Bovver Book...

Why are some of the greatest books also the toughest reads? My theory is that they are written by boffins, professors and eccentrics. People passionate about their subject who either don’t understand the poor reader or just lack a good editor.

Life is too short to plough through this stuff unless your job depends on it (mine does). Wouldn’t it be nice if someone did it for you? But who is selfless or possibly crazy enough to take on such a task?

Well, here is a collection of great books I have recently read focusing purely on their payload. You get the gist without the grind!

Enjoy!

Pink but Perfect!

Many of us watch in amazement as our pension pots stagger from one financial crisis to the next barely keeping pace with inflation. We entrust our life savings to professional fund managers to little effect. Could we do better ourselves? John Kay thinks we can and this book is a great introduction to this.

John is a well regarded economics professor (ex-LBS where I attended his excellent lectures) and his position is based on sound economic principles. His starting point is that although there are a few very good investors (e.g. Warren Buffet and George Soros), most of us (including eminent economics and finance professors) are pretty rubbish. The randomness of the market may make us feel we are skilled in the short term but over the longer term we get fairly average returns.

Given our general lack of skill, Professor Kay shows us how to use economic principles to stack the odds in our favour. Some of these economic principles are as mathematically complex as rocket science and this book thankfully avoids this.

The main practical financial lessons from this book are straightforward and offer quick wins:

1. Optimize your personal borrowing efficiency by bundling all loans if you have them into a low cost offset mortgage.
2. Shop around for the best deals using monoliners and avoid financial services conglomerates. For example www.moneysavingexpert.com can save you a fortune if you have never seriously done this before  (I’ve just saved 60% on the cost of home and car insurance, and got better cover in 2.5 hours work which for years I had mistakenly assumed I was way too busy to do)
3. Optimize your personal tax efficiency using the various tax breaks and allowances available (e.g. partner’s tax allowances, ISAs, CGT, pension contributions, etc.)
4. Use a low cost execution-only online stockbroker to make your investments which should be in diverse low management cost index tracking assets such as ETFs (few fund managers can outperform them)
5. Benchmark your asset allocation according to the sort of pattern followed by a typical local authority pension scheme as a starter for ten. Hmm, not sure about this one…
6. Drip feed your investments regularly into the market rather than in lumps to avoid buying at a temporary market peak and benefit from ‘pound / dollar cost averaging’

John argues that if we follow this approach, economics and the law of averages will work in our favour over the long term and we will be able to retire at a reasonable age.

The great benefit of this approach is that it’s simple, uses little of one’s time and thus allows one to get on with more interesting things in life than finance. Although there is a lot more interesting stuff in the book, it seemed much less useful for the average private investor.

Did I enjoy the book? Yes. It’s well written and I would thoroughly recommend it.

Did I find it illuminating? Certainly but mainly to confirm ideas I had already worked out for myself in recent years.

Was I satisfied with it? Not entirely. Why? Well, for three reasons.

Firstly I would have liked clearer references to some of the underlying theory. For example, how does ‘dollar cost averaging’ work? It would be handy to have more of the theory referenced on-line (I’m being lazy).

Secondly I felt John was teasing us with the efficient market hypothesis (EMH). OK, so the  EMH is illuminating but not true. So what? What are the conditions for it to be true? Under what conditions does it break down? How does my 22 year old nephew use its flaws to earn as much as I do after 9 months working for Optiva? Sounds like it’s time to shovel some expensive grub into him in exchange for a few answers…

Thirdly, as an engineer, I just can’t believe that these systems are totally random. Yes there may be a large short-term random component but if you look back at the different asset classes, their price movements over the long term are clearly driven by economic fundamentals such as cash flow, supply, demand, competition and economic growth.

In conclusion, this book achieves what it sets out to do but invites us to go further. Overall a great achievement and a good read.

