Valuing the Future

I once asked an Assistant Secretary and Chief Financial Executive of a government agency whether he preferred to be in control of all the budget of his agency or to be in control of how the money was counted.  He responded, “If I can control how the money is counted, I don’t need to control the money itself.”  Clearly, how things are counted matters a lot.

How do we count our financial resources as a nation?  We can think about the answer to this question in terms of the national Income Statement and Balance Sheet – two fundamental elements of an enterprise’s financial state.  Right now, the national Income Statement looks pretty grim.  Our expenditures substantially exceed our income by an enormous amount.

How should we think about this situation?  Well, it depends on how the money is being expended.  Are these expenditures increasing the asset values on our national Balance Sheet?  Are we creating assets that will later yield returns that justify the current losses on our Income Statement?

It appears that we are improving the Balance Sheets of the major U.S. banks.  Thus, they may be in better positions to loan money to other enterprises, and they will at least be in positions to provide their senior executives and traders better bonuses.  But, does this improve the national Balance Sheet?

This begs the question of the nature of the national Balance Sheet.  What does it looks like and where is it?  Well, we will not find it in Congress.  They manage using an Income Statement at most and, more realistically, by simply using their checkbook.  They do not think in terms of national assets that will later provide returns.  They do not own the future.

So, who owns the future?  Our children do and, of course, we do too, both in terms of wanting returns on earlier investments and having to pay shortfalls that result from expenditures that do not yield returns.  What kind of assets will best yield returns?  Perhaps it will not surprise you that I think the answer is straightforward – a healthy, educated, and productive population that is competitive in the global marketplace.

Our assets are our people and their abilities to transform expenditures to assets that yield future returns.  We need to invest in fostering these abilities, incentivizing these transformations, and capturing the resulting returns.  We need to keep score on a national Balance Sheet.  Congress will not know what this means, but we will and, as a result, our national Income Statement will look a lot better in the future.

Value of Prevention

Last August, the Director of the Congressional Budget Office (CBO), Douglas W. Elmendorf, sent a letter to Congress informing them that most preventative health interventions tend to expand utilization of services with costs that far exceed the eventual cost savings due to avoiding disease or detecting it earlier.  In other words, he reported that prevention is not worth the investment.

I considered immediately stopping exercising and not worrying about trying to eat healthy.  Based on the CBO’s sage advice, I now knew that it was not worth it.  The money spent on the exercise club and Whole Foods produce would not provide a return on this investment that would exceed the costs.  I even entertained stopping eating because it just increases food costs.

Then it struck me.  The CBO had attached no value to healthy, productive people.  People who are healthy, educated, and productive, and thereby increase GDP and tax revenues, have no value to Congress.  The CBO only counts what matters to Congress – how tax dollars are distributed, not how these dollars are secured.

Of course, as I indicated in an earlier post, another problem is that the “return” on prevention primarily occurs in later years.  No one in Congress owns the future, 5, 10, or 20 years from now.  Thus, despite the fact that relatively small investments in prevention now will contribute to a healthier and more productive workforce in the future, Congress is not concerned with the GDP and tax revenues these people will generate many years from now.

If you and I were to adopt the philosophy that Congress embodies, we would not save for our children’s college education.  We would not pay the exercise club dues or waste time on after dinner walks.  We would avoid expensive broccoli and whole grains and, instead, consume a lot of tasty but poor quality food, made cheap by government corn subsidies.

However, we do attach value to being healthy, educated, and productive.  We also probably attach value to other people being healthy, educated, and productive.  We would like a society where as many people as possible are healthy, educated, and productive.  We know that prevention is worth it, just like we know that eating is worth it, even if it does increase food costs.

Unintended Consequences

Medicare limits reimbursement for healthcare procedures, often below the cost of delivery of these procedures.  Not surprisingly, healthcare providers figure out ways to compensate for these price controls.  They may, for example, bundle other, profitable services with those that they are forced to provide at a loss to get the overall profit margin to be positive.

Another thing providers do is charge non-Medicare patients more.  Consequently, patients with employer-based insurance pay more to subsidize Medicare patients.  I have seen several studies that estimate that employers pay, on average, for 120% of the costs of their employees’ healthcare costs.  In other words, they are paying for 20% of a Medicare patient for every employee and family member they insure.

The result of this is that employer-based health costs are growing faster than the costs of their employees’ healthcare.  This means that employee productivity increases that would have translated to wage growth are instead being used to cover increased healthcare costs for Medicare patients.  Wage levels are, therefore, depressed.  I cannot imagine that Medicare policy makers consciously decided to depress wage levels in the U.S.  However, that is a primary unintended consequence of their price control policies.

Healthy, Educated & Productive

Starting with the overarching objective of a healthy, educated, and productive population that is competitive in the global marketplace, what should be done?  Let’s work through this piece by piece.

Start with healthy.  We are facing an epidemic of chronic disease, driven in part by an epidemic of obesity.  The eventual financial costs of diabetes and all its complications, e.g., heart disease, will be enormous.  The human costs in terms of lost quality of life will also be daunting.

The most important thing in stemming this epidemic is quite straightforward, at least on the surface.  People have to consume fewer calories and/or burn more calories via activity.  Better quality food and smaller portion sizes would help on the consumption side of things.  More physical education in schools, as well as by employers, would help the burning of calories.

One of the problems, however, it that junk food, much of which is corn based, is subsidized by the government via farm price supports. So we have created a food ecosystem where the government invests in the creation of foods that people should not be eating.  However, for poorer people, this food is the best deal in terms of calories per dollar, so they buy it.  We need the government to subsidize broccoli and carrots, not corn.

