Harvard Business Review (February 2004)

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View Back Issues | February 2004 > Measuring t he St rat egic Readiness of I nt angible Asset s

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Measuring t he St rat egic Readiness of I nt angible Asset s A r e a l—a n d r e volu t ion a r y—oppor t u n it y lie s in st u dyin g a n d a sse ssin g h ow w e ll pr e pa r e d a com pa n y’s pe ople , syst e m s, a n d cu lt u r e a r e t o ca r r y ou t it s st r a t e gy.

by Robe r t S. Ka pla n a n d D a vid P. N or t on

How valuable is a com pany cult ure t hat enables em ployees t o underst and and believe in t heir organizat ion’s m ission, vision, and core values? What ’s t he payoff from invest ing in a knowledge m anagem ent syst em or in a new cust om er dat abase? I s it m ore im port ant t o im prove t he skills of all em ployees or focus on t hose in j ust a few key posit ions? Measuring t he value of such int angible asset s is t he holy grail of account ing. Em ployees’ skills, I T syst em s, and organizat ional cult ures are wort h far m ore t o m any com panies t han t heir t angible asset s. Unlike financial and physical ones, int angible asset s are hard for com pet it ors t o im it at e, which m akes t hem a powerful source of sust ainable com pet it ive advant age. I f m anagers could find a way t o est im at e t he value of t heir int angible asset s, t hey could m easure and m anage t heir com pany’s com pet it ive posit ion m uch m ore easily and accurat ely. But t hat ’s sim pler said t han done. Unlike financial and physical asset s, int angible asset s are wort h different t hings t o different people. An oil well, for exam ple, is alm ost as valuable t o a ret ail firm as it is t o an oil explorat ion corporat ion because eit her com pany could sell it swift ly if necessary. But a workforce wit h a st rong sense of cust om er service and sat isfact ion is wort h far m ore t o t he ret ailer t han it would be t o t he oil com pany. Also, unlike t angible asset s, int angible asset s alm ost never creat e value by t hem selves. They need t o be com bined wit h ot her asset s. I nvest m ent s in I T, for exam ple, have lit t le value unless com plem ent ed wit h HR t raining and incent ive program s. And, conversely, m any HR t raining program s have lit t le value unless com plem ent ed wit h m odern t echnology t ools. HR and I T invest m ent s m ust be int egrat ed and aligned wit h corporat e st rat egy if t he organizat ion is t o realize t heir full pot ent ial. I ndeed, when com panies separat e funct ions like HR and I T organizat ionally, t hey usually end up wit h com pet ing silos of t echnical specializat ion. The HR depart m ent argues for increases in em ployee t raining, while t he I T depart m ent lobbies for buying new hardware and soft ware packages. What ’s m ore, int angible asset s seldom affect financial perform ance direct ly. I nst ead, t hey work indirect ly t hrough com plex chains of cause and effect . Training em ployees in Tot al Qualit y Managem ent and Six Sigm a, for inst ance, should im prove process qualit y. That im provem ent should t hen increase cust om er sat isfact ion and loyalt y—and also creat e som e excess resource capacit y. But only if t he com pany can t ransform t hat loyalt y int o im proved sales and m argins and elim inat e or redeploy t he excess resources will t he invest m ent in t raining pay off. By cont rast , t he im pact of a new t angible asset is im m ediat e: When a ret ailer develops a new sit e, it sees financial benefit s from t he sales in t he newly opened out let right away. Alt hough t hese charact erist ics m ake it im possible t o value int angible asset s on a freest anding basis, t hey also point t he way t o a new approach for quant ifying how int angible asset s add value t o t he com pany. By underst anding t he problem s associat ed wit h valuing int angible asset s, we learn t hat t he m easurem ent of t he value t hey creat e is em bedded in t he cont ext of t he st rat egy t he com pany is pursuing. Com panies such as Dell, Wal- Mart , or McDonald’s t hat are following a low- cost st rat egy derive value from Six Sigm a and TQM t raining because t heir st rat egies are predicat ed on cont inuous process im provem ent . The st rat egy of offering cust om ers int egrat ed solut ions ( rat her t han discret e product s) pursued by Goldm an Sachs, I BM Consult ing, and t he like

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Th e St r a t e gy M a p H u m a n Ca pit a l Re a din e ss a t Con su m e r Ba n k Se ve n Be h a vior s for Tr a n sfor m a t ion

Robe r t S. Ka pla n ( r k a pla n @h bs.e du ) is t he Marvin Bower Professor of Leadership Developm ent at Harvard Business School in Bost on. D a vid P. N or t on ( dn or t on @bscol.com ) is t he founder and president of t he Balanced Scorecard Collaborat ive ( www.bscol. com ) in Lincoln, Massachuset t s. This art icle is based on t heir book St rat egy Maps: Convert ing I nt angible Asset s int o Tangible Out com es ( Harvard Business School Press, 2004) .

