Mr. Niall Ferguson (2010APR23 Wall Street Journal) sums up the U.S. post-crisis financial regulation as a “trilemma” that could optimize to any two of three, but never all three: (a) efficient capital markets; (b) no bailouts to big banks; or (c) a depression-free economy.  ( Mr. Ferguson further  warns against a delusional proposition that bigger government could give us all three.)  Pick two, any two, but not all three.

Other than the interestingly complex content ( the continuing economic debate),  we can learn from that exercise of attempting to identify the core factors of a situation.  Project managers know the classical trilemma of scope, schedules, and budget.  Or, as the sign says at mechanic shop: good, fast, or cheap: pick two, any two.

The past months have seen earthquakes and volcanic activity. It’s easy in our human conceit to forget that this ancient earth’s mantle is shifting ever so slowly but continuously, and with an occasional tectonic shudder.  In a free market, we will see discontinuous corrections, as occasionally hidden faults surface in a precipitous cataclysm.  It was too naive to think that a few bailouts could have eliminated serious structural issues.

A financial institution can be so complex and large that one part of the house touts risky instruments, and another bets against it with hedging derivatives.

Can free market enterprise regulate itself, whose fundamental premise is efficient profitability, as the incessant sea flows in and around to find advantageous crevices? No doubt better regulation is needed, and will come. But could we trust it to come from bigger government, especially one driven by polls and earmarks?

There are parallel problems as well in how national economies are managed. Economic disparities within a common currency are fracturing the European union. Greece, as it turned out, was entirely too creative in disguising its liabilities.  And as it scrambles to keep its economy together, it must do so without control over monetary policy. Unfortunately, sadly, the best Greek drachmas, uh, dramas invariably are still tragedies.

Or take current US foreign policy.  As a culture, Americans often confuse rhetoric and realpolitik. We want our oil, but, in a lack of forthrightness about our petropolitical agenda, trip on our own preachy rhetoric.  We want to curry favorable world opinion and world peace awards.   We must appease the domestic distaste for prolonged wars, and therefore the strategically dubious pre-announcement of our exit from Afghanistan and Iraq.  Yet again, those local heroes we exhorted to the fight will find themselves twisting in the post-US vacuum. Is it surprising that Afghanistan is now scrambling to realign with Iran?

No easy solutions. And no doubt some critics might say Mr. Ferguson’s trilemma is simplistic.  But though initial analyses are nuanced in sixty-four shades of grey, the process must ultimately reduce to three, then two, then a decision of one.    And let’s not feign surprise if Israel finally, preemptively confronts the Iranian nuclear program.

The state of Ohio is struggling out of a rusty bucket.  At one time, the Dayton-Cincinnati corridor was the world’s tool and die center.   The pioneer in radio shows; the world’s most powerful AM radio. P&G fostered marketing research and still remains the world’s largest spender on advertising.

Today, Cincinnati, Ohio fetes Dr. Albert Sabin’s development of the polio vaccine.  Among the area’s notable inventions is George Rieveschl’s enduring Benadryl.

Where will the new  Sabins and Rieveschls come from?

Several years ago, a British company licensed a pediatric dialysis technology that was just gathering dust at Cincinnati Children’s hospital.  Its technical significance: tighter control of physical and chemical fluctuations in the newborn’s smaller blood supply.

Here’s the irony. As Children’s took the plaudits, the laid off inventor remained jobless.  No judgment intended: the dissolution of the development program was a larger business redirection.

Boss Kettering of Dayton

It would be an interesting case study to examine how Ohio lost its chance at information technology.  Zoom in on how NCR (Dayton, OH) pioneered business machines, microfiche and carbonless paper. It championed the unix platform; it pioneered in bank atm technologies.  Dayton also saw the earliest developments of the bar code.  It is the site for the Air Force’s technology center, WPAFB.  The corridor to Columbus had information pioneers Compuserve and the OCLC.  A generation ago, Montgomery county had the largest number of patents in the country.

Michael Porter’s development strategy theories would not imply that we could legislate innovative venturing: rather, cities can only put clustering factors in place, to grow or draw innovators.

Inventors are individuals; ventures are risks.