Profiting from Evidence-based Management by Jeffrey Pfeffer & Robert Sutton

This book is a timely reminder that management should be based on sound scientific principles yet in the real world it is anything but. Evidence Based Management (the authors’ updating of ‘scientific management’) is a loud wake-up call to senior executives and their consultants to apply scientific thinking whenever they launch a new business initiative.

The authors, both professors at Stanford, present an interesting yet remarkably chaotic collection of evidence, case studies and advice about the crazy things that managers (and their consultants) believe and implement, often in the face of overwhelming evidence.

First the good stuff – lots of examples of ‘Dangerous Half-truths and Total Nonsense’…

Acquisitions Create Shareholder Value

One of the most spectacular ways to destroy shareholder value is through misguided acquisitions. RBS/ABN Amro, Lloyds TSB/HBOS, Daimler/Crysler, AOL/Time Warner, HP/Compaq and hundreds of others litter the economic landscape. Yet power-bent CEOs and their advisers continue to cheerfully leap into this particular ‘valley of death’.

Skilful acquisitions can add a great deal of value yet few organizations have perfected how to do them. Based on a careful study of their own skills, the characteristics of their target companies and the historical carnage, Cisco has made dozens of successful acquisitions. The book does not spell Cisco’s recipe for success in full but provides a useful indication of the different ways synergy can be realised:

• There must be multiple real synergies
• The target company must be significantly smaller than Cisco
• The target company is geographically proximate making integration and collaboration much easier
• Compatible organizational culture
• Use a structured merger integration process to ensure key staff stay
• Continues to strengthen its acquisition process

The authors conclude that Cisco is using EBM and profiting from it.

Casual Benchmarking

Benchmarking can add a great deal of value yet it is often poorly done and destroys shareholder value. The book gives the example of how United Airlines unsuccessfully aped Southwest Airlines in the mid 1990s. It also describes how the US automakers copied Toyota and failed. Both of these failed because they failed to adopt the culture which underpinned both approaches.

As one executive put it “Instead of copying what others do, we ought to also copy how they think.” Before you benchmark you need to ask:

• Is the benchmarking target’s success because of the practice you seek to emulate? e.g. Herb Kelleher CEO of Southwest Airlines drinks a lot of Wild Turkey bourbon. Should your CEO do the same?
• Why does a particular practice improve performance? If you can’t evidence this you are engaging in superstitious learning and may be copying something that is damaging.
• What are the risks / disadvantages of implementing the management practice? Are there ways of mitigating these that we are missing?

Doing What Seemed to Work in the Past

Al Dunlap (aka ‘Chainsaw Al’) was notorious for attempting to ‘turnaround’ companies via massive layoffs. This one-size-fits-all approach did not work in many cases (along with the accounting fraud that allegedly accompanied it). Before implementing a management practice the following questions should be asked:

• Is the practice you are about to implement closely linked to past success? Don’t confuse success that has happened in spite of an action with success that has occurred because of that action
• Is the new situation so similar to past situations that what worked in the past will work in the new setting?
• Why do you think the past practice worked? If you cannot analyse the logic it is unlikely you will be able to determine whether or not it will work this time.

Implementing New Enterprise Software

This is normally far more expensive and time consuming than expected. Botched implementations are linked to serious setbacks and failed organizations. A survey of 232 IT executives found that 51% viewed their ERP implementations as unsuccessful. A survey of 365 IT executives showed that a typical major software project took twice as long and cost about twice as much as originally planned and over 30% were cancelled before completion.

Switching to Better HR Practices

Changing to the ‘best’ HR practices may be so disruptive that it isn’t worth it. A study of 181 Silicon Valley start-ups between 1995 and 2001 found that changing people management systems after the firm had been founded was linked to increased staff turnover, reduced performance and double the failure rate.

Quality Improvement Efforts

Six Sigma and TQM efforts can increase quality and incremental innovation. But focusing on tiny improvements in old systems can detract from the big picture. Also many qualify initiatives are all talk and no action. Harvard studies of the paint and photography industries show that a focus on remorseless improvement is linked to less radical innovation. Studies of TQM implementations show that companies talk about it but often actually do very little.

