Tuesday, 28 April 2009

Rename the unpalatable

You may foresee that decisions you choose to take (or have to take) will have both upsides and downsides. In fact they may be downright unpopular. You should do what you can to create a new language in which to describe your decision.

Suppose you are Chancellor of the Exchequer. You decide to increase the money supply. US economist Milton Friedman said it would be theoretically possible for governments to drop large amounts of cash out of helicopters for the public to pick up. Non-economists may talk of “turning on the printing press”. More obscure mechanisms may be used nowadays but they amount to the same thing.

You may be looking to make life easier for people to buy things, or bankers to lend, or exporters to export to get the economy moving. And you might be lucky – get it right. However, the downside risk is a currency devaluation that makes imports and foreign holidays more expensive, then leads later to inflation and higher taxes. Some people might remember these negative consequences when governments tried this before.

So don’t talk of increasing the money supply. Don’t mention devaluation or inflation. Use a new and more positive-sounding language. Say “quantitative easing”.

And then add that there is no alternative - even if there is one (which there always is).

Tuesday, 21 April 2009

Move back office functions out of sight

“Belief in targets, incentives and inspection; belief in economies of scale and shared back-office services... these are all wrong-headed ideas and yet they have underpinned this government's attempts to reform the public sector.” (Ref.)

Top managers don’t want be bothered with back-offices. So on the up, you’ll need to demonstrate you are actively managing back office functions. Consolidate support units into one. Subcontract support services. And move them all to a remote location if you can.

These initiatives may turn out be expensive failures; they may damage customer service and destroy customer confidence (consider your own experience of call centres); but top managers find these proposals irresistible.

Ref. “Systems Thinking in the Public Sector: the failure of the reform regime... and a manifesto for a better way” John Seddon. (2008)

Close your ears to challenges

“John Spivey (letter Apr 8) suggests that in today's public service bureaucracy, managers are chosen for their ability to filter out bad news. As chairman of a medical Royal College committee a few years ago, it was on occasion my job to meet officials from the Dept of Health to discuss the latest political gimmick. On attempting to acquaint them with the realities of medical life, I was often told, 'I can’t tell my minister that - he wouldn’t want to hear it'.” (Letter to The Times 9th April 2009)

Once you have gambled, once you have proposed an idea, prematurely, with a view to increasing your personal visibility or some other priority - close your ears to contrary ideas. Do not test your proposal is robust before going too far with it. That would merely increase the chance that your wisdom will be questioned.

The higher your position, the more you can gamble

“The bankers’ bonus system has given a huge upside to people who gamble, with no downside for them if their gambles fail.” Edited from remarks made by the Bank of England boss Mervyn King on BBC radio Feb 2009.

As you move up the management hierarchy, the laws of chance play a bigger part. On each promotion you must make bigger decisions, but collecting all the relevant information grows harder and/or you get less inclined to do it.

Perhaps the data you need is uncollectable, perhaps it is unknowable. Perhaps your information systems are inadequate. Perhaps you are a gambler by nature, you have no inclination to collect data or analyse the data you are given.

The higher the manager, the harder it is to challenge their decision, and (in the private sector) the less likely people will question it. The more senior you are, the more money you earn, the more people assume you know what you are doing.

Also, the closer you get to board level, the more you will be surrounded by other gamblers sympathetic to an informal management style. They will give you licence to take bigger gambles, to take bigger decisions with less evidence.

For all these reasons, promotion tends to require and reinforce a willingness to take bigger risks, make bigger gambles. This self-reinforcing spiral reaches its peak at the point where top level managers (like James Crosby) make near random decisions.

The inevitable result is that a large organisation tends to gather a pool of directors who are paid a lot for making under-researched decisions.

“There’s no science behind it. It is simply my judgement that I thought the figure was an appropriate one.” The Chancellor of the Exchequer Alistair Darling explaining how he decided to impose a new 50% tax rate on those who earn over £150,000. April 29th 2009

Admitting the 50% tax rate was a gamble, not backed by analysis of its effect on tax revenue is remarkable. Alistair Darling deserves credit for his honesty.

