Plucking Geese

Over the past two years, I have become a frequent train traveler between New York and mostly Washington, but also Albany and Boston.  The Acela is more expensive than flying but much more convenient and usually on time.

The other Amtrak trains provide much poorer service. Delays are frequent; an hour or more is not unusual. Multiple gate changes can happen, resulting in huge swathes of people flooding from one gate to another and then another. Agents often seen uninformed and confused.

Why is there such disparate service when the same organization provides both services?  A strong possibility is that the Acela gets priority because it provides much better revenue and profits.  I have several times experienced the Northeast Regional being sidetracked to let the Acela pass.

Of course, I could always fly. The captains of private industry should know how to provide high quality service compared to the semi-public sector passenger train business. But, they do not!

In fact, this segment of the private sector could not be much worse. We should hear almost daily of airline CEO firings.  But, we do not. Their Boards of Directors seem content with their companies being hated. Clearly, the commercial aviation industry has completely lost its luster.

To be fair, however, first-rate airlines still exist, for example, Cathy Pacific and Singapore Airlines. There are also excellent automobile companies such as BMW, Honda, Mercedes, and Toyota.  The US still has leading high tech companies like Apple, Intel, and Texas Instruments, although global competitors are snapping at their heels.

How have US airlines and automotive companies become mediocre?  The primary answer is leadership. When these companies were still high performers, they persistently hired CEOs to be stewards of the status quo. They needed to “hit the numbers” in any way possible.

Consequently, truly strategic thinking about customers and innovation were limited to litanies of buzz words.  These companies increasingly antagonized and confused customers. No one any longer believes US airlines marketing slogans. As one airline executive told me, “We keep pulling feathers until just before the goose honks.”

We lost Mercury, Oldsmobile, Plymouth, and Pontiac as the Big Three cut costs and quality, rendering these brands effectively de-badged.  The wonder is that these companies’ leaders did not think customers would notice. They must have imagined that they would be just like the airlines’ geese.

Stewards of the status quo cannot imagine being anywhere except at the top of the heap. A key competency is ease of being deluded. If this is combined with a strong dose of arrogance, a top firm is well on its way to creative destruction, having cooked its own goose.

Complexity Overload

How many user names and passwords do you have? Do you need passwords with exactly six or eight or ten characters including as least one numeric character and one non-alphabetic or non-numeric character? How often are you required to change them for security reasons?   Do you have a list, tucked away physically or electronically that helps you manage this information?  In general, how do you keep track of all the essentials of connectivity?

Many of these user names and passwords enable access to websites for your bank accounts, investment accounts, airlines, various utilities, seemingly endless retailers, and countless news sites.  For the most part, transactions on these websites are easy and successful.  However, when something goes wrong, e.g., a credit card or an address is not acceptable, it can take enormous effort to straighten things out.

The problem, of course, is that there is no knowledgeable human to ask for help.  Some sites provide a phone number to call for help; some of the helpers are actually knowledgeable.  Many sites, however, provide limited or no access to help.  The objective of the enterprises associated with these sites is, I assume, to minimize labor costs.  Further, they expect to regularly lose irritated customers and see this as just part of business.

This ever-growing connectivity infrastructure provides us with a vast number of choices of ways to spend (or possibly invest) our money and consume seemingly endless goodies and entertainment.  Beyond these benefits, what are the costs of this wild west of opportunities?  Certainly there are occasional frustrations as noted above.  There is also sporadic electronic fraud that might affect one of your credit cards or retail accounts, e.g., the recent Target fiasco.

More pervasively, how do you feel about unknown entities that know every online transaction and cellular call you make?  How about their knowing every email you send, every movie you watch and every download you make?  How about their knowing your every keystroke?  Of course, we willingly give up all this information in exchange for the things we seek.  By searching, downloading, etc., we “opt in” to divulging the basic transactions of most of our lives.

If you reflect on all of the above, the complexity of everyday life has increased substantially.  The number of things you need to know and relationships you need to manage has burgeoned.  The probability, albeit extremely small, that all your assets could suddenly disappear is very real.  When you call about your suddenly zeroed accounts, you will hear, “Chose 7 if your account balances are now zero.”  Once you choose 7, you will hear, “Our customer support center for this service is open on Tuesdays between 7:00 and 8:00AM, IST (India Standard Time).”

How Great Companies Transform — Then Fizzle

From many years in Atlanta, I have known many UPS executives, including CEO Mike Eskew who led the transformation of UPS from a package delivery company to a global supply chain services company.  I use a case study of this transformation in my classes and workshops on enterprise transformation.  It is one of my favorite success stories.

Well, at least I thought it was until recent experiences trying to ship several boxes via UPS.com.  These recent negative experiences, detailed below, led me to the local UPS store a few times for explanations of various practices.  In the process, I discovered that the UPS franchised stores have a very arms-length relationship with the corporation that owns all the brown trucks.  Put simply, they use UPS as their shipper – as a vendor of services – but cannot help you with anything about UPS.  I might as well have asked my UPS-related questions at McDonalds or Baskin-Robbins.

I had hoped to ship several boxes by using UPS.com to print labels, schedule a pickup, and pay in advance.  I created an account on UPS.com, but found that this was not really a UPS account; it was only access to the website.  So, I needed to set up another personal account, but it would not allow this because my address is on a university campus.  When I tried a different address, it would not accept it because it was not the address associated with my credit card.

So, I called customer service.  The representative told me that I could schedule a pickup and then do all the paperwork with the driver, including printing out the shipping labels.  She could not help with the address and credit card problem at all.  When the driver arrived the next day, he would not take the boxes because I had not completed the online transaction and printed the labels.  In fact, he never prints labels.

I eventually got the boxes shipped three days later by manually lugging the five large boxes to the UPS store.  This experience caused me to explore other people’s experiences with UPS.  I found an enormous wealth of complaints, far too many to detail here.  Interestingly, one of the most common complaints is that there is no mechanism to complain, other than via your state’s consumer protection agency.  UPS clearly does not want to know about unhappy customers.  Thus, they can avoid learning and adapting to customers’ desires and expectations.

This is not the UPS that I knew ten years ago.  Of course, their Atlanta neighbor, Delta Air Lines, is also not the company I used to know, in their case twenty years ago.  In both cases, excellent service has been severely compromised in the pursuit of efficiency.  The fact that many customers now despise them is not of concern.  You have to conform to their rules and accept whatever level of service they provide, or you have to choose among all the other companies with the same philosophies of service.

Are there implications of such changes, or is the demise of service quality simply a fact of life?  My limited data on UPS and extensive data on Delta suggest that customers are very much looking for alternatives.  I have heard many premium Delta customers say, “I used to be a huge Delta fan; now I wish they would go bankrupt and out of business.  I really hate Delta Air Lines.”  Similarly, my limited UPS data says the love is gone.  Many customers are looking forward to the creative destruction of these companies by innovative new concepts and technologies.

What Might Happen

Various pundits in sundry domains attempt to predict what will happen.   In domains such as climate change, urban systems, and national politics, which are laced with human and social phenomena, such predictions are folly.  There are far too many possible ways in which individuals and social groups can behave in response to evolving events, whether they be physical (e.g., environmental threats), economic (e.g., new financial bubbles), or social (e.g., changed attitudes towards social issues).

Pundits may try to hedge their predictions by making them contingent on particular assumptions such as “if humans continue to consume resources as they currently do,” or “if economic growth follows the historical average.”  These types of assumptions certainly narrow the range of uncertainties if the assumptions are warranted.  However, we are left to wonder about the probabilities of the assumptions being true over the time periods of interest.

I have lately become attracted to a new line of reasoning that focuses on what might happen.  This perspective allows us to consider a variety of things that might happen and the conditions under which they might happen.  Some of the things that might happen will be appealing; others will not be at all appealing.  Such differentiation by level of appeal can prompt an exploration of the differing conditions leading to likely outcomes.  This enables a discussion of how we can foster the conditions that seemingly lead to more appealing outcomes.

This approach suggests that problem solving and planning should not focus on predicting a particular future.  It should instead be a discussion and exploration of alternative futures, how these futures might emerge, and how today’s choices might influence the possibilities of these futures.  If we find that X almost always leads to appealing futures, and Y almost always results in unappealing futures, we should try to facilitate X and avoid Y.

This approach has enormous implications for planning and control of enterprises, organizations, and even careers.  Instead of having specific targets, which drive actions and determine controls, attention should be focused on a portfolio of possible scenarios, leading indicators of emergence, and lagging indicators of performance.  Instead of focusing on how well targets are being hit, e.g., 10% revenue increase and 20% profit increase, the key questions should be, “What is happening?  What might happen next?”

Consequently, strategies and plans are needed for each current and nascent scenario.  This requires careful consideration of situation assessment, strategic planning, and the efficiency and effectiveness of execution.  Traditional metrics, such as revenues and profits are the consequences of accurate assessments, effective strategies and plans, and efficient execution of plans.  However, one should first make sure that the right things are being pursued.

How can we project what might happen?  There are data sets and analytic tools that can help, but they seldom enable clairvoyance.  I have found that the keys are understanding, sustaining, and enhancing the organization’s relationship network with key current stakeholders and prospective stakeholders, including competitors, customers, suppliers, and employees, as well as thought leaders in the realms of economics, politics, and technology.  Their concerns and insights, as well as their reactions to your ideas, can be invaluable.

Encounters with stakeholders can happen in a variety of ways – meetings, telephone calls, emails, etc.  The key is to capture knowledge from each encounter, planned or otherwise.  Many questions are of interest.  What would customers like next?  What are competitors thinking of doing next?  What technologies are maturing to the point of realistic deployment?  What effects are healthcare reforms likely to have?  What aspects of climate change are undoubtedly real and likely to have impacts sooner rather than later?

Answers to these questions should be captured, compared, and contrasted.  Opportunities and challenges should be gleaned from this information and lead to further questions for subsequent encounters.  Insights should be curated with links to information sources.  This accumulating wealth of information will, over time, enable understanding what might happen.

Converging Experiences

Recently, I went to Kara Schlichting’s lecture, “From Dumps to Glory: City Planning, Coastal Reclamation, and the Rebirth of Flushing Meadow for the 1939-1940 New York World’s Fair.”  The next morning, I read Russ Buettner’s article in the New York Times, “They Kept a Lower East Side Lot Vacant for Decades.”  That afternoon, I went to the Lower East Side Tenement Museum and, in particular, watched their 20-30 minute movie on the evolution of the Lower East Side from 1840 on.

So, in 24 hours, I experienced the complexity of how cities evolve – three times.  It seems like a chaotic mess of conflicting interests, struggles for power, and strong personalities.  In the midst of all this, there are thousands or millions of people and families trying to make ends meet, get their children educated, and occasionally have some fun.  A few people make a lot of money and everybody tries to do a bit better tomorrow.

It strikes me that cities do not get engineered.  Road networks, sewer systems, and subways are engineered.  Infrastructure and buildings are engineered.  However, the cultural fabric of cities is not engineered.  It emerges from the hustle and bustle of people seeking to make money, get a job, earn a promotion, educate their kids, play a game of cards, and enjoy a ball game.  We cannot predict where all that will lead, what serendipity will prompt.

How can we research this?  I think we need to focus on insights rather than predictions.  It is reasonable to assume that the actors are rational, although they will not necessarily conform to classical economics.  I think we can assume that they will take advantage of and adapt to the environment.  However, all the rationality and adaptability of enormous numbers of independent actors will lead to an abundance of possible paths and outcomes.  Our understanding will be limited to how particular paths and outcomes might emerge.

The best approach to gaining this understanding will, in my opinion, result from studies of virtual urban worlds.  Simulated immersive representations of Hoboken, NJ and Red Hook, NY, for example, will enable exploring how “humans in the loop” as well as synthetic avatars respond to emergency warnings, actual weather, power outages, terrorist events, and perhaps even economic opportunities due to redevelopment.  We will learn about how people “game” the system and, in the process, learn what innovations to encourage and what behaviors to inhibit.

We cannot approach cities in the same ways we address airplanes, factories, and power plants.  Cities are laced with too many complex behavioral and social phenomena.  Yet we can systematically explore the ways in which cities might respond to opportunities, incentives, and inhibitions, and identify the conditions more likely to lead to one response rather than another.  Then we can think about how we might engender the conditions leading to more appealing responses.  Our methodology should focus on how to get a city to design itself in ways that improve the quality of life for everyone.

Transformation as a Wicked Problem

In 1973, Horst Rittel and Melvin Webber published “Dilemmas in a General Theory of Planning” in the journal Policy Science (volume 4, pp. 155-169).  In this article, they characterized “wicked problems” as follows:

  • —  There is no definitive formulation of a wicked problem
  • —  Wicked problems have no stopping rule – there is always a better solution
  • —  Solutions to wicked problems are not true or false, but good or bad
  • —  There is no immediate nor ultimate test of a solution to a wicked problem
  • —  Wicked problem are not amenable to trial and error solutions
  • —  There is no innumerable (or an exhaustively describable) set of potential solutions and permissible operations
  • —  Every wicked problem is essentially unique
  • —  Every wicked problem can be considered a symptom of another problem
  • —  Discrepancies in representations can be explained in numerous ways – the choice of explanation determines the nature of problem’s resolution
  • —  Problem solvers are liable for the consequences of the actions their solutions generate.

It can be useful to look at enterprise transformation as a wicked problem.   Rather than exhaustively discussing every characteristic in the above list, let’s just focus on three – no stopping rule, no trial and error, and liability for consequences.

Transformation is never done.  There may be ebbs and flows of change, but the need for change is persistent.  The nature and level of value desired by markets and other constituencies continually evolve, sometimes very slowly, but other times quite quickly as, for example, technology breakthroughs such as electric lighting are suddenly available.  The key insight here is that you need to get good at changing rather than thinking that change is something you finish.

Transformation is not amenable to nibbling.  You cannot experiment with a wide range of ways of changing and then adopt the winner.  Empirical confirmation that a new value proposition works is certainly valuable.  However, such evidence is only meaningful and useful if you have clear intentions and plans for how to accomplish changes.  Otherwise, all you have is ideas.

Transformation is real.  Good outcomes are sought but bad outcomes are possible, with the enterprise leadership liable for the outcomes.  You can lower the risk by adopting changes that others have perfected, for example, back office and supply chain efficiencies.  But, this just keeps you in the game and will not win the market returns of being the innovator rather than the follower.

Another very important consideration is not in the above list.  You need to balance creativity and continuity.  Creative new value propositions drive market innovations – and creative destruction.  New approaches to value are likely to need new competencies and capacities, while obsoleting older ones.  Organizations usually have limited capacities to absorb such changes.  Yesterdays’ machinists may not be easily transformed into tomorrows’ computer programmers.  People highly skilled at a particular set of tasks cannot quickly become highly skilled at a very different set of tasks.

Thus, a central driver of transformation is that once you become really good at something, there is a significant risk that what you are really good at will eventually no longer be valued.  What you were really good at it – perhaps the best – was likely of great value to the economy and society.  But new innovations will eventually creatively destroy that value proposition.

How long should you cling to hard-won competencies and capacities?  When is it time to shift attention and resources to new value propositions?  There is no “starting rule.”  We can add this to the list of characteristics of wicked problems.  It is not at all clear how you decide that now the wicked problem really has to be addressed.  You can always wait until tomorrow.  Eventually time and resources are no longer available and change is impossible.   This dilemma is certainly wicked.

Levels of Change

Fundamental change is pervasive across every level of life.  In this post, I compare four levels and time scales of change including evolution (millions of years), history (thousands of years), industry (centuries), and technology (decades).  This comparison leads to a few overall observations about transformation and a few insights into how people think about fundamental change.

Central concepts in evolution are species, populations, and extinctions.  Example species, in order of appearance, include plants, insects, reptiles, mammals, and birds. Relatively recent are primates, which include Homo sapiens (humans), all within the mammal species.  The populations of species tend to grow unless predators weed them out.  More significant are mass extinctions, which are defined by more than 50% of all species being eliminated.

There have been five mass extinctions, the last one of which eliminated the dinosaurs.  Some scientists argue that we are on the verge of a sixth mass extinction.  Fortunately, the time scale on which mass extinctions happen is such that we need not worry about this right now.  Nevertheless, this possibility doubtlessly represents transformative fundamental change.

Central concepts in history include civilizations, empires, revolutions and conquests.  Notable civilizations and empires include Egypt, Mesopotamia, China, Maya, Greece, and Rome.  All of these empires ended, often due to internal strife (revolutions) or external sources (conquests).  In some cases civilization ended.  It appears that the typical life of a civilization is one thousand years or so.  This does not mean that all the people disappear, but standards of living usually plummet.

Core ideas for industry include needs, markets, and creative destruction.  Markets emerge to meet human needs for food, housing, energy, transportation, finance, etc.  Industries change due to increased efficiencies (e.g., agriculture), technology replacement (e.g., horse-drawn streetcars), and consolidation (e.g., airplane manufacturing).  The winners of the competition perfect their offerings, which greatly benefits customers, until their offerings (e.g., buggy whips) are no longer needed.  Then industries face creative destruction, in part due to new technologies.

Key notions in technology are invention, innovation, and obsolescence.  Over millennia, humankind has invented tools, wheels, propellers, crossbows, and gunpowder; waterwheels, steam engines, and gears; aqueducts, drainage, sails, and rudders; steamboats, railroads, automobiles, and airplanes; and electricity, telephones, computers, and Internet.  These inventions, often rather slowly, became market innovations as technologies and infrastructures matured.  As they were perfected, these offerings tended to become commodities or, in many cases, obsolete.  In the process, most companies and, sometimes, whole industries were creatively destroyed by new market innovations and value propositions.

Reflection on these four levels of transformation prompts a notional life cycle of change operating on all four levels:

  1. New epochs eventually lead to consolidation and refinement or perfection
  2. Assumptions on which perfection is based are eventually no longer tenable
  3. New entities emerge to exploit new assumptions, but are bit players at first
  4. Existing entities attempt to adapt, even transform, but almost always fail
  5. New epochs emerge — go to step 1

If transformation inevitably fails, at least eventually, why try?  First of all, you cannot know a new epoch is emerging until after it happens.  There are economic and social benefits to sustaining the current epoch.  For example, capital assets cannot be quickly redeployed, unless via liquidation.  Further, the stewards of the current epoch will inevitably attempt to survive.  Overall, it seems reasonable to observe that, despite their inevitability, extinctions, revolutions, conquests, destruction and obsolescence are only addressed when their time has come.  We strive to hold them off even though we know they are inevitable because such is the only rational and productive strategy.

