Posts Tagged ‘corporate survival’

How not to do Social Networking – Think of it as just regular marketing

May 26, 2011

Even big and reputable companies sometimes do stupid things, and social media is one of those new shiny things that can make even a respected company look foolish – and what better way to demonstrate than to show it in a social medium like a blog?

One way to get it hopelessly wrong is to think of social media as just your regular one-to-many vehicle to get a standardized and glossy marketing message out to the public, and allied to that is a mistake of not making sure that you are ready for the bi-directional discourse that social media elicits.
Social media is a many-to-many medium and social networking means listening just as much (or more) than talking, and if you send a message across social media, you should anticipate a response.

Many organizations, especially their HR departments, firewall themselves from external email and have server settings and policies that make it virtually impossible for a member of the public to talk to them.

Here is a nicely branded email I got (unsolicited) from a very reputable company urging me to “connect” – and while the intent is good and the branding is solid, it simply doesn’t align well with their behavior and their (in)ability to react properly.

The Solicitation to Connect

So far so good, but my previous experience with them suggested to me that they are not very self-aware when it comes to talking to the general public and especially job-seekers.
I replied that I didn’t think I would be connecting because some time ago when I did apply for a position there, they didn’t even bother to send me the regular unbranded “get lost” email.

Response

Here is my email response explaining myself.

Subject:

Re: Connect with …… Online!

From:

Matthew Loxton [..]

[…]
To:

—– Careers ……Careers@……..com>

Sorry, but no.
When I did apply at ……. I got no response, which means you don’t really understand the concept of social networking and following you would be pointless.
I neither want to work for nor socialize with organizations that think social networking is the same as just saying things using social media – social networking is about listening as well as talking, it is not just putting marketing out on a different medium.

… and of course the totally unexpected then happened (/sarcasm), the mail was bounced because they hide behind a “don’t talk to us” firewall.
I received a bounce response as follows

This is an automatically generated Delivery Status Notification.

Delivery to the following recipients failed.


