I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

Tuesday, April 30, 2019


“A fishing crew may be organised and understood as a purely technical and economic means to a productive end, whose aim is only or overridingly to satisfy as profitably as possible some market’s demand for fish. Just as those managing its organisation aim at a high level of profits, so also the individual crew members aim at a high level of reward. Not only the skills, but also the qualities of character valued by those who manage the organisation, will be those well designed to achieve a high level of profitability. And each individual at work as a member of such a fishing crew will value those qualities of character in her or himself or in others which are apt to produce a high level of reward for her or himself. When however the level of reward is insufficiently high, then the individual whose motivations and values are of this kind will have from her or his own point of view the best of reasons for leaving this particular crew or even taking to another trade. And when the level of profitability is insufficiently high, relative to comparative returns on investment elsewhere, management will from its point of view have no good reason not to invest their money elsewhere.
“Consider by contrast a crew whose members may well have initially joined for the sake of their wage or other share of the catch, but who have acquired from the rest of the crew an understanding of and devotion to excellence in fishing and to excellence in playing one’s part as a member of such a crew. Excellence of the requisite kind is a matter of skills and qualities of character required both for the fishing and for achievement of the goods of the common life of such a crew. The dependence of each member on the qualities of character and skills of others will be accompanied by a recognition that from time to time one’s own life will be in danger and that whether one drowns or not may depend upon someone else’s courage. And the consequent concern of each member of the crew for the others, if it is to have the stamp of genuine concern, will characteristically have to extend to those for whom those others care: the members of their immediate families." (MacIntyre, 1994, pp.284-285)
Now MacIntyre is a moral philosopher, and there is no reason why he should ask the question which would concern a business economist like me: which of these crews catches more fish?
-- John Kay, Ethical Finance

In the early 1980s, Tom Peters and Robert Waterman co-authored a book called "In Search of Excellence." At the time, US products and services were generally regarded as inferior in quality to those from other countries. It was bad enough that American manufactured goods and consumer services were so poor; what really made it annoying were the tens of thousands of corporate bystanders who were unwilling or just flat-out helpless to do anything about it. That inaction in corporate America was brought home with a video of a Japanese manufacturing line worker electively inspecting the windshield wipers on finished cars on his way out of the plant after his shift was over. Needless to say, Peters and Waterman had struck a nerve.

Although In Search of Excellence presented an empirical case for a correlation between economic success and excellence in operations, their case studies didn't stand the test of time as a number of their exemplar companies suffered problems within a few years of the publication of the book. While those companies didn't necessarily underperform for operational reasons, their disappointing results did cast doubt on the causality. Still, that didn't invalidate their thesis: at most, the evidence of causality is fleeting owing to multiple business conditions; at the very least, In Search Of Excellence was the first to articulate some common sense stuff.

There are other ways to look for the relationship between excellence and outcomes. Dr. John Kay has long argued that a company that is in the business of what it does will outperform a company that is in the business of making money. When Imperial Chemical Industries was in the business of "the responsible application of chemistry" and Boeing's purpose was to "eat, breathe and sleep the world of aeronautics" they were dominant firms in their industries. Each changed their focus to be in the business of financial outcomes. Once that happened, the latter lost its previously unassailable grip on commercial aviation while the prior disappeared entirely as an independent company. When a business disconnects the value of what it provides from how it provides it, and connects it instead to the financial results it wants to achieve, it tends to fall well short of goals. Worse still, once that transition happens the business itself can erode very, very quickly.

In his book Good Strategy, Bad Strategy, Dr. Richard Rumelt lays out characteristics of bad strategy, including mistaking goals for strategy. "Bad strategy", writes Dr. Rumelt, "is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable." Good strategy consists of a diagnosis, a guiding policy, and coherent action. By definition, strategy is execution-focused; without execution, strategy is worthless. Financial results are not a strategy, they are byproducts of identifying gaps and challenges, meeting and overcoming those - and that the hoped for opportunities that lie beyond them do, in fact, materialize.

If strategy is execution, then what a company does and how it does it will drive the outcomes that it achieves. Yet there is a subtle differentiator in the "how" that Alasdair MacIntyre, the author of the introductory narrative, draws attention to. The first fishing crew has incentives to achieve performance targets. They have clear alignment of values, skills, and outcomes, on which they are supervised and measured. The second fishing crew has a social contract with one another. They also have clear alignment of values, skills, and outcomes, but that alignment happens through how they function as a community: they teach and reinforce values, skills, norms, and behaviors, and they extend their duty of care to the families of their members. Whereas each member of the prior group is committed to themselves individually, each member of the latter group is committed to each other. Mr. MacIntyre makes clear that a commitment to excellence is a product of a community, not a group of individuals no matter how like-minded they may be. He also makes clear that the value yielded by excellence is more than just financial remuneration for doing the job.

But does excellence matter?

Given how narrow measures of business value tend to be, the evidence tends to be on the negative more than on the affirmative. Excellence is like governance, in that it is most obvious when it is absent than when it is present. For example, you can argue as Dr. Kay does that American automakers, having never quite leveled up to the quality standards of their Japanese and German peers in sedans and small cars, suffered more acutely in the 2008 recession than perhaps they would have otherwise. American manufacturers couldn't compensate for a big fall-off in demand for SUVs and light trucks by selling more sedans and small cars, and as a result two out of the three took a tour through bankruptcy, wiping out a lot of investors. In the story of the two fishing crews, Dr. Kay cites the case of the Prelude Corporation which tried to bring modern management to the commercial fishing industry, only to misunderstand that excellence in operations matters more to success in fishing than do measurements and supervision. The Prelude Corporation, which had been a large lobster producer, went out of business within a few years of adopting those modern management techniques.

A company can create the appearance of financial mastery over operations through things like aggressive cost management and starving itself for investment. But as Kraft Heinz reminded investors recently, burning the furniture to keep warm only lasts for so long. If you believe financial goals are more likely to be met by the absence of bad (no accidents, no shutdowns, no product failures) and the presence of good (high netpromoter score, high quality ratings, high uptime), then you can accept that excellence in what a company does and how it goes about it will be a contributing factor to both limiting impairments and generating value. Not necessarily as quantifiable as we would like it to be: the counterfactuals aren't provable and customer decision-making rationale is wooly. But it is enough to say that excellence - as a socio-cultural phenomenon - amplifies the upside and buffers the down.