What to Keep

Enterprise transformation involves redesigning or creating new work processes that enable remediating anticipated or experienced value deficiencies.  This implies that some aspects of the enterprise have to be discarded.  Why not discard everything?  That is certainly as option, but it is called liquidation rather than transformation.

A central question is what do you keep and how does it need to change?  To avoid answering with a stream of abstractions, let’s consider a specific example.  Higher education has replaced healthcare as the poster child for runaway costs.  It is useful to look at this from the perspective of a single enterprise in higher education attempting to transform itself.

What should they keep?  Typical mission statements involve some combination of education, research, and service.  Students, their families, and employers value education as a means to a good standard of living, employees who excel at their jobs and, in general, productive, informed, and involved citizens.  Every educational institution wants to meet this need.  The question is how best to do this.  Is it classrooms and lectures, or online courses, or something different?

This is the point where strategic thinking often falters.  Most universities have made enormous investments in faculties and facilities for delivering education in traditional manners.  There is an increasing trend of “outsourcing” delivery to adjunct faculty rather than more-expensive tenure track faculty.  This saves money but does not fundamentally change the process.

The value of research is much more ambiguous than education.  At one level, research helps the faculty to be on the cutting edge, thereby enhancing the education mission.  At the other extreme, the research enterprise becomes an end in itself.  The goal is typically ever-increasing sponsored research budgets, which results in many faculty members teaching little or perhaps not at all.

If successful, the research enterprise can help the university’s ranking by increasing funding and PhD graduates per faculty member and, over time, the number of faculty members elected to prestigious academies.  It can reasonably be argued that increasing rankings will lead to increasing numbers of applicants for admissions, which will enable increasing entrance requirements and lead to better quality students.

This all seems to make sense, except for the costs of doing it.  The costs of creating winning proposals are enormous.  This is due to the 5-10% success rate at the prestigious National Science Foundation (NSF) and National Institutes of Health (NIH).  Faculty members are provided release (non-teaching) time to devote to proposal preparation and submission.  Every tenth time or so, they succeed.

Once the grant or contract is won, the university is reimbursed for its direct costs plus indirect costs, typically estimated to be 50-70% of direct costs.  These “overhead” monies pay for administrative costs (provosts, deans, libraries, etc.) that are spread uniformly across all sponsored projects.  Administrators argue that the overhead funds received do not really cover all the relevant costs.  Sponsors argue that many of the costs in the overhead pool are not relevant to conducting research.  The final overhead rate is a matter of negotiation.

The research enterprise has to be subsidized because it loses money on both the front end and back end of the process.  This is inherent to the market being addressed – NSF and NIH.  Other research sponsors such as the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA) have different award decision processes and typically higher success rates.

Industrial funding (as contracts, grants, or gifts) is such that proposals are discussed and refined along the way.  One quickly learns that the idea is a loser or is able to refine the idea until funding is assured.  The upfront costs per success are much lower.  The downstream overhead costs are still an issue, but are open to negotiation.  If a university were to strip out all the costs of working with the government, industrial overhead costs would be lower. In fact, they are typically higher because universities can get away with this.

One strategy for fixing the economics of research would be to minimize or avoid NSF and NIH proposals.  This would run into another very large obstacle.  Funding from NSF and NIH is viewed as more valuable because of their peer review process.  To get funded, one needs more than a good idea.  One has to convince anonymous peers in one’s discipline that the proposed research fits into the discipline and will advance the discipline.

Thus, NSF or NIH funding vets the faculty member as fitting in, as being valued by peers.  This lessens the burden on administrators and faculty committees in evaluating faculty members.  In effect, they have outsourced evaluation. This places great emphasis on the source of funding and peer approval rather than the outcomes of the research such as articles published, patent filings, and artistic exhibitions.

If evaluation was limited to outcomes, then the problems of money-losing research operations could be overcome in a variety of ways.  High probability funding sources would be much more important than low probability, and typically very slow, funding sources.  The marketplace of ideas, rather than solicitation announcements and peer review panels, would become the focus.  Researchers would spend much more time on producing outcomes.

The third element of a university’s mission is service, sometimes called outreach.  Support of professional societies and involvement on advisory committees are good examples.  Unfortunately, academia is highly subject to mission creep.  They find more and more services they could provide and invest resources to provide them.  The result is that the numbers of academic staff has long been growing at twice the rate of the numbers of academic faculty.  All the new vice presidents need staff assistants and growth continues.

Among the many areas that could be discussed, entertainment deserves the closest attention.  The biggest elements of many universities’ entertainment enterprise are men’s football and basketball.   They earn billions of dollars of revenue, pay millions to coaches and athletic directors, and graduate few of their “student athletes.”  These athletes rightfully should be employees of the entertainment business.

It is not a question of the merits of this entertainment business in itself.  It is a question of whether academic institutions should be in this business and subsidizing it, as the vast majority has to do.  Some argue that alumni like this entertainment and this generates increased donations to the university.  My experience is that a significant portion of these donations goes to the sports side of the university rather than academics.

One solution would be to set up the entertainment business independent of the university.  Alternatively, it could be outsourced like food services are done at most universities, and the bookstores at many universities.  The football and basketball entertainment business could be outsourced to the National Football League (NFL) and National Basketball Association (NBA), respectively.  The NFL and NBA could then pay athletes minor league salaries as done in baseball.

Considering what to keep when transforming an academic enterprise, the following conclusions seem warranted:

  • Keep the education line of business, but consider a much broader range of approaches to delivery; be cautious when investing in physical classrooms
  • Keep the research line of business, but get the economics right to generate both knowledge and money; be skeptical of low probability opportunities
  • Keep the service line of business that relates directly to the education and research businesses; spinoff or outsource all the rest

Success in adopting this strategy will depend on several other things:

  • Move to activity based cost accounting and minimize non-attributable overhead costs; aspire to achieve a near-zero overhead rate
  • Price services based on costs directly attributable to these services; include profit margins that are competitive in relevant markets
  • Retain money-losing services only to the extent that they are vital to one of more lines of business; if there are many of these, you have not faced reality
  • Outsource everything that someone else can perform better and/or cheaper; become expert at selecting and managing vendors and partners

There is one final, critical need.  Define, measure, and reward performance in all aspects of the business.  This can be problematic in academia.  Universities have great difficulty penalizing poor performance and even greater difficulty rewarding good performance.  Thus, poor performers hang around – for years, even careers – and good performers get frustrated and leave.  Fix this as soon as possible.

Execute, Execute, Execute

The lack of committed visionary leadership will doom any transformation aspirations.  However, will the presence of such leadership assure success?  The simple answer is, “No!”

Great aspirations and ideas need compelling plans to succeed.  Further, these plans have to be successfully executed to realize these aspirations.  Quite often, plan fall prey to inabilities to execute.  Consider the following examples:

  • Marketing and sales functions fail to leverage natural competitive advantages, focused instead on business as usual and trying to promote fading ideas and dying brands.
  • Sales and proposal functions fail to pay attention to idiosyncrasies of new market opportunities, resulting in non-compliant proposals and lost business opportunities.
  • Financial management functions fail to pay attention to the new cost structures of emerging market opportunities, for example “peanut buttering” overhead costs across opportunities where these costs are unwarranted.
  • IT and web support functions fail to maintain and update capabilities, resulting on stodgy and out of date capabilities, or perhaps capabilities that simply do not function at all.

What is going on in such organizations?  There are several possibilities.  Perhaps strategists and planners have not translated their high-level plans to specific action plans for these functions.  Thus, these functions are unaware of needs for any different behaviors.

Another possibility is the “as is” business simply consumes all capabilities. There is little, if anything, left to devote to the “to be” business.  Keeping the status quo functioning is all consuming, even when the status quo is on a downward spiral.  There is no energy left to nurture change.

Yet another explanation is that the staff members in these functions simply “do what they do.”  Regardless of any newly articulated strategies and plans, people put in their time until the end of the day and then go home.  The next day, they do the same things again.  No one holds them accountable for anything, other than showing up.

At worst, people resent being held accountable.  They are used to placidly positive annual reviews and modest raises, both of which prompt considerable grumbling.  They are used to being liked and fitting in.  They are used to much of the workday being devoted to discussions of children, schools, and sports.

To assure execution of plans from top to bottom of the organization, senior leadership has to convince everyone that change is for real.  A sense of urgency has to be created.  This may require large-scale replacement of the “no accounts” with new people eager to pursue change.  Key functions might be outsourced to high performing providers.  Poorly performing divisions might be sold or liquidated.  The key is to get everybody paying attention to execution, and either executing or leaving.

Three Strikes and You Are Out

The poor performance of the US healthcare system can primarily be attributed to three things.  First, the “fee for service” payment model incentivizes providers to provide as many services as possible to maximize reimbursements from insurers, either private or public.  Second, the lack of integration of archival and operational information systems undermines the delivery of effective and inefficient services.

I as well as many others have argued that a systems approach to redesigning the system of healthcare delivery would address these issues and transform the system to provide high quality, affordable healthcare for everyone.  There appears to be widespread agreement in this.  Why then is this so slow to happen?  This leads to the third source of poor performance – the orientation of senior leadership of many healthcare providers.

Three examples illustrate this well.  In talking with the CEO and CQO (chief quality officer) of a major provider in the southeastern US, with whom we had been working regularly, they commented that the best characterization of their delivery system was “chaos.”  We proposed an approach to mapping and improving their delivery processes.  The cost would be modest as the proposed team was composed of engineering faculty and graduate students.

The CEO balked at the price.  I argued that this would quickly save him much more than the cost of the effort.  He agreed with this assertion but, as a former CFO, indicated that he was not willing to spend a single dollar on process improvement.  He suggested that we try to find a grant that would pay for this effort.  He clearly saw his role as steward of the status quo.

We worked to create an alliance with a major provider in the northeastern US.  Meetings and briefings with the CMO (chief medical officer) and his leadership team led to a planned set of initiatives.  A process mapping and improvement initiative was agreed upon at modest cost; much less than the instance cited above as we had refined our methods and tools for such an initiative.

Meetings with the department heads associated with this effort led to great enthusiasm, but no progress.  Everyone was far too busy to provide access to the information needed to proceed.  I suggested that they were not really committed to the project.  They apologized profusely and reaffirmed their commitment — but still did not supply the promised information.  These leaders were also far too busy stewarding the status quo.

We reached agreement with a major, internationally renown, provider to study human-centered, computer-based systems to support patients, their families, and clinicians in delivery of out-patient services.  Funds for this research effort would be provided by an external source.  Our initial proposal, with the provider, was not submitted because they could not achieve agreement across various stakeholders by the deadline.  We decided to delay submission until the then next round, six months later.

The detailed proposal was developed and ready for submission.  A final briefing was scheduled to review the completed proposal three days before the due date.  At that point, one of the affected groups complained that they had not been given adequate time to digest and react to the proposal, despite the fact that time with them had been repeatedly requested during proposal development.  They were concerned that the proposed effort was much more ambitious than their ongoing effort in this area.

They were also concerned that they were losing control of efforts to improve out-patient services.  It was observed that their progress was both modest and slow, due to the demands of their status quo responsibilities.  Further, the proposed effort would bring in outside resources and significant external recognition. Nevertheless, the provider leadership involved did not want to antagonize this group.  They withdrew from the partnership and the completed proposal was not submitted three days later as planned.

What can be learned from these three experiences?  First, the status quo is all consuming.  The current way of doing things demands almost all attention and resources.  One executive, in a different organization, said, “Bill, you don’t understand.  I am far too busy underperforming to have the time to get good at this.”  Of course, this is not just the case for healthcare.  It is also true for education and government, for example.

Some organizations, however, escape this conundrum.  The key ingredient is senior leadership who have a vision of the “to be” organization as well as a clear sense of the path from the “as is” to the “to be.”  They communicate this vision and stay closely involved with its pursuit.  They are not afraid to ruffle feathers in the process.  Such leaders would never be characterized as stewards of the status quo.  As a result, their organizations tend to be innovators rather than reluctant followers.  Much more of this is needed in healthcare.

So, three strikes and we are out, at least for this inning.  If we look at the differences between our successes and failures in pursing change via systems approaches, what have we learned that will help us with our next times at bat?  First and foremost, regardless of the technical merits of an idea and the expertise and skills of the team, the full commitment of senior leadership is crucial.  We know from extensive studies of a wide range of industries that middle management will not spontaneously transform an enterprise.  Second, senior leadership has to explicitly commit to helping overcome pushback from the forces of the status quo.  Initially at least, visionary leadership is not the frosting on the cake – it is the cake!

Back Online

This blog has been on hold for 18 months as I have transitioned from Atlanta to Hoboken, the sixth borough of New York City.  I retired from Georgia Institute of Technology and am now on the faculty of Stevens Institute of Technology.  I am still immersed in enterprise transformation, focused on healthcare delivery, higher education and, in my new context, urban resilience.

The change of context has been amazing, the primary reason this blog has been on hold.  Greater New York City is a very large highly diversified economy with over 20 million people.  Atlanta is large as well (6 million people), but the economy revolves around being the Southeast’s supply chain and logistics hub, as well as real estate development.  New York City rivals Silicon Valley in terms of technology-oriented venture capital, while Atlanta is well outside the top ten cities for technology investments.

So, it has taken me awhile to get my feet fully on the ground in New York City and its surrounds.  Opportunities abound and corporate headquarters dot the landscape.  Mastering the train, subway, and bus system has been an important task.  One benefit has been a dramatic reduction in plane trips.  The pleasure of hopping on the train to Washington at the last minute was, at first at least, immeasurable.  Changing reservations just minutes before leaving, with no penalties, continues to be a pleasure.

Another difference has been the food.  As a vegetarian, the more ethnic restaurants the better, particularly Italian as well as Asian.  Pizza in New York is a different experience than Atlanta.  Bakeries are much more pervasive.  Pubs of every make and model are on most corners, although their appetites for college football are quite limited.  However, with two professional baseball, basketball and football teams, as well as three hockey teams and a soccer team, pubs are crowded with fans during game times.

I am a bit of a history buff and I have broadened my view of the Northeast beyond Boston (my roots) to include greater New York City.  The technological innovations here from the 18th, 19th and 20th centuries are most impressive, making Silicon Valley a “Johnny come lately” in the late 1930s and the Route 128 “Massachusetts Miracle” a very recent arrival in the early 1950s.  Stanford and MIT enjoy the applause for their association with these upstarts.  New York is much less interested in applause.   Power and money seem to be the dominant goals.

My plan is to continue Rouse on Transformation in the spirit with which it started in 2009.  The geographical footprint will be larger and the range of examples broader, e.g., including urban resilience.  However, the goal is the same – understanding fundamental change of complex organizational systems.

The Transformation Debate

Who is more American?  Is it the Kenyan or the Mormon?  Who created or destroyed more jobs?  Is it the community organizer or the private equity economizer? The candidates are focused on attacking personalities and circumstances rather than reality.

But, what really happened to blue collar jobs?  This answer is straightforward. Our blue-collar laborers became too expensive due to union agreements and healthcare costs while other countries’ laborers were less expensive and better educated.  They are more likely to have the knowledge and skills needed for hi-tech manufacturing.

It is not really just about wages, however. Germany has higher wages than the U.S.  Germany also has much higher social costs than the U.S.  Yet, their manufacturing sector is thriving — the envy of Europe.  This is due to the fact that they systematically and substantially invest in technical training for those not headed to the university.

Why would Germany make such investments?  My conclusion is that they see a healthy, educated and productive workforce as a “public good.” In other words, all Germans are better off if every German is healthy, educated and productive. This was once part of the belief system of America, but such beliefs have faded. Healthcare and education are now “private goods.”

In other words, if one wants healthcare and education, one should pay for it just like you pay for cell phones, televisions, and automobiles. No one else benefits from your being healthy and educated. If you are unhealthy and uneducated, that is your problem.  It is your problem as well if you cannot find a job and cannot afford to take care of your children.

But is that really the case?  Are unhealthy, uneducated and unemployed people of no cost to society?  Use of hospital emergency rooms for non-urgent care by uninsured people costs the average American well over $1,000 per year.  Costs of unemployment benefits add over $1,000 to the average American tax bill. Add the two items together and we are coming close to 10% of the average American’s after-tax income.

Bottom line — we are spending more per capita on compensating for uneducated, unhealthy and unemployed people than we are saving for our future.  It is very expensive — for all of us — to have large numbers of unhealthy, uneducated and unemployed people wandering around, trying to find something to eat. We need to reinvent the concept of public goods and invest prudently in health and education in ways that will yield enormous returns for all of us.

It’s Really Tough

You are leading a very successful enterprise in airplanes, automobiles, mobile devices, healthcare — or perhaps higher education. The business model that got you to where you are — successful, profitable — seems to be faltering.  The growth of revenue is diminishing while costs are escalating.  The costs of infrastructure — physical, financial and human — are inexorably growing. Customers seem to be sticking with you, but they are not happy. Cynical jokes are pervasive.

What should you do?  How about sticking to the knitting?  Just keep doing what you have always done, perhaps a little bit better and a lot cheaper. If you need to sell airline seats as cheaply as possible, charge people for everything else — baggage, food, entertainment, bathrooms, and seat belts. If revenue comes from students in seats, put hundreds of students in each classroom.  Let the students sit in the aisles unless the fire marshal protests.

Perhaps you should lead the enterprise towards a new business model. Rethink the whole transportation or education experience. But, this requires a lot of courage because most if not all of the key stakeholders are clinging to the status quo.  Embracing change means creating enemies — people whose rice bowls are threatened by change.  Leading change requires strong self-confidence and abilities to absorb enormous criticism. You will be challenging many people’s comfort zones.