Being strategic is distinct from merely setting the goal: it’s about how we get to the goal.  But the increasing complexity of our environment (dispersion; interconnectedness; fluid environments that act and react continuously) – it requires a new sensibility of learning rather than statically knowing. Of constant reality checks: feedback loops: the jet fighter pilot OODA training.
Practical, effective leadership triangulates amongst goal, resources, and stakeholders (which includes self): and it means continuously navigating, adjusting – not only internally within that triangle, but most especially within the external context.

Fog of war. Dealing with that takes more than having an internal compass which can be tricked into relativism. Find your true north: have an absolute reference point. Very quickly: in a strict hierarchy (no “jeez-that’s-tough” ties, no “Charley Brown” draws: it’s a totem pole), name your top three values, from the top.  Keep it simple, keep it clear, keep it always.

Author Faber talks about a simple rule he had as a Delta force commander: the mission, the men, and me: in that order.

Analysis, political correctness, economics: they’re all about the complex 64 steps of grey.  But decisions are black and white. It’s nice to afford many choices. To soft-focus, to appease.  Or govern for the polls.   But in the end, it’s still about that one choice you have to make.

The complex meltdown has governments exploring more concerted global monetary coordination and regulation.  But what about the diverse fiscal spending policies, even among the EU, and ultimately intractable issues of regional protectionism (all politics, after all, are local)? What to make of US national debt  levels at 60-70% of its GDP; or that in ten years debt interest service will exceed all spending on defense, education and transportation (See WSJ)?

World Science Festival 2009: Bobby McFerrin Demonstrates the Power of the Pentatonic Scale from World Science Festival on Vimeo.

1. GenY will outnumber boomers by 2010; 96% of them have joined social networks.
2. If Facebook were a country, it would be third largest in population, after China, India and the US.
3. YouTube is the second largest search engine in the world, with over 100 million videos.
4. Some studies have shown Wikipedia’s 13 million articles are more accurate than the Encyclopedia Britannica, and only 22% of those articles are in English!
5. Kindle-based sales are now approaching a third of Amazon’s sales.
6. Daily, 1.5 million pieces of content are shared on FaceBook.
7. (Success is in understanding) it’s now about a people-driven economy.
8. Successful social media players are the companies that act more like party planners and content providers, than advertisers.
9. It will be less of people searching for product, and more of product finding people.

Sssh.  I know – I hear the footsteps, too.

Socialnomics: Summary

Most economists agree that the worst of this financial meltdown is now behind us. ..

The question is, what, if anything will we learn from this disaster? Already economists are subjecting their field to a long overdo critical review… (But) whatt if the problem isn’t economics? What if the problem is a business problem–a failure of management and an absence of leadership? Shouldn’t business and business schools be looking at their practices and precepts with the same critical eye as the economics profession?

What is the business of business school? And what is the purpose of business?

At least once per decade for the last 30 years we’ve seen American business go seriously off the rails. The reengineering fad, Mike Milken and junk bonds, the savings and loan crisis, the dotcom boom and bust, the Long Term Capital Management panic–only a partial, abbreviated history of business disasters–suggest that something systemic is wrong with the way business goes about business. An individual with this track record of crises would be a candidate for an intervention, a time out in a recovery center, and life-long participation in the 12-step program of their choice. Something is wrong–and it’s time to face it.

Business schools teach finance and strategy, marketing and HR, IT and operations management. Those are the courses of a trade school, not the developmental curriculum of a profession.

The first question business schools should teach their students to ask is my Rule #3: Ask the last question first. The last question is, what’s the point of the exercise? Jack Welch famously said it was to maximize shareholder value–a terrible answer in retrospect. Peter Drucker famously said it was to make and keep a customer. What is the answer that fits our situation in 2009, and beyond? Today, business schools need to teach students to ask the last question first–or risk taking their company down the old dead-end path.

The next piece of the curriculum has to be Rule #23: Keep two lists, one that holds what gets you up in the morning and one for what keeps you up at night. Managers and leaders have got to know themselves before they know their businesses. They’ve got to have passion for their work and concern for their world. Otherwise they’re just punching the time clock and risking everyone’s future.