Note however that decisions that are random in their capacity to deliver return on investment are far from random in other ways – since directors are intelligent people who have their own goals and are skilful at achieving those. Alistair Darling surely had in mind grabbing a headline that would boost his party’s appeal to low-paid voters.

Delegate governance to a quality management function

The way people make decisions at lower levels is deeply affected by the culture that cascades from the top level - by what questions are asked and what questions are not asked. The failure of Jacque Santer to set the right tone at the top of the European Commission led to his fall from grace.

You are responsible for the actions/decisions you are authorised to do/take yourself. You are accountable for the actions/decisions done/taken by your delegates. So, you are not directly responsible for a fraudulent procurement made by your subordinate, but you are accountable. That means you are responsible for ensuring the subordinate is governed by reasonable process of supervision. You become responsible if the supervision process is too thin or if you fail to react to information that process gives you.

Frankly, the principle of accountability is a huge drag on the entrapaneur, on the gambling manager. How can you be sure that your reign at the top is not brought to an end by an irresponsible subordinate? Does accountability really mean you have to supervise what your subordinates are doing?

There is a way out. Separate governance from management. Employ quality managers who are responsible for the processes that monitor and control your subordinates’ decisions and actions. But make sure they are not so competent that they are effective, and report things to you. So when things go wrong, you can blame the failure of your quality management organisation. Then show your bravery by calling for an 'audit' - that's what proper managers do isn’t it?

Delegate dodgy work

“I take full responsibility for what happened. That's why the person who was responsible went immediately." Gordon Brown (16 April 2009)

Leaving aside whether Gordon Brown grasps what taking responsibility means, the obvious point here is that as a top manager, you will delegate the riskiest, dodgiest and dirtiest work. Then maintain sufficient distance to avoid blame for what your delegate does.

And when things go wrong, it is better for your delegate to resign rather than be dismissed, since this will demonstrate the high standards of behaviour in your organisation.

Sunday, 22 March 2009

Remember whatever happens, you really were right at the time

"Never apologise, never explain." Commonly attributed to Benjamin Disraeli

It is a natural law that top managers must take big decisions without evidence that they are right or wrong. It just as natural that post hoc evaluations will be unbalanced and unfair.

When a decision proves right, you must claim authorship not only of the decision but also of its upside consequences. This is your argument for being hugely rewarded, even though you took the decision without 'evidence' that it was right.

When a decision proves wrong, then you must argue you should not be punished or held accountable for the consequence, because there was no 'evidence' at the time that the decision was wrong. (E.g. nobody could foresee the fall in the housing market, that no Weapons of Mass Destruction would be found, etc.) Admit no errors of judgement.

Beforehand, stress the quality of your judgemental input. Afterwards, never say your judgement was wrong – you were right at the time given what was known then – it is just that events took an unforeseeable turn, to which you have now adapted yourself. Dismiss any suggestion that events could have been foreseen. Those who had sufficient judgement to foresee events, and advised you from the start to take the course you were eventually forced to take, did not have better judgement; they were wrong at the time, given what was known then. People like that always advise against any radical action anyway. They were right in this case, but only like stopped clocks are right twice a day.

Prepare your excuses

Of course, a gamble or a risky decision can appear stupid with hindsight. And others may be in a position to make plausible criticisms. So you should prepare your excuses or escape plan for the eventuality that people do attribute bad outcomes to a decision you made. So start rehearsing some of the following get outs:

Construct scenarios in which decisions other than yours would have led to disaster.

Adapt Gordon Brown’s line “Making no decision could, nay would have been worse than any other decision.”

Tell them business necessarily involves taking risks. E.g. Loaning money to the poor is risky, but that's how banks have been making money for their shareholders for years. You don't make money in finance by taking no risks.

Blame your analysers. “Our highly qualified risk managers calculated the risk was acceptable.”

Say “Of course judgement with hindsight is always perfect, but I was right at the time.”

Saturday, 21 March 2009

Rest assured that outcomes are rarely clear cut

"There is no error so monstrous that it fails to find defenders among the ablest men." Lord Action

You may be worrying. If you approach management decision making as gambling, and you place your bet without working to establish a consensus, then what if things go wrong? What will other people think or say then?