What about your comfort zone?  Do you need everyone to be happy?  Do you need everyone to like you?  What if your vision of an alternative future is wrong?  What if the faltering status quo is as good as it gets?  The key question is whether you are willing and able to lead in times of change.  It’s really tough because you cannot be sure of what will happen and whether you will succeed. However, you can be sure that your willingness and abilities are exactly why they gave you the job in the first place.

One Journey to Engineering Systems

The organizers of the 3rd International Symposium on Engineering Systems asked me to provide a brief story of my journey to engineering systems — how I came to be at this Symposium on this June evening in Delft.   The idea is to stimulate your thinking and perhaps motivate you to share your stories during dinner this evening.

I have always been a planner, so the story of how I came to be at this meeting begins in 1961. I was 14 years old when I bought my first car.  My intention was to teach myself to drive, but it turned out that I was also to teach myself some engineering.  The object in Picture 1 prompted the need for this.

1952 Plymouth Carburetor

Picture 1. Carburetor

This picture shows the carburetor of the car I bought — the 1952 Plymouth in Picture 2.  This is the same model and colors of the car I bought.  However, for $35 the car did not exactly look like this one.  In fact, as I repaired body dents and rust, red primer slowly replaced much of the blue and white.

Being too young to get a driver’s permit, I decided to learn by driving through the fields in this small, island town of Portsmouth, Rhode Island — the smallest state in the United States.  Picture 3 shows my training track, which was captured during an aerial survey of the town prior to building a new road.  The track started out very bumpy but over time the Plymouth smoothed it out.

1952 Plymouth Cranbrook No. 1

Picture 2. 1952 Plymouth

Driving endlessly on this track, I became very good at left-hand turns, and right-hand turns, in second gear but could never get going fast enough to get into third gear.  I also could make it to the center of town, with its 3-4 stores, without going on a public road. This meant driving through fields normally populated by cows or potatoes. Again, it was very bumpy.  The carburetor did not like this. It failed often.  Pieces bent or disappeared.

Driver Training 1962

Picture 3. Training Track

I got to know the carburetor very well.  I constantly had to figure out how to get it functioning again.  I did not have the money to buy replacement parts.  I resolved this quandary with my Erector Set, shown in Picture 4. I used the linkages and sliders from this set to restore the carburetor’s function, although not quite in the way originally intended. The result was a Rube Goldberg version of a carburetor.

Erector Set

Picture 4. Erector Set

The Erector Set could not compensate for my lack of knowledge that cars had oil filters. Eventually the Plymouth’s engine succumbed to a lack of oil — plenty in the reservoir but little making it to the engine.  Next came a 1949 Chevrolet, again for $35.  This car’s specialty was leaks. During heavy rains, the floor wells in the front seat would fill up.  I learned that water would always have its way.

Each subsequent car provided its own lessons.  There were many lessons. We managed to successfully implant a Ford V-8 in a Jeep.  However, a Renault’s frame could not support a Thunderbird V-8, providing a lesson in mechanics of materials.  We also learned that people were happy to get rid of old cars in their backyards and we could try all sorts of things, while selling parts salvaged from these cars.

By the time I was 20, I landed a job as an assistant engineer at Raytheon, a large defense contractor in Portsmouth.  I was involved with the AN/BQS-13 sonar system, which looked much like Picture 5.  During my two years at Raytheon, before heading to graduate school at MIT, I worked in mechanical, electrical, and systems engineering. It was a wonderful immersive experience.

My ultimate task was to figure out how many spare parts to bring on a submarine, given the different reliability and maintainability characteristics of the subsystems, assemblies and components and, of course, the limited space for spare parts.  I also was able to participate in some of the discussions of the human operators of these systems in terms of the information and interface needed to support their tasks.

Sonar Room

Picture 5. Sonar Room

Picture 6 shows my current involvement.  In some ways, the hospital operating room is like the sonar control room. However, there are critical distinctions.  The information systems and the incentive systems in healthcare are much more poorly aligned with human behavior and performance requirements.  Inadequate information and poorly aligned incentives are issues that must be addressed in a broader context than depicted by Picture 6.

Operating Room

Picture 6. Operating Room

This observation reflects a life-long penchant to question external constraints — to wonder why “givens” are given. The “best” solution to a problem is almost always only best within a given set of assumptions. These assumptions often reflect constraints that, when viewed broadly, can be seen as totally arbitrary.  In this way, problem solutions are often limited by problem definitions.  I am always energized by the question of what is the real problem.

So, what have I learned?  Three lessons seem like a good number.  First, no matter at what level you address a complex system, there is always a broader context that impacts the system.  Simply externalizing the context is not a good idea; this assumption will plague you later by hindering successful operation and maintenance of the system.  For example, better design of hospital operating rooms will not, in itself, remediate the information and incentives problems of healthcare delivery.

Second, complex systems cannot be addressed successfully by a single, traditional discipline.  Appropriate consideration of interactions at different levels of abstraction and aggregation require a mix of knowledge and skills. Consequently, one professor and one PhD student cannot single-handedly address complexity successfully. Interdisciplinary approaches are needed to transform complex systems.

Third, the engineering of complex systems requires a professional community that embraces the first two lessons. For me, the Council of Engineering Systems Universities and the International Symposium on Engineering Systems is that community.  I am indeed fortunate that the 1952 Plymouth carburetor headed me in this direction five decades ago. I expect CESUN and the Symposium to be central to transforming complex systems for many years to come.

Technology-Driven Change

Change tends to be very difficult, but it does happen.  Technology is one of the key drivers of change.  Technologies enable new possibilities, such as typing this post on my iPad early Sunday morning, sipping coffee and listening to the rain. The iPad means that I can be productive any time, any place. This capability has become very popular and Apple’s share price has soared.

Why does this constitute change?  The immediate impact is that my laptop seldom leaves my office at the university. I have not had a home computer for several years. I am questioning whether I really need a smart phone any longer since Wi-Fi is becoming ubiquitous. I read many books and 90% of them I download to the iPad.  I read newspapers this way as well.

So, one device has eliminated my previous inclinations to buy a home computer, a smart phone, most books, and all newspapers.  I imagine the companies who sell these things are quite aware of such changes of buying habits. Employees, or former employees, of these companies are also, I am sure, very aware of these changes. Decreasing demand for products and services means that fewer people are employed to provide these products and services.

This pattern has repeated throughout history, ranging from steamboats to railroads to electricity to automobiles to airplanes and computers. It often takes quite some time for patterns to play out. The transistor was invented and refined in the late 1940s. More than six decades later, the iPad is having the impacts noted above. Of course, there were many steps along the way, and many other technologies were needed in addition to semiconductors.

One cannot help but wonder what is next. Many think that technologies associated with the life sciences and health will be the next drivers of change. Personalized medicine is the current Holy Grail. It is imagined that this will replace mass produced medicine.  Treatments and drugs will be tailored to each individual’s genetic makeup. This means much smaller markets for each type of treatment and drug. This threatens pharmaceutical companies’ penchant for blockbuster, high volume offerings.

Changes on a personal level are likely to be much more profound. Once you are aware of your genetic predispositions, what range of interventions do you entertain?  What increased probability of a health problem will justify intervening?  How will you or your employer or the government pay for these interventions? How will your employer or the government limit the allowable interventions? There are many possible answers to these questions; most of them portend substantial changes to how we live.

Report From the Front

Over the past two semesters, I have been helping Georgia Tech undergraduate teams to contribute to transforming healthcare delivery.  Their senior “capstone” projects have focused on patient in-flow (Emergency Department), in-patient operations (Operating Rooms) and patient out-flow (Discharge and Bed Turnover).  Three eight-person teams addressed each of these areas of hospital operations.

The problems these students faced were excessive waiting time in the Emergency Department, low utilization of Operating Rooms, and delayed Discharge and Bed Turnover.  All three of these problems resulted in inefficient use of capacities, decreased revenues, and excess staffing costs. The students’ solutions focused on improving use of capacities to increase revenues and decrease costs, resulting in net gains in the millions.

In all three instances, the hospitals had many ideas for how to improve operations. However, they did not understand the economic implications of the alternatives. The students used their engineering models; sleuthed down the data they needed; and projected the benefits and costs of alternative courses of action. They presented their results and implications in clearly actionable recommendations.

Perhaps not surprisingly, these projects depended on each other. Most significantly, increased use of the Operating Room capacity depends on improved Discharge and Bed Turnover. Otherwise, where do you put the increased number of patients emerging from surgery? In this way, inefficiencies in one functional area can impose inefficiencies in another area.

These three projects show how highly motivated, well-intended healthcare professionals can promote inefficient solutions due to having to operate within the significant constraints imposed by the rest of the organization.  We have the methods and tools to overcome these limitations. We just need the courage to approach healthcare delivery problems systemically.

Why Transformation Is So Difficult

It is fairly common for the perceived benefits of current market offerings to fade and new value propositions to displace older offerings.  As noted in earlier posts, Schumpeter called this process “creative destruction.”  Steel ships replaced iron ships, which replaced wooden ships.  Microprocessors subsumed transistors, which replaced vacuum tubes. Change happens and creative destruction causes obsolete offerings to be replaced by new innovations.

This process of fundamental change sounds much smoother than it actually is.  The stewards of the “as is” enterprise — in other words, the stewards of the status quo — usually do their best to thwart the emergence of the “to be” enterprise.  In fact, they are likely to do their utmost to undermine the very thought that a new paradigm may emerge and be successful.

Last week, I spent a night in Bethlehem, Pennsylvania.  The carcass of the Bethlehem Steel Plant dominates the town.  This sprawling facility has been deserted for three decades.  This was once the “as is” enterprise.  There were thousands of people who did their utmost to steward this “as is” enterprise.  I expect that they simply did not believe that a different future was emerging.

This is not at all surprising.  The builders of wooden ships were not intrigued by the capitally intensive emergence of iron and steel ships.  The vendors of oil and gas lamps were not very enthusiastic about the possibility of electric lights.  The owners, managers, and employees at the Bethlehem Steel Plant were not big fans of high-efficiency continuous casting, not to mention low-wage foreign steel production.

Transformation is, to a great extent, very difficult because an enormous number of people are depending on change not happening. They expect the jobs at the steel plant or automobile plant to continue forever, generation after generation. A few members of each generation break out, perhaps becoming engineers after one generation, and lawyers or doctors after two.  However, the ranks of those seeking the factory jobs grow much faster than of those seeking to leave.

Of course, this phenomenon is not limited to factory work.  Teachers and doctors, for instance, argue against new processes and technologies that they perceive will undermine the value of the knowledge and skills they have long invested in gaining and refining. Thus, online education is impugned for not embodying the human skills of the physically present teacher.  Yet, the current generation of young people has mastered Internet-based interactions with people in far-flung other locations.  The trend in this arena is clear.

Transformation would be much easier if everyone were more adaptable in the sense that they would willingly gain new knowledge and skills whenever necessary.  Factory works would quickly become computer programmers.  Teachers would give up lecturing and rapidly refine facilitation skills for guiding students in online education.  Everyone would happily discard skills that are becoming obsolete and eagerly gain newly valuable skills.

Beyond the problem of motivating everyone to act in this manner, there is a more fundamental limit to this idea.  It takes a long time to become really good at something.  As Malcolm Gladwell popularized in Outliers, research has shown that it takes around 10,000 hours to become an expert.  This is five years if done full-time, perhaps ten years if work involves other activities than just focusing on gaining the targeted expertise.

So, it takes the factory worker 5-10 years to become a skilled computer programmer and the teacher 5-10 years to become an expert “guide on the side” rather than a “sage on the stage”.  I may be overestimating the time required, since the teacher, for example, would not be starting with no facilitation skills.  However, the point is that there is a limit to how fast people can adapt, even if they are willing.

A counter argument is that people do not need to be experts to be productive. But, would you want the flight management software on the plane you are flying in to have been programmed by a less than expert programmer?  Would you want to undergo surgery with a surgeon that just a few years ago was in a completely unrelated profession?  Clearly, high levels of expertise and the resulting high levels of performance are often very important.

Dynamic, innovative economies lead to high levels of creative destruction.  This results in needs for frequent and significant transformation of enterprises.  Often people do not want to make the changes transformation requires.  They may be unwilling, but more fundamentally, they are unlikely to be able to change fast enough to maintain their positions — and incomes — in the transformed enterprise. That is one of the basic reasons why transformation is so difficult.

Worst Practices

I have recently been involved with an enterprise that has somehow managed to embrace just about the worst transformation practices possible.  It all started with the vocabulary the leaders chose to employ.  They managed to paint a transformation picture that they apparently had no intention of pursuing.  While they portrayed fundamental change, their actions totally represented those of stewards of the status quo.

They did not “walk the talk” in several ways.  While cutting production staff and freezing salaries, they relentlessly increased the size and payroll of the management staff.  This included changing elements of the leadership team without communicating to those reporting to these leaders.  New bosses just showed up and took over.  It did not seem to matter to the senior leadership that the subordinates involved were totally confused.

They also rolled out policy changes that fundamentally affected people without informing them.  For example, they moved accounts and responsibilities without announcing the policy changes, leaving managers unable to find accounts and manage them.  The resulting confusion among program managers was apparently of no concern to senior leadership.  It did not matter that financial management was now impossible — the issue was power and control, not performance.

It would seem that only the most wooden-headed leadership would expect that these practices could succeed.  Middle management has had endless debates over whether senior leaders are inept or simply do not care.  No one seems to know what the leaders have been thinking.  However, most employees feel that the leadership was simply assuming that employees are lucky to be employed and should put up with anything.  The stewards of the status quo could not imagine that people would do anything other than what they were supposed to do, even when what they supposed to do was never communicated.

I asked several senior mid-level executives how they felt about events of the past year or two.  One of them put it best, “It is like being pecked to death by ducks.”  All sorts of irritating little changes happen, things that might have been acceptable if communicated and discussed. However, these changes – most small but some big – were simply implemented without explanation.  With supervisors unable to explain the source or intent of these changes, staff morale is steadily slipping..

So, what happens next?  Does this organization spiral to oblivion?  The problem is that such incompetency can be embraced for an amazingly long time.  Bloated work processes that provide little value can be sustained and expanded with little scrutiny. Investments can be made in competencies that are no longer needed, or were never needed.  The realization of irrelevance comes much too late.  The leadership is completely at odds with the future, which they consciously ignore seeing.  The message, strategy, and plan are totally at odds with reality.  The severance packages may be much too generous, but the sooner such leaders are gone, the sooner the wonders of creative destruction can commence.

So Who Are the Creators?

So, the game plan, according to me, is to create the future.  Who is on the team?  You might think, based on my last post, that the team is all engineers and scientists.  But, that is not how it has worked in the past.

Regardless of the technology — steamboats to automobiles to computers — the players in the innovation game have included many artisans beyond those with formal educations.  Players have also included many entrepreneurs, investors and, of course, many “high tech” workers where the definitions of “high” and “tech” were and are completely context dependent.

This immediately begs the question of whether we have a large cadre of such people now.  Where are the mechanical (1800s), electrical (1900s), or computer (2000s) artisans for the future?  In the past, we out-paced English workers because our workforce was better educated and ready to contribute to the processes of invention and innovation.  It does not seem that we are ready to out-pace Chinese workers in the same way.

We need artisans in IT, biotech, and energy.  In the past, such folks would have been cultivated in high school classes and labs in computing, biology and chemistry. People who flourished in these labs, but perhaps floundered with theory exams, may have gone to college for a year or two, or skipped college completely, and immersed themselves in creating the future.  Bill Gates, Steve Jobs and Chris Klaus are recent, but by no means unique, examples.

In my case, high school included woodworking, metalworking and foundry.  While math and physics led me to an engineering degree, these labs led me to hands-on experience and a feel for whether something could be manufactured and how to make it.  My understanding is that those days are gone.  Now, it is all about test scores.  SATs predominate, and welding skills are irrelevant.  Math skills completely trump abilities to use a lathe.

Perhaps abilities to deal with abstractions are all that now matter.  The physical world is no longer where things happen.  That’s what other people do — in China, India and Singapore.  But, then what do we do?  We manage things, count things, borrow money and account for returns.  This sounds a lot like England when we were soon to displace them in innovation and economic growth.  All because we are unable — or perhaps unwilling — to create the artisans who can contribute to the processes of invention and innovation.

Creating the Future

I am a student of history, particularly economic history.  Lately, I have been immersed in reading about technological innovation in the late 19th and early 20th centuries.  Transportation was transformed from stagecoaches and steamboats to railroads, automobiles and airplanes.  Electricity transformed communications from mail, telegraph and telephone to radio, television and now Internet.

In the process, there was much creative destruction.  Industries morphed or disappeared, and jobs changed or disappeared.  The stewards of the status quo did their best to stymie these changes, but they inevitably failed and change happened. We are now seeing fundamental change in healthcare delivery, and will sooner or later see fundamental change in higher education — the former being the incumbent poster child for runaway costs, and the latter soon to become the reigning poster child for costs that far exceed the value provided.

While the stewards of the status quo work to thwart change via endless team meetings and glossy strategies and plans, what should the rest of us do?  We could go to these meetings, check our emails or search the web during the interminable discussions, and help wordsmith the slides and brochures.  We could embrace business as usual, hoping the rules of the game are not changed during our watch.

On the other hand, we could embrace the ambiguous, uncertain future.  How?  Well, I am not a fan of crystal balls or dice.  There is another choice.  We could focus on creating the future.  We could imagine a different future and work to make it happen.  We could create products and services that might transform people’s lives. How about teleportation or mind reading?  Too much?  How about cars that cannot run into things, due to sensing and control technologies, and hence can weigh 70-80% less than current cars?  How about natural chemical agents that can track down cancer cells and convince them to die?

Much of what we take for granted — for example, this iPad on which I am typing — would be seen as pure magic by people of 50 to 100 years ago.  We have created a future most could not have imagined.  Now, we should imagine a future that no one believes is possible — and then go make it happen.  Creating the future is much more productive and satisfying than waiting for the future.  It is much more fun than being a steward of the status quo.

Market Forces

Change happens when it is forced.  The force can be an opportunity or a threat, perhaps embodied in a crisis.  In many domains, the forces for change are manifested as market forces.  Competitors, large or small, recognized or unrecognized, are the sources of market forces.  Thus, change happens when there is competition to meet market needs with better performance, quality, service and/or prices.