> | H a r va r d Bu sin e ss Re vie w On Poin t Edit ion This art icle is enhanced wit h a sum m ary of key point s t o help you quickly absorb and apply t he concept s and a bibliography t o guide furt her explorat ion.

> | H a r va r d Bu sin e ss Re vie w On Poin t Colle ct ion This art icle is also part of t he specially priced OnPoint collect ion “ Focusing Your Organizat ion on St rat egy— wit h t he Balanced Scorecard, 2nd Edit ion” which includes four OnPoint art icles wit h an overview com paring different perspect ives on t his t opic.

requires em ployees good at est ablishing and m aint aining long- t erm cust om er relat ionships. An organizat ion cannot possibly assign a m eaningful financial value t o an int angible asset like “ a m ot ivat ed and prepared workforce” in a vacuum because value can be derived only in t he cont ext of t he st rat egy. What t he com pany can m easure, however, is whet her it s workforce is properly t rained and m ot ivat ed t o pursue a part icular goal. Viewed in t his light , it becom es clear t hat m easuring t he value of int angible asset s is really about est im at ing how closely aligned t hose asset s are t o t he com pany’s st rat egy. I f t he com pany has a sound st rat egy and if t he int angible asset s are aligned wit h t hat st rat egy, t hen t he asset s will creat e value for t he organizat ion. I f t he asset s are not aligned wit h t he st rat egy or if t he st rat egy is flawed, t hen int angible asset s will creat e lit t le value, even if large am ount s have been spent on t hem . I n t he following pages, we will draw on t he concept s and t ools of t he Balanced Scorecard t o present a way t o syst em at ically m easure t he alignm ent of t he com pany’s hum an, inform at ion, and organizat ion capit al—what we call it s st rat egic readiness—wit hout which even t he best st rat egy cannot succeed. D e fin in g St r a t e gic Re a din e ss I n developing t he Balanced Scorecard m ore t han a decade ago, we ident ified, in it s Learning and Growt h Perspect ive, t hree cat egories of int angible asset s essent ial for im plem ent ing any st rat egy: • H u m a n Ca pit a l: t he skills, t alent , and knowledge t hat a com pany’s em ployees possess. • I n for m a t ion Ca pit a l: t he com pany’s dat abases, inform at ion syst em s, net works, and t echnology infrast ruct ure. • Or ga n iza t ion Ca pit a l: t he com pany’s cult ure, it s leadership, how aligned it s people are wit h it s st rat egic goals, and em ployees’ abilit y t o share knowledge. To link t hese int angible asset s t o a com pany’s st rat egy and perform ance, we developed a t ool called t he “ st rat egy m ap,” which we first int roduced in our previous art icle for Harvard Business Review, “ Having Trouble wit h Your St rat egy? Then Map I t ” ( Sept em ber–Oct ober 2000) . As t he exhibit “ The St rat egy Map” shows, int angible asset s influence a com pany’s perform ance by enhancing t he int ernal processes m ost crit ical t o creat ing value for cust om ers and shareholders. Com panies build t heir st rat egy m aps from t he t op down, st art ing wit h t heir long- t erm financial goals and t hen det erm ining t he value proposit ion t hat will deliver t he revenue growt h specified in t hose goals, ident ifying t he processes m ost crit ical t o creat ing and delivering t hat value proposit ion, and, finally, det erm ining t he hum an, inform at ion, and organizat ion capit al t he processes require. Th e St r a t e gy M a p This art icle focuses on t he bot t om —t he foundat ion—of t he m ap and will show how int angible asset s act ually det erm ine t he perform ance of t he crit ical int ernal processes. Once t hat link has been est ablished, it becom es easy t o t race t he st eps back up t he m ap t o see exact ly how int angible asset s relat e t o t he com pany’s st rat egy and perform ance. That , in t urn, m akes it possible t o align t hose asset s wit h t he st rat egy and m easure t heir cont ribut ion t o it . The degree t o which t he current set of asset s does—or does not — cont ribut e t o t he perform ance of t he crit ical int ernal processes det erm ines t he st rat egic readiness of t hose asset s and t hus t heir value t o t he organizat ion. The st rat egic readiness of each t ype of int angible asset can be t hought of as follows: H u m a n Ca pit a l ( H C) : I n t he case of hum an capit al, st rat egic readiness is m easured by whet her em ployees have t he right kind and level of skills t o perform t he crit ical int ernal processes on t he st rat egy m ap. The first st ep in est im at ing HC readiness is t o ident ify t he st rat egic j ob fam ilies—t he posit ions in which em ployees wit h t he right skills, t alent , and knowledge have t he biggest im pact on enhancing t he organizat ion’s crit ical int ernal processes. The next st ep is t o pinpoint t he set of specific com pet encies needed t o perform each of t hose st rat egic j obs. The difference bet ween t he requirem ent s needed t o carry out t hese j obs effect ively and t he com pany’s current capabilit ies represent s a “ com pet ency gap” t hat m easures t he organizat ion’s HC readiness. I n for m a t ion Ca pit a l ( I C) : The st rat egic readiness of inform at ion capit al is a m easure of how well t he com pany’s st rat egic I T port folio of infrast ruct ure and applicat ions support s t he crit ical int ernal processes. I nfrast ruct ure com prises hardware—such as