Business Process Re-engineering (BPR)

In 1994 CSC Index “State of Re-engineering Report” of 99 completed re-engineering initiatives found that 67% were seen as producing mediocre, marginal or failed results. Michael Hammer the main promotor of BPR now admits that only about 30% of BPR projects achieve their goals.

Layoffs

Layoffs alone can’t help companies improve profits or long-term performance. They have hidden costs like lawsuits and lost skills, damage surviving employees’ morale, commitment and health. A University of Colorado of S&P 500 firms between 1982 and 2000 showed no link between downsizing and subsequent return on assets. Other studies suggest that layoffs are focused on workers rather than managers – a process called featherbedding – so the relative cost of administration goes up.

Launching a New Product

Less than 1% of chemical compounds developed by pharma firms are ever sold and only 30% of those tested on people are ever marketed. A study of 151 companies showed that the new product failure rate was 40% in food processing and 30% in medical instrument firms. A study of 700 firms found that nearly all the money invested in R&D was devoted to failed products.

Starting a New Organization

The death rates of new and young organizations are substantially higher than for established organizations. Dun & Bradstreet say that only 1/3 of retail and service businesses live longer than 5 years.

Other Dangerous Half-Truths:

These beliefs are often rooted in ideology or in cultural values and are quite ‘sticky’, i.e. difficult to recognise:

1. Share options motivate employees. This can work in smaller companies but tends to act as a perverse incentive and time waster in larger companies.
2. First mover advantage is crucial to success. Note how Microsoft and Apple are usually not the first movers into new markets.
3. Paying teachers bonuses based on child performance works. Research shows that it normally does not. Teachers are not in it for the money. Better to harness parental influence.
4. Work should be separated from the rest of life – leave your personal life at home. This is very interesting and gets an entire chapter on its own. The upshot is that there are potentially big gains if personal life can be skilfully woven into business activities. Too long to do justice here. However, Southwest Airlines skilfully integrates work and private lives (i.e. friends & family become fare paying passengers, people’s ‘genuine’ behaviour attracts customers, etc.)
5. The best organizations have the best people – you need to have an aggressive ‘talent management system’. Again too long to give it justice here. The upshot of this is that a large organization with great systems and effective teamworking will often outperform the one that ruthless hires the best and prunes the rest.
6. Do financial incentives drive company performance? The principle points in this chapter are how ‘Perverse Incentives’ potentially attract the wrong kind of employee, get them motivated to do the wrong thing and create a divisive environment which ultimately saps performance. The recent collapse of the banking system is strong evidence for this.
7. Strategy is destiny? i.e. does the traditional ‘business school’ approach to strategy work? The answer (and we run a 3 day course on this) is that it helps understand the competitive environment but that it can be highly limiting and damage agility. This is a highly complex issue and is highly context specific. One size does not fit all.
8. Change or Die? The book lists a range of dangerous organizational changes, identifies the main risks and provides evidence supporting this position. It also asks what to ask before launching a major organizational change initiative.
9. Are great leaders in control of their companies? This is complex but the short answer is that leadership is more about projecting a positive future and achieving through others than control freakery.

How to Apply Evidence Based Management (EBM)

This is where the authors draw some learning from the above. To be honest I found that the advice offered in the book came across as poorly edited and structured. Anyway, here is my attempt to pull it together (it is fairly haphazardly scattered throughout the book):

Managers and their consultants often implement initiatives that destroy value big time for two main reasons:

1. They believe in false management practices
2. They poorly apply good practice that has worked elsewhere

In both cases they are not using their critical thinking skills properly. Here is a useful checklist of questions to ask before tackling any major initiative:

1. Is the practice actually better than what we are doing right now?
   1. Are we already doing it under another banner?
   2. How often has it succeeded elsewhere?
   3. Can we test it in our organization first?
2. Is the change really worth the time, disruption and money?
   1. Are our timescales and budget realistic?
   2. Do the promoters have incentives to underestimate costs?
3. Is it better just to make symbolic changes rather than core changes?
   1. Are powerful stakeholders clamouring for this change?
   2. Will this change actually hurt our organization’s performance?
4. Is doing the change good for the promoter but bad for the organization?
   1. Will doing it increase the promoter’s fame, prestige or pay?
   2. Will doing it mean that someone powerful owes you a favour?
   3. Will it make your job easier and everyone else’s harder?
5. Do you have enough power to make the change happen?
   1. Internal support and resources?
   2. Are your allies powerful enough?
   3. Do you have a strategy to strengthen supporters & weaken opponents?
6. Are people already overwhelmed by too many changes?
   1. Do people believe that this change will stick or is it just a flavour of the month?
   2. Are people still digesting the last change initiative?
   3. Will people be able to learn and update as the change unfolds?Will you be able to pull the plug?
7. How will you know the proposed initiative is failing?
   1. How will you know when it is time to quit?
   2. Who will judge it a failure and pull the plug?

Other advice from the authors’ on how to apply EMB includes:

1. Identify and gather relevant evidence and options (‘show me the evidence’)
2. Ask the following questions before implementation:
   1. What assumptions does the proposal make about people and organizations? What would have to be true about people and organizations for the idea to work?
   2. Which of these assumptions seem reasonable and correct to you and your colleagues? Which seem wrong or suspect?
   3. Could this idea still succeed if the assumptions turned out to be wrong?
   4. How might you and your colleagues quickly and inexpensively gather some data to test the underlying assumptions?
   5. What other ideas or management practices can you think of that would address the same issue and be more consistent with what you believe is true about people and organizations?
3. Practice ‘wise management’:
   1. Act with knowledge / evidence (while doubting what you know)
   2. Understand the limits of your knowledge / evidence
   3. Have humility about your knowledge / evidence
   4. Ask for and accept help from others
   5. Give help to others
   6. Be curious – ask questions, listen, constantly strive to learn new things from the events, information and people around you
4. Avoid succumbing to a management belief or ideology by asking:
   1. Is my preference for a particular management practice solely or mostly because it fits with my intuitions about people and organizations?
   2. Am I requiring the same level of proof and the same amount of data regardless of whether or not the issue is one I believe in?
   3. Are my colleagues and I allowing our beliefs to cloud our willingness to gather and consider data that may be pertinent to our choices?

I think there are real gems in the above. However, I can’t make up my mind whether the authors ploy to scatter them randomly throughout the book was intentional (i.e. “this may be a bit weak so let’s try and hide it”), chaotic (i.e. “wouldn’t it be cool to stick this particular nugget in here” or just slapdash. This is a poor way to structure a series of really useful management insights.

Conclusion

A leading medical statistician recently told me that less than 20% of medicine was evidence based. I shudder to think what the equivalent percentage is for management. I think the following quote from the book deftly sums it up:

“If doctors practiced medicine the way many companies practice management, there would be far more sick and dead patients, and many more doctors would be in jail.”

Overall, this book is a terrific romp through the bone-headed behaviour of some the highest paid executives on the planet.

The book starts with the simple but profound question: “What does it take to be good at something in which failure is easy?” (despite having serious consequences such as killing people).

The book explores this question through a series of life or death medical scenarios. During these, doctors struggle with what appear to be intractable problems in which the lives of millions are at stake. Here are some of the scenarios and lessons learnt.

On Washing Hands

If you are a health worker there are no personal consequences to not washing hands. Yet 2 million Americans a year contract a disease while in hospital of whom 90,000 die of it. Most of this could be prevented if health workers were diligent and washed their hands 100% of the time. Alas, they only wash their hands 30% to 50% of the time which is not enough (you need close to 100%).