Happily for you, it is most often impossible with hindsight to know whether a senior management decision was good or bad, right or wrong. Who has the time and resources to measure outcomes? Who can say what would have happened if an alternative path was followed?

So you can get away with a lot.

Tuesday, 10 March 2009

Sideline calculators

When the UK Treasury Select Committee grilled former banking bosses about their role in the financial crisis, their defence was undermined by the disclosure that one former bank CEO (James Crosby) fired his head of risk (Paul Moore) for warning the bank’s strategy was too risky (Ref.)

One alpha characteristic is to have no doubts about your judgement. You don’t believe your decisions are little or no better than random. You don’t invite your decisions to be challenged. You assume the right to push aside anyone who disagrees with you, rather than engage them in dialogue. Be you an alpha or not, this is wise, because you don’t want to risk shallow thinking being shown up. And if your decision turns out to be mistaken, you don’t want people recalling it was questioned.

As a gambler, who prefers to make business decisions without systematic analysis, you don’t want calculators alongside you at the top table. Better to sit with other gamblers, who are more concerned about their own decisions than yours.

You do however want calculators in positions where you can control them. If you fear a decision may be challenged, then employ your calculators to create an audit trail. They’ll usually find it easy to manipulate a decision-making tool (by changing the factors and the weightings) until it supports the direction you first thought of.

Ref. The grilling was February 10th 2009; the events some years before.

Tuesday, 3 March 2009

Back yourself against the crowd

You can use a group to reach a better decision than you can alone. Professionals use for example the Delphi method. And if you don’t have pool of experts, then you may find a way to use “The Wisdom of Crowds” to inform your decisions.

The Delphi method is a systematic way to produce an estimate or forecast. A facilitator guides a panel of experts through a process that gradually narrows range of their individual answers until they converge towards the optimal answer. Many such consensus forecasts have proven to be more accurate than forecasts made by individuals.

In “The Wisdom of Crowds”, the author Surowiecki suggests you use four key criteria to separate wise crowds from irrational ones:

· Diversity of opinion: Each person should have private information even if it's just their own interpretation of commonly known facts.
· Independence: People's opinions aren't determined by the opinions of those around them.
· Decentralization: People are able to specialize and draw on local knowledge.
· Aggregation: Some mechanism exists for turning private judgments into a collective decision.

But again, the careerist will ask: How many managers are promoted as a reward for painstaking work to establish a consensus?

Systematic decision methods appeal to analysers. The gamblers who tend to reach the topmost management positions prefer to go with their instinct. Why embark on a procedure that will either reach a decision you would rather be seen as making yourself? or contradict what you want to do?

Saturday, 28 February 2009

Get other gamblers on board

“When people are in groups, they make decision about risk differently from when they are alone.”

If you want support for a risky decision, then present it for approval to a board full of gamblers. Corporate governance codes imply that collective decision making is a way to reduce, or at least control, risky random decisions. You might think that is obvious. But psychology research suggests the reverse. In a group, accountability is reduced and each gambler is reassured by the support of other gamblers.

An individual is likely to make riskier decisions in a group, since the shared risk makes the individual risk less. Various researchers have suggested that:
  • greater risks are chosen due to a diffusion of responsibility, where emotional bonds decrease anxieties and risk is perceived as shared.
  • high risk-takers are more confident and hence may persuade others to take greater risks.
  • social status in groups is often associated with risk-taking, leading people to avoid a low risk position.
  • as people pay attention to a possible action, they become more familiar and comfortable with it and hence perceive less risk.

Ref. “The Risky Shift Phenomenon” http://changingminds.org/explanations/theories/risky_shift.htm

Thursday, 26 February 2009

Prepare to make decisions that are close to random

“In a job like mine… you only really have a 55% chance of being right, now matter how bright you are.” James Crosby (then CEO of a major UK bank).

Bear in mind that 55% right is this Crosby’s self-interested assessment of his own performance. His track record may not in fact be that good.