Next, let’s consider education.  We need literacy and numeracy skills to be increasing, not decreasing.  We need people to understand and be competent with technologies and computers.  The key is making K-12 education motivating and even fun.  Problem based learning could help tremendously.  Perhaps we should eliminate closed-book exams and instead focus on problems and cases that require literacy and numeracy.  A nation of problem solvers will be much more competitive than a nation of memorizers.

Finally, let’s address productivity.  In general, the private sector invests in employees’ productivity via training, education, and technology.  The more output per hour or dollar, the more people are paid.  (Unless, of course, healthcare costs are consuming these gains.)  We need tax policies that encourage employers to make these investments in our healthy and educated problem solvers who can help companies innovate and compete.

So, for health, we need resources focused on prevention and wellness, as well as chronic disease management to deter disease progression.  We need resources for education focused on creating a nation of literate, numerate problem solvers.  And, we need tax policies that motivate employers to invest in their productivity.

Transforming the Debate

The debate in Washington seems stuck in partisan positioning and sound bites.  We have lost track of the fundamental objectives that need to be pursued.  I think the overarching objective should be quite simple – we want a healthy, educated, and productive population that is competitive in the global marketplace.

We do not really want the lowest cost healthcare system or education system.  That would be simple; just zero the health and education budgets.  We really want high value healthcare and education systems.  Value might be defined as the extent to which the overarching objective is achieved, perhaps divided by the cost of achieving it.

Were the U.S. a corporate entity whose CEO could decide what would and would not be done, it would be easier to pursue this objective.  However, the wide range of stakeholders in our society makes the decision process much more complicated.  Two aspects of this process exacerbate the difficulties.

First, we need to invest now for returns many years in the future.  Investing now in preventing chronic disease, e.g., diabetes, will save enormous sums decades from now.  However, the people who would otherwise have to pay these sums are not here now to influence the decision process.  Similarly, we need to better educate our children so they will have globally competitive knowledge and skills a decade or two from now.  But they are not part of the decision process either.

Second, it is often the case that the organization that might invest in the future is not the organization that will gain the returns when the investment pays off.  States invest in services that subsequently save the federal government future outlays, and vice versa.  This creates strong incentives to minimize current outlays, as there will be no direct returns to justify the investments.

What we need is somebody who owns the future – all of it, not just their piece.  They need to be “at the table” and have influence.  They need, for example, to argue for sacrifice now that will enable higher payoffs later.  Sacrifice might be services reduced, taxes increased, or privileges eliminated.  I am less concerned that any particular sacrifice happen, then I am that an influential person or organization be making that argument.

Transforming Academia

The transformation framework from the last post can be applied to thinking through the four scenarios for academia from the post before the last one.  Consider the Network U. scenario.  This scenario basically involves changing offerings across the instruction function and/or organization via process and technology changes.  Put simply, teaching would be quite different.

All students would be taught physics by Richard Feynman and economics by Paul Samuelson.  The fact that both of these individuals are deceased will not matter given the state of digital media technology.  They would even be able to lecture on research results that were not known before they died.

Students would no longer sit in crowded auditoriums while professors lectured on the stage.  The lectures could be viewed when and where students chose.  They could watch and listen to the lectures again and again.  Small groups could gather around the presentation media and occasionally put the lecture on hold and discuss the points just made.

The vast majority of physics and economics teachers would no longer prepare lecture notes and deliver lectures.  Instead, they would meet with small groups of students, say 10-20, to discuss the lectures and talk about the implications of the material.  Most teachers would become recitation leaders rather than lecturers.  They would be “guides on the side” rather than “sages on the stage.”

This would also change the bricks and mortar strategies of universities.  Few large lecture rooms would be needed, but many more small meeting rooms would be required.  Perhaps faculty member offices would become more like elementary school classrooms with a work area to one side and, in the middle, seating for the 10-20 students in each recitation group.  A faculty member might meet with 4-6 of these groups each day.

There would be few teaching assistants because the faculty members would now be responsible for far fewer students.  The demands of correcting exams and homework would be eased by technology, including social technology that would engage students in this process.  Collaborative learning would have become the norm for the generations of “digital natives.”

In parallel, faculty research will also become more networked and collaborative, both across disciplines and across academia, industry, and government.  Funding from industry would have increased substantially, while government funding declined due to other demands on these resources.  Networked collaboration technology will be a great enabler, both for work and for translation of research outcomes to practice.

Transformation Framework

A framework for understanding the nature of enterprise transformation is shown below – it also appears on the cover of Enterprise Transformation: Understanding and Enabling Fundamental Change (Wiley, 2006).  The goal or ends pursued via transformation tends to significantly differentiate initiatives.  The approach or means adopted for transformation pursuits relates to both the goals pursued and the nature and competencies of the enterprise.  The ends and means, as well as extent of integration of the enterprise, influence the scope of transformation.

Transformation Framework Figure

Transformation Framework

The ends of transformation can range from greater cost efficiencies, to enhanced market perceptions, to new product and service offerings, to fundamental changes of markets.  The means can range from upgrading people’s skills, to redesigning business practices, to significant infusions of technology, to fundamental changes of strategy.  The scope of transformation can range from work activities, to business functions, to overall organizations, to the enterprise as a whole.

I have found this framework to provide a useful categorization of a broad range of case studies of enterprise transformation.  Considering transformation of markets, Amazon leveraged IT to redefine book buying, while Wal-Mart leveraged IT to redefine the retail industry.  Illustrations of transformation of offerings include CNN redefining news delivery, Motorola moving from battery eliminators to radios to cell phones, UPS transforming from solely package delivery to being a provider of integrated supply chain management services, and IBM moving from an emphasis on selling computer products to providing integrated technology services.  Examples of transformation of perceptions include Dell repositioning computer buying and Starbucks repositioning coffee buying.  The many instances of transforming business operations include Lockheed Martin merging three aircraft companies and Newell resuscitating numerous home products companies.