cent ral servers and com m unicat ion net works—and t he m anagerial expert ise—such as st andards, disast er planning, and securit y—required t o effect ively deliver and use applicat ions. Two cat egories of applicat ions, in t urn, are built on t his infrast ruct ure: Transact ion- processing applicat ions, such as an ERP syst em , aut om at e t he basic repet it ive t ransact ions of t he ent erprise. Analyt ic applicat ions prom ot e analysis, int erpret at ion, and sharing of inform at ion and knowledge. Eit her t ype m ay or m ay not be a t ransform at ional applicat ion—one t hat changes t he prevailing business m odel of t he ent erprise. Levi’s uses a t ransform at ional applicat ion t o t ailor j eans t o individual cust om ers. Hom e Shopping Net work uses a t ransform at ional applicat ion t o m easure t he “ profit s per second” being generat ed by current ly offered m erchandise. Transform at ional applicat ions have t he m ost pot ent ial im pact on st rat egic obj ect ives and require t he great est degree of organizat ion change t o deliver t heir benefit s. Or ga n iza t ion Ca pit a l ( OC) : Organizat ion capit al is perhaps t he least underst ood of t he int angible asset s, and t he t ask of m easuring it is correspondingly difficult . But in looking at t he st rat egic priorit ies t hat com panies in our dat abase of Balanced Scorecard im plem ent at ions used for t heir organizat ion capit al obj ect ives, we found a consist ent pict ure. Successful com panies had a cult ure in which people were deeply aware of and int ernalized t he m ission, vision, and core values needed t o execut e t he com pany’s st rat egy. These com panies st rove for excellent leadership at all levels, leadership t hat could m obilize t he organizat ion t oward it s st rat egy. They st rove for a clear alignm ent bet ween t he organizat ion’s st rat egic obj ect ives and individual, t eam , and depart m ent al goals and incent ives. Finally, t hese com panies prom ot ed t eam work, especially t he sharing of st rat egic knowledge t hroughout t he organizat ion. Det erm ining OC readiness, we concluded, would involve first ident ifying t he changes in organizat ion capit al required by t he new st rat egy—what we call t he “ organizat ion change agenda” —and t hen separat ely ident ifying and m easuring t he st at e of readiness of t he com pany’s cult ural, leadership, alignm ent , and t eam work obj ect ives. St rat egic readiness is relat ed t o t he concept of liquidit y, which account ant s use t o classify financial and physical asset s on a com pany’s balance sheet . Account ant s divide a firm ’s asset s int o various cat egories, such as cash, account s receivable, invent ory, propert y, plant and equipm ent , and long- t erm invest m ent s. These are ordered hierarchically according t o t he ease and speed wit h which t hey can be convert ed t o cash —in ot her words, according t o t he degree of t heir liquidit y. Account s receivable is m ore liquid t han invent ory, and bot h account s receivable and invent ory are classified as short t erm asset s since t hey t ypically convert t o cash wit hin 12 m ont hs, fast er t han t he cash recovery cycle from such illiquid asset s as plant and equipm ent . St rat egic readiness does m uch t he sam e for int angible asset s—t he higher t heir st at e of readiness, t he fast er t hey cont ribut e t o generat ing cash. H u m a n Ca pit a l Re a din e ss All j obs are im port ant t o t he organizat ion; ot herwise, people wouldn’t be hired and paid t o perform t hem . Organizat ions m ay require t ruck drivers, com put er operat ors, product ion supervisors, m at erials handlers, and call cent er operat ors and should m ake it clear t hat cont ribut ions from all t hese em ployees can im prove organizat ional perform ance. But we have found t hat som e j obs have a m uch great er im pact on st rat egy t han ot hers. Managers m ust ident ify and focus on t he crit ical few t hat have t he great est im pact on successful st rat egy im plem ent at ion. John Bronson, vice president of hum an resources at William s- Sonom a, est im at es t hat people in only five j ob fam ilies det erm ine 80% of his com pany’s st rat egic priorit ies. The execut ive t eam of a chem ical com pany has ident ified eight j ob fam ilies crit ical t o it s st rat egy of offering cust om ized innovat ive solut ions. These j ob fam ilies em ploy, in aggregat e, 100 individuals—less t han 7% of t he t ot al workforce. Kim berlee William s, vice president of hum an resources at Unicco, a large int egrat ed facilit ies- services m anagem ent com pany, says t hat t hree j ob fam ilies are key t o it s st rat egy: proj ect m anagers, who oversee t he operat ions in specific account s; operat ions direct ors, who broaden t he relat ionships wit hin exist ing account s; and business developm ent execut ives, who help acquire new account s. These t hree j ob fam ilies em ploy only 215 people, less t han 4% of t he workforce. By focusing hum an capit al developm ent act ivit ies on t hese crit ical few individuals, t he chem ical com pany, Unicco, and William s- Sonom a can great ly leverage t heir hum an capit al invest m ent s. I t is sobering t o t hink t hat st rat egic success in t hese t hree com panies is det erm ined by how well t hey develop com pet encies in less t han 10% of t heir workforces. Once a com pany ident ifies it s st rat egic j ob fam ilies, it m ust define t he requirem ent s for t hese j obs in considerable det ail, a t ask oft en referred t o as “ j ob profiling” or “ com pet ency profiling.” A com pet ency profile describes t he knowledge, skills, and values