………..Careers@…….com

Reporting-MTA: dns;blu0-omc4-s15.blu0.hotmail.com

Received-From-MTA: dns;BLU0-SMTP106

Arrival-Date: Thu, 26 May 2011 07:43:03 -0700

Final-Recipient: rfc822;…………..Careers@…….com

Action: failed

Status: 5.5.0

Diagnostic-Code: smtp;550 Message refused by SpamProfiler

Conclusion

Social media is going to increasingly become an issue of corporate survival for many people and those that don’t figure out how to use them to engage with their customers, investors, and other stakeholders are going to be under significant natural-selection pressure. However engaging through social networking is not just a bit of IT and regular marketing, and it is far less about being able to produce glossy copy and far more about establishing an engaging online persona and engaging in discourse. Social media are not just a different one-to-many broadcasting medium like TV, radio, and newspapers, it requires that you stand ready to listen and respond. Sending out an email invitation to connect and then bouncing an email reply just won’t do.
This requires not just rethinking IT systems but more importantly, also making cultural shifts.

~~~

Matthew Loxton is a Knowledge Management expert, holds a Master’s degree in Knowledge Management from the University of Canberra, and provides pro-bono consulting in Knowledge Management and IT Governance to various medical institutions.

My 2010, a year of blogging

January 6, 2011

Today marks my 1st anniversary of blogging, and 2010 was an “interesting” year, as they say.

I changed continents (again), and took on multiple roles in addition to being a global director of Knowledge Management, and wound up job hunting – but not in that order.

My roles this year included my main job, that of a director of Knowledge Management, as well as unofficial Chief Learning Officer which saw me in many meetings with universities and vendors of learning materials, head of Localization & Translation in which I inherited a recently emptied department and a strangled budget, and made friends with several translation vendors across the world.
Another role was that of program manager of the offshoring and outsourcing activities that took me to India, and involved building a team of over a hundred software engineers while I also managed the contract and relationship of a similar-sized group in Bali, tried vainly to move some outsourcing to South-Africa, and celebrated the building of a 15-person team in Chile.
During this time I received a few “what are you doing” phone-calls from the Australian embassy in India, and many people avoided me in case I was looking to offshore their job.

In July I my relationship with Mincom ended, and having waved goodbye to Brisbane, found myself back in Denver and job hunting.
Since then I have interviewed with dozens of firms – been hugely interested in some, horrified by a few, and left others feeling vaguely relieved not to be working there and having to breathe in their toxic culture on a daily basis.
Some interviews ran into several months and included large panels only to end with me as the runner-up, while others ended in a fizzle when the budget vanished, the position was cancelled, or the VP herself resigned after missing several chances for an interview.
Some had really sharp and focused job descriptions (HP, Invensys, and Philips for example), some had a copy/paste smorgasbord, and some had job descriptions that were a complete mystery.
Some organizations were clear and transparent about their process, others seemed to be playing it by ear and making it up as they went along.

Generally, the people were nice but clearly unsure about what they are trying to achieve – one guy spent 30 minutes posing an elaborate scenario that he fed me piece by piece until we arrived at the answer he apparently had in mind. According to him this was the first time anybody had given the correct answer but he was seemingly unhappy with that so I didn’t get the job.
Maybe just as well, all things considered.

I often wonder how much a firm’s recruitment practices are a reflection of what it is like to work there, and what effect recruitment practices have on their clients.
According to a few research papers I read, it is and it does.

Keeping Busy

Besides looking for a permanent employer, flying around for interviews, and making copious resume modifications to satisfy recruiters, I blogged on KM-related topics, networked, and read several IO Psychology and KM textbooks from cover to cover. Some people have hobbies, some play golf, and I read textbooks – go figure.

Some people take a break from work when they are between jobs, I mostly designed questionnaires and wondered about Communities of Practice.
I also thought about Sharepoint a lot – can you believe it, 130 million licenses and likely to hit 97% adoption rate this year?
Again, go figure!

As part of a Master’s in Knowledge Management I covered various maturity models and although I really liked the KMMM by Lange & Ehms, the K3M by Liebowitz & Beckman, and the various KMMI attempts, they all seemed to be heavy on the Conservation side and light at the Innovation end. I also felt that they neglected the point made by Argyris that processes will inevitably obscure and hide those systematic problems that are essentially never spoken about – things that we become systematically blinded to by the way we measure and think. As a result I built my own KM Maturity model based on the Carnegie-Melon CMMI, with two added layers bookending the CMMI, and blogged incessantly about the implications of Argyris and his Single and Double Loop Learning concepts. The blog about externalization and avoidance I was sure might get me lynched by recruiters.
Seems I must like Argyris, because he comes up in my blogs more than any other author.
Owing to my longtime interest in IO Psychology and research methods, the offspring of the KMM was a questionnaire instrument (currently in Beta), which of course lives on a KM wiki (CoP-M).

To get a better way to benchmark and examine the current state of KM in an organization, I developed a KM & OL Climate questionnaire called the KMOL-C which is now in its RC2.1 version with an RC-3.0 in planning.

During this time I also started thinking about starting my own LLC, firstly because even providing pro bono consulting in the US means one is vulnerable to being sued personally.
Secondly it would allow me to do paid consulting and contracting.
I am still stuck for a company name however, so feel free to suggest one.

Having Fun

Mostly I read textbooks for fun, but I also had many enjoyable discussions, debates, and arguments with HR people on LinkedIn – Since I was dealing with them a lot it seemed logical.
I also played with some new applications – bibus an opensource equivalent to EndNote, Qiqqa a nice CAQDAS tool for qualitative interviewing, R a free statistical package that means I can’t afford SPSS or SAS, and ggobi a graphical add-on for R. No spinplots like VisualStats had, but VisualStats seems to have stopped.
I added all my books to GuruLib – mostly by using a webcam to scan in the ISBN barcodes.
Using R, I pulled correlation numbers for a survey I did for a LinkedIn discussion and discovered that self-identified HR people are more than twice as risk averse as operational managers.

Reading academic papers was very enjoyable, and in case you think they are all boring and filled with indigestible facts and arcane theory, here is one I particularly enjoyed:

My most favorite piece of research findings was this one about penguins (Meyer-Rochow & Gall 2003)

Now besides the fact that next to ducks, penguins are the next funniest animal, there is something inherently funny about research that clocks the speeds and distances of penguin evacuation.
Also, knowing that penguin poop is more dense than blood but less dense than honey, and is ejected at pressures that approach that of a car tire, is just fascinating.
The paper also won an IgNoble award in 2005

What’s in Store for 2011

I hope to register my own LLC soon, start a PhD, and get a job with a really interesting and innovative company, and I hope to use my survey instruments with several organizations, volunteer time to worthy organizations, and stay healthy.

More to the point, I hope to carry on enjoying knowledge management, IO Psychology, and discovering interesting ideas and people.

… and blogging, of course.