The costs and risks of transformation increase as the endeavor moves farther from the center.  Initiatives focused on the center (in green) will typically involve well-known and mature methods and tools from industrial engineering and operations management.  In contrast, initiatives towards the perimeter (in red) will often require substantial changes of products, services, channels, etc., as well as associated large investments.

It is important to note that successful transformations in the outer band of this framework are likely to require significant investments in the inner bands also.  In general, any level of transformation requires consideration of all subordinate levels.  Thus, for example, successfully changing the market’s perceptions of an enterprise’s offerings is likely to also require enhanced operational excellence to underpin the new image being sought.  As another illustration, significant changes of strategies often require new processes for decision making, e.g., for R&D investments.

Four Scenarios for Academia

What will the academic world be like in 25 years – 2035?  Thinking 25 years into the future is quite difficult, as is evidenced by thinking back to 1985 and imagining our current iPhones, Kindles, and pervasive social technology such as Facebook. Nevertheless, it is interesting – and potentially useful – to consider future scenarios.  We know one thing for sure.  Any one scenario will inevitably be wrong.  Thus, we need multiple scenarios.

Driving Forces

Scenario development should be based on best practices on this topic.  All of the pundits begin by defining the forces that drive the future. There are — at least — four strong driving forces that will affect academia’s future:

1. Competition among top universities will become increasingly intense, both for talent and resources — there will be a clash of the titans

2. Globalization will result in many academic institutions, particularly in Asia, achieving parity in the competition — it will become hot, flat, and crowded

3. Demographic trends portend an aging, but active populace leading to an older student population — higher education will need to become a lifespan mecca

4. The generation of digital natives will come of age, go to college and enter the workforce — there will be no choice but become a networked university

We cannot escape these forces; nor can we fully predict the ways in which they will interact to shape the world of 2035.  We can be sure, however, that for academic institutions to compete in this future, their strategies must be sufficiently robust to accommodate these forces.  If, instead, they focus on just one scenario — for example the clash of titans that most closely resembles business as usual, perhaps on steroids — they will almost certainly be at a competitive disadvantage in the future.

Clash of Titans

I have worked at, consulted with, or served on advisory boards of quite a few top universities.  Every one of them pays attention to their U.S News & World Report rankings.  They aspire to battle with the titans of higher education, and hold their own.  This scenario has universities continuing that clash, perhaps clawing their way to higher rankings, albeit in an increasingly competitive environment.

General Description: Academic institutions continue to battle to achieve dominance in various academic disciplines, as well as compete with top universities for overall rankings within the U.S., and with premier international universities for global rankings.

Dominant Issues: The competition for talent becomes fierce, with well-endowed faculty chairs becoming the minimum for attracting talent; top students at all levels expect and get near-free education.

Economic Implications: The top players continue to dominate receipt of Federal funds, with considerable pushback from other players; costs of facilities and labs soar, much of which must be raised from philanthropic sources.

Social Implications: University cultures are sustained, with adaptations for a decreasingly Caucasian male population – for both students and faculty — but one that is committed to the values and sense of purpose that has been central for recent decades; changing demographics impacts how alumni best relate to their alma maters.

Hot, Flat & Crowded

Tom Friedman has argued that the world is flat and we should no longer assume business as usual – his revision of this best seller included a chapter on Georgia Tech and how we are transforming education in computing.  More recently, Friedman has argued that the world will be hot, flat, and crowded.  In this scenario, academic institutions have to compete with a much wider range of players in a global arena.

General Description: Global parity emerges in graduate education in science and technology, particularly for traditional disciplines and subdisciplines; greater collaboration among institutions emerges; demand for higher education in the U.S. will nevertheless increase substantially.

Dominant Issues: Many of the best jobs are in Asia; scarcity and constraints dominate sustainability debates; clashes of belief systems create political turmoil and security concerns; meeting demands presents strong challenges.

Economic Implications: Federal and state support diminish as portions of budget; industrial and philanthropic support are increasingly competitive; sponsors become sensitive to where resources are deployed; undergraduate tuition stabilizes and increases are less and less acceptable.

Social Implications: Global footprints of top universities increase by necessity; social, cultural, and ethnic diversity of faculty and students increases in turn; traditional business practices, e.g., promotion and tenure, must change to accommodate diversity.

Lifespan Mecca

It is easy – and convenient – to assume that the students of the future will be much like the students of today.  However, over the past decade, the number of graduate students 40 years old and older has reached record numbers. From 1995 to 2005, the number of post-baccalaureate students age 40 and older at U.S. colleges and universities jumped 27%. And during the next two decades, the number of older citizens will rise at even faster rates, which suggests that the number of post-baccalaureate students age 40 and over very likely will continue to grow.   In this scenario, universities have to address a “student” population with more diverse interests and expectations rather different from students of the past and current eras.

General Description: Demand for postgraduate and executive education surges as career changes become quite common; demand steadily grows for education and artistic performances by an increasingly urban older population.

Dominant Issues: Two or three MS or MA degrees become common across careers, as do often required certificate programs; multiple artistic performance and sporting events per day become common at any top university.

Economic Implications: Tuition revenues soar for executive programs and graduate education programs popular with elders; revenues from artistic performance and sports venues become significant portions of university budgets.

Social Implications: Median age of students increases substantially, changing the campus culture substantially; older students in particular expect and get high quality, user-friendly services; diversity of faculty increases substantially to satisfy diversity of demands.

Network U.

Technology is increasingly enabling access to world-class content in terms of publications, lectures, and performances.  Higher education can leverage this content to both increase quality and lower costs.  This technology has also spawned the generation of “digital natives” that is always connected, weaned on collaboration, and adept at multi-tasking.  In this scenario, academia has to address different types of student using very different approaches to delivering education and conducting research.