As you move up the management hierarchy, the laws of chance play a bigger part. On each promotion you must make bigger decisions, but collecting all the relevant information grows harder and/or you get less inclined to do it.

Perhaps the data you need is uncollectable, perhaps it is unknowable. Perhaps your information systems are inadequate. Perhaps you are a gambler by nature, you don’t personally have an interest in collecting data or analysing the data you are given.

Whatever the reasons, promotion tends to require and reinforce a willingness to take bigger risks, make bigger gambles.

Be willing to make decisions with little evidence

As the earlier principles showed, a manager has to gamble now and then. What happens after you make a less-than-fully-informed decision? If the effect of your decision is good, then your business advances. If its effect is bad, your business retreats.

Suppose you have a foothold on the promotion ladder, and you make decisions whose outcome is uncertain. You can be unlucky, may accidentally make a few ‘bad’ decisions in succession, and lose the chance of promotion. Or you can accidentally make a succession of ‘good’ decisions, and gain promotion to a higher level of management.

Thus the forces of evolution will have their effect on both your business and your career. A common view is that promotion requires “schmoozing” or “brown nosing”. A streak of good fortune will probably serve you better.

Gambles lead to evolutionary changes

Intelligent design may be a professional approach. But it is hard work. You may find you can get on more easily by taking chances.

It is a jungle out there. Both the progress of a business and the promotion of its managers can be viewed as processes of evolution, in which there is natural selection of those advantageous variations that result from random changes.

Darwin summarised his theory of evolution on page 5 of “On the Origin of Species”. We paraphrase and adapt that summary as follows.

“Many more employees are employed in an organisation than can possibly be promoted to senior levels; and consequently, there is a never ending struggle for promotion.
Any employee whose decisions appear more profitable will have a better chance of being selected for promotion.
And the promoted employees will tend to repeat the decision making processes that led to their promotion.”

The progress of your business is driven by management decisions, each of which can lead to an improvement or deterioration in the business. Your management decisions can be rewarded by an improvement in the business and an increase in your authority, even if you made those decisions with little or no certainty about their impact on the business.

Some of your management decisions will approach random in that sense, but not in all senses. You will apply intelligence and experience to the decision making. You will take care especially to consider the short-term impact on your salary or bonus. And consider what will help you survive in the surrounding culture.

There is another angle to our take on evolution. The “alpha male” gets to boss a troop of apes. Promotion to a senior level will require you to be seen and selected by others as an alpha character. This is still a sought-for selection criterion in top jobs. Indeed, you do need some alphaness to carry through a top job, though that is not necessarily associated with the other competencies needed to manage a complex business.

Data shortages turn decisions into gambles

Analysers prefer to have the facts in front of them before they make a decision. However, many business decisions hang on unknowable information and will have unpredictable impacts.

Some information is knowable or predictable (say, details of a hotel in Scotland).
Some is unknowable or unpredictable (the weather when you get there).
Sometimes, however much time you have and effort you make, the costs and/or benefits of a decision are so difficult to predict that your decision will remain ill-informed.
For many projects, the immediate costs are relatively predictable but long-term benefits are unpredictable.

Don’t search for data that doesn’t matter. Make an educated guess based on assumptions about the unknowable. Change the assumptions, and if the answer changes (that is called sensitivity analysis), then try to firm up the information.

Since (be it for lack of time or lack of data) some management decisions are educated guesses – even gambles - you can regard them as leading to random changes in the fortunes of the manager and the organisation. Thus the forces of evolution start to work, which brings us to the main points of our essay.

Make decisions only when needed

"If there's one thing I've learned in politics, it is: never make a decision until you have to." (Margaret Thatcher)

The earlier you make a decision, the more likely circumstances will change before the decision can be implemented. Also, you can miss an opportunity that becomes available on waiting. So, you can reduce the risk of misguided decisions by not taking them too early.

On the other hand, bear in mind that your peers and partners may give up waiting for your decision, and do their own thing, thus reducing your options.

Despite our best attempts to be satirical, some serious advice on decision making has crept in here and there. If you want more advice, the web is your friend.

Here is one specific paper on decision making.