Finally I’d teach Rule #4: Don’t implement solutions. Prevent problems. Everything that will be put in place as a clean up to the mess we’re in now won’t be enough if we keep creating new disasters. We need a new generation of business leaders who anticipate problems and prevent them from happening. It’s smarter, cheaper, and more effective than the every-ten-year clean up we’ve become accustomed to.

Every one of these three rules has two things in common. First, they cut across all the disciplines of traditional business school. They are ways of seeing the world, ways of making sense of everyday business realities.

Refreshing. It is indeed too easy to pop up 500 things, quite different to be able to say, “But here are the three (or five) that matter…”  Our clients would recognize that as one of our favorite reality checks.

We might not lose our way as easily if we stepped back to check the frame.  And perhaps see the larger frame, the newer context.   In 1987 few of us saw the proliferation of programmed trading vibrating into a collapse.  Should we have seen in 2007 how cantilevered derivatives were quickly straining beyond load limits and quickly into a global complexity? If you think you have problems on the coasts, try prying open the minds in the manufacturing corridors that are still locked into linear sensibilities, largely a product of their immersion in physical product processes and the management analogies they derive from that.

As a surgeon, he also spent his life fighting nature’s relentless law of entropy, and he’d take each patient’s case personally. Yet, in the end, after a week himself in the ICU and a week before he died, he chuckled at my asking what exactly happened, “ Well, you know, the parts are just old.”  Then for the umpteenth time that it had become a ritual, he asked teasingly about our sending my son Kent to live with them. Dad would have been 87 a week later.

Nature’s like its ocean’s perpetual cycle: perpetually evolving into greater complexities that then break down into elemental pieces.

Charles Perrow says that complexity reaches a level where catastrophic failure is not attributable to any single part but rather to factors created by that complexity itself. Perrow in 1984 published Accidents: Living With High Risk Technologies which the New York Times describes as, “a penetrating study of catastrophes and near catastrophes… writes lucidly…. An outstanding analysis of organizational complexity.” At a certain stage, accidents are “normal” – implication: plan for the inevitable.

In an earlier blog, I referred to how the government, and Wall Street and its quants, seem to never learn the humility that there will never be a final perfect solution. Each solution creates new problems. We need then to step back and hopefully see the new, unprecedented larger “frame” – the new context. Just as programmed trading is the likely cause of the 1987 breakdown in the financial markets, in 2007 there were a few lonely hairshirts warning us about “globalization”. At the time, there were a few voices critical of how the quants were creating actuarial fiction – as if risk can be eliminated by simply insuring against it. Each subsequent derivative layer became more and more abstract. There’s a specious optimism that the economy is saved after saving the largest players; that is simply a start, and the meltdown will take months yet to manifest its broad and deep spiral down into the lowest levels.

What’s the difference between risk-asset insurance, and social security, or the Ponzi-Madoff school for pyramidal architecture, or the Mr. Obama’s massive plans for health, education and alternative-energy spending? Denial is a river in Egypt, quips Dr. Temple Grandin. Pyramids, however, are obviously everywhere the alchemist in us thinks we can invent a perpetually self-renewing resource.

Well, I’d be the last to pretend I saw all this then. I know it’s not as easy as “weshouldaseenitcoming”. But I think the global meltdown argues for vigilance for a larger context, the next larger “frame”. Not just seeking answers, but questioning the question. Clearly delineating roles, where external auditors are not your management advisors; where business leaders aren’t their own regulators; where external and internal roles are kept separate; and, perhaps, in the swing from a free market having all the answers, to a presidential hubris in thinking government has all the answers.  Life is not a straight line; nor even a smooth curve.  I think we get closer to truth if we can accept that life is a jaggedy dialectic:that decision making is a continuing correction of the last decision – as pilots might describe flying.

1. Do your style and tools communicate an openness to disagreements or even just different ideas?
2. Do the team members think you only want content to fill a predetermined
   structure? Or do they think you expect to pick up something from them
   you might not have even known to ask?
3. At the other extreme, did you abdicate leadership by abandoning them to an amorphous “collaboration” dumping site?
4. How does the organization maintain separate perspectives? Who’s looking at external threats and opportunities; who’s conserving  internal resources? Or are you a perfectly self-sufficient one-man band?