~~~

Matthew Loxton is a Knowledge Management expert and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge assets to work.

Passion and Purpose : An Attainable Intrinsic Motivator?

December 21, 2010

The topic of work satisfaction either as a construct on its own or as a predictor of performance or productivity goes all the way back to Elton Mayo’s Hawthorne Plant study at least, and must be one of the top three most researched and published topics in IO Psychology. However the existing instruments tend to stay in the 40′s and 50′s for predictive power against performance, and that seems to be where they are stuck.

For an area that takes up such a big slice of our life, it deserves better – a typical career starts at around 18 years of age, and for about 48 weeks of the year it occupies us for nine hours day (at least) for five days a week (if you are lucky). Knock off 8 hours for sleep, an hour for commuting, and all you get in change for your 24hr terrestrial rotation is six hours to be “yourself” and life outside work.
Many people socialize with people from work, take work home, and marry somebody they met at work.
Losing a job is for most people somewhat of a personal identity crisis.

Clearly work takes a huge slice of our lives, and the degree to which you find it interesting and rewarding has been shown to be critical to health and happiness if not also wealth.
From a Knowledge Management perspective the implications for Intellectual Asset Management are also immense – people who are disinterested in their work produce results that are far inferior both for them in terms of health and happiness as well as for their employers in terms of productivity and ROI.
A really good worker that is engaged in what they do and puts in effort that results in achieving organizational goals is a critical competitive advantage in the market, and it is from them that much of the growth and innovation comes.

Measuring Work Behavior

Most instruments take the approach of a quasi market, and view this work thing as a quid pro quo of “this work for that pay”, and then help the management to ask how to get more work done – and if they are also Taylorite or Theory X in approach they go further and ask how to get more work for less pay and benefits.

However, like Maslow, they are undone by the concept of passionate people, but first let’s just sketch what I am talking about here.

Going back to a blog post I did about Leadership Replacement there is a kind of matrix for what one would get out of various combinations (modified a bit here), it looks like so:

Passion

Excellence

Revenue

Result: You have a …

-

-

-

Death

X

-

-

Pastime

X

X

-

Hobby/Interest

-

-

X

Heaven

X

-

X

Miracle

-

X

-

Hell

-

X

X

Occupation

X

X

X

Career/Calling

Clearly by this matrix, if you want a person who punches a card and does the expected list of tasks each day, then passion isn’t required, just an equitable exchange of money for ability.

However, if you want a slice of discretionary effort and the chance at pulling ahead of the competition, more than disinterested exchange of labor becomes mandatory.

One measure that is frequently used to tell if staff are pulling in the same direction as the corporate mission requires, is Attachment.
This construct has been studied from a variety of angles, ranging from the similarities between work attachment and romantic love (Hazan and Shaver 1990), staff turnover and attachment (Koch and Steers 1978; Abrams, Ando et al. 1998; Maertz Jr, Griffeth et al. 2007), to studies on attachment as a basic human need that plays itself out in work settings (Hepper and Carnelley ; Baumeister and Leary 1995; Simmons, Gooty et al. 2009).
In a real sense the phrase “I love my work” is more than just a casual metaphor, and speaks to real and deep-seated needs within people for affiliation, interaction, and purpose.

