Professional Service Firms Should Stay Off Wall Street

(With Corrections)
Hutong West
Sunday, Sunday
1228 hrs.

About two years ago, the New Yorker ran an excellent article plumbing the question of whether Wall Street firms were capable of doing social good. In the heart of the article, however, was a revelation that should waken the leaders of any professional service firm from their dreams of IPO riches. (Keep in mind that I am thinking more about advertising agencies, investment banks, management consultancies, PR firms, and the like. As one reader correctly pointed out in comments, law firms, accounting firms, and auditors tend to remain private, though event that structure has limitations.)

Big doesn’t necessarily mean bad, but when the Wall Street firms grew beyond a certain point they faced a set of new challenges. In a private partnership, the people who run the firm, rather than outside shareholders, bear the brunt of losses—a structure that discourages reckless risk-taking. In addition, small banks don’t employ very much capital, which allows them to make a decent return by acting in the interests of their clients and relying on commissions. Big firms, however, have to take on more risk in order to generate the sorts of profits that their stockholders have come to expect.

Not long ago I had a delightful dinner in Beijing with the nonagenarian founder of one of the world’s premiere professional service firms. We spent much of our time talking about the history of the firm, where he had gone right, and where he had gone wrong. I flatter myself to think that there was more to the discussion than a self-indulgent trip down Memory Lane: that is not the style of this old-school Southern gentleman. I prefer to think he was passing me warnings about my own little firm.

He told me that in retrospect one of the greatest errors his industry had made was in trading the partnership structure for public listing. It was an error for the people (it dehumanized them,) the partners (it took away their incentives), and the clients (it refocused firm management on their corporate overlords more than on client work.)

There are many virtues to the corporate structure and public ownership. For professional service firms they are outweighed by the risks and the downsides. Investment banks are learning this the hard way, as are advertising, public relations, and management consultancies. After the one-time IPO payoff for the partners, the benefits of public ownership start looking thin.

I don’t expect this revelation will slow the velocity of conglomeration and public ownership of professional service firms. I do expect, however, that wiser clients are going to start evaluating firm ownership when they choose service providers. The burden of proof will be on the publicly-owned firms to prove that they will get senior-level time and attention and maximum value to the clients.

Asia and the Need to Re-engineer Research

Hutong West
Wonking
1200 hrs. local

Fair warning: I’m about to get a little wonkish, so if you don’t care about market or academic research, skip on down to my last post.

In an otherwise superb review of Doh Chull Shin’s Confucianism and Democratization in East Asia, in Foreign Affairs, (“Confucius and the Ballot Box“, July/August 2012) Andrew Nathan digresses from his eloquent explanation of why “Asian Values” and democracy are not incompatible to defend Shin’s methodology.

Critics view the survey-based study of culture as flawed in three ways. First, if culture is something shared by all members of a society, treating it as a distribution of values and attitudes among individuals ignores the way it works as a shared experience. Second, by reducing culture to a series of questionnaire items, the survey method oversimplifies complex, multilayered attitudes. Third, the questionnaire format forces respondents to choose among rigid response categories that cannot adequately reflect their beliefs.

For all that, the survey method remains indispensable. No other approach does as good a job of finding out what large numbers of people actually believe. And it is less reductive than the older method of gesturing in the direction of an entire nation and claiming that all its members share some vaguely defined set of norms.

This all may seem like a shot in an esoteric battle of academic nit-picking, but it is telling that Nathan feels compelled to conduct this preemptive defense in a review written for a mainstream (rather than purely academic) journal. Dr. Nathan protests overmuch, and in so doing gives us a view to his fear that while they may be one of the few methods available to make the social sciences as scientific as possible, surveys have some innate flaws that call for some extra scrutiny on Shin’s thesis specifically, and the conduct of research in Asia in general.

My first concern is general: does the survey method travel well? The survey method was developed in the West by sociologists who were operating in a specific culture and political environment, one in which people feel relatively comfortable about voicing their honest opinions without worrying about political reprisals or pleasing the person doing the survey. This is important because if you stop to think about it, the value of any answer to a survey absolutely depends on those two conditions.