HR can't help you

You work for a large organisation. Your Human Resources (what a scary and dehumanising term that it is) department has devised a tabular job framework. The columns represent different kinds of job. The rows represent steps up the promotion ladder. Documented competencies are needed to progress from one level to the next higher one. So you can plan your route to the top of company? Right? Wrong!

Your promotion might be arrested by The Peter Principle. You may reach your "level of incompetence" and remain there. But what competencies really matter in promotion to a high level? Not necessarily the documented competencies.

Consider two kinds of competency - analysis and gambling – as two kinds of people. Analysers make decisions on the basis of information. Extreme analysers collect as much as information as possible before they make a decision. By way of contrast, gamblers make decisions on little information. Extreme gamblers make decisions on the basis of information so inadequate that their decision is near to random.

As an analyser, you will read career guidance, then take care to acquire and demonstrate the documented competencies. You may thus reach the top grade in the job framework. When you get there, you will be frustrated to find you are not a member of the top management team and are unlikely to be invited to join it.

However well your organisation has designed and documented its formal career paths, the route to the top management table is uncharted. An informal hierarchy overlays your formal tabular job framework, and it becomes more important as you rise through the organisation. Promotion in this hierarchy does not depend on gaining qualifications. Other factors matter more than documented competencies.

An analyser’s first instinct is to apply rational thought to a business issue; fact gathering and analysis are their tools of choice. Gamblers prefer to apply social skills to the same business issue; they develop and hone these skills to their purposes.

Promotion depends partly on the personality you reveal in work place social interactions. In the public sector of old, the sherry party and the Masonic lodge played their part. Now, more likely, it is the golf course and the management away day.

Promotion depends also on others’ recognition of your skills and successes. Considerable effort is needed to appreciate the skill of the analyser – since it involves following their analysis. What you need is a track record of “making a difference”. Or rather, you need others to associate you with successful innovations and decisions, and to perceive you as having such a track record. So, how to acquire this reputation?

An introduction to the principles

“Do you ever see directors approach a strategic decision with dispassionate analysis? Don’t you find they start with their instinctive decision (influenced by emotions and self-interest) and then happily use any misleading argument or irrelevant facts to dispose of any argument standing in the way of deciding as they want?” Anon

That was the kind of thing people were saying to us, and we were saying to each other, before we decided to stop moaning and work out why. (We are a senior civil servant, a company director with experience of technical risk management, and a CxO in an IT company.)

We want to explain why the top-level directors of a large organisation can be so clever yet make such bad decisions. We set out here to explain some behaviour of directors, and some features of their decisions making processes.

We will draw several threads together:
the theory of evolution (on the 200th anniversary of Darwin’s birth);
the factors at work in promotion of managers to director level;
the calls in recent years to ‘strengthen business governance’; and
how evolutionary principles might be applied to the current crisis in banking.

You can compare the race for survival between enterprises in a competition with each other with the race for survival between individuals and species in the theory of evolution. We consider the race for promotion in the same light.

We don’t insist that our principles are good or bad. We think of them as the natural consequences of evolutionary forces and human nature. You the reader may choose whether you use the principles or decry them.

Despite our best attempts to be satirical, some advice on professional decision making has crept in here and there. And we give you some references to follow up.

It is encouraging to find our principles are endorsed by others.

“In a job like mine… you only really have a 55% chance of being right, now matter how bright you are.” James Crosby (then CEO of a major UK bank).

Before we set out our principles, let us a recap some established principles.

The Peter Principle (Laurence Peter)
"In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence"

The Dilbert Principle (Douglas Adams)
“The most ineffective workers are systematically moved to where they can do the
least damage: management.”

“Power tends to corrupt” (Lord Action)
"I cannot accept your canon that we are to judge Pope and King unlike other men with
a favourable presumption that they did no wrong. If there is any presumption, it is the
other way, against the holders of power, increasing as the power increases.”

The theory of evolution (Charles Darwin)
You will know that evolution works on the basis of random changes, some of which
lead to an individual having an advantage over others

Parkinson's Law (Cyril Northcote Parkinson)
"An official wants to multiply subordinates, not rivals"