General Description: Social technology prevails; access to the best content and faculty is universal; nevertheless, students go to college to learn and mature; however, the classroom experience is now highly interactive, both remotely and face to face.

Dominant Issues: Students and faculty have broad and easy access to knowledge, often via other people; with the “best in class” universally available, local faculty play more facilitative roles in small (10-20) “high touch” discussion groups.

Economic Implications: More teaching professionals are needed for recitation-sized classes; teaching skills are at a premium; increasing numbers of high quality programs result in strong downward pressure on tuition and fees; faculty research becomes near totally externally funded.

Social Implications: Students and faculty are networkers par excellence; both within and across institutions; students’ evaluations of teaching effectiveness play an increasing role; students seamlessly transition from K-12 to university to lifespan education.

Implications

Framing the future 25 years from now is quite difficult.  Yet, this is essential if academic institutions are to focus their competencies and resources on the possible futures in which our students – and all of us – will have to compete.  Our abilities to understand and manage the inherent uncertainties associated with these futures can be an enormous competitive advantage.  We need to enhance these abilities to maintain our competitive position in global education.

Transforming Silos to Networks

I have been a faculty member at four universities – two in leadership positions and two in one-year visiting positions.  Nevertheless, academia is a bit of enigma to me, perhaps because of my thirteen-year “leave of absence” to found and lead two software companies.  In terms of content, in my case science and engineering, universities tend to be hotbeds of new ideas, often expounded by very talented and impressive free thinkers.  However, as organizations, universities are among the most conservative I have encountered.

How can groups of highly educated, mostly liberal intellectuals create such conservative organizations?  In People and Organizations (Wiley, 2007) and Don’t Jump to Solutions (Jossey-Bass, 1998) I addressed this question.  The organizational structure of disciplinary departments, schools, and colleges is almost sacred – having begun with the founding of the University of Bologna in 1119.  The incentive and reward system that totally emphasizes individual accomplishments by faculty members is, in fact, sacred.

I have often used this bit of history to explain the roots of academic organizations.  A few years ago, I encountered a faculty member from UCLA whose specialty is the history of academia.  She mentioned that Bologna formed departments for the specific reason of keeping members of disciplines from killing each other, as they all carried and used swords in those days.  Now, we just use words rather than swords, just as lethal but not nearly as satisfying.

Despite the limitations and frustrations, academia has created some remarkable outcomes in science, technology, architecture, the arts, and so on.  Aided by government largess since World War II, we have become increasingly specialized.  Surely we will soon see whole academic schools devoted to (nano or neuro) (chem or bio) (geno or proteo) (information or computational) technology.  Actually, there are enough combinations for 16 schools here, which could create one to three colleges.

All of these new schools will need enormous human, financial, and physical resources.  There will be long lines at government agencies that fund research.  With the specter of Social Security and Medicare also standing in line for resources, can we expect the government to fund all these new disciplines and subdisciplines?  Can we continue to refine the game defined in Bologna and optimized throughout the 20th century?

Beyond the availability of resources, a key issue is whether or not the old rules of the games will still work in the future.  Bob Lucky, in a recent issue of IEEE Spectrum, contrasted two lists compiled by the National Academy of Engineering – one of the most significant accomplishments of the 20th century, and the other of the greatest challenges of the 21st century.  The 20th century list, topped by electrification, the automobile, and the airplane, mainly included things that had emerged from individual drawing boards, ideas that had made it through the gauntlets of invention, innovation, and market success.  The 21st century list, headed by energy, the environment, urban infrastructure and health informatics, addresses national challenges that we are not sure how best to address.

These types of challenges cannot be addressed by decomposing them into little pieces, each of which is addressed by a highly specialized professor and his or her graduate students – and primarily results in an article published in a highly specialized journal.  A more integrated approach is needed whereby the requirements for each of the pieces are driven by a top-down view of the whole problem and the bottom-up solutions for each of the pieces are integrated into an overall solution.  Without such integration, the whole may be less than the sum of the parts.

To accomplish this integration, we need networks of disciplines working in an integrated manner rather than silos of disciplines working independently of each other.  This, in turn, requires a different organizational model for how universities conduct large-scale research, and how we reward faculty and staff for their pursuit of large challenges.

As a junior faculty member in a Bologna-type system who made it up through the ranks to tenured full professor, the system was great.  There was no doubt about what counted and no doubt about the rules of the game.  If you could publish lots of journal articles, bring in sizable amounts of grant money, and earn above-average teacher ratings from students, your success was assured.

However, incentives and rewards that focus solely on individual accomplishment do not necessarily create great organizations.  They also do not create institutions that can contribute to solutions of complex problems such as embodied by the NAE challenges.  What they do produce, however, are students, especially at the graduate level, who are programmed to recreate the “standard” academic organization wherever they work.  This, in turn, makes it very difficult for academic organizations to face their own organizational delusions.

Beyond reward systems, we need to reconsider how research is funded.  The traditional model involves one or two researchers writing proposals to cover one or two months of their summer salaries plus a couple of graduate students.  These types of grants are great for beginning junior faculty.  However, this model does not scale for addressing national challenges.  Having 100 grants of $100,000 is very different from having one grant of $10,000,000.

To pursue larger funding opportunities, we have to offer more than piles of obscure journal articles.  We need to provide integrated insights and solution concepts for large-scale problems.  Academia need not provide “installed” solutions, but should provide sufficiently proven ideas that industry can run with them, confident that they will work.  Beyond being a key source of ideas, academic research needs to be a means of risk reduction for those who will translate research inventions to market innovations.

The pursuit of larger opportunities will require robust relationship networks and strategic alliances involving academia, industry, and government.  We should not wait to form strong, competitive teams when the solicitation of proposals is about to emerge.  Instead, we need to build and nurture these teams to pursue portfolios of opportunities over many years.  Personnel need to move across the organizational boundaries within the team.  Students graduating provide a great mechanism for this, as do industry and government team members seeking graduate degrees.  Retired executives joining the faculties of universities provide another wonderful mechanism.