Change is much less likely to happen when there is little or no competition.  The stewards of the status quo can then argue that everything is great — as good as it can be within the prevailing constraints.  If competitors are not offering viable alternatives, it is difficult to convincingly argue that the stewards of the status quo are wrong.  Consequently, all investments are focused on preserving the status quo.

Healthcare is currently in crisis.  New alternatives are being driven by information and incentives.  Information will improve overall efficiency, but also enable health consumers to know the best providers, the best treatments, and the best pricing. Changing incentives focused on pay for outcomes will cause providers to focus on procedures that improve outcomes because those are the only ones for which they will be paid.

Higher education is a crisis in waiting.  Costs of administration (per student) have soared while expenditures on education and research (per student) have steadily declined.  At the same time, the merits of the old argument that a college education is always worth it have faded.  Unfortunately, there is a dearth of viable alternatives.  Online education has some benefits, but campus-based education provides a much richer growth experience.

What we need is an alternative that retains the benefits of campus-based education with much less overhead.  How about a university with a president, provost, deans and department heads, with NO vice presidents, vice provosts, associate vice presidents, associate vice provosts, etc.?  How about a university where the faculty members are the majority of employees?  Those two rules alone would constitute a dramatic change.

No mainstream university would agree to these rules.  There are far too many stewards of the status quo to allow this to happen.  But, there could be new universities, perhaps populated by faculty disaffected with the mainstream, which could operate this way.  The result might be a first-rate education for less than $10,000 per year — no fees added, no hidden charges.

This type of alternative would force change.  The best students would opt for this new alternative.  The mainstream universities, with increasingly bloated costs, would attract mediocre students from financially well-off families.  These students and their families would be more attracted to suites at the football stadium than science labs.  This would enable mainstream universities to cut back expenditures on the more academic side of things to focus on campus amenities and intramural enrichments.

How would we convince students — and their parents — that the degree from Alternative U is as valuable, or more valuable, than a degree from Mainstream U?  There are two key elements of making this case.  First, the quality of the faculty could be superb due to the enormous savings from salaries of non-faculty. Faculty members could be paid quite well since the typical five university staff members per faculty member would not exist.

Second, close alliances with industry and, to an extent, government would create great opportunities for internships and virtually guaranteed employment upon graduation.  There would be no graduates from Alternative U with marginal work knowledge and skills.  Everyone would be really good at something, ranging from design and engineering to journalism, theatre and media.  The graduates of Alternative U would run the world, and the students at Alternative U would know this.

Mainstream U could pursue the Alternative U mission, actually much easier than those who would have to start from scratch.  But, Mainstream U will not pursue this opportunity to innovate — they are much too busy.  There are hundreds of faculty members to manage and thousands of staff members to pay and promote.  The administrative assistant to the Deputy Associate Vice Provost has filed a complaint requesting the title of Assistant Deputy Associate Vice Provost and the university’s legal counsel has advised that this be settled out of court.

Disrupting the Status Quo

A few months ago, a colleague asked me, “What if our big idea does not get approved by the powers at be?”  I said, “We will start an insurgency and just do it anyway.”  We are still waiting for approval, and may get it, but we are quickly progressing despite the lack of formal blessing.  Our idea may be too disruptive for the stewards of the status quo to fully support it, but we are determined to prove the benefits of this idea and create a tipping point of demand for these benefits.

These experiences, combined with my recent posts, caused me to ask whether there are limits to the benefits of disrupting the status quo.  Either extreme will, obviously, not work. If everything changed all the time, chaos would result.  If nothing ever changed, complete stasis would be the result.  So, is there some intermediate level of disruption that balances creativity and continuity?

The stakeholders seeking continuity usually far outnumber those pursuing creativity.  The political, business, social, and personal interests associated with the status quo are often strong and compelling.  The interests associated with creative change may be quite energetic, but typically involves far fewer stakeholders.  Thus, the default reaction is often watered down change or no change at all.

One way to pursue the question of the appropriate level of disruption is to consider the extent to which an enterprise is open to entertaining and pursuing change.  Two factors, at least, affect the openness of an enterprise to transformation.

First, to what extent is the enterprise facing crisis or opportunity?  Much fundamental change is driven by crisis.  The crisis in healthcare spending is widely acknowledged because the largest payer has balked.  Medicare and Medicaid have restricted what they will pay in order to limit spending growth.  Employers are also very unhappy.  The broadly defined healthcare enterprise is paying attention.

In contrast, the crisis in higher education is only seen by millions of individual payers who, in general, have little if any leverage.  For the higher education enterprise, the status quo is powerful and hunkered down.  Acknowledgement of the crisis will require a systemic jolt.  One possibility would be the federal government’s limiting of students loans.  The current loan program provides universities with a license to raise tuition and fees.

The flip side is opportunity.  In health delivery, medical knowledge and information infrastructure are enabling enormous possibilities for prevention and wellness, chronic disease management, and patient empowerment in general.  This is driving many ideas and inventions, some of which will surely become innovations — fundamental changes in the marketplace.

There is no lack of opportunities in higher education, many technologically enabled. However, institutional leaders are not pursuing these opportunities.  Instead, they tend to be framed as research projects, typically outside of the mainstream and funded, often marginally, by external sources.  Transforming these inventions into innovations is an uphill battle.

The second factor is the extent to which an enterprise’s dominant stakeholders feel threatened by change. In healthcare, the acknowledged crisis has resulted in the primacy of the physician being redefined, in part due to the opportunities noted above.  There are many ongoing attempts by institutional leaders to disrupt the status quo and it is quite likely that a few will succeed to transform the healthcare enterprise.

In higher education, the primacy of the professor is steadfastly maintained, and faculty governance models strongly limit the extent and pace of change.  With no acknowledged crisis, attempts to disrupt the status quo are not led by institutional leaders.  Instead, these leaders are usually recruited to be stewards of the status quo.

Change is most difficult when the role of the dominant stakeholder is threatened, whether they are physician or professor.  Institutional leaders, usually drawn from the dominant stakeholder group, are very hesitant to alienate their former peers.  Indeed, they may be oblivious to the reality of the threat.

I have encountered this phenomenon in domains beyond healthcare and higher education.  In my many years working with the U.S. Air Force, I was often amazed at how pilot-centric decision making was.  However, given that almost all the senior leadership came from the pilot ranks, it should not have been surprising that the solution of every problem was seen to be an airplane.  In fact, problems obviously not addressable by weapon systems often received little enthusiasm and attention, e.g., enterprise efficiency.

The history of change in politics and religion has also been heavily politician-centric and priest-centric, respectively. Attempts to disrupt the status quo in those domains have resulted in purges, inquisitions and many other bloody reactions.  People who have worked hard to gain knowledge, resources and status are, in general, very reluctant to relinquish power.

Returning to the question of how much disruption is enough, it is clear that the answer depends on the situation.  If the dominant stakeholders in a domain are open to change, perhaps motivated by a recognized crisis, then quite a bit of disruption may be welcomed and productive.  In contrast, if the dominant stakeholders have chosen stewards of the status quo as leaders, then investing energy and emotion in disruption is quite likely to be a very frustrating and unproductive experience.

Stewards of the Status Quo

There are many impediments to addressing and solving executives’ toughest problem – see my last post.  Resource limitations – time, money, and people – can obviously be impediments.  Less obvious, and often much more troublesome, are the stewards of the status quo.  These stewards include people and organizations who are determined to keep everything as it is – markets, products, salary structures, pensions, tenure and so on.  They want all entitlements – legally mandated or socially perceived – to remain just as they are.

Such responses are not unexpected.  Getting people and organizations to buy into and support fundamental change often requires great creativity and compromise.  Often, this creativity is focused on inspiring a sense of urgency or precipitating a “burning platform.”  Once people truly believe that change is inevitable, they will usually constructively engage in deliberations on the nature of change and how it should be implemented.  A good example of this is the healthcare delivery system in the U.S.  There is much valuable dialog going on currently among a wide range of stakeholders.  Few people still believe that this system is fine just the way it is.

Perhaps the biggest impediment to change is when the stewards of the status quo are in charge.  When the leaders of the organization constrain thinking to business as usual, perhaps on steroids, fundamental change becomes very difficult if not impossible.  It is common for such leaders to use the vocabulary of change, e.g., new directions, strategic leaps, and enterprise transformation.  However, this is just rhetoric.  Their real goals are to keep the troops fed, make sure the trains run on time, and avoid rocking the boat.

This form of leadership is most common in enterprises that are shielded from market forces.  Government, education and religion, for example, typically attract and recruit these types of leaders.  The process of searching for new leaders in these types of enterprises places enormous emphasis on identifying candidates that will not be disruptive.  This does not always succeed and occasional change agents will secure major leadership roles.  Frequently, their tenure in these positions is relatively brief.

Stewards of the status quo thwart change to such an extent that the roots of change typically emerge outside of the mainstream.  People such as Alexander Graham Bell and Thomas Edison, and more recently Steve Jobs, formed new types of businesses and, over time, fundamentally changed our day-to-day lives.  The phone business, lighting business, and portable device business were not just business as usual on steroids.  These men and, of course, many other men and women invested little energy in preserving the status quo.

In general, change happens when market forces drive it.  When forces for change are prevalent, enterprises led by stewards of the status quo, suffer, fail and disappear.  Such forces may emerge in education, but are unlikely in government and religion.  If forces for change become prevalent in education, one can expect to see many leaders who are ill prepared to be other than stewards of the status quo.  Then, slowly and painfully, change agent leadership will become more the rule than the exception.

The Toughest Problem

Over the past two decades, I have often asked executives about their toughest problem.  Not surprisingly, they use many different words to answer this question.  However, there is quite a consensus around, “Running the enterprise I have while trying to create the enterprise I want.”

Keeping the existing enterprise running tends to be a very demanding job.  Enormous human and financial resources are needed to stoke the fires of the business.  Pressures to “stick to the knitting” are usually compelling, both financially and within the social network of the enterprise.

As a consequence, I have found that even enterprises that entertain a broad range of future scenarios will, in the end, focus on the “business as usual on steroids” scenario or the equivalent.  This is especially true when resources are tight and time pressures enhanced.  The need to support the reigning business model becomes heightened, regardless of whether or not this model is obviously becoming obsolete.

Nevertheless, there are usually executives that realize that the reigning business model is threatened.  Often, this possibility has been discussed long before the resource constraints and time pressures mounted.  However, it often was the case that it was socially unacceptable to openly recognize the need for change, much less attempt any fundamental change.  The stewards of the status quo would vociferously defend the viability of the current business model.

One or more possibilities for enabling change might emerge — for example, a new product line or new market channel.  However, this nascent solution would whither, subject to Christensen’s innovator’s dilemma.  The near-term revenues and profits associated with these alternatives would invariably be too small to provide the silver bullet everyone was seeking.  Instead scarce resources were sunk into the status quo.

Eventually, Schumpeter’s creative destruction emerges and many enterprises share the fate of the 1,000 companies who have departed the Fortune 500 in the past 25 years. This is great for the economy, but a defeat for each enterprise, all because the executive team could not solve the enterprise’s toughest problem.

The Current Communicator

I recently visited the Ronald Reagan Presidential Library.  One can question the whole “City on the Hill” imagery, but the Great Communicator was undoubtedly able to evoke a positive emotional response from me three decades after the original narrative. How does this compare to the Current Communicator?

Both Presidents inherited troubled economies– one could easily argue that Obama’s inheritance was much more troubled than Reagan’s.  Both looked forward with a message of hope that captivated the electorate.  Reagan, perhaps working from a much shallower economic hole, was able to oversee strong growth by two years into his first term.

Reagan’s enormous investment in defense played a central role in the fall of the Berlin Wall in 1989, following the end of Reagan’s second term in 1988.  It is, of course, much too early to assess Obama at a similar point on his impact on the country.  Let’s imagine, however, we are in 2017, looking back at Obama’s contributions.  What might we see?

Better yet, what might my children and grandchildren find compelling when they visit the Obama Presidential Library in Chicago in 2039, twenty-three years after he leaves office after his second term?  What messages would make them feel as I felt when leaving the Reagan Library last week?

Barring another 9/11 or a war, Obama’s claim to fame will be in terms of domestic accomplishments, and in all likelihood in healthcare.  Thus far, he has accomplished insurance reform — millions of more people provided with government-paid access to an easily arguable inefficient and ineffective delivery system.  This hardly sounds like a success, but it could create a tipping point.

Millions of additional people in the system will stress the system to such an extent that it will break.  This will create the “burning platform” that will enable healthcare reform, not just insurance reform.  Survival will require a move from fee for services to payment for outcomes.  This change will require a fundamental change of how providers deliver care.  They will have to eliminate activities that do not provide better outcomes — because no one will pay for them!

The key question is what is Obama’s equivalent to Reagan’s, “Mr. Gorbachev, take down that wall”. I think this requires that we see the nation’s health to be just as compelling and important as the nation’s defense.  How can President Obama make this happen?

First, it requires transformational leadership.  The President needs to articulate a vision, strategy and plan — and steadfastly hold to this message just as President Reagan held to the “evil empire” message.  He has to lead, not just throw this idea “over the wall” to Congress as a notion that they need to pursue. He needs to bet the farm on this one.

Second, he needs to take the case to the healthcare establishment.  Transforming healthcare will yield better outcomes for lower costs.  The best providers will be much more profitable –and the poor providers will go out of business. Healthcare needs this “creative destruction” with the strong players prospering and the weak players disappearing.

Third, the senior leadership of the Obama administration needs to be relentless in embracing the overarching goal of a healthy, educated and productive population that is competitive in the global marketplace.  Yes, healthcare is just one piece of the puzzle.  Education is next.  That’s needs to be the agenda of the administration following Obama. But Obama needs to stay on healthcare, and little else.  That will be the highlight of the Barack Obama Presidential Library in Chicago.

He Still Looks Like Him

Last Sunday, I had breakfast at the Beachcomber, which is right on the beach at Crystal Cove, just south of Newport Beach, California.  The waitress mentioned that many celebrities eat there often.  She talked about a particular performer, her favorite, and said, “He still looks like him.” I asked what she meant by such an odd choice of words, and she said that many celebrities have had so much plastic surgery that they no longer look like their former selves.

Plastic surgery is pursued in hopes of avoiding the changes typically associated with aging.  The goal is to avoid the appearance of aging.  Of course, this does not do much for actual aging.  Thus, the transformation is only on the surface – literally.  This is not the only form of transformation that only deals with the surface.

I have worked with many enterprises in business, government, and academia that undertook initiatives to envision a new future, formulate a strategy for pursuing that future, and develop a plan to transform their enterprise in the process.  On the surface — of PowerPoint slides and Word documents — these enterprises were transformation ready.

Over time, however, business as usual recaptured people’s attention.  The vision of a new future faded in all but the promotional brochures.  The strategy became more of a slogan than a path to the future.  The enterprise still looked like itself, only more so. The energy with which these initiatives began never got below the surface to enable real change.

Plastic surgery represents easy change, just as PowerPoint slides and Word documents represent easy change.  Change below the surface requires a much greater investment.  First and foremost, it requires committed transformational leadership that can articulate the vision that will compel people to act, in part because they have contributed to shaping this vision.  Leaders who were recruited to be stewards of the status quo will be unable to provide this type of leadership.

Second, change below the surface requires substantial human and financial resources.  In a time of scarcity, which may be one of the drivers of change, these resources are likely to have to be repurposed from other functions and activities.  This means that some elements of the status quo will have to be eliminated.  A leading indicator of successful transformation is the number of functions and activities that are completely eliminated.

Third, incentives and rewards have to be aligned with successful pursuit of the new future.  People will not march to a new drummer if their pay and promotions are still tied to the old marching tune.  Realignment of incentives and rewards usually results in outcries from the stewards of the status quo. Strong transformational leadership is needed to stay the course of change and allocate resources to the new future while also realigning incentives and rewards.

Change on the surface is so much easier than deeper change.  Beyond the plastic smile or glossy brochure, the stewards of the status quo tend to keep business as usual rolling along, with all functions and activities budgeted as usual, and everyone incented and rewarded as usual.  Nothing has really changed, because fundamental change below the surface is very difficult.

What Is or What If

Much of contemporary analytics focuses on tabulating and portraying characteristics of existing systems, whether they are for energy supply, health delivery or a wide range of other complex systems.  This type of analytics addresses “what is” or in many cases “what was.” This approach is backward looking, which makes a lot of sense if there are important lessons to learn from the past and carry forward.

There are some situations, however, where the current system is not one to be emulated.  Health delivery is one of these cases.  While medical science has steadily advanced, the delivery of health has not.  The delivery system is a federation of millions of entrepreneurs with no one in charge. Information systems are highly fragmented and rife with incompatibilities. The incentive system rewards delivery of procedures rather than health outcomes.

We need a very different system in terms of how health delivery is organized, operated, and financed.  This requires that we move from “what is” to “what if” in the sense that we need to explore delivery models that do not yet exist.  We cannot rely on empirical data from systems that have not been designed and deployed.  Further, as these will be very expensive systems, we need some way to drive the future before we write the check.

Computational approaches can provide the means to this end.  What we need is interactive organizational simulations that enable key stakeholders to explore alternatives, eliminate bad ideas, and refine good ideas.  As stakeholders come from a wide range of disciplines, these simulations have to include compelling interactive visualizations that allow extensive “what if” explorations.  When stakeholders move the sliders for key model parameters and choose their own assumptions, they become increasingly committed to the shared models they are developing.

Creation of these types of capabilities requires several ingredients. First, several types of computational models must be linked, e.g., agent-based for patients, discrete-event for delivery processes, microeconomic for providers and payers, rule-based for policy, and system dynamics for exogenous phenomena.  Linking such a disparate range of models can be a substantial challenge.

Second, the parameters for component models must be gleaned from large data sets including clinical data, financial data, and claims data.  Using such data to parameterize process models, for example, can be quite difficult, as most providers and payers have not structured their data sets in terms of processes. Instead, data are organized by codes for diagnoses, procedures, and locations. This requires that processes be inferred from data sets never intended to support such inferences, which often involves filtering out special cases as well as mistakes.