Yet common sense and a passing knowledge of Asian cultures call into question whether these conditions exist to the same degree in Asia as the West, and, equally important, whether they exist to the same degree among Asian cultures. Indians, for example, might be very ready to answer frankly and at length. Would Koreans be as willing? Would Singaporeans? Would Japanese? Would there not be differences between how Americans would answer and how any Asians would answer?

I would be less concerned if Shin had conducted his survey in the context of a single culture, because he could have designed an survey and delivery method that compensate for the variances between that country’s culture and the outspoken West. One firm I know in China, for example, has learned how to compensate for cultural factors by making the interviewer someone who is known and trusted by the interviewee, and focuses on interviewer training to work the variances out of the responses.

But Shin’s survey cuts across sixteen different cultures and nationalities, and this brings me to my second concern. By using the survey method across a range of cultures and polities where there are likely to be huge variances in the willingness to speak out and the cultural desire to please, is it even possible to wind up with comparable results?

I have no answers that I can prove scientifically, but the questions need to be addressed before we accept Shin’s findings or those of any survey in Asia – whether academic of for business research. If we are genuinely interested in defensible research, we need to question our implicit assumption that the tools created in one culture work just as well in any other, and then test our answers.

I would feel a lot better about Dr. Shin’s book if either Shin – or Dr. Nathan, whom I admire greatly – had hinted that they had even considered whether the survey method is culturally appropriate outside of America at all, and whether and how it can be meaningfully administered across cultures.

They did not, and I believe that they did not because they cannot. The minute they start questioning the precious few tools on which their peer-reviewed research rests, they lose the ability to conduct the kind of research their professions and employers expect them to conduct. When our best scholars are shackled to weak tools, what can we expect but debatable outcomes?

Without more substantive answers, I’m led to the conclusion that for the sake of marketers, academics, and policymakers, we need to re-engineer research. The realities of globalization demand new tools. It is time to create them.

 

The Innovator’s Dilemma with Chinese Characteristics

Hutong West
Catching up
2009 hrs

In what has to have been one of the most important moments of my life, while running errands today in the car my wife touched my hand, looked into my eyes, and said “the time has come in our lives for you to focus on what is important: your books, your blogs, your research, your speaking, and your teaching. Let me worry about the other stuff from now on.”

Talk about a lump in the throat. I do not deserve a partner like her. With that kind of support, however, I’m rolling up the sleeves.

With this post, I am beginning an effort to write the posts I have been dying to write, but have put off over the years because of other obligations. Not everything will be timely, but it will all be relevant. I can promise you, though, that I’ll keep most of them short and pithy. To keep these grouped together, I will mark each of them with my “FITG” (“flag in the ground”) category.

Is China like Japan, Only Bigger?

In a thoughtful article in The New York Times from January 2011 [see, I told you I’d been waiting a long time to write these – dw], Steve Lohr suggested that perhaps the U.S. trade disputes and commercial competition with Japan were mere warm-ups for what we would face in China. It’s a provocative thesis, but the passage that got me in the article was this one:

“The bet for I.B.M. in Japan, as it is for companies like Boeing and General Electric today in China, is that they can stay ahead, innovate faster than the potential competitors they are helping,” says Edward J. Lincoln, professor of economics at the Stern School of Business at New York University, and director of its Japan-U.S. Center for Business and Economic Studies.

I’m on record in this blog for suggesting that the way for companies to keep ahead of the Chinese was with a flow of innovation. But when I read Professor Lincoln’s words, my brain goes straight to Clayton Christiansen’s Innovator’s Dilemma. Piling innovations on top of each other to stay ahead is great, but at some point your customers are going to wake up and ask exactly how much of this innovation they really need, or whether buying “good enough” products will do just fine?

Bells, Whistles, and Value

What triggered me was the reference to Boeing. I’ve been compiling notes and research on a book about Chinese aerospace over the years, and the issue I keep coming back to is that at some point Boeing’s innovations – as remarkable as they may be – may not mean enough to a Chinese, Latin American, or African customer to make a 11o passenger jet worth 25% or 30% more.

In construction equipment, for example, the global manufacturers have created so many process innovations that their earth movers, graders, and loaders will last for a decade or more. But those innovations don’t pay off with many Chinese customers: they amortize the cost of the equipment over a year or two, so they would rather buy cheap equipment, burn it up, and then sell it used to companies in the poorer parts of China than pay a premium for the longer-lasting equipment.