All in all, the new game will require some new rules for how we formulate problems, develop proposals, acquire resources, and deploy knowledge.  The strong organizational traditions of academia may undermine our abilities to define and adopt such new rules.  Indeed, as Paul Samuelson, who recently passed away, said in 2003, “Funeral by funeral, theory advances.”  (Samuelson was referencing Max Planck who said in the 1940s, “Science advances one funeral at a time.”)  However, I think that the true leaders among academic enterprises will be those who proactively embrace and create change.  The national challenges we face will not get easier if we wait.

Transforming Air Lines to Bus Lines

I have been a frequent flyer for almost 30 years on Delta Air Lines.  I’ll soon reach 3,000,000 miles.  I’ve been everywhere with Delta, both as my conveyance to adventure and my safe passage home.  I’ve had countless drinks, lots of ice cream sundaes, and many fascinating conversations and heart-felt laughs, all on Delta, flying first class heading somewhere.

During these 30 years, the airline industry has adapted to the deregulation initiated in 1978 in the Carter Administration.  Competition has greatly intensified, helped in part by seat price optimization that enables one passenger to pay $699 for a seat next to another passenger paying $99.  The result is every seat is full, yet the airlines continue to lose lots of money.

Passengers lose too.  People are tightly packed together, waiting like gerbils for their little bag of pretzels.  There is little legroom – guard your pretzels in case the person in front of you puts their seat back.  Luggage compartments are overflowing.  On-time departures are almost impossible as people wrestle their bulging roll-aboards around each other seeking rapidly diminishing opportunities to dock them.

My recent flights, still occasionally in first class, provide astounding contrasts with my memories of Delta before they optimized the “passenger containment units”.  Now, everything feels like McDonalds, from the throwaway placemat to the plastic utensils.  There are two wines – called red and white – and no champagne.  Grapefruit juice is long gone.  The ice cream sundaes seem farther away than my childhood experiences of the ice cream man.  It is upscale coach – maybe.

I’ve heard people say that this is Delta’s natural reaction to the pressures of Southwest, AirTran, and others.  It may be natural, but it does not seem like a prudent choice.  I used to pay more for Delta flights (in inflation-adjusted dollars), never complained, and Delta made money.  Now, I am paying less – sometimes – and receiving much less value and Delta is losing money.  Sure, I get where I’m going, a little compressed sometimes from the lack of space.  But, I get there.  So, why complain?

I’ve looked for the answers in trains.  I never experienced the opulence of trains in the U.S.  My mother had a glimpse, but even by World War II, the experience was fading.  In contrast, I have experienced first class travel on European and Japanese trains.  I love going to the dining car, having a drink and watching the world whisk by.  I expect to sometime see Cary Grant and Eva Marie Saint, or someone like them sharing love, adventure, or simply being scared stiff.  So, I am an incurable romantic, which might reasonably call you to question this whole post.

So, what’s happened to air travel?  Certainly, Delta argues that it is trying to do a good job, as are its pilots, flight attendants, and other employees.  However, the world seems to have changed.  Many people want low-price everything.  Laundry soap, potato chips, and airplane flights.  We want the absolute cheapest, minimal frills, and take the bus travel that anyone can provide.  If you can provide a transcontinental flight for $99, how about $89?

For Delta at least, this is clearly the end of greatness.  Delta has decided to compete in the bus business.  As one Delta executive commented to me, they will continue to pull feathers (i.e., eliminate services) until the goose honks – as I am honking now.  Then we will get used to the bus service from Atlanta to Washington, Chicago, and Los Angeles, and accept the bare-bones everything – all for $89, $79, $69, ….  I once had a great relationship with a great airline.  Now, I take the bus.

Transformation Archetypes — Part 4

A year ago, I bought an iPhone.  About six months ago, I switched from a PC to a Mac.  A few months ago, I began to use texting and now frequently rely on this means of communication.  Now, I am writing a blog.  My colleagues think that I have a chance of actually making it into the 21st century.  I am not sure – I am not that keen on Facebook and I still fancy cars from the 1940s.

Information and communications technologies seem to be transforming how we work and live.  The web is pervasive – right now, I am on a flight to Detroit, answering email on my laptop.  Social technology, smart phones, and perhaps even e-books enable a highly distributed and mobile workforce.  The same technologies enable highly connected personal lives.

Consider this candidate transformation in terms of the three ingredients identified as important to the Renaissance – creativity, resources, and flexibility.  My sense is that we score highly in terms of creativity as Amazon, Apple, Google, and many others provide a steady stream of new possibilities.  Working on a college campus, I see many inventive uses of these technologies, ranging from applications to support chronic disease management to performing arts initiatives.

As for resources, money is quite tight right now.  The investment monies available during the Internet bubble in the 1990s have not been around for this decade – and the last couple of years have been much worse.  While the housing bubble created a lot of wealth, at least temporarily, I don’t sense that the bulk of this flowed into technology investments.  So, we do not score too highly here.

This leaves flexibility.  Clearly, people are quite open – worldwide – to adopting these technologies.  However, are we as a society as open to changes in the nature of work and personal life?  This is difficult to answer in general.  Instead, let’s return to earlier discussions of healthcare.  There are substantial and powerful forces against transformation of healthcare, for example, in terms of information and communications technologies enabling people to play major roles in managing their own health.  We need people to help significantly in managing their chronic diseases, but many key stakeholders see such developments as undermining their sources of revenue.