Third, interactive visualizations are needed for decision makers to understand and be comfortable with computational approaches.  They need to view the computational models as a means for exploring a range of possibilities rather than as a “magic box” that produces optimal but, unfortunately, often opaque answers. This requires core competencies in interactive computing and decision support systems.

The three competencies outlined above — computational modeling, statistical estimation, and interactive visualization — are rarely found in one individual or even one discipline.  Multiple disciplines are needed, working as a team to tackle large-scale “what if” problems.  Any initiatives to address the transformation of healthcare requires the multi-disciplinary team needed to assure the availability of these competencies.

Smart health is not just about doing what we now do better.  Indeed, Peter Drucker has cautioned us to never invest in improving something that you should not be doing at all.  For health, being smart means being able explore whole new ways of doing things to eliminate bad ideas and refine good ideas, so that we can then invest in improving and deploying these good ideas to create quality, affordable health for everyone.

Controlling the Costs of Healthcare

We continue to anguish over escalating healthcare costs.  To gain control of these costs, we need to understand one essential equation.   The total cost of healthcare is

Total Cost = Costs Per Use x Number of Uses

Careful design of delivery processes to eliminate unwarranted care process variations can decrease the costs per use.  Variations are unwarranted if practices differ from evidence-based medicine for no beneficial reason.  Such variations may yield significant revenue for providers, but if these variations do not benefit patients, they should be eliminated.

Prevention and wellness programs and chronic disease management programs can decrease the number of uses by keeping people out of in-patient treatment because either they do not get diseased or, if diseased, have crucial variables under control.  Such programs involve small investments per person now to avoid large costs per patient later.  These types of investments have repeatedly been shown to yield attractive returns, especially if one attaches value to healthy, productive people, as employers certainly do.

The central issue is how best to allocate resources across process (re)design, chronic disease management, and prevention and wellness to control healthcare costs with equal or better health outcomes.  This logic seems tractable, but is rarely pursued.  Why?  As I interact with executives of more and more providers, two things strike me:

Few executives are addicted to inefficiency.  They simply do not have the information to improve.  They do not understand their processes; do not know their costs, etc.  So they just try to maximize revenue and keep their capacity fully booked.  We are working on methods that take clinical, financial, and claims data and infer the providers’ processes, including the variability in these processes, to then determine which processes, when given attention by clinicians, should be the first targets for improvement.

However, increased efficiency often decreases revenues until providers figure out how to re-deploy capacity.  While it may increase profits by eliminating “bad” revenue, most providers have no means (i.e., information) to make this assessment.   Thus, for example, using non-MD care coordinators plus e-visits leads to increased costs (for added people and infrastructure) but less, maybe zero, revenue.  For this reason, Patient Centered Medical Homes may be terrible investments for providers unless they can re-deploy clinician capacity in profitable areas or, better yet, be paid in part, at least, for keeping people out of the hospital.  We are using the models described above to determine the best ways to do this.

The bottom line is that we know how to reduce total costs, as defined by the above equation, but there are strong disincentives to do this.  The current fee for service payment model encourages providing many services, regardless of whether they provably benefit patients.  The unwarranted process variations generate significant revenue for providers.  Payment for health outcomes can remove these disincentives.

For prevention and wellness, providers should be paid for risk reduction.  For chronic disease management, providers should be paid for keeping blood pressure, glucose levels, etc. in control.  For in-patient care delivery, providers should be paid for provision of the best evidence-based practices.  Payments should be paid for these outcomes regardless of how they are delivered, i.e., doctor vs. nurse vs. care coordinator vs. health coach.  Payment should also be independent of where they are delivered, i.e., hospital vs. clinic vs. telephone vs. Internet vs. at home.

If payment for outcomes is adopted, and it does not matter who delivers these outcomes or where these outcomes are delivered, providers will have enormous incentives to understand and redesign their processes to maximize the outcomes achieved and earn the economic benefits of these achievements.  We all will then have access to affordable, quality healthcare.

The Costs of Conformity

I recently resigned from an administrative leadership position at my university, having served for ten years in this position and an earlier one.  The precipitating event involved decisions by senior administrative leadership that I felt limited my abilities to continue in my role.  My guess is that it was not intended to have that effect, but the leadership was simply not paying attention to such implications.

However, that was just the straw that broke the camel’s back.  The nature of “business” processes in academia has long frustrated me. . This frustration has been greatly elevated over the past year with the reorganization of the research enterprise at the university.  I agree with the vision, at least in principle, but the execution has been excruciating.  Everything moves agonizingly slowly.  Almost nothing happens in the summer.  Important issues are left hanging for many months, or longer.

In reflecting on this, I realized that effectiveness and efficiency may be the spoken goals, but the real goal is conformity, as well as compliance to assure conformity.  We must conform to the policies and procedures of the federal and state governments and those of the university.  We must conform to the faculty governance policies and procedures adopted by the faculty senate.  This includes operating within the academic culture surrounding this governance model.  All this conformity consumes an enormous amount of time and money.

The university’s goal is to produce high value outcomes in education and research.  That is certainly what students, parents, alumni, sponsors, and the public expect.  What about producing these outcomes in a timely and cost effective manner?  It seems to me that the university works as quickly and as cost effectively as it can — within the constraints of all the conformity outlined above.   The result is that the costs of higher education in the US are increasing at a faster rate than healthcare, the current poster child for runaway costs.

Raising this issue at several universities with which I am involved has yielded similar, often somewhat arrogant, responses.  Higher education sees the value they provide as a given and not to be disputed or even discussed.  They see the costs of conformity as inherently justified.  Many will say that it is unimaginable that the processes of the university should be redesigned to be more efficient and effective.  Most of these processes have been in place for decades; some of them for centuries.

Occasionally, someone in a leadership position decides to consider the redesign of some non-controversial processes.  Typically, this involves forming a committee of faculty and staff of perhaps 15-20 people, given the range of stakeholders that needs to be involved. This committee will meet regularly to discuss and debate at length the nature of the current processes and how they might be improved.  All opinions and ideas will be honored and discussed at length.

After a year or two — not counting summers when it is impossible for the committee to meet — a set of recommendations will be created.  These recommendations will represent an integration of all ideas discussed, assuring that all committee members can see their ideas in the compilation. The committee will be warmly thanked after they present their recommendations. Perhaps one or two of the ideas on their long list of recommendations will be pursued, as long as they conform to the relevant policies and procedures.

Moneyball and Football

I have been thinking about how Michael Lewis’ Moneyball: The Art of Winning an Unfair Game, might be applied to American football.  On-Base Percentage was found to be the best predictor of success for baseball.  What might work for football?  I tried a variety of statistics and found that a team’s total number of turnovers (interceptions plus fumbles lost) plus punts was highly negatively correlated with the percentage of games won.  Thus, if a team has zero turnovers and zero punts, it is highly likely to win the game.

It struck me, though, that winning may be a secondary goal in football. This is based on another amazing statistic.  In each 60-minute game, the ball is in play, on the average, for 12 minutes, or 20% of the game.  This is the time from when the ball is snapped until the ball is whistled dead.  If we put this in the context of the 180-minute viewing time, whether you are at the stadium or watching television, the ball is in play only 6.7% of the time.

This allows 93.3% of the time for socializing and watching beer and truck commercials.  The game has been optimized as a marketing and sales channel rather than a sport.  It is a game of arbitrary precision.  Often senseless rules, interpreted with great variability by referee judgments, result in precise placement of the ball, and endless opportunities for more advertisements.  American football is a money machine.

For fans of American football, the first priority is an opportunity to socialize with friends.  The next priority is to be entertained by 300-pound men crashing into each other at 30 miles per hour (relative speed).  Finally, there is football as a sport.  In contrast, for rugby and soccer, seemingly older cousins of American football, the sport comes first.

One can view American football as a sport in the same way that the gladiator contests in ancient Rome were sports.  There was (is) lots of blood and gore, or equivalent.  There are also great opportunities to socialize with friends while grazing on snack foods and consuming large quantities of alcoholic beverages.  Football stadiums even tend to look like coliseums.

Another view of American football is as a reality show.  The competitive tension is orchestrated to keep viewer’s attention, with enough rule infractions, network timeouts, and so on to provide ample advertisement opportunities and enormous revenue.  Although, unlike most reality shows, I still believe that the outcomes of football games are not predetermined.  Thus, I remain convinced that the fewer the turnovers and punts, the more likely a team will win.

Replacing the Old Order

I recently read John Lynch’s Simon Bolivar: A Life (Yale University Press, 2006).  Bolivar played the central role in freeing six Latin American countries from Spanish colonialism.   The eventual domination of his armies and his subsequent nation building destroyed the old colonial order.  However, creating the new order was a much more daunting task than he anticipated.

Bolivar needed to address the interests and concerns of a large set of stakeholders.  Spanish natives living in Venezuela, Peru, and so on had long ruled these countries with iron fists.  However, now that the old order was gone, a wide range of aspirations emerged among various stakeholder groups.  These groups included creoles (native born people of Spanish ancestry), pardos (racially mixed individuals), the people from the vast grasslands (Llanos), native American Indians, and slaves who were mostly black.

All of these stakeholders had long-harbored grievances and aspirations for social justice.  Bolivar’s message of liberty and equality was heartening and provided a rallying cry.  However, the redistribution of land and other wealth was more important to these stakeholder groups.  This made the transformation to true democracy, or even an approximation, quite difficult. New tensions and infighting hindered Bolivar at every step.

As fascinating as this story is, the more general lesson is perhaps more compelling.  Transformation involves unfreezing the old order, moving to a new order, and then refreezing around the new order.  It may be easier to get people to agree to the unfreezing then getting them to agree to move to a particular new order.  Instead, unfreezing may lead to chaos as newly freed stakeholder interests undermine the possibility of any new order.

Perhaps this is why religious and academic organizations, to name just two, cling to old ways in terms of principles and practices. If they allow any slippage, then they expect they will avalanche down the slippery slope of fundamental change. This may enable many creative possibilities.  However, it is also very likely to upset many apple carts.  The old order, despite its flaws, is a source of stability.

Beyond stability, many will have designed their lives, businesses, universities, and so on around the implicit assumption that the old order will persist.  This is even true for those disadvantaged by the old order.  When this order is replaced, there are many losers.  There may also be many more who will respond in perhaps unpredictable ways once they have the freedom allowed by the loss of the old order.  Latin America, as Lynn shows, provides a good illustration of this tendency.

This perspective may make transformation sound hopeless or, at the very least, a process that is inevitably very long and rocky.  One approach to avoiding this is to build the new order in advance of the dismantling of the old order.  More specifically, create a demonstration of the new order in the midst of the old order. This is a typical path for technological transformation, e.g., from land lines to smart phones.

Could Bolivar have taken this approach?  To a slight extent he did, with a bit of nation building along the way.  However, the monopoly of Spanish colonialism repeatedly squashed these efforts.  There is an element of this in technological transformation as well where monopolies like public utilities can block potential innovations because they challenge the reigning order.

However, these types of monopolies do not have armies, guns and gallows.  Liberating countries is decidedly on a very different scale than transforming markets. In fact, it is not just a matter of scale. The behavioral and social components of liberating countries involve a type of complexity that cannot be avoided by simply having a sound “methodology.” Liberation is inherently much, much messier than transforming companies and markets.

Moneyball in Academia?

I just finished reading Michael Lewis’ Moneyball: The Art of Winning an Unfair Game.  Lewis relates the story of the Oakland Athletics and their ability to use scientific management to maximize wins per dollar. I could not help but wonder how their empirically derived principles might apply to academia. What is the equivalent of On-Base Percentage for a university?  And, if we could agree on that, how would we align all of our resources to maximize this metric?

The essence of the book’s argument is that many of the truths that organizations embrace and use to guide decisions are, in fact, myths with no empirical basis in fact. Once you look at the data in detail, you can find what really matters. If your competitors continue to embrace the old (false) truths while you embrace the new empirically based truths, you can gain an enormous competitive advantage.

Of course, the priesthood associated with the old (false) truths will do their best to defend the dogma and discredit the new empirically-based truths, often without even paying attention to the source and nature of the new truths. They will attack the integrity and abilities of those presenting the new truths, typically dismissing them as uninformed and self-serving. (See pages 287-288 of Moneyball.)

But, transformation can happen. The Red Sox adopted the Athletics’ practices and, with a much bigger market and hence budget, escaped the curse of the bambino. For much less money, they relied on Ellsbury and Pedroia while getting rid of the high-priced Ramirez.  The Toronto Blue Jays, led by acolyte of Oakland’s Billy Beane, are similarly pursuing the new model.

I know that a university is much more complex than a baseball team, but I wonder if we are not often trapped by our assumed truths rather that empirically exploring what really matters and how the allocation of our resources could truly improve the value we provide.

Transforming Colombia

I gave a keynote lecture on “Enterprise Transformation” at the Logistics International Congress last Wednesday in Bogota, Colombia.  I also listened to several other talks from government officials in various ministries, as well as a few academics.  I spent quite a bit of time talking with a wide range of people.  Overall, I learned much more about Colombia than I did about supply chains and logistics.

I should put my report in context.  Bogota is a city of 8-9 million people living at an elevation of 8,612 feet on a high plane, surrounded by the Andes Mountains.  Although not far from the equator, the altitude results in moderate temperatures year round.  Colombia has a small upper class (5%), a growing middle class (30%) and an enormous lower class (65%).  Income disparities in Colombia, as assessed using the Gini Coefficient, were the highest in Latin America in 2009.

Colombia’s main exports are agricultural products (e.g., coffee), and commodity natural resources (e.g., coal, gas, minerals).  (Brazil, in contrast, exports airplanes, as well as agricultural products and natural resources.)  Agriculture and mining employ much manual labor, but much of this employment is low-wage “informal jobs.”

Colombia is one of the CIVETS countries, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa.  These countries are in similar stages of economic development.  Ahead of them are the BRIC countries – Brazil, Russia, India, and China.

National goals, according to several ministries’ spokespersons, are represented by a triangle linking three interrelated objectives: more employment, less poverty, and more security.  They recognize that achieving these goals depends on education.  This poses a couple of challenges.

The high school dropout rate is 20-25% in Colombia, compared to 31% in the United States.  However, because school is only required through the 5th grade, the poor are disproportionately affected.  Many 10 year olds must leave school to go to work to help their families, which tends to perpetuate poverty.  Colombians who are able to attend universities and obtain advanced degrees find a different problem – under-employment and unemployment.

Given the nature of the Congress, there was much discussion of transforming infrastructure related to transportation, innovation, and sustainability.  One presentation indicated nine “technoparques” focused on biotech, nanotech, and other engineering endeavors.

The Ministry of Transportation reported that Colombia ranks lowest among CIVETS countries in terms of “mobility infrastructure” – roads, bridges, railroads, airports, etc.  Colombia is also behind Brazil and Chile, with the costs of mobility quite high in Colombia.  This makes Colombia’s oil, gas, minerals, and agricultural products less competitive.  They are working to get investments, regulations, etc. better aligned with decreasing mobility costs.  They are also working to be more responsive to the damage and destruction of their transportation infrastructure due to major rains and flooding in the area.

Colombia is trying to revive its railroad system, which accounts for nearly zero percent of exports, despite having exports ideally suited to railway transport rather than trucks, for example.  In side conversations, it was noted that the trucking industry has done its best to hinder revival of the railroads.  I also learned that the railroads are deficient across Latin America.  Paul Theroux’s superb travelogue, “The Old Patagonia Express,” wonderfully depicts the state of these railroads.  This book was my companion during this trip.

The Deputy Minister of Transportation also discussed the need to enhance urban mobility.  She indicated that strikes have impeded modernization of the urban transportation system.  Colombia’s average commute time in its urban transportation systems is worst among CIVETS countries.  Road safety, especially traffic-related deaths, is a also major issue.  I was glad to have a driver for my jaunts around Bogota as the traffic was very chaotic and required a seasoned person at the wheel.

The Ministry of Trade reported that Colombia is ranked seventh in Latin America in terms of transportation and logistics infrastructure – Chile is first.  He outlined a variety of initiatives aimed at improving Colombia’s standing.  Despite these many initiatives, one participant told me that the government is not “high velocity.”  Another participant mentioned that the government is strong on planning but weak on execution.

Overall, Colombia’s transformation intentions seem quite well articulated, but progress is very slow.  Many major stakeholders appear to feel entitled to the status quo – as my recent posts indicate, this is common in the United States as well.  This includes politicians, business owners, and the broad, poorly educated working class.  Stability, only recently achieved, is coveted much more greatly than the uncertainties and likely displacements of any leaps in economic development.

One person suggested that Colombians do not like change.  I said it seemed to me that over the past decades Colombia has seen much change, and most of it has had negative consequences.   Thus, despite enthusiasm for new leaders at the federal and city level, Colombians may be justifiably hesitant to embrace the changes being discussed.  From extensive discussions with many people, my guess is that the optimists will prevail.

The city of Bogota is vibrant and exciting.  There are many wonderful things to see, often in the midst of the chaos of road traffic and, in some older neighborhoods, a little grime.  The original old city in La Candelaria contrasts with the upscale Business District (a bit west of the airport) and the exciting nightlife of Zona Rosa.  Monserrate at 10, 342 feet provides a wonderful view of the city from the Andes, as well as a quiet church and two good restaurants.  The Gold Museum and the Botero Museum provide glimpses into historical and contemporary Colombian culture.

Andres DC in Zona Rosa, and the original Andres in Chia, provide amazing restaurant experiences of food and music, with hundred to thousands of fun-loving Bogotanians all in the same restaurant, and décor drawn from the magical realism of Gabriel García Márquez.  The Salt Cathedral in Zipaquirá, a bit north of Chia, provides an amazing experience, especially for Catholics, of a cathedral and numerous chapels, all carved in an enormous salt mine dating from the fifth century BC.  The creation of the cathedral and chapels began in the 1930s to provide places of worship for the miners.