Attachment speaks mostly of affiliation, but also of alignment to a shared purpose, and to a sense that what is being done and achieved is valued – people with high levels of this sort of attachment also feel a sense of deeper interest in the work itself – but there is a curious thing that happens when that interest runs deeper still.

You get a person who becomes a bit obsessed and develops more than just an interest, in fact, a passion – and this has been largely missing from the original theories of work.

Mayo, Taylor, Gilbraith, and even Maslow, not much mention of passion.

Passion

Passion gets a bit unnerving because it goes beyond mere interest and the person that comes under the spell of a passion for a subject area forms an affiliation and bond with the subject itself, sometimes to the virtual exclusion of everything else.

A person who regards their work as a calling, something they are passionate about, needs no extrinsic motivation and seems to see no need for a work/life “balance”.
It isn’t that they balance differently, it’s as though the term simply becomes meaningless because work and life become entangled to the point where the person’s work and life are virtually identical and where their work is an essential part of their identity both publicly and personally.

We could view such people as some sort of aberration, a kind of benign obsessive pathology that visits itself on the broad population to produce here a Mozart, there a Michelangelo, and on occasion a Kasparov.
An alternative view is to regard these people as simply having more of something on a scale and whose skills and interests set each other on fire – the hint seems to be that passion is something that can be grown and increased in people that lie just under the combustion point.
Be that as it may though, we certainly want to know who in our organizations are either already passionate, or have the propensity to become passionate, and to be so about something that is aligned with the corporate mission.

So ala Seth Godin and Mihaly Csikszentmihalyi and others, I want to measure to what degree a person is passionate about what they do as an occupation and also see how close that aligns with both the role they occupy and the organization they are in. Does the corporate image and mission fit like a surgical glove over their passion, and if not, how far from it is it?

In the 2nd release candidate of a Knowledge Management & Organizational Learning Climate survey, I added two items to measure respondent’s self-perception of their degree of passion for their job and their area of specialization where I had previously just asked about their passion for the company’s mission.
The initial results show an interesting split between respondent’s feelings of passion for their company’s mission and their subject domain on the one hand, and that for their job on the other.
While it is far too early to claim a tendency, it is fascinating to wonder what it would mean in terms of potential job enhancement.

However, this instrument was not designed to delve into passion as such and we should perhaps recap on the current thinking on what constructs comprise job satisfaction and performance.

Constructs ahoy

My initial construct ideas gleaned from various authors and many TED talks are:

  • Passion/Purpose
  • Autonomy/LoC
  • Feedback/Reward
  • Expertise/Excellence

I have several questions to solve before an instrument can be built – for starters, are “passion” and a “sense of purpose” part of the same construct, and can I measure them both at the same time?
Secondly, since various authors have also posed
Locus of Control (LoC) as a component of job satisfaction (Brett 2001) it makes sense to measure this, but I suspect that LoC and “Autonomy” are the same thing or closely related (Aubé, Rousseau et al. 2007). There is even a hint that a combination of passion and internal LoC is critical to entrepreneurship (Carsrud and Brännback 2009)
Thirdly, I wonder if “Feedback” and “Reward” are also at least stable-mates and that measuring for a cluster that includes both would also be significant

The biggest question is whether passion is ever entirely internally fueled, or whether autonomy/LoC is mediating the degree of feedback/reward and level of expertise/excellence that is needed to turn an interest into a passion. Once passion is fired up, is it the case that as long as LoC remains internal, that feedback and perception of excellence are mostly internal, or would an organization need to “pump” a bit?

… and of course, how exactly does one manage a passionate person?- Does one just leave them alone and provide infrastructural support, and what does one do if their passion is diverging from the organizational goal?

Next Steps

My plan is to build up a model of passion as it applies to the work environment and construct an instrument to measure it in that context.
The general idea is to have a tool with a Knowledge Management perspective on passion vs performance, and at the same time to benchmark and see what external factors can prime and steer passion.

Stay tuned!