Here are some of the ways they solved it at one hospital:

1. Used industrial engineering methods, i.e. working in teams to identify: a) what makes it difficult to comply with hand washing, b) improvements, c) positive deviants (i.e. people who are good at it) and asking them how they do it [aka internal benchmarking] and d) minimising other causes of infections (i.e. one stethoscope per patient).
2. Making it easy to comply. They did this by introducing antiseptic hand gel dispensers in easy-to-reach places. This gel is more effective than soap and takes 20 seconds to apply vs hand washing which takes >1 minute.
3. Creating a culture in which peer pressure makes it difficult to not wash hands. Colleagues openly criticise co-workers for not washing hands.
4. Ensure that improvements are kept up and that this whole process becomes ‘business as usual’.

The author acknowledges how difficult it is to sustain this activity when hospital doctors typically see 20 patients an hour. Yet it has the potential to save millions of lives.

Casualties of War

Industrial engineering methods were used to radically reduce American battlefield casualties. Consider the following table:

This big and surprisingly recent improvement was achieved by a systematic approach to improving operational methods. The key driver for innovation was the realisation that most lives were lost due to blood loss. Key improvements included:

• Improved medical battlefield backpacks to stop bleeding early
• Focused battlefield hospitals near the front line
• Helicopter based medical units
• Rapidly stopping blood loss and shipping the wounded to specialist hospitals to repair the serious damage

Stunning how such simple processes save so many lives and yet it took so long to figure out and implement. Tens if not hundreds of thousands of lives could have been saved if such thinking had been applied earlier.

Doing Right

The author examines a number of medical ethical dilemmas. Although well written and thought provoking, this section of the book is of less immediate practical use than the rest of the book.

However, in a world where fewer than 98% of management consultants have signed up to a professional code of conduct and ethics this is definitely thought provoking.

The Score

Measuring the correct performance indicators and acting on poor results can radically improve performance.

Up to the mid 1930s 1 in 150 women died in childbirth in the US. By 1950 this had dropped to 1 in 2,000 due to medical progress including the availability and use of antibiotics. Paradoxically, during the same period (1930 to 1950) the mortality of the newborn remained the same at 1 in 30.

In 1953 Dr Virginia Apgar published what has become known as the Apgar Score. This simple to apply measurement done 1 minute after birth and 5 minutes after birth (and repeated if required) is an objective assessment of the health of the newborn. It rapidly tells medical staff what if any actions to take if a baby is heading in the wrong direction.

Reassuringly, in the US today, fewer than 1 in 10,000 mothers and 1 in 500 babies die during childbirth.

Suggestions for Becoming Better at What You Do 

The author offers five suggestions for those who wish to get better at what they do:

1. Ask an unscripted question. People are full of fascinating information and insight yet as professionals we won’t discover any of this unless we ask them. Normal professional conversations are unlikely to uncover this so invest a little time in discovering more about the people you are working with.
2. Don’t complain. Focus on the interesting challenges of life rather than its problems. It can feel tough if you are a busy professional. However, if clients didn’t have difficult problems, we consultants would be out of a job! There are great ideas lurking in those challenges and you are just the person to discover them.
3. Count something. It is often as easy to be diligent as to be sloppy. There is a lot of data around our professional activities and we are often too lazy to collect and analyse it. I take great interest in reviewing my participant feedback scores at the end of each course and constantly seek ways to improve them.
4. Write something. This gives a greater sense of purpose to life and allows one to develop and challenge oneself. Choose an audience and get started. Blogging is easy to set up. Who knows, you could even find yourself making a contribution!
5. Change. Become an explorer, an early adopter and continue to challenge yourself. This makes life more of an adventure and you will amaze yourelf!

Key Lessons

Unlike the world described in this book, failure in business or public services is seldom life or death. Yet the the practices described can have a profound impact on most measures of organisational performance, even shareholder value.

Although only fleetingly referred to, industrial engineering practices (we call them value methods in our programmes) have a major impact on performance improvement. First they provide a powerful toolkit to investigate and improve any aspect of performance. Second they lay the foundations for long term sustaining of performance improvement.