Many of these key stakeholders in healthcare delivery have made major investments to optimize their business practices for the way that the system currently operates.  Moving towards paying for health outcomes rather than fees for services — enabled by information and communications technologies — is a threatening prospect for many key stakeholders.  They need things to stay the way they are.  This is a hallmark of a lack of flexibility.  There is a similar lack of flexibility in many of our complex public-private enterprises – education and defense, as well as healthcare.

Yet, there are some bright prospects, as illustrated in Tom Friedman’s editorial “The Do-It-Yourself Economy” in last Sunday’s New York Times.  He discusses two companies that had to accelerate change, using the technologies noted above, in order to stay in business – survive.  They changed the ways they did business because they felt they had no choice.  Sounds a lot like the shipbuilders who stopped building with wood because they could not get enough wood any more.  Perhaps the old adage “necessity is the mother of invention” can be morphed into necessity is the mother of reinvention.  If many pundits’ projections are right, healthcare will be encountering lots of “necessity” in coming years, so perhaps a Renaissance in healthcare will emerge.

Transformation Archetypes — Part 3

The Renaissance is typically associated with great works of art and architecture.  As noted in Part 2, Filippo Brunelleschi was an early Renaissance artist and architect.  His dome of the Florence Cathedral was a major engineering feat.  Leonardo da Vinci (1452-1519) was a scientist, engineer, painter, and sculptor, with works ranging from The Last Supper and Mona Lisa to military weapon systems and civil engineering projects.  Michelangelo di Lodovico Buonarroti Simoni (1475-1564) was a painter, sculptor, architect, engineer, whose greatest works include the ceiling of the Sistine Chapel and the design of St. Peter’s Basilica.  Leonardo and Michelangelo epitomize the notion of “the Renaissance man.”

Lorenzo de Medici (1449-1492) is often credited with serving as a primary catalyst of the Renaissance in his role as a patron of arts.  He is recognized as the best example of a second critical ingredient of the Renaissance.  The commerce-oriented nature of Italian city-states such as Florence, Milan, and Venice created wealth that provided the means for the wonderful art and architecture of the Renaissance.  Thus, there were both creative, inventive people and those who were inclined and able to invest in their creations.

There was a third ingredient – a political landscape that was open to change and aggressive in pursuing it.  The leader of the Roman Catholic Church, during a crucial period, was Pope Alexander VI  (1431-1503).  He took corruption to new levels, fathering four children while Pope, and doing his best to assure dominance of the Borgia family, hopefully long after his reign as Pope ended.  His son, Cesare Borgia (1475-1507), was a key element of this strategy, serving as a military general and statesman in the unification of the Romagna region in Italy.  Many citizens welcomed Borgia’s often-harsh arrival because his subsequent political and administrative practices were great improvements over those of the tyrants preceding him.

The sweep of political change, of which Borgia is just one example, was chronicled and studied by the political philosopher Niccolo Machiavelli (1469-1527).  His understanding of the behavioral and social nature of politics, and his writings on this, have led many to term him the father of political science.  He understood how to facilitate political change and played a central role in Florentine politics.  The overall result was a much more flexible political environment, compared to traditional monarchies or traditional conservative Papal rulers.  This flexibility often results in somewhat chaotic progress, but it provided an avenue for new ideas to emerge and succeed or fail on their own merits.

So the ingredients of transformation during the Renaissance included creativity, resources, and flexibility, all enabled by a political and social context that encouraged change, at least much more so than in preceding eras.  In Part 4, I will consider the extent to which it can be argued that these ingredients and context currently prevail and whether we are now in the process of transformation.

Transformation Archetypes — Part 2

A confluence of forces also led to the Renaissance, the highly creative period between the Middle Ages and the Modern Era that began in Tuscany in Florence in the 14th Century.  The origins of the Renaissance are often traced to the writings of Dante Alighieri (1265-1321) and Francesco Petrarca (1304-1374), and the art of Filippo Brunelleschi (1377-1446) and many others.  The Renaissance, as well as humanism, led to the Reformation and Luther’s “95 Theses” in 1517.  The Age of Enlightenment followed the Renaissance and is often dated from Rene Descartes (1596-1650) seminal writings to the French Revolution in 1789.

Why did the Renaissance happen and why did it happen in Italy?  As with the transformation of New England, it was a confluence of forces.  I will discuss these forces and the key players in Part 3 of this discussion of archetypes.  At this point, let’s just address the question, “Why Italy?”  The answer is that the unique political structure of Italian city-states provided a fertile social climate for change.  Monarchs ruled England, France, and Spain.  Germany did not yet exist.  To the east, the Ottomans were in power.  In contrast, the Italian city-states were all about commerce and skilled artisans had some say in what happened.

It seems to me that transformation requires a fertile social climate for fundamental change to be entertained and pursued.  Conservative, centrally managed cultures focus on preserving the status quo, not seeking fundamental change.  Creativity blossoms in places where it is valued and supported.  Creative inventions are more likely to become market innovations when there are lots of blossoms and many bees who are convinced they can and will succeed.

Here are my favorite books on the Italy and the Renaissance.  King (2007) and Strathern (2009) were key to my thoughts on the Renaissance as a transformation archetype.  The books on Brunelleschi, da Vinci, and Michelangelo provide fascinating views of these creative geniuses.   Preston and Spezi (2008) is set in contemporary Florence and therefore is fairly tangential — but it is a great read.

Capra, F. (2007). The Science of Leonardo: Inside the Mind of the Great Genius of the Renaissance. New York: Doubleday.

King, R. (2001). Brunelleschi’s Dome: How a Renaissance Genius Reinvented Architecture. New York: Penguin.

King, R. (2003). Michelangelo and the Pope’s Ceiling. New York: Penguin.

King, R. (2007). Machiavelli: Philosopher of Power. New York: Harper.

Preston, D. & Spezi, M. (2008). The Monster of Florence.  New York: Grand Central Publishing.