With airliners, many carriers in the developing world have been getting by with used Boeings and Airbuses for years because they simply could not afford to equip their airlines with the newest planes. But at some point, a company (like China’s COMAC, for instance) will come to those carriers and say “look, we’ll sell you our new airliners for just a bit more than you have been paying for the used Boeings and Airbuses. You get new planes rather than used ones, and it doesn’t cost you much more. Sure, they don’t use the latest technologies, but you don’t really need composites and Garmin avionics – you’d be perfectly happy with aluminum planes with old-fashioned dials for instruments. Your maintenance costs will drop substantially, and you’ll have happier passengers.”

Apologies to Debbie Fields of Mrs. Field Cookies, but sometimes, good enough is good enough.

What KIND of Innovation Stream?

So what do companies like Boeing need to do?

Part of the answer is to go back to Franz Johansson’s definition of “innovation” from his book The Medici Effect. A true innovation, Johansson noted, has two characteristics: it is novel (i.e., new or never been done before), and it is useful. That last bit, he noted was the part most people missed. But I think companies like Boeing and GE manage to get both the “novel” and “useful” bits right, but that is not enough: just ask the guys who make earth moving equipment. Something is missing.

I once had a jolly debate by mail with an auto reviewer for the L.A. Times who felt that Mitsubishi’s inclusion of an inclinometer in the instrument panel of its off-road vehicles was useless. I thought it was quite useful, as it is possible to get disoriented when bouncing around off-road, especially in low light. He responded by suggesting that maybe I needed my inner ear checked. I ended the conversation before calling him an effete Limey, which is just as well. Twenty years on, I think we were both right. For him, the doohickey was useless, but for me, it was useful.

Herein, I think, lies an answer to the challenge innovative companies are going to face with Chinese competitors. An innovation must be novel, and it must be useful, but it also must be relevant: it must be meaningful to the specific customer given that customer’s preferences and proclivities. In fact, the more relevant an innovation is, the less truly novel it need be.

This simple question reframes the thinking around innovation and around the value proposition an innovation offers. Instead of assuming that, say, because Singapore Airlines will value an innovation, Air Afrique will value it equally, we automatically assume that some of our customers will value an innovation and that some will not, and we start seeing innovations as targeted rather than as generic. This means that there will be multiple streams of innovations that are targeted to customers with different needs and preferences.

So yes, as Professor Lincoln said, to keep ahead of the competition who are innovating on your heels, innovate faster. But keep the innovations relevant, or you may turn around and realize that you missed a turn, but the competition didn’t.

China and the BRICs

English: The BRICS - Brazil, Russia, India, Ch...
English: The BRICS – Brazil, Russia, India, China and South Africa. Português: As Potências regionais. (Photo credit: Wikipedia)

BRICS: In Search of Unity? | Institute for Defence Studies and Analyses.

Hutong West
Dealing with plumbers
1228 hrs.

While the Fourth BRICS (Brazil, Russia, India, China, and South Africa) summit was nearly three months ago, the meta-message that is emerging from the aftermath is that these countries do not yet form anything resembling a bloc of interests.

Ruchita Beri’s short piece (linked above) is guardedly optimistic about the grouping, but if you read between the lines you can almost feel the divergence of interests that is pulling this grouping apart. Beri, a senior researcher at India’s Institute for Defence Studies and Analyses, gently suggests that China is part of the problem.

While the BRICS grouping does provide an opportunity for each member to play an important role on the global stage, one of the challenges that it faces is cohesiveness. Take the issue of the BRICS development bank. While it is indeed a laudable initiative, the challenge lies in aligning the differing interests of the member countries. Moreover, other members of the grouping are wary of China’s domination over the bank given that China holds very large foreign exchange reserves ($ 3 trillion).

All of this serves to underscore the real elephant in the room, which is the fact that while some of the BRICS might trust each other, most are having a hard time trusting China. As it considers its soft power challenges, China also needs to see that being a trustworthy player in the global system would do a lot toward making it influential (rather than disruptive) in such international groupings, and in turn toward making those groupings influential.