 

~~~

Matthew Loxton is a Knowledge Management expert and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge assets to work.

 

Bibliography

Abrams, D., K. Ando, et al. (1998). “Psychological attachment to the group: Cross-cultural differences in organizational identification and subjective norms as predictors of workers’ turnover intentions.” Personality and Social Psychology Bulletin
24(10): 1027-39.

Aubé, C., V. Rousseau, et al. (2007). “Perceived organizational support and organizational commitment: The moderating effect of< IT> locus</IT> of control and work autonomy.” Journal of managerial Psychology
22(5): 479-495.

Baumeister, R. F. and M. R. Leary (1995). “The need to belong: Desire for interpersonal attachments as a fundamental human motivation.” Psychological bulletin
117: 497-497.

Brett, J. M. (2001). “The Psychology of Work: Theoretically Based Empirical Research (Organization & Management Series).”

Carsrud, A. L. and M. Brännback (2009). Understanding the entrepreneurial mind: opening the black box, Springer Verlag.

Hazan, C. and P. R. Shaver (1990). “Love and work: An attachment-theoretical perspective.” Journal of personality and social psychology
59(2): 270-280.

Hepper, E. G. and K. B. Carnelley “Adult attachment and feedback seeking patterns in relationships and work.” European Journal of Social Psychology
40(3): 448-464.

Koch, J. L. and R. M. Steers (1978). “Job attachment, satisfaction, and turnover among public sector employees* 1.” Journal of Vocational Behavior
12(1): 119-128.

Maertz Jr, C. P., R. W. Griffeth, et al. (2007). “The effects of perceived organizational support and perceived supervisor support on employee turnover.” Journal of Organizational Behavior
28(8): 1059-1075.

Simmons, B. L., J. Gooty, et al. (2009). “Secure attachment: Implications for hope, trust, burnout, and performance.” Journal of Organizational Behavior
30(2): 233-247.

 

Does Your Firm Score As Badly As BAH?

December 14, 2010

In between pro bono consulting, contracting, and research, I am also job-hunting for a permanent position and I thought I would give a specific example of bad Knowledge Management practices that I come across typically from  HR departments.

Since Booz Allen Hamilton have over the years never responded to any job application or job query I have sent them, I feel quite safe in discussing them by name as a good example of a really stupid practice.
They obviously aren’t very self-aware, so this post should comfortably escape their attention, but if they did suddenly wake up and want to talk, maybe I could get them to pay for some basic education on prudent knowledge management practices – as I have said before, Knowledge Management isn’t something you buy, it is something you already do, just either well or badly.

… but maybe buying some education might be a start.

To survive in a competitive commercial terrain, a firm needs to provide copious signaling to various parties that it is a serious contender and getting this wrong – being off-key, deaf, or imperious, can spell the difference between long-term survival and not.
This includes inter alia getting the behavior and messaging right in respect of three distinct groups of people, and to give …:

  1. … existing and potential investors the distinct impression that you are master of a domain
  2. … current and potential customers tangible evidence that you are alert, responsive, and reliable
  3. … current and potential employees that you are awake, in-tune, and believable

In case this post was tempted to wander off into a strictly theoretical discussion, what follows is a verbatim response to a job application that illustrates in lurid detail the kinds of things that people do hundreds of times a month and which do damage to the corporate image and branding, and which makes the highly-skilled and desirable applicants think your organization must be staffed with morons.

I have highlighted some specific strings for comment, but as a general observation the whole response is unworthy of a serious company that is aware that job applications may come from current or future customers, investors, suppliers, and employees, and which makes an effort to get this right.

Example

The following text (my italics) is a verbatim response to a specific job application:

Dear Matthew H Loxton(1),

Thank you for taking the time to submit your profile for the position Knowledge Management Strategist (01098857)(2) at Booz Allen Hamilton(3).

We are eager to review your qualifications in terms of the requirements for this position.  If our recruiters believe you may be a fit for this role, someone from our staff will contact you(4).

We encourage you to continue to check our web site(5) for new opportunities.  As you add to your credentials, we encourage you to click here(6) to update your profile.

Again, thank you for submitting your profile and for expressing an interest in our firm(7, 8).

Best regards,

Recruiting Services Team
Booz Allen Hamilton(9)
http://www.boozallen.com

Replies to this message are undeliverable and will not reach the Recruiting Services Team. Please do not reply.(10)


ce_message_en_html.htm(11)

Comments

  1. Well ok, they got my name right, which is a plus because most don’t even get this bit right, score 1
  2. Score a point here for saying what the role was and the number, because frankly, after seven different submissions I can’t remember what your role was, and typically a job-seeker will submit hundreds of applications. Subtract the point for not hyper-linking the job – I mean really guys, you list it but then don’t link to it, how lame is that?