Strathern, P. (2009). The Artist, the Philosopher, and the Warrior: The Intersecting Lives of Da Vinci, Machiavelli, and Borgia and the World They Shaped. New York: Harper.

Transformation Archetypes — Part 1

Last Wednesday, I was at the White Mountain School in Bethlehem, NH.  The invited lecturer in earth sciences was Mariko Yamasaki of the USDA Northern Research Station at Bartlett, NH.  She noted that all the forests in New England “from the notches south” have grown over the past 150 years.  Before that, from 1620 to 1860 or 1870 or so – people cleared the land for farming and harvested the trees for what she termed the “wood economy.”  The wood was used to construct buildings and ships, and was the primary source of energy.

Interestingly, only a few of the pre-colonization mammals, birds, and insects became extinct in the process.  The vast majority adapted to loss of habitat and, since the end of that period, have adapted to regaining their habitat, as the remnants of the wood economy have become quite small.  While we have not allowed the re-emergence of habitat renewal via forest fires, we have become much better at habitat management.

So, people transformed rural New England for 250 years, and then nature transformed it back – well, almost — for 150 years and northern New England is now heavily forested.  In the process, we went from a wood economy, to a fossil fuel economy, to an information economy.  Of course, we still are a fossil fuel economy.  We cannot use information for energy – bits cannot equal BTUs.

How did the wood economy transform.  I have not been able to find any august advisory committee that led the way, nor any government agency that provided stimulus funds.  How, then, did change happen?

My mother’s side of the family included many ship builders.  They built ships in southern Maine.  In the late 1800s, they found it increasingly difficult to get the wood they needed for their ships.  Being in Maine was no longer a competitive advantage.  So, they moved to Boston, more specifically Chelsea.

Other things were happening at the same time.  Railroads were replacing steamboats, which had replaced coaches and barges.  Iron was in widespread use and steel was in the ascendancy.  Oil had been discovered in western Pennsylvania.  So, how about iron or steel ships, with new hull designs, and new propulsion systems?  Why not, the old wood-based designs were unsustainable anyways?  A confluence of forces led to a new economy.

Theory of Transformation

In the past 25 years, there has been 200% turnover in the Fortune 500.  Clearly, large enterprises find it very difficult to fundamentally change or transform themselves as technologies, markets, and economies change.  Our studies of this phenomenon led to the following “theory” of transformation that was published in Systems Engineering in 2005, and subsequently in Enterprise Transformation (Wiley, 2006).

“Enterprise transformation is driven by experienced and/or anticipated value deficiencies that result in significantly redesigned and/or new work processes as determined by management’s decision making abilities, limitations, and inclinations, all in the context of the social networks of management in particular, and the enterprise in general.”

The central elements of the theory are underlined.  Value deficiencies, either experienced or anticipate, drive fundamental change.  There has to be a reason – perhaps a burning platform – for change to be entertained.  Value is delivered via work processes.  To change the nature of the value is provided or the way it is provided, one has to reconsider the work done and how it is done.

Value deficiencies and work processes are the technical aspects of the problem of change.  Management decision making and social networks constitute the behavioral and social elements of fundamental change.  I have been in many situations where the technical side of the problem was quite clear, but management was not inclined to make the decisions necessary to proceed.  I have also experienced many situations where the social network rejected the need for change, effectively providing the function of an organizational immune system.

Successful enterprise transformation requires leadership that assures all four elements of the theory are addressed, with appropriately balance across the technical, behavioral, and social dimensions of the problem.  That’s how one stays in the Fortune 500 when your value proposition is challenged.  If this does not work for you, then I suggest you heed Ogden Nash’s advice, “When called by a panther, don’t anther.”

Forces Against Change

The November 12th issue of The Economist and November 22nd issue of the New York Times provide interesting analyses of forces against change.  The Lexington column in The Economist, “Farmers vs. Greens,” outlines rural America’s opposition to anything that will increase the price of fossil fuel.  It notes that senators representing 11% of the U.S. population can block any legislation.  This is a strong force against change.

Tom Friedman in his New York Times column, “Advice from Grandma,” outlines six factors that are pushing our political system towards paralysis.  Money, gerrymandering, cable TV loudmouths, permanent presidential campaigns, web-enabled extreme views, and intense lobbying, especially when combined, are forces against change.

Finally, the Schumpeter column in The Economist, “The Cult of the Faceless Boss,” argues that flamboyant, visionary leaders change the world.  These are the people who create the future rather than just manage change.  The column references George Bernard Shaw’s notion that progress depends on “unreasonable” people who feel no need to apologize for themselves or their calling.  Discouraging such behaviors is a force against change.

Challenges in Healthcare Delivery

We are currently embroiled in two healthcare debates. One debate involves how the costs of making healthcare available to everyone should be apportioned among individuals, employers, and the government. The second debate concerns how to achieve reductions in the high costs of healthcare to provide the best value. Both debates have to be resolved effectively to achieve our goals.  Only addressing one – by, for example, solely making everyone insured – may worsen our cost problems by having many more people demanding very expensive, and sometimes marginally effective care.

Which of the seven challenges is predominant in this situation?  Cost growth is obviously a major concern.  However, we might recast the growth challenge in terms of the extent to which the high costs incurred yield value relative to fostering a healthy, educated, and productive population.  Perhaps this is too grandiose.  Why not just seek the lowest cost healthcare system?  That would be easy.  We might even be able to achieve a zero cost healthcare system.  However, if the consequences of this perspective are not appealing, then we need to address the central tradeoffs between value and cost.

This, of course, begs the fundamental question of what value means in healthcare.  My sense is the highest value healthcare would be such that people would be well and not need attention to debilitating diseases.  I heard this expressed as follows, “I want to die young, as late in life as possible.”  It would be great if the second healthcare debate indicated above could focus on this possibility.