A highlight of this visit to Bogota was a FIFA World Cup soccer game between Colombia and South Korea, in which Colombia prevailed 1-0.  The view of the Andes from the stadium was awe-inspiring.  The logistics of entering and exiting the stadium left nothing to chance.  The security forces were numerous and quite helpful.  Everything was well kept and maintained.  Alcoholic beverages, that might encourage acting out, were not available.  I chatted with the Bogotanian sitting next to me about how well things were done.  He said that the government was determined to overcome Colombia’s image as an unsafe place and, thereby, attract tourists and business investment.  All in all, it was a great event – and we won!

Regarding safety, Colombia had become infamous for its drug wars and the associated violence.  This spring, however, the BBC reported that the International Narcotics Control Board dropped Colombia from its list of countries requiring special observation. Colombia was praised for strengthening its state institutions and its justice system, allowing it to control the supply and demand of drugs more effectively.  More recently, the Los Angeles Times reported, “Colombia’s Cali cocaine cartel, once the richest and most powerful crime syndicate in the world, fell as a direct result of U.S.-led law enforcement and diplomatic pressure about a decade ago. Its toppling remains one of the most significant blows inflicted on modern organized crime.”  The people with whom I discussed these developments were proud of these changes and look forward to many more visitors to Bogota as a result.

Economic development in Colombia may be slower than many would like, but transformation seems nascent.  The friendliness and good will of the many Colombians that I met surely will be the “secret sauce” in this quest for fundamental change. Their eagerness to advance in South America and the world, combined with their enthusiasm, as demonstrated by their passion for food, music, dance and, of course, soccer, will surely enable them to transform their country.

Transforming Public-Private Enterprises: Energy

Most people seem to agree that we need to be more conservative when it comes to energy.  We need to conserve our stocks of fossil fuels while also investing in renewable energy sources.  Our electrical grid is rife with inefficiencies, ranging from transmission losses to power-hungry devices in our homes.  The notion of a Smart Grid has emerged, premised on smart sensing technologies and intelligent control devices.  Numerous TV ads, from a range of companies, show us being able to remotely control everything in our homes from our smart phones.

The EE Times has estimated that it will require a $0.5 trillion dollar investment to bring this vision to reality.  Who will make this investment?  Various studies have shown that consumers would be willing to pay for energy management capabilities that would save them $50 per month or more on utility bills.  However, someone else will have to make the initial investments to bring these capabilities to market.

Electric utilities might be the obvious investors.  Greater efficiencies would enable them to meet increased demand with less capital investment.  States’ public service commissions usually approve utilities rates based on operating and investment costs.  Thus, decreased capital investment, relative to what it might have been, will effectively reduce rates, thereby reducing revenue.  This may be a significant disincentive.

Utilities are usually monopolies in their service areas.  They can set rates at whatever they can get public service commissions to agree.  For companies born and bred in a capitally intensive environment, why would they limit investments and decrease revenues?  Such decisions would not be natural acts for utilities.  Instead, their regulated monopoly mentality is likely to keep them making larger and larger capital investments, securing steadily increasing rates and revenue, and making profits that are safe within this reigning paradigm.

So who will invest and innovate?  My guess is that it will be a non-traditional player, probably a new player.  The impact of Apple on mobile telecommunications offers an interesting example.  The iPod was their first mobile device and the mainstream phone service providers did not see this device as a threat.  Then came the iPhone and the smart phone market mushroomed.  Who will play this role for Smart Grid?  IBM, Microsoft, and Oracle aspire to put the smart in the grid.  Google might be a better game changer.  Or, quite possibly, it could be someone completely unexpected.

Transforming Public-Private Enterprises: Defense

National defense, and acquisition of weapon systems in particular, has long been a target of transformation.  The Packard Commission in 1985 provided a very reasonable set of recommendations for reforming defense acquisition processes.  These recommendations resulted in relatively minor changes.  Blue ribbon committees both before and after the Packard Commission had comparably minor impacts.

President Dwight Eisenhower highlighted the notion of a military-industrial complex in his farewell speech in January of 1961.  He cautioned that the often-cozy relationship between government and defense contractors could result in priorities that were less aligned with the nation’s defense than with the particular interests of the agencies, services, and companies involved.  Fifty years later, this perspective remains relevant.

The acquisition of weapon systems is an enormously complicated organizational process.  A few years ago, we focused on the acquisition of ships.  We learned that if the shipyards could produce ships instantaneously, it would take three years to get one.  The process of buying ships is so complicated that three years are consumed, on average, by the procedures and paperwork associated with acquiring a ship.

The problem, not surprisingly, is that all the various elements of the ship buying process has stakeholders who feel entitled to their roles in the process.  Streamlining the acquisition process would eliminate large numbers of jobs and many companies whose business models were designed to take advantage of how the acquisition system operates now.  Changing the acquisition system would obsolete many business models.  The owners of these business models will not go quietly.

There are also information issues.  There is a lack of transparency of how the system operates, what activities occur when, and how money flows accordingly.  It is very difficult, perhaps impossible, to improve a system when you cannot determine how it is currently operating.

A couple of years ago, I had a series of discussion with a senior defense official focused on what information I could get to employ with the economic models we were developing.  I commented that DoD seemed to collect and archive information on virtually everything, so they should easily be able to provide the information I was seeking.  He said, “You are assuming we have a financial management system.  We do not.  You are assuming we have a cost accounting system.  We do not.  All we have is a checkbook and, usually, we know who we write checks to.”

Finally, of course, there are issues of incentives.  Millions of people are buttering their bread because of how the acquisition system works now.  Thousands of companies were explicitly designed to succeed in the current system.  Hundreds of members of Congress see as their role the securing of as large a portion as possible of the jobs and money associated with the current system.  The incentives are overwhelmingly aligned with preserving the status quo.

Transforming Public-Private Enterprises: Education

We often see dire assessments of our educational systems.  K-12 is judged to be quite poor compared to other developed countries, as reflected in comparisons of educational achievements across countries.  This is particularly true for STEM — science, technology, engineering, and mathematics.  More broadly, our high school graduation rate of roughly two thirds means that one third of young adults are woefully under educated.

Higher education appears to deliver better results.  Our graduate schools still dominate the international rankings.  However, the costs of higher education continue to escalate – tuition in public institutions in many states is doubling every five years.  This is due to steadily declining support for public education by state legislatures.  This is also much evidence of “mission creep” and administrative bloat with an ever-increasing number of associate vice provosts and similar titles.

What is wrong and what needs to change?  These questions can be addressed using the three core transformation constructs introduced earlier – stakeholders, incentives, and entitlements.  There certainly are lots of stakeholders in education, including students, parents, teachers, administrators, employers, politicians and taxpayers.  There are many conflicts among the interests of these stakeholders, including the costs and benefits seen from their various perspectives.

It seems reasonable to assert that there are many instances where high quality education has resulted for well-prepared and motivated students, involved and supportive parents, well-trained and motivated teachers, and administrators, employers, politicians, and taxpayers willing to invest the necessary resources in these types of students, parents, and teachers.  This equation works well in some parts of the country, but does not work in general.

The overarching difficulties are that many students are not well prepared and motivated, many parents cannot be involved and supportive, and not all teachers are well trained, especially to teach ill-prepared, unmotivated, and unsupported students.  Further, high quality education can be expensive, particularly when small class sizes and one-on-one tutoring are needed.

Taxpayers are unwilling to make such investments.  In fact, they may be unable giving the increasing costs of healthcare (e.g., Medicaid) and prisons in most states.  Yet, a lack of education leads to poor health practices.  Lack of education also leads to unemployment and crime.  Thus, not investing in education now results in much higher costs later.

One can argue, therefore, that we have a traditional investment problem.  We need to invest now for later returns in terms of lower costs of healthcare and criminal justice, as well as increased tax revenues from healthy, educated citizens.  But, the investments are needed now and the returns will accrue years later.  No one seems to “own” that future.

Alternatively, the effective discount rate Americans apply to that future is so high that negative consequences are highly discounted, at least psychologically.  Transformation, therefore, does not make sense.  Current stakeholders will not accept the near-term pain of diminished entitlements and long-term stakeholders are not at the table.  There is no sense of urgency.

A Small Transformation Experiment

On November 15th of 2010, I began a small experiment.  The lease on my car ended that day, and I just turned the car in and took the bus home.  I decided to see what life would be like without a car.

My office is close to a subway stop and there is a bus stop near my home.  I only had to figure out how to get them connected, as well as the schedules of all the pieces of the route.  For those times when I would need a car, I joined Zipcar.  They have several cars located across the street from my office.

This experiment continued until June 18th of 2011 when I acquired a new vehicle.  Thus, it is obviously feasible to live without a car.  However, with hot summer upon us, and my ultimate admission that it is inconvenient to not have a vehicle, I am back among the driving public.

This experiment showed me that I could dramatically reduce my transportation costs, from $700 per month (for lease, gas, maintenance and insurance) to $60-80 per month (for subway and bus fares and an occasional Zipcar).  However, this does not include the cost of my time in transit, which increased substantially.

A cross-town meeting would require determining the mix of subways and buses needed to get from here to there and back.  I had to build in extra time to handle schedule variations.  This sometimes resulted in my arriving at a meeting an hour early because the connections happened to dovetail nicely.  I was only rarely late.

I would catch up on my email or read magazines and other materials during these transit times, so the time was not really lost.  Nevertheless, were I not on public transportation, or waiting at a transit stop; I would not have spent my time this way.  Thus, there was certainly some inefficiency.

I met quite a variety of people on the subway, and especially on buses.  For many cases, my first impressions were dead wrong.  Most people seemed poor, and perhaps unable to afford their own vehicles, but occasional conversations uncovered graduate students, aircraft pilots, and lawyers.  In general, people were quite friendly.

I have become a fan of public transportation.  However, for me to fully transform my mode of transportation from private to public, three things need to change:

  • The transportation network has to be more robust, enabling me to efficiently get between more places.
  • Route planning has to only require a glance, not a web search, either at a posted map or a smart phone app.
  • Schedules need to be much more predictable, with the time until next subway or bus arrival displayed at each stop or on another smart phone app.

Succinctly, I need a system much more like Washington’s than Atlanta’s.

Transforming Public-Private Enterprises: Healthcare

Healthcare presents a major challenge for the U.S.  We pay twice as much per capita as any other country; yet achieve much poorer results in terms of health and longevity.  The current system can be characterized as a federation of millions of entrepreneurs with no one in charge.  Even assuming that everyone is well intended, we have the overarching problem of everyone trying to optimize the system from his or her personal perspective.

Patients feel entitled to care and providers of care feel entitled to reimbursement for their costs.  Insurers and providers of medical equipment, devices, and supplies all feel entitled to profits.  These entitlements, both mandated and assumed, tend to be enormous barriers to change.  Everyone one wants the problem of healthcare costs solved, but no one is willing to compromise their entitlements.

All of these stakeholders have premised their business models on the assumption that the economic system will continue to operate as it has been since they made these commitments.  These business models will only be changed if these stakeholders have no choice.  We need a “burning platform” to motivate the needed changes.

I suggest that two changes of the incentive system will create this burning platform.  First, providers of care, as well as equipment, devices, and supplies, should be paid for outcomes in terms of improved health and decreased risks of disease.  They should not be paid for the costs of their procedures or the number of procedures conducted.  Their payment should be linked to the extent to which a patient is better off than they would have been without the providers’ services.  Ideally, we would create market mechanisms that would enable and motivate people to determine the extent to which they are better off, and then pay accordingly.

Second, it should be illegal for providers to charge patients with employer-based insurance more than they are allowed to charge Medicare and Medicaid patients.  If such “cost shifting’ was illegal, the system would have to change because either all providers would soon go out of business or Medicare and Medicaid patients would not receive any care.  The invisible tax embodied in cost shifting has significantly depressed wage levels across the U.S. for the past two decades.  Making this practice visible – and then illegal – would force change.

One might argue that these two suggestions would result in poor and elderly people receiving inadequate care.  However, the opposite would happen.  If one is only paid for improving people’s health, then one needs to finds lots of unhealthy and at-risk people.  That is where improvements can be achieved and money made.  Focusing on healthy, low-risk people would be a poor choice as one cannot improve their health sufficiently to stay in business.

Transforming Public-Private Enterprises: Introduction

It is difficult to transform a large enterprise.  Leaders of many private sector enterprises have told me that their toughest job is managing the enterprise they have while trying to create the enterprise they want.  Not surprisingly, the failure rate is very high, as illustrated by 200% turnover in the Fortune 500 in the past 25 years.

Much more difficult, however, is the transformation of large public-private enterprises such as healthcare, education, energy, and defense.  These types of enterprise are composed of large numbers of smaller enterprises that typically have conflicting interests and priorities.  Further, there is no one really in charge, so these many smaller enterprises cannot be commanded or controlled to do anything.

This posting is the first of a five-part series that will address the transformation of public-private enterprises.  Parts 2-5 will address healthcare, education, energy, and defense, respectively.  My intent is to find some common ground and perhaps a few good practices across these domains.

First, however, we need to define and discuss a few concepts.  The notion of a public-private enterprise reflects the reality that truly large enterprises have to seek some form of symbiosis with the governments that enable their operations.  Government licenses, regulates, and taxes commerce.  Government also legislates and, in the process, often strongly impacts the business environment.

But, government can be more than just an “externality.”  Government invests in education and research that business consumes in terms of employees and research results.  Government is also often a major consumer, ranging from Medicare and Medicaid payments to Department of Defense weapon system procurements.  Few companies really want the government to totally leave them alone.  At the very least, they want tax breaks for oil exploration and subsidies for agricultural production.

Another important concept is entitlements.  This term tends to prompt thoughts of Social Security, Medicare, and Medicaid.  There are, however, much mores subtle entitlements.  The agricultural industry acts as though it is entitled to subsidies for corn and cotton production.  The defense industry acts as though it is entitled to the production quantities originally planned for weapon systems contracts.

Both mandated entitlements and assumed entitlements tend to be enormous barriers to change.  Attempting to change Social Security or Medicare for current recipients of these benefits is likely to result in a firestorm of protests from retirees.  They will argue, quite reasonably, that their personal financial plans were totally premised on the promised benefits from these programs.  As a consequence, we have tended to make changes for future beneficiaries so that, in theory as least, they have time to adapt their plans to these anticipated changes.

More subtle are industries and companies whose structures, processes, and investments – their business models — have all been premised on the economic system operating as it has been since they made these commitments.  Fundamental changes of the economic system could obsolete many of these investments, putting people out of work and hurting shareholders.  It is not surprising that companies fight such changes.

If the Department of Defense were to stop buying military aircraft, for example, and instead lease them by the hour, the business models of defense contractors would be significantly disrupted.  Who, for instance, would put up the capital to buy the airplanes in the first place? Who would insure weapon systems quite likely to be destroyed?  In general, who would take the risks that defense companies have never had to take?

As another illustration, if Medicare decided to no longer reimburse costs – via fees for services – and instead just paid for outcomes, healthcare providers would find their business models very much disrupted.  Perhaps providers would only accept healthy patients.  What if Medicare only paid for unhealthy patients made well, or at-risk people whose risks were reduced?  It might then be worth providers paying high-risk people to avail themselves of their services because they could make so much off the risk reduction.

Not surprisingly, defense contractors would lobby against the “power by the hour” model and healthcare providers would lobby against “pay for outcomes.”  These changes would disrupt their business models and probably marginalize many of their investments.  This leads to a general principle.

When considering transformation of a public-private enterprise, first consider how changes being entertained will affect benefits seen as entitlements, people’s incomes, and companies’ business models.  The more disruptions these changes will create, the greater the difficulty of proceeding and the lower the probability of success.

System-Enabled Incompetence

I wrote early last year about Delta Air Lines transforming a great airline into a bus line.  I really did not anticipate how bad Delta’s performance could get.

I was in Houston on Thursday waiting for a flight to Atlanta. When I checked in at the kiosk, Delta offered me the opportunity to stand by for an earlier flight, which I gladly accepted. Then the kiosk said “processing error” and printed a boarding pass that did not make sense.

I proceeded to a human agent who, after much typing, informed me that my non-sensical boarding pass reflected a change of equipment (i.e., aircraft type).  She also put me on standby for the earlier flight, which she informed me was two hours late due to “weather in Atlanta.”  I called Atlanta to learn that the weather was beautiful with sunny, blue skies.

There are certainly quite appropriate reasons for delays. Why not use these as plausible explanations?  Instead, Delta provides explanations that are obviously wrong.  They apparently do not care that no one believes them. It does not matter — quality service, once their hallmark, is no longer a corporate value.

I went to the gate and asked the gate agent when they would process standbys. He said 45 minutes before departure and, oh by the way, I was not on the standby list. He added me and I jumped to the top of the list — I fly a lot.

Finally 15 minutes before departure the standby list was cleared and several people made it but not me. I pointed to the list and asked him how I, being on the top of the list, did not make the cut. He said that I was not really at the top of the list.

I waited a half hour or so and went back to the gate. I saw that I was on the top of the standby list for the next flight, which would depart an hour or two earlier than my now delayed original flight. I asked the agent if I was really at the top of the list. He told me that I was not on the list at all. Despite what he and I could clearly see on the publicly displayed standby list, his computer terminal said that I was not on the list.

Then good news, he told me that he could confirm me on this earlier flight, in fact in first class. He then typed for the next five minutes and finally handed me a boarding pass — Eureka!

I asked him why it took so long to generate a boarding pass. It seemed to me like an enormous number of keystrokes. He said. “This is not point and click. You have to memorize many, many codes, and then type them all in correctly.”

Waiting an extra couple of hours is irritating but not a major issue, especially if you fly often with Delta. However, dealing with pervasive organizational failure is very frustrating. Delta’s personnel have no idea if they are telling you things that have any basis in reality. Delta has, in effect, fostered system-enabled incompetence.

I am not suggesting that Delta’s gate agents and flight attendants are incompetent individuals. They tend to be well intended and very courteous as they try to meet your needs. However, Delta’s organizational system — their work processes and information systems — have resulted in their personnel not knowing what is patently clear to passengers, e.g., the weather in Atlanta is great and my name is right there at the top of the list.

So, the Delta bus line is increasingly becoming a really bad bus line. There may be some hope as Southwest has acquired AirTran and will become a major presence in Atlanta. They really know how to run a first-rate bus line.

