their role with a company's Board a few hours ago. Ade McCormack was nice enough to quickly respond to my posting in his IT Value Stack blog. To see his response, click here.
Ade McCormack's column in the February 11, 2008 Financial Times is entitled "Technology Management is a Board Issue" and argues that "a lack of technology wherewithal at the board level is, today, an indicator of poor governance."
Overall, the article had some interesting points but was generally way off-the-mark and perpetuated the "IT as a victim" theme which seems very persistent today. I'm perplexed by IT organizations and what seems like this pervasive Rodney Dangerfield-esque 'I get no respect' philosophy and attitude. This inferiority complex manifests itself repeatedly with the constant "what is the business value of IT?" efforts that IT organizations seem to undertake. These generally do little to prove the value and instead serve to make a host of consultants and software vendors who sell various elixirs a bit wealthier.
In the case of the Board, it is not their job to understand and realize the importance of IT, but in fact, it is the CIO's responsibility to create a compelling case that makes the Board prioritize and want to hear about IT. This may mean the CIO collaborates and influences the CEO or his/her business partners to raise IT discussions. Or perhaps they do it via some other means, but the main point is that it is the CIO's job to raise consciousness on this topic.
The Board should be focusing on strategic and financial considerations which means that the CEO, CFO and business/operations folks will dominate the agenda because they generally speak about these topics in the language of business, e.g., revenue, profit, cashflow, new customers, retained customers, etc.
It is not the job of the Board or the rest of the organization to understand IT, but the job of IT to talk, like other groups, in the language of business. If they do this in a compelling manner, they'll earn the requisite spot(s) on the Board agenda. Merely saying you deserve the time/attention is not enough.
I do agree that many business & Board members maybe ill-informed about technology and its implications, but again, the responsibility falls onto the CIO and his/her organization to provide appropriate education and context to get the Board interested & engaged. This may mean convincing the CEO or other senior managers of this, but as a high-ranking member of the senior team, I'd presume the CIO would have the capability to "sell" these ideas. If they cannot syndicate their ideas, the issue maybe with the CIO.
Your point about future board members being likely to have spent part of their career in the IT function maybe true because of the changing demographics within corporations, but again, this is not nor should it be requisite. A board which is financially and strategically astute and which understands that IT maybe an enabler of certain organizational priorities should be enough.
The folks at the Wall Street Journal's Business Tech Blog find jargon and babble just as absurd as me, and so they had a great post yesterday about a recent Oracle press release. It stands alone so I'll just copy the offending jargon/technobabble and the WSJ's comments below as written by Ben Worthen. The 'quote' by Torleif Nesheim is classic...too funny.
"If you are looking for a "market offering designed to simplify the lifecycle management of complex IP-based services," we've got the product for you!
That description is straight from an Oracle Corp. news release that touts...well, we still aren't sure. The release is a string of bewildering tech terms and vague verbiage. It refers to whatever it is the company is selling as an "offering" in each of