By the way, note that the challenges of focus, change, future, knowledge, and time cannot be central until we agree on the foundation of value that we collectively want.

Essential Challenges of Strategic Management

After working with well over 100 enterprises – large and small companies, government agencies, non-profits, and universities – it should not be surprising that I came to wonder about common challenges across all these types and sizes of enterprises.  Pursuing this idea, I identified seven challenges.

Growth is the overarching challenge.  How can your enterprise increase its impact, perhaps in saturated or declining markets?  For an enterprise to prosper, growth must be your goal.  Whether the metric is revenue, profit, market share or lives saved, any goal other than growth will eventually lead to decline.

Addressing the challenge of value provides your foundation for growth.  This involves enhancing the relationships of your enterprise’s processes to benefits and costs.  This requires a solid understanding of the nature of your processes, the stakeholders in these processes, and how these processes provide benefits and incur costs.

Success in pursuing the challenges of growth and value, requires addressing the challenge of focus, which provides your path from value to growth.  Focus involves pursuing opportunities and avoiding diversions.  It involves reducing or eliminating investments in your old value proposition to invest in the new.

The challenge of change requires that you design the new enterprise for the pursuing the path from value to growth.  This design or redesign should balance competing creatively while maintaining continuity with those aspects of the enterprise you want to preserve.  If you have to change everything, then liquidation may be better than transformation.

Change almost always involves investing in inherently unpredictable outcomes in the future, the fifth challenge.  Articulating your view of possible outcomes and the uncertainties associated with them is key to both your commitment and that of your team.  Keep in mind that many these uncertainties and associated risks cannot be eliminated.  Your goal, therefore, is to be better at risk management than your competitors.

By addressing the challenge of knowledge, you can gain the means of transforming information to insights to programs of action.  This involves understanding the nature and role of knowledge in your enterprise.  Much of this knowledge will not be archival.  Instead, it will be in the heads of the people in your enterprise.

The seventh challenge is time.  This challenge involves carefully allocating the organization’s scarcest resource – the time of the top management team, including you.  This resource is much more scarce than money.  Yet, executives and senior managers often waste their time on the urgent but unimportant quadrant of Stephen Covey’s matrix.

These seven challenges are discussed at length in Essential Challenges of Strategic Management (2001) published by John Wiley.  In many situations these challenges can be addressed by improving one or more elements of the “as is” enterprise.  In some cases, however, there is a need to fundamentally transform from “as is” to the “to be” enterprise.  This is your ultimate challenge.

Fundamental Change Is Very Difficult

When I first got into the strategy and planning business, I complied all the best practices I could find.  You can access these compilations in Design for Success (1991), Strategies for Innovation (1992), and Catalysts for Change (1993), all published by John Wiley.  I realized all this stuff could be quite dry, so I brought it all together into a down-to-earth treatise, Best Laid Plans (1994), published by Prentice-Hall.  This book elaborates the best practices in the contexts of designing and building furniture, planning and taking hikes, and doing business and other adventures in foreign cultures.

Despite all this pithy wisdom, I found that many engagements encountered the apparently insurmountable barrier of fundamental change.  This phenomenon came to fascinate me.  I started to compile historical case studies.  I studied roughly 200 enterprises in the period from 1800 to 2000, focusing on the transportation, computing, and defense industries.  The transitions from steamboats to railroads to automobiles and airplanes led the way, but not by much, for the transitions from cash registers and typewriters to tabulators and computers.  Almost every enterprise failed to transform itself along the way, so most disappeared amidst Joseph Schumpeter’s “creative destruction.”  However, not everyone failed – we’ll return to this later.

These case studies – see Start Where You Are (1996) published by Jossey-Bass, now a John Wiley imprint – led me to wonder why management teams so often avoided recognizing the obvious.  I thought they must have been deluded, which led to another set of contemporary studies and another book – Don’t Jump to Solutions (1998), again published by Jossey-Bass.  This book discusses thirteen organizational delusions that undermine strategic thinking.  These delusions cause enterprises to develop strategies and plans for enterprises that they no longer are – or never were.

By this point, you are probably thinking that my only goal in this process was writing and publishing books.  However, my purpose was much more one of making sense of the intense experiences I was having working with company after company, reading all the latest management literature, and trying to help management teams address the strategic challenges at hand.  Thus, these books were more like reports from the front rather than intellectual treatises.

Welcome to Change

My focus in this blog is fundamental change.  In particular, I will write about fundamental change of complex organizational systems.  Another phrase I like is enterprise transformation.

During the 1990s, in between two stints as a faculty member at Georgia Tech, I founded and managed two research and software companies – Search Technology, Inc., and Enterprise Support Systems, Inc.  The second company created and sold a suite of software tools for strategic business planning, new product planning, market situation assessment, and technology portfolio analysis.  We worked with over 100 companies, including Abbott Laboratories, Coca-Cola, Digital, Honeywell, Lockheed Martin, 3M, Motorola, NCR, Raytheon, Rolls Royce, Rover, Southern Company and many others.

While our focus was on developing and selling software tools, our customers’ focus was on success in investing in new technologies and launching new products.  This quest for success led them to ask for help in employing our tools to develop and evaluate strategies and plans.  I kept track of who we helped and, until I stopped tracking it, we had a spreadsheet with several thousand senior managers and executives that we helped.

One particular thing stuck me in these many engagements.  Many of these enterprises had great difficulty entertaining, addressing, and pursuing fundamental change.  As an outsider, with quite a breath of experience, it was sometimes quite evident to me that tweaking “business as usual” would fall far short of successfully addressing the strategic challenges at hand.  Yet, management teams could not accept the need for fundamental change of their business models.

In this blog, I will discuss how these teams often avoided change until they were out of time and low on resources.   I’ll talk about why I think this happens.  Of most importance, we’ll look in depth at how people avoided this fate.