  3. Score a point for reminding me who you are, subtract it again for not hyper-linking it
  4. OK, so how condescending could you possibly get for starters and why aren’t you telling me when and how? Explain your process, put some commitment in regarding timeframes, and be specific! Deduct 5 points
  5. What sort of lame anchor text to your web site is “web site”? – use a meaningful anchor text so you don’t look like utter newbs. Deduct 1 point for newb factor that makes the company look foolish and clumsy.
  6. Same as above, “click here” isn’t something people need to be told in order to comprehend the implication of a hyperlink – show that you “get it” and make the anchor text meaningful. Deduct another point for making people think you probably do the same stupid stuff on your web page too.
  7. You have a name, use it, your firm’s name isn’t “our firm” and this needs to be hyperlinked as well. Branding guys, branding! Deduct 1 point
  8. This was your shot at providing a hook from the Marketing guys to say something sticky and meaningful about what you do and who you are, and you flubbed it so badly I want to deduct several hundred points, but one will suffice. Try to make the reader get a little frisson of emotional entanglement with your mission and vision.
  9. Again you could hyperlink and again you had a shot at branding, and again you undermine the brand. -1
  10. This deserves a public flogging at least – besides being incredibly insulting and condescending, it is just plain moronic. No other department in a firm other than HR thinks it makes sense to have one-way communication with the public. You are dealing with people who might wind up at customers or investors or analysts, do you really want to stick your thumb in their eye. … but that’s not all, having insulted the public, you then also remove any hope that the person could help you learn. They can’t even say “hey, your job add has errors in it”! See my previous blog on departments that undermine corporate branding
  11. Well attaching the same email was, …um…, interesting, but you know what would have made more sense? – sending me a copy of my application and the job details. Now that would be useful when you call in three months and I can’t remember what it was about. -1

Discussion

Getting -11 is not a good score and should be a sign that things are wrong – Either staff are running around without a due degree of management oversight, or (even worse) the managers are running a shop that is deliberately out of alignment with the Marketing and Sales part of the company.
In which case, it might be better if the recruitment side of Booz Allen Hamilton worked for the competition instead.

Why a firm’s recruiters should behave so radically differently to how other departments behave that touch the public is a source of mystification to me.
I do know that the common trope will be that they are very busy, that they get hundreds (if not thousands) of emails, and that nobody has ever complained before, so let’s look at that for a moment.

We are too Busy

Not too busy to undermine the corporate branding though, just too busy to be like any other customer-facing department and be polite and have coherent and consistent practices.
Customer Service and Sales go to the ends of the earth to be polite and to maintain branding and messaging, and none of them would in their wildest nightmares imagine that ignoring the public is a clever or even remotely sane thing to do. Let’s not beat around the bush on this, making the HR return email address an invalid one is like a receptionist that refuses to listen to anybody calling or arriving on the premises.

HR should no more supply an invalid email address to the public than should Sales, Support, or the receptionist, and nobody is too busy to adhere to good knowledge management practices or protect the brand.

But we get so many emails

So what? – That’s your job, figure it out.
Throwing them in the bin is not a valid option

This is the public talking back to you and if you don’t like that then get another profession that doesn’t deal with the public.
Amongst those emails could easily (very likely) be one from somebody whose other job opportunity will be as the chief purchasing officer of your biggest customer, and they might easily take this experience with them in their next role. In fact the research shows that they do.
Being rude to the public is stupid, ask Marie Antoinette.

Nobody Ever Complained Before

How would you know if you don’t let them email you, your phone number isn’t listed, and you don’t invite comment.

It is truly amazing how many firms are deliberately and systematically deaf, and how this eventually leads to corporate death.
Preventing people from telling you that you are full of it or that what you are doing is wrong, irritating, or stupid is not a clever approach to survival and does nothing to foster a Learning Organization.
Being incurious is bad enough, but actually preventing feedback is stupendously stupid.

Conclusion

This really should not be something anyone needs to point out or explain – never be rude or dismissive to the public, and yet HR departments across the globe do this on a routine and ongoing fashion, apparently exempt from the kind of oversight that we conspicuously apply to sales, marketing, and customer service teams.
I am not singling Booz Allen Hamilton out for criticism, this is a widespread and pernicious pattern of behavior – and one that needs to be stamped out across the board.