The ultimate challenge wherever we work is to develop an organisation culture to make this stick over the long term. Organisations that manage this become legends. Toyota does it, Southwest Airlines does it and so does Schlumberger in its Wireline Division (where I worked for several years).

At the end of the day there are limitless opportunities to improve the world around us. This insightful and readable book challenges us to do just this.

On the positive side this book is a readable anthology of research and anecdotes about FI. It gets one thinking about the nature of FI and the ‘adaptive unconscious’ - the part of our mental processes that learns how to react quickly to certain situations. Some of these mental processes are built-in (i.e. we duck to avoid a snowball). Others are learned through thousands of hours of study and practice (i.e. jazz musicianship).

Interesting Research Described in the Book:

1. University of Iowa experiment. Two card decks (one random but favourable [RbF] the other random but unfavourable [RbU]) were given to subjects whose hand palms were wired to sweat detectors. The subjects were asked to place bets on the cards uncovered in sequential order. It typically took 50 cards for normal people to develop a hunch about each deck and 80 cards for them to be sure which what was going on with the deck they were using. However, the experiment showed that experienced gamblers developed an unconscious hunch in about 10 cards based on their sweating palms.
2. John Gottman’s research (University of Washington). Series of psychological experiments in which people were wired for physiological reactions and then asked questions. Reactions were recorded and then thin sliced second by second. The research described focused on married couples. It was shown that it was possible to estimate the long term success of a relationship by just examining a few seconds of interactions.
3. John Bargh’s research (New York University). Developed a ‘priming’ experiment in which he demonstrated that unscrambling simple sentences with random but, for example, negative words can affect subjects reactions. He managed to prime people to be polite and agressive using this approach. Also rersearchers put people into a ’smart’ frame of mind can answer questions more accurately.

Interesting Anecdotes

1. In 1985 the Getty Museum bought a kouros (a ~2,600 year old Greek sculpture) for $7 million.  Although it had been ’scientifically tested’ and deemed genuine, the first impressions of a number of scholars indicated that it was likely to be a fake (it is inscribed Greek, about 530 B.C., or modern forgery).
2. Malcolm Gladwell (the author) was arrested more by the police when he grew his hair. Their first impressions of his appearance were that he was a criminal – not surprising when you see his mug shot at the front of the book!

Where First Impressions Fail

1. FI leads to all types of prejudice
2. How ‘priming’ can be used to distort / wrongfoot FI
3. How sharp salespeople operate to wrongfoot a prospect’s FI
4. The dangers of Hypothesis / Test => we ‘fall in love’ with our Aunt Sally / Straw Man

Where the Book Falls Short

On the negative side the book has little to offer us in terms of real insight into how we can use FI ourselves. It also states the obvious, for example:

1. There can be as much value in FI as in months of rational analysis (yes but be very careful)
2. FI can be dangerous, misleading and lead us to prejudice (pretty obvious)
3. We can train ourselves to use FI to our advantage (doesn’t say how)
4. FI can be applied to lots of areas (yes, but so can many other things)
5. FI can make the world a better place (so can many other tools or techniques)

True to the proverb “you can’t judge a book by its cover”, this glossy book is a frustrating read simply because it gets lost about two thirds the way through and ultimately doesn’t really deliver the goods. This book is long on anecdote but short on practical suggestions for using FI in our professional lives.

This well written and researched book, probably largely penned by his co-author, provides a neat package of small-scale (<1% of the population) social trends that politicians and marketers should take note of.

Why? For two good reasons:

1. Major changes in the political and marketing landscape start as microtrends. If you are skillful enough to spot them and develop an appealing proposition you could ‘make a killing’.
2. Although small scale, these microtrends can still offer substantial opportunities for skilled politicians and marketeers. 1% of the population is still a big market if you have a ‘good product’ for it.

This is a book to dip into a bit like an anthology of short stories. Unlike most anthologies however, there are no duffs  here – each of the microtrends identified is interesting and insightful.