A Tsunami of Talent

I am in Beijing and Shanghai for a few days.  The reason for my being in China is to chair the International Review Board at Tsinghua University where we are reviewing the Department of Industrial Engineering.

The basic statistics are chilling.  In the U.S., 4% of undergraduates matriculate in engineering. Of those that graduate, 12% continue to graduate school.  Thus, roughly 0.5% of college graduates in the U.S. have advanced degrees in engineering.

In China, 40% of undergraduates matriculate in engineering.  At Tsinghua at least, of those that graduate, 67% continue to graduate school.  While it is risky to generalize, this leads to an estimate that 25% of college graduates in China have advanced degrees in engineering.

I may be off, perhaps by quite a bit, but 0.5% versus 25% is a rather daunting difference.  If this compounds year are year, decade after decade, the consequences could be astounding.

The students at Tsinghua are extraordinary.  One in ten thousand Chinese young people qualify for acceptance.  Their English proficiency is rather amazing; their abilities to articulate their views in English are even more impressive.  This is due in part to their use of English textbooks for their classes, as well as a wealth of project-oriented courses where they must put the content of these books to use.

The department head, Gavriel Salvendy, a Hungarian-born American, has spearheaded an effort to enhance the abilities of these students for creative and independent thinking.  When these abilities are combined with the students’ diligent mastery of math, science, and language, Tsinghua is fostering a large cadre of formidable competitors in the global talent pool.

My first impression of Beijing is laced with adjectives such as big, new, modern and busy. Soaring modern buildings are steadily replacing somber grey buildings of the 1960s, 70s and perhaps 80s.  As we drive through the city, pedestrians and cars jostle to make their ways across the street or around other vehicles, some have stopped in the middle of a crowded thoroughfare on one errand or another.

On this holiday weekend (the Chinese equivalent of Memorial Day in the U.S.), I join hoards of people streaming up and down the irregular steps of the Great Wall.  It is quite the exercise, compared to the stroll I expected.  The next morning, my upper legs know that I used them quite differently than usual.  But hiking on a beautiful crisp, sunny day is a favorite of mine.

The next day, the sky is overcast with pollution, replacing the sunny bright blue sky of the day before.  The day after that, it is worse, the mountains having disappeared. Every day and every hour, we encounter huge numbers of people first learning to drive late in life, combined with herds of pedestrians who wander across streets into oncoming traffic.  This provides a strong visual image of change. Beijing, and China in general, has challenges of not only transportation, but also energy and healthcare.

The talented undergraduates and graduates at Tsinghua and other increasingly strong Chinese universities will help the nation to address these challenges.  My sense is that the solutions they devise will have value beyond China.  This will create increasing competitive advantage and economic benefits for this tsunami of talent.  0.5% versus 25% is really a big difference.

On the Cutting Edge

Last week, I was a visiting faculty member as a Spine Symposium.  I gave three talks related to a systems approach to healthcare delivery.  The context of spine surgery was purely serendipitous, as the folks inviting me did not know in advance that I have spent several years doing my best to avoid spine surgery.  I used my case history, and that of a colleague, to make the case that poor care coordination is a major issue, as the many specialties involved seem to have difficulty adopting a perspective that is broader than their specialty.

Why does this happen?  How does a group of highly motivated, well-educated physicians end up taking such a myopic view of back problems?  The answer is rather simple.  We, collectively, incentivize them to do this.  We only pay them for exercising their specialties, not for understanding the relationships across the various aspects of back problems and treatments.  If the orthopedic surgeon or neurosurgeon helps you to avoid spine surgery, he or she loses significant income.  If they help you to achieve a better outcome with much less pain and suffering, they are penalized.

Why do we do this?  I think it is our preoccupation with minimizing healthcare costs rather than maximizing health.  We have lost track of what really matters.  The goal should be a healthy, educated, productive population that is competitive in the global marketplace.  Everyone seems to agree that this should be the goal, but we somehow cannot collectively commit to making it happen.  We want to minimize healthcare expenditures.  Now, that is really simple.  Why don’t we eliminate Medicare and Medicaid, zero out NIH research budgets, and start closing down hospitals and nursing homes.  After this, politicians can run for office on platforms that extol the merits of zero healthcare costs – at least, for the voters that are still with us.

Floods, Cyclones, Earthquakes and Avalanches

I have been in Australia and New Zealand for the past two weeks – I am in Sydney right now.  The first week was a workshop at Gold Coast in Australia.  This workshop was to have been held in Brisbane, but floods reached the second floor of the hotel where the workshop was to be held.  Consequently, the meeting was relocated to Gold Coast.  However, a Level 5 Cyclone also threatened this location shortly after the flood.  Fortunately, the cyclone passed through much farther north and additional changes were not needed.

After the workshop, my long-time friend Ken and I headed to New Zealand for a week of hiking and sightseeing.  We spent February 19-20 in Christchurch and then headed west to Mt. Cook and the Tasman Glacier.  On February 22 we arrived in Cromwell to learn that there had been a 6.3 earthquake in Christchurch at roughly 1:00PM that day.  The next day we learned that there had been an avalanche on the Tasman Glacier, less than 24 hours after we had been there.  It was attributed to the earthquake.

This sequence of natural events in Australia and New Zealand show how change can be forced by nature rather than markets, politics and so on.  Brisbane and Christchurch will need to do much rebuilding.  There will be new buildings and infrastructure.  This will require money, of course, but will also create opportunity.  This is not the type of “creative destruction” that Schumpeter had in mind, but it will prompt construction that is more resistant to floods and earthquakes.

There is, however, another type of legacy.  The mood in New Zealand is quite somber.  Two earthquakes in six months have many people thinking about whether they want to rebuild their lives, not just their homes, in Christchurch.  In Wellington yesterday, I heard of many people migrating to the North Island, saying they could not bring themselves to stay in Christchurch.  Thus, the near-term impacts of change can be quite negative despite the prospects of long-term benefits from successfully addressing the change.  This pattern is quite common.

Causes of Transformation in Academia

Our graduate seminar on “Transforming Academia” started this week. We focused on the roots of the modern university in the Middle Ages, Renaissance, and The Enlightenment. We debated the interpretation of developments in terms of transformational versus evolutionary changes.

Also of central interest were the causes of change. The plague, printing press and paper all had substantial impacts. Literacy, for instance, became more important when things to read became more widely available. In general, there seemed to be a confluence of causes rather than a single overarching cause.

I will be co-leading a workshop in Australia in two weeks on “Understanding and Influencing the Causality of Change.” The participants are coming from a wide range of disciplines and domains, so there are many emerging contrasts among people’s points of view.

One debate concerns the extent to which one can “know” the cause of anything. If I slide my now empty coffee mug off the desk, I expect it will fall to the floor. Why?  Gravity will typically be the response. How do we “know” that, other than via rote learning in grade school?  The simple fact is that we just do not have a better explanation of the mug falling.

The workshop will not spend much time on coffee mugs. Instead, we will consider the causes of bank failures during the Great Depression, the recent housing market collapse in the United States, soaring healthcare costs in the United States, and Pickett’s Charge in the American Civil War.  Why did these things happen?

There are proximal causes like a run on a particular bank or the absence of a particular army general. However, there are also deeper, more fundamental causes such as institutional decisions to disassociate risks and returns or a substantial mismatch of resources between adversaries. Thus, there is often a cascading set of causes and catalysts that precipitate major events.

In our seminar, we are tracing the emergence and development of a network of causes that collectively may trigger the transformation of academia. Rapidly increasing costs are a major driver. At some point, students and their parents will be forced to find other means to higher education. Information and computer technologies are likely to be among those means.

It is, however, unlikely to be as simple as people going to college at their desks in the bedrooms of their parents’ homes. Young people will still need to go away to grow up and mature. However, this may not require massive infrastructures of bricks and mortar, football stadiums, and scores of senior vice provosts, associate vice provosts, and deputy assistant vice provosts.

New value propositions will emerge – indeed, are emerging. New means for delivering value will be created, developed, and refined. The result will be the transformation of academia.

Christmas Presents from David Brooks

On December 23 and 28 in the New York Times, David Brooks unveiled this year’s Sidney Awards for the best essays published in a variety of areas.  His two lists (see links below) include some real gems.  In the online edition of the Times, there are links to each award winner’s essay in the original magazine or journal.  I highly recommend this sampling.  It covers a much wider range of publications than I normally peruse.  It’s great that he does this.

http://www.nytimes.com/2010/12/24/opinion/24brooks.html?ref=davidbrooks

http://www.nytimes.com/2010/12/28/opinion/28brooks.html?ref=davidbrooks

Transforming Academia — Reading List

Here are all the suggestions received thus far:

Altbach, P.G., Berdahl, R.O., & Gumport, P.J. (Eds.).(2005). American Higher Education in the Twenty-First Century: Social, Political and Economic Challenges. Baltimore, MD: Johns Hopkins University Press.

Barke, R. (2000). Sustainable Technology/Development and Challenges to Engineering Education. Proceedings of the American Society for Engineering Education, St. Louis, MO.

Barnett, R. (2000) Realizing the University in an Age of Supercomplexity. Buckinghamshire, UK: Open University Press.

Birnbaum, R. (1991). How Colleges Work: The Cybernetics of Academic Organization and Leadership. San Francisco: Jossey-Bass.

Bok, D. (2003). Universities in the Marketplace: The Commercialization of Higher Education. Princeton, NJ: Princeton University Press.

Bush, V. (1945). Science: The Endless Frontier. Washington, DC: U.S. Office of Scientific Research and Development, Report to the President on a Program for Postwar Scientific Research, Government Printing Office.

Cohen, A.M. (1998). The Shaping of American Higher Education: Emergence and Growth of the Contemporary System. San Francisco: Jossey-Bass.

Cole, J.R. (2010). The Great American University: Its Rise to Preeminence, Its Indispensable National Role, Why It Must Be Protected. Public Affairs.

DeMillo, R.A. (2011).  Abelard to Apple: The Fate of American Colleges and Universities in the Twenty-first Century. Cambridge, MA: MIT Press.

Duderstadt, J.J. (2000). A University for the 21st Century. Ann Arbor, MI: University of Michigan Press.

Gaff, J.G., & Ratcliff, J.L. (1996). Handbook of the Undergraduate Curriculum: A Comprehensive Guide to Purposes, Structures, Practices and Change. San Francisco: Jossey-Bass.

Grendler, P.F. (2004). The Universities of the Italian Renaissance. Baltimore, MD: Johns Hopkins University Press.

Killian, J.R., Jr. (1985). The Education of a College President: A Memoir. Cambridge, MA: MIT Press.

Khurana, R. (2010). From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Princeton, NJ: Princeton University Press.

Lazerson, M. (2010). The Making of Corporate U: How We Got Here. The Chronicle of Higher Education, October 17.

Levin, R.C. (2003). The Work of the University. New Haven, CT: Yale University Press.

Martin, E.D. (1926). The Meaning of a Liberal Education. New York: Norton.

Menand, L. (2001). The Metaphysical Club: A Story of Ideas in America. New York: Farrar, Straus and Giroux.

Menand, L. (2010). The Marketplace of Ideas: Reform and Resistance in the American University.  New York: Norton.

National Academies (2007). Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: National Academy Press.

Reynolds, T., & Seely, B. (1993). Striving for Balance: A Hundred Years of the American Society for Engineering Education,” Journal of Engineering Education,” 136-151.

Rudolph, F., & Thelin, J.R. (1991). American Colleges and Universities: A History. Athens, GA: University of Georgia Press.

Rouse, W.B., & Garcia, D. (2004). Moving up in the Rankings: Creating and Sustaining a World-Class Research University. Information · Knowledge · Systems Management, 4 (3), 139-147.

Savage, J.D. (2000). Funding Science in America: Congress, Universities, and the Politics of the Academic Pork Barrel. Cambridge, UK: Cambridge University Press.

Szoån Lloån Si-Janze, M. (2005). Science and Social Space: Transformations in the Institutions of Wissenschaft from the Wilhelmine Empire to the Weimar Republic. Minerva (2005) 43, 339–360.

Taylor, M.C. (2010). Crisis on Campus: A Bold Plan for Reforming Our Colleges and Universities. New York: Knopf.

Van Der Werf, M., & Sabatier, G. (2009). College 2020: Students. Washington, DC: Chronicle Research Services.

Vest, C.M. (2007). The American Research University from World War II to World Wide Web: Governments, the Private Sector, and the Emerging Meta-University. Berkeley, CA: University of California Press.

Wildavsky, B. (2010). The Great Brain Race:  How Global Universities are Reshaping the World. Princeton, NJ:  Princeton University Press.

Transforming Academia

The first universities in Europe — University of Bologna (1088), University of Oxford (1096), University of Paris (1150), University of Modena (1175) — began as private corporations of teachers and their pupils. Soon they realized they needed protection against local city authorities. They petitioned secular power for privileges and this became the model for academia.

The organizational structure of disciplinary departments, schools, and colleges emerged in the process.  The secular independence and this organizational structure represent the first major transformation of academia.  These characteristics of academia have persisted for over 900 years and seem immutable.  Yet, notable transformations of academia have occurred more recently.

Land-grant colleges and universities are U.S. institutions benefiting from the provisions of the Morrill Act (1862), which gave to the states federal lands for the establishment of colleges offering programs in agriculture, engineering, and home economics as well as in the traditional academic subjects.  This transformation more closely linked academia to society and economic development.

Between the 1880s and the 1920s, the German system of scientific research, traditionally dominated by the universities, underwent rapid institutional change and functional differentiation, resulting in the formation of national research institutes that were much more interdisciplinary in nature than typical German universities at that time. It has been argued that this served as an important factor in Germany’s transition from a predominantly industrial to a primarily knowledge-based society.

Several contemporary forces portend another transformation of academia:

  • Information and communications technologies have enabled distributed and relatively virtual organizations, both for education and research
  • Social technologies are fostering increasing collaborative interactions, with implications for education and research
  • Research challenges have become increasingly interdisciplinary, or even transdisciplinary, requiring greater networking among organizations
  • Traditional State and Federal funding sources are under continual stress of demands for resources, heavily constraining support for academia

This Spring, I am teaching a seminar that will address both the history of and prospects for transforming academia.  Students will research the nature of historical changes of pedagogy and inquiry.  They will also study the changing social and economic roles of academia over the centuries.  They will compile lessons learned in terms of driving forces, tipping points, and consequences of change.  Students will then apply this knowledge to formulating scenarios for future transformations of academia, including strategies for institutions to anticipate change, invest in competencies to excel at change, and leverage these competencies to assure a leadership position in the transformation of academia.

Please let me know of any suggestions for the reading list.  I will publish the list that emerges and share it with all of you.

Invention and Innovation

Invention is the creation of a new device or process.  Examples include computers, software products, chemical processes, junk foods, and kitchen gadgets.  Innovation is the introduction of change via something new.  Cable television and video rental stores were innovations, as were overnight mail and communication via fax and the Internet.  Each of these innovations took advantage of one ore more inventions.  However, these inventions were not the innovations.

The vast majority of inventions do not result in change.  Recently, I saw evidence of this conclusion from two sources.  The first was William Rosen’s book The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, (Random House, 2010).  Rosen chronicles the many inventions emerging during the Industrial Revolution in the 1700s and 1800s, primarily in England but also the United States.  A large number of highly motivated artisans created a wealth of inventions, a few of which converged in steam engines that led to business innovations in manufacturing and enormous economic growth.

The other source was an opportunity to speak to the Inventors Association of Georgia.  I talked for an hour to roughly one hundred inventors on “How to Get Your Ideas Supported.”  Prior to and following my talk, I enjoyed talking to many of these people about their ideas.  Just before I spoke, the host, Dave Savage, asked people about the status of their ideas – was development done, had they secured a patent, and was their revenue thus far sufficient to recoup their development costs.  Many people had patents.  Quite a few were done with development.  One person had recouped his development costs.

In his review of the inventors of the Industrial Revolution, Rosen commented that hundreds of artisans thought they could become rich and famous; a few did.  This has not changed.  The hundred inventors I talked with recently seemed to me to be convinced that great success was just around the corner, yet only one had managed to achieve break even.  The odds of creating a true innovation, not just an invention, were pretty low during the Industrial Revolution and are pretty low now.

I find it interesting that so many people are willing to invest great energy and scarce resources when the chances of success are so low.  Of course, they do not seem to think that their chances are low at all – the statistics only apply to everyone else.  It strikes me that we are very fortunate that many people will take such chances.  The vast majority will fail, but the economy will inevitably prosper, especially if we continue to applaud those who invent and do their best to innovate.

People and Organizations

I have worked with well over 100 enterprises and several thousand executives and senior managers, often focused on initiatives that have the potential to fundamentally change their enterprises.  Somewhat simplistically, these initiatives depended on three ingredients – technology, people, and organizations.  Frequently these executives and managers commented that technology was the easy part.  People and organizations were much more difficult to change, support, motivate, and design.

Let’s consider three examples.  First, many see health IT (information technology) as the means of transforming healthcare.  However, this can only happen if people embrace this technology and organizations are designed to leverage these investments.  Further, the individual and business incentives have to be aligned with achieving these ends.

How about energy and the Smart Grid?  Wind turbines, solar panels, smart sensors and intelligent controls are seen as the means for greatly enhancing energy efficiency.  However, consumers have to be willing to play a central role in managing their energy consumption.  Energy providers have to see benefits from decreasing peak-level consumption, as well as organize around the services associated with motivating and enabling consumers.

Consider education.   Laptops and e-books, for example, are seen as greatly facilitating the delivery of education.  However, students have to be ready, willing and able to gain knowledge and skills in this manner.  Schools have to organize themselves around this means of delivery and assessment.  Teachers need to morph from being “sages on the stage” to “guides on the side.”  This will be particularly difficult for university-level instructors, in part due to misalignment of incentives.

Technological inventions succeed in becoming market innovations when all three elements of success are aligned.  The vast majority of inventions languish on the shelf, or in the literature, because no one has worked out the people and organization issues that must be resolved for success.  These issues should be addressed across all the stakeholders in the success of the innovation.  This includes users, payers, distributors, maintainers, investors, inventors, and so on.