~~~

Matthew Loxton is a Knowledge Management expert and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge assets to work.

Risk and Creeping Conservatism – The Death of a Company

November 16, 2010

Some readers have asked me to expand a bit on what I meant by “Conservatism” as being part of what leads to corporate death – they were worried that I meant that their political views were being cast in a negative light. While it certainly would be interesting to see if political Conservatism was related to risk aversion, in decision-making the term “conservatism” relates to risk aversion and how that winds up leading to paralysis and some very bizarre behaviour under stress.

It’s all about the price of eggs

Some years ago Daniel Putler of the USDA noticed that customer behaviour towards egg prices was asymmetrical in what he called a “reference price effect”(Putler 1992).
When egg prices rose, as predicted by standard economical theory, demand dropped, but what was inexplicable by economic theory was that when egg prices subsequently dropped, the purchasing did not respond in equal measures – people reacted more strongly to the price rise than they did to price drop.

This response asymmetry turns out to be the result of a deep-seated, probably evolutionary, cognitive bias towards risk. As a species, the behavioural economics theory goes, we are more attentive and react more strongly to risk than reward and this plays out whenever we have already set an expectation or reference (Chen, Lakshminarayanan et al. ; Tversky and Kahneman 1991; McDermott, Fowler et al. 2008).
It’s easy to imagine how this could develop evolutionarily – the sound of tall savannah grass moving might be just the wind, it could be somebody bringing us a nice melon, or it might be somebody or something creeping up on us. If one typically reacted to it as a threat and were wrong it would just mean we burned up a little energy and appeared jumpy. If on the other hand we typically assumed it was something nice and were wrong, then we would more often end up as lunch.

Jumpy but living people leave more offspring than relaxed but dead people.

Nightmare Auctions

There are some amusing experiments that show how this works in everyday life, one is the Bazerman auction in which non-rationally escalating commitments result from loss-aversion (Bazerman and Neale 1992; Bazerman 2001). Prof. Max Bazerman has routinely carried out the following piece of trickery on unsuspecting students.

Bazerman offers an amount of money out of his wallet for auction, say $20. The rules of the auction are atypical but fairly straightforward: bids must be increments of a certain minimum value ($1), and the winner is obviously the person with the highest bid.

So far so good.

The payout however is a little different – the runner-up also pays their own bid, but only the winner gets the prize.

Behavior is fairly typical, bids come in thick and fast until the bids approach a significant proportion of the prize, at which point most players drop out, leaving the leader and runner-up alone in the game.
Bids slow but keep climbing until the fateful point is reached where the next bid will be $21 for a $20 prize. At this point, rather than capitulate, the typical outcome is further furious bidding as each player ups the ante and tries to avoid loss – In many trials reaching $180 bids for the $20 prize.

Before you think that this is all rather contrived and of no importance to your firm, consider Nick Leeson.

Because Leeson was biased in this same way, he piled debt upon debt trying to recover an initial loss, and the result of this put Barings Bank out of business (Nicholson 1998; Hoch and Kunreuther 2001; Goto 2007).

The phenomenon has been seen in countless examples ranging from big lies to cover small lies (President Clinton?) to people who sell their good shares and hold onto those that are plummeting – a trait shared by monkeys.

It even overpowers actual gains.