The pair of tools I consistently recommend to clients are (a) a mind mapping tool ; and (b) a database with a tabular outlining interface.

• Mind mapping is a terrific tool when I’m faced with an unfamiliar or a complex situation. It’s simply the best way to explore and parse out the elements. The emerging map captures the natural relationships and logic.
• A database is essentially a multi-dimensional spreadsheet. Anyone who, in the early spreadsheet days, laid out a three-year financial projection on a single sheet should quickly appreciate what life could have been to have a “box” where you could dump data any which way in any whatever order – and then have customized interfaces with those data filtered and sorted just so they match exactly the user’s perspective at that time.
  

Edward Tufte, widely regarded as the dean of graphical representation of quantitative data, believes that a table ( x rows, y columns) is the most effective way to present relationships for up to 500 data points.

I have found Tufte’s recommendation to hold true in client situations ranging from a small start-up, to a mature $25Bn multi-timezone organization. In brief, mind mapping is good for exploratory discussions, like getting to fly overhead and gaining a 500ft, 10,000ft, etc. vantage point.

Once we pick the best logical fit from that mapping, we move the data into a table that “linearizes” (shows the sequential relationship). The rows and their subrows, with progressive levels of indentation, would still quickly show the logical relationships. The columns could show the time-sequential data. Another page might use the columns to display current values, or alerts instead.

Picking the right form does enhance the communication function .

A quick segue here. (OK, a WIDE lateral here…) I would often remark how the practical American sensibility is reflected in the plain orange-brick box forms of the last several decades’ shools and government buildings. Quite consistent with the direct, plain spoken American style, compared to, say, the French who always round out their corners and syllables. Look at the typical trailers hauled by our landscapers, with angle bars just butt-welded and left exposed.

I have wondered how we affect the sensibility of younger people when we are all on a first-name basis: an informality that I am sure gives younger people a sense of being on equal footing with the older authority – not a bad thing for encouraging a vigorously innovative sensibility.

I wonder, too,  what’s lost when schools are simply an orange brick saltbox, windowless for security purposes, displacing the earlier culture when you looked up to the schools and schoolteachers, as you ascend up broad steps to ornate twelve-foot double doors that open to a tall foyer and sweeping staircases going up to the balcony and its mural backdrop?

Doug Johnson’s blog talks about school designs. His emphasis is on the human factors and their probable impact on the students and faculty’s sensibilities. Doug ponders the closed brick boxes and asks, “Might one not expect graduates of this school to think in straight lines and exhibit one-right-answer mentalities?”

In 1987, the “system accident” came from not realizing how computerized trading,  scaling up into programmed trading, would vibrate into a collapse.  In 2008, we were all surprised at the extent and speed of the financial collapse;  again we failed to see the next larger scale of complexity, underestimating the downside of tightly intertwined global systems.

So,  how do you know when you don’t know?

I suggest that the book, in fact, suffers a subtle blind spot like that of the people who made-off (sorry, couldn’t resist) with Other People’s Money.

It wasn’t  poor abilities to make decisions. Those people were in fact too effective in making decisions, and ingenious with their execution. Part of that scene was saying we only needed actuarial risk hedging, in place of regulation.   Did we step back, and see the larger “frame” – the context?

The lessons learned should include the structure, not just content.  We so fall in love with our technology, forgetting the lessons like those we should have learned in 1987.  Only this time, the afterquakes are global – the other side to that wonderful newly minted coin, globalization.  Perrow has written about system accidents.  In a later blog, I will write about Stanford’s excellent model for strategic execution.

Take our increasing use of quants and analytics.   What about those soft issues that we cannot quantify nor fit into a spreadsheet cell?  They tend to clutter our tidy logical constructs, don’t they?

Zoom out. See the goal in its context of competing goals and the larger community of stakeholders. But it’s a catch-22: to have that vantage view, one must want to rise to the next level beyond goals: Values. Maybe even confess to some morality?  There is a subtle blindspot to not being able to use those words, and instead reduce them to decision-process mechanics.

Context.  Values lead to clarity, and clarity might lead to accountability – if we wanted to.