Addressing and resolving people and organization issues often involves subtleties and complexities that cannot be addressed with a checklist.  One needs to understand the concerns, values, and perceptions of each class of stakeholder, as well as their abilities, limitations, and inclinations in playing their roles.  Then one must creatively find the “sweet spot” among all these needs, desires, and constraints that, hopefully, delights the primary stakeholders and gains the support of secondary stakeholders.

One should not view people and organizations as complications that thwart innovation.  Without creatively working the people and organization issues there is no innovation; there is just invention.  Innovation involves creating change in the marketplace.  People and organizations define markets.  Innovation and value are created by inventions that enable and motivate people and organizations to do things better, or perhaps do things they could not do before.  If people and organizations do feel enabled and motivated, no change happens and no value is created.

Change in Science, Technology, the Arts, and Humanities

How does change differ within various aspects of society?  Are differing changes somehow related?  C.P. Snow has argued that there is a chasm between the arts and humanities, and science and technology (Snow, 1965).  However, all of these endeavors are inevitably influenced by the times in which they are pursued.

Consider the late 18th and early 19th centuries.  Richard Holmes (2008) describes the lives and scientific accomplishments of Joseph Banks, William Herschel, and Humphry Davy during the “second scientific revolution” of 1770-1830.  He outlines how their popularization of findings in exploration, botany, astronomy, and chemistry influenced the poetry of their contemporaries: Coleridge, Byron, Keats, and Shelley.

Moving to the later 19th and early 20th centuries, Louis Menand (2001) presents a study of Oliver Wendell Holmes, William James, Charles Sanders Peirce, and John Dewey that shows how these four men developed a philosophy of pragmatism following the Civil War and continuing, at least, until World War I.  Their thinking fundamentally affected America in law, science, and education, reaching far beyond academia.

Finally, considering the early and mid 20th century, Howard Gardner (1994) portrays the 20th century creative genius of Sigmund Freud, Albert Einstein, Pablo Picasso, Igor Stravinsky, T.S. Eliot, Martha Graham, and Gandhi.  Arthur Miller (2002) focuses on just Einstein and Picasso.  He chronicles the impact of Henri Poincaré’s 1902 geometry book La Science et L’Hypothèse on the thinking of these two great geniuses.  The non-Euclidian exposition in this book influenced both the notion that gravity bends light (i.e., relativity) and the Cubist movement in art.  These are two seminal developments in the early 20th century.

Thus, change in one arena can have enormous impacts on other areas, sometimes directly but often indirectly as such changes are manifested in the broader social dialogue.  In this way, the causality of change often functions more like a network of relationships through which change propagates, rather than a simple A affects B.

References

Gardner, H.E. (1994). Creating Minds: An Anatomy Of Creativity As Seen Through The Lives Of Freud, Einstein, Picasso, Stravinsky, Eliot, Graham, And Gandhi. New York: Basic Books.

Holmes, R. (2008). The age of wonder. New York: Vintage.

Menand, L. (2001). The Metaphysical Club: A Story of Ideas in America. New York: Farrar, Straus and Giroux.

Miller, A.I. (2002). Einstein, Picasso: Space, time, and the beauty that causes havoc. New York: Basic Books.

Snow, C.P. (1965). The two cultures: And a second look. Cambridge, UK: Cambridge University Press.

Investing in People

I am pleased to report that this week John Wiley released “The Economics of Human Systems Integration: Valuation of Investments in People’s Training and Education, Safety and Health, and Work Productivity.”  I edited this book with contributions from many economists, systems engineers, and behavioral and social scientists.  The overarching question that motivated this book was, “Can we attach economic value to investing in people?”

Given that the book was published, the obvious answer is, “Yes.”  However, there are many subtleties.  Most notably, the economic case for investment is most easily made when the organization making the investment is also the organization that receives the returns on the investment.  The case studies in this book illustrate this conclusion very clearly.  We know how to develop the economic models, collect the requisite data, and compute the value of these types of investments.

However, many important investment problems do not fit this template.  Education and healthcare are two significant examples.  The returns on these investments pay off many years after the investments, with returns that seldom directly accrue to the original investors – except, of course, for the educated person enjoying good health.  The investors – often, community, state, and federal governments – do not directly gain returns.  Further, the people making the original investment decisions are usually long gone when the returns emerge.

We used to think of these returns as “public goods.”  The idea is that we are all better off if everyone is educated and healthy.  Such people, it is argued, will be productive and creative, yielding contributions to society for everyone’s benefit..  In the small New England town where I grew up, it seems to me this argument was never questioned.  However, this argument is not as widely accepted as it used to be.

Contemporary thinking seems to be that education and healthcare represent costs that need to be contained or, better yet, reduced.  Monies spent are seen as the operating costs of government, not as investments.  Such expenditures are seen as analogous to paying utility bills rather than putting monies into the social equivalent of a 401(k).  In this way, education and healthcare are being treated as “private goods” – if you want it, you should pay for it.  It is just a consumable like entertainment or sports.

Unfortunately, this is not a useful philosophy upon which to build a healthy, educated, and productive population that is competitive in the global marketplace.  This is especially true when we compare our philosophy to that of other countries that are making these types of investments and still consider the returns to be public goods.  We need to pay attention to the possibilities that these countries entertain and pursue.

Tipping Points

Malcolm Gladwell popularized the notion of a “tipping point,” the point at which something is displaced from a state of equilibrium and evolves, either quickly or slowly, to a new and different state of equilibrium.  For example, my telephone bill used to be something like $20 per month; now it is several hundred.  The capabilities offered by smart phones led me, and many others, to commit to service contracts that increased bills by a factor of ten or more.  What “tipped” me was the iPhone.  For many others, it was Blackberries.  Now, we can talk, text, and email 24 x 7.  We are always connected and it somehow seems like that is the way it should be.

I am not concerned, at least not at the moment, with whether or not 24 x 7 connectivity is a good idea.  Instead, the point is that we somehow have arrived to where we are willing to pay for connectivity amounts of money that we used to allocate for monthly car payments.  In the process, the “equilibrium” that was $20 per month is now $200.  Change has happened and we are unlikely to retreat to past communication habits, in part because the younger “digital natives” never experienced that past.

Most major social and economic changes do not happen because we consciously decide to make a major change.  Instead, such changes creep up on us until a tipping point is reached and, seemingly suddenly, the major change is upon us.  Yet, there were often many, usually unseen, symptoms of these changes manifesting themselves in our social and cultural peripheral vision.  It may be difficult to anticipate what the tipping points will be.  However, it is possible to watch for slowly emerging changes.  Global warming and natural resource depletion are reasonable examples.   Demographic changes are another great example.

The average education level of Americans increased every year for the first 380 years since Europeans first colonized North America.  This level has been decreasing for the past ten years.  The United States was long ranked first in terms of percentage of young adults with college degrees.  Now, we rank 12th globally.  These trends suggest that at some point we will lose the lead in number of patents granted and number of scientific articles published.  Next, we will no longer lead in terms of percentage of Noble Prizes garnered.  There is a tipping point waiting for us out there unless we address these trends.  If we do pursue these trends aggressively, we will not need to know what the tipping point would have been because it will not happen.

Forces Driving Change

I have been reading a lot of history lately, mostly U.S. history from 1620 to 1914, trying to understand the nature of changes that occurred in that period.  The dominant businesses are interesting – cod fish in the Grand Banks, whales in Nantucket and New Bedford, ships for fishing and commerce (including slaves), textiles in Fall River, canals in New York, coal and steel in Pennsylvania, and railroads everywhere.  People migrated for jobs, worked in the same industry generation after generation, and then the economy shifted.  For example, refrigeration was invented and the masses of ice cutters on northern lakes were obsolete.

People were reluctant to change but finally had no choice.  They did not see the changes in the offing and prepare for new vocations.  Consequently, there were often many lean years until they finally moved to where the new opportunities seemed attractive.  I could not find many cases of large numbers of people moving simply for better weather or scenery.  They were usually driven by promised or imagined opportunity.  The next few generations stayed with that opportunity, if it was real, until change was forced again.

Another common pattern was people seeing an emerging trend – cod, whales, canal, railroads, etc. – and thinking that they might catch this trend and become wealthy with minimal effort.  As more and more people got this idea, prices kept increasing.  People began to make lots of money from the speculation itself rather than the canals or railroads.  Eventually the bubble burst and prices plummeted.  As recent history shows, we have a tendency to do this again and again.

There are many forces for change, including technological change, economic need, and outright greed.  Mae West said, “Too much of a good thing is wonderful.”  However, too much harvesting of cod and whales resulted in these industries disappearing.  Too many railroads, or automobile manufacturers, or airplane manufacturers, eventually led to just a few.  Too many houses being flipped depended on continual soaring prices that were unsustainable.  Good things are only really good for a period of time, not forever.

Responding to Change

We seem to be in times of great uncertainty and potentially enormous changes.  I have been wondering how different this is from the past.  To answer this question, I reviewed our country’s first 40 decades – from 1620 until now in the first year of the 40th decade.  How many decades would you guess there has been neither a war nor a financial crisis?  Just seven.  The last decade with neither was 1880!

Thus, it appears that we have always faced much uncertainty and possible fundamental changes.  How have we responded?  Not surprisingly, most people clung to the status quo as long as they could.  Many tried to thwart change.  Those who had invested in capacities to succeed within current business models understandably did not want these capacities to be rendered obsolete.  They argued that the emerging business models would fail, that technologies would not work, and that markets would not materialize.  However, much has changed.

Yet we still have wars and financial crises, if fact with increasing frequency as the decades have gone by and our role in the world has changed from being a distant colony to a world power and, to an extent more recently, the world’s policeman.  How should one respond to increasing uncertainty and likelihood of major changes?  We have been addressing this question by using microeconomic models of firms and markets.  Is it better for the firm to act faster, learn faster, or predict better so as to enable new offerings that will succeed in changing markets?

Acting faster has the biggest impact, but requires the greatest investment.  Learning faster is less expensive, but is only useful if the knowledge gained enables acting differently.  The value of predicting better increases if one can also learn and act faster.  These conclusions seem intuitively reasonable.

However, these conclusions change as markets become increasingly uncertain and noisy.  At some point, the likely error of changing becomes at least as large as the error of continuing to do what you are already doing.  And, what you are already doing probably requires the least investment because you are already doing it.  Thus, the rational, profit maximizing firm will squirrel away resources and wait until the market signals become much clearer.  In such situations, the right response is to do nothing.

Types of Change

It is typical to think about change in terms of intentions and consequences.  We intend to exercise more or eat better to achieve the consequences of weight loss and improved fitness.  The President intends to move the country towards greater use of renewable energy sources to achieve the consequences of greater energy independence and decreased carbon emissions.  Sometimes, these intentions and consequences play out as intended.  However, it seems that, more often than not, things do not work our so simply.

Intended changes can result in unintended consequences. James Burke’s The Pinball Effect (1996) provides a wonderful panorama of examples.   My reading of this book suggests two overarching principles.  First, the primary benefit of a new technology is hardly ever what the originator envisioned. Second, the primary beneficiary of a new technology is seldom the original investor.  The unintended consequences of an invention are, surprisingly often, an innovation that was never anticipated.

A glue is invented that does not dry and create a permanent bond – someone uses it to attach notes to choir books and the result is Post Its.  A substance is invented that results in an unintended and unbreakable bond between laboratory tools and lab benches – some one recognizes this “problem” as an opportunity and the result is Super Glue.

What value did people imagine for telephony?  One possibility was that people would like to listen to live opera in their homes.  Good idea – maybe – but what about people just wanting to talk to each other.  Never happen!  Same results for email, sans the opera.  Early adopters transform inventions into innovations that change the marketplace.  Unintended consequences are pervasive.

Not all unintended consequences are positive. Policies can lead to unexpected behaviors with negative consequences.  President Eisenhower invests in expressways to enable more rapid military mobilization.  People then move out of the cities to buy much more affordable homes.   They also buy cars, often two or more, and need more and more fuel.  We become dependent on foreign sources of fuel.  These sources use their profits, in part, to fund schools that educate people to become terrorists.  This was not what President Eisenhower intended!

We subsidize corn production is the U.S. by providing price supports for corn farmers.  Consequently, corn is really cheap.  Creative folks figure out how to use corn for everything.  Most of the “food” offerings at McDonald’s are primarily corn.  These offerings, by McDonald’s and other companies, provide the best deal in terms of calories per dollar.  Consequently, poor people buy this food.  They become obese, get diabetes, and impose an enormous burden on the U.S. healthcare system,

Some people characterize such unexpected consequences as “higher order effects,” with the first order effects being those expected.  Regardless of terminology, such consequences are usually unintended.  Often, these effects can be characterized as “emergent” changes with unanticipated consequences.  For instance, local change may propagate, e.g., one person’s may idea take off by others noticing and copying it.  On the down side, incremental toxins in the environment may lead to complete disappearance of a species.

Higher order effects and unintended consequences can precipitate the transformation of an enterprise, whether it is a corporation, a political entity, or a natural ecosystem.  We need to pay attention to the changes we pursue, enable, or perhaps hinder in terms of their systemic and perhaps unanticipated impacts.

Collaborative Networks

I am at the IEEE Workshop on the Future of Information at the National Academy of Engineering in Washington, DC.  The purpose of the workshop is to consider how engineers and scientists will access and use information in 2020, including what types and sources of information they will seek and find available.

Yesterday was the first of three days.  The four speakers all focused on the nature of collaboration to a much greater extent that the nature of information.  Computer and communications technologies are rapidly changing the ways we work, as well as how we connect with people personally.

Many discussions lately have revolved around the formation and management of collaborative networks for the purpose of business, research, education, and so on.  The purposeful design of collaborative networks is not as straightforward as we tend to assume.  Beyond group membership and how work gets done, there are issues of financing network formation and operations, as well as incentivizing people to commit to the network’s purpose and fully participate.

My experiences at several universities are that we assume “sweat equity” will be sufficient for financing networks and we totally ignore the incentives issue.  One idea is for universities to take a percentage of their budgets “off the top” to finance cross-disciplinary collaborative networks.  This would, of course, result in budget decreases for traditional colleges, schools, and departments.  In these tight economic times, I would expect immense push back on this idea.

Yet, this would force the traditional organizational entities to compete for the fenced off funds with creative proposals for collaboration.  Foundations and industry might substantially increase these funds if these cross-disciplinary initiatives related to appealing problems and opportunities such as health, energy, and future media.  In this way, the overall university budget might significantly increase.

This possibility brings us back to how best to form and manage collaborative networks.  If universities became frequent networkers, across institutions as well as disciplines, those who became really good at it might become the top universities of the future.  Other institutions would mimic them and, over time, we would all become excellent networkers and cross-disciplinary collaborative networks would become the norm.

Engineering Healthcare Delivery

I am pleased to report that IOS Press released “Engineering the System of Healthcare Delivery” this week in Amsterdam.  Denis Cortese and I edited this 500-page compendium of the insights and ideas of a wide range of luminaries in healthcare.  Our goal was to bring together in one place the thought leaders who are transforming healthcare.

The book includes six sections: 1) issues, 2) information, 3) incentives, 4) engineering approaches, 5) perspectives and, 6) prospects.  Readers will gain two overarching impressions from this book.  First, the complex adaptive system of healthcare delivery in the U.S. is extraordinarily complex.  I have characterized this system as a federation of millions of entrepreneurs with no one in charge.  Information systems that are integrated and incentives that aligned with high-value outcomes will go a long way to overcome this extreme fragmentation.

The second overarching impression that readers will gain is that we already know how to deliver high quality, affordable health outcomes.  There are many provider organizations that deliver very high quality care with costs much lower than the national average.  We know what to do; we just have been unable to get everyone to do it.  Information and incentives are also impediments in this area.

In the concluding chapter of this book, Denis and I consider prospects for change.  We conclude that within 10 years, the U.S. system will include 50-60 large, integrated providers.  Several of them may be federations of smallish practices with standardized clinical and back office systems.  The small 2-3 doctor practices that are common across the U.S. will disappear, unable to afford the cost of playing the game independently.

In 20 years, we see the emergence of “retail health.”  The health consumer will have extensive data and tools available to support decision making, including data on provider performance and costs.  This web-based infrastructure, in conjunction with human health coaches, will enable people to take charge of their own health and care.  High quality care and good services will be rewarded.  Well-informed consumers will not tolerate mediocre care and poor service.

Information and Incentives

In January, I discussed the notion of transforming organizational silos in academia to collaborative networks that can address large-scale research problems.  At the moment, I am sitting in a meeting at the University of Illinois that is, in part, focused on this possibility.  People are discussing the difficulties that they have encountered in pursuing this transformation.

Most of the difficulties can be attributed to the problems associated with incentivizing the silos to contribute to the networks.  Typically, faculty members have appointments and tenure lines in one or more of the academic silos – colleges, schools, and departments.  The silos often see their faculty members’ participation in collaborative networks as threatening their control of agendas and gain of potential rewards in terms of recognition and budget.

Some of these perceptions are certainly warranted, but there are mechanisms for ameliorating these difficulties.  First, the flow of budgets, overhead funds, and other rewards needs to be much more transparent than typical in most universities.  Somewhat simplistically, if all the stakeholders can track the flow of financial, physical, and human resources, and form expectations accordingly, then perceptions will be based on reality rather than rumor.

Once this flow is made explicit, one is in a position to change the flow to create the incentives needed to align the stakeholders in both the silos and the networks.  Succinctly, the silos need to be treated like shareholders in the networks and gain financial returns, and associated non-financial returns, due to their participation and support of the networks.

For this to work, the networks have to be capable of securing resources that the silos could not have otherwise secured.  In other words, the formation of collaborative networks needs to result in “new” money.  To the extent that “old” money needs to be diverted to seed the formation and startup of the networks, the case needs to be made that the likely returns of new money will dwarf the investments of old money.

So, the bottom line is information and incentives.  The organizational system needs to be transparent so that all stakeholders understand how things really work.  This understanding then needs to enable aligning incentives so that everyone can see how the investments they are being asked to make are likely to yields returns in which they will share.

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.