Take exchange rates: Some time ago the Australian dollar was at 0.96 to the US dollar against a typical exchange rate of closer to 0.7. A person holding AUD could thus make a tidy profit by paying the $20 fee and moving a large quantity of AUD into USD. However, in many cases, when the rate dropped to 0.94, people, having pegged expectations to 0.96, now regarded 0.94 as a loss, and instead of selling and getting the benefit of 0.94 against a typical 0.7, held onto their AUD in the hopes that it would climb back to 0.96.

However, it proceeded to drop further, triggering even more angst, and resulting in those people tending to perceive and even big loss, and even more desire to see it climb back up before they wanted to sell, … and so on.

This is the way people lose great fortunes on the stock market, in gambling, and in business ventures in general.

Risk aversion also has a twin brother – Aversion to Change

Change Reluctance

Since most random change is harmful, risk aversion equates to a reluctance to change what is tried and true, and herein lies the real rub – while good professional practices can limit the harm done due to Bazerman Auction situations and can embed safeguards against scenarios such as Barings Bank, there is another problem that no amount of procedural interlocks and policies can prevent – external changes.

Even if a company has an absolutely perfect market approach, externalities cause unpredictable changes in the business terrain that require adaptation and course corrections that will inevitably require novelty and innovation.

This inverse link between risk-aversion and innovation has been the subject of books (Hunt and Hazel 2003) and has even spurred some research suggesting that it is tied to low cognitive ability (Dohmen, Falk et al.) We might in a snide moment say that corporations that are risk averse are just stupid, but that is unkind and untrue.

Which brings us back to the kind of Conservatism that leads to corporate death.

Conclusion

Even though in mature companies the cultural & existential narratives tend to be “onwards and upwards” in aspiration, the more mundane “How things are done here” or ground truths tend to show that there is often a gap between declared vs operant behaviour and goals, and that actual behaviour is risk averse rather than innovative.

The difficulty is that to gain the benefits of experimentation without the risks that catastrophic failure might bring, one has to build an environment in which frequent small risks can be taken without jeopardizing the survival of the organization. In order to do this, one has to be open to experimentation and wilfully expend resources to experiment. In order to have that, one has to have a mindset and corporate culture in which “playing” is allowed, and as companies shed their youthful “go-go” character during their entrepreneurial stage, caution and change reluctance grow.

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Matthew Loxton is a Knowledge Management professional and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge to work.

Bibliography

Bazerman, M. and M. Neale (1992). “Nonrational escalation of commitment in negotiation.” European Management Journal
10(2): 163-168.

Bazerman, M. H. (2001). Smart money decisions: why you do what you do with money (and how to change for the better), Wiley.

Chen, K., V. Lakshminarayanan, et al. “The evolution of our preferences: Evidence from capuchin monkey trading behavior.”

Dohmen, T., A. Falk, et al. “Are risk aversion and impatience related to cognitive ability?” The American Economic Review
100(3): 1238-1260.

Goto, S. (2007). “The Bounds of Classical Risk Management and the Importance of a Behavioral Approach.” Risk Management and Insurance Review
10(2): 267-282.

Hoch, S. J. and H. C. Kunreuther (2001). “A complex web of decisions.” Wharton on making decisions: 1-14.

Hunt, B. and G. Hazel (2003). The Timid Corporation: why business is terrified of taking risk, J. Wiley.

McDermott, R., J. H. Fowler, et al. (2008). “On the evolutionary origin of prospect theory preferences.” The Journal of Politics
70(02): 335-350.

Nicholson, N. (1998). “How hardwired is human behavior?” Harvard Business Review
76: 134-147.

Putler, D. S. (1992). “Incorporating reference price effects into a theory of consumer choice.” Marketing Science
11(3): 287-309.

Tversky, A. and D. Kahneman (1991). “Loss aversion in riskless choice: A reference-dependent model.” The Quarterly Journal of Economics
106(4): 1039-1061.

 

Please contribute to my self-knowledge and take this 1-minute survey that tells me what my blog tells you about me. – Completely anonymous.

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Matthew Loxton is a Knowledge Management professional and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge to work.

 


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