required by successful occupant s in t he j ob fam ily. Oft en, HR m anagers will int erview individuals who best underst and t he j ob requirem ent s t o develop a com pet ency profile t hey can use t o recruit , hire, t rain, and develop people for t hat posit ion. To see how t his m ight be done, consider Consum er Bank, a com posit e exam ple dist illed from our experiences in working wit h about a dozen ret ail banks. Consum er Bank was m igrat ing from it s hist oric st rat egy of prom ot ing individual product s t o one offering com plet e financial solut ions and one- st op shopping t o t arget ed cust om ers. The m ap for t his new st rat egy ident ified seven crit ical int ernal processes, one of which was “ cross- sell t he product line.” Hum an resources and line execut ives t hen ident ified t he financial planner as t he j ob m ost im port ant t o t he effect ive perform ance of t his process. A planning workshop furt her ident ified four skills fundam ent al t o t he financial planner’s j ob: solut ions selling, relat ionship m anagem ent , product - line knowledge, and professional cert ificat ion. For each int ernal process on it s st rat egy m ap, Consum er Bank replicat ed t his approach, ident ifying t he st rat egic j ob fam ilies and crit ical com pet encies each required. The result s are sum m arized in t he exhibit “ Hum an Capit al Readiness at Consum er Bank.” H u m a n Ca pit a l Re a din e ss a t Con su m e r Ba n k To t ake t he next st ep—assessing t he current capabilit ies and com pet encies of each of t he em ployees in each st rat egic j ob fam ily—com panies can draw from a broad range of approaches. For exam ple, em ployees can t hem selves assess how well t heir current capabilit ies fit t he j ob requirem ent s and t hen discuss t hose assessm ent s wit h a m ent or or career m anager. Alt ernat ively, an assessor can solicit 360- degree feedback on em ployees’ perform ance from t heir supervisors, peers, and subordinat es. From t hese assessm ent s, em ployees get a clear underst anding of t heir obj ect ives, m eaningful feedback on t heir current levels of skill and perform ance, and specific recom m endat ions for fut ure personal developm ent . Consum er Bank est im at ed t hat it needed 100 t rained and skilled financial planners t o execut e t he cross- selling process. But in assessing it s recent t arget ed hiring, t raining, and developm ent program s, t he bank’s HR group det erm ined t hat only 40 of it s financial planners had reached a high enough level of proficiency. The bank’s hum an capit al readiness for t his piece of t he st rat egy was, t herefore, only 40% , as t he exhibit shows. By replicat ing t his analysis for all it s st rat egic j ob fam ilies, t he bank learned t he st at e of it s hum an capit al readiness and t hus whet her t he organizat ion could m ove forward quickly wit h it s new st rat egy. I n for m a t ion Ca pit a l Re a din e ss Execut ives m ust underst and how t o plan, set priorit ies for, and m anage an inform at ion capit al port folio t hat support s t heir organizat ion’s st rat egy. As wit h hum an capit al, t he st rat egy m ap serves as a st art ing point for delineat ing a com pany’s I C obj ect ives. I n t he case of Consum er Bank, t he chief inform at ion officer led an init iat ive t o ident ify t he specific inform at ion capit al needs of each of t he seven int ernal processes previously ident ified as crit ical t o t he bank’s new value proposit ion. For t he cust om er m anagem ent process “ cross- sell t he product line,” t he workshop t eam ident ified an applicat ion for cust om ers t o analyze and m anage t heir port folios by t hem selves ( a cust om er port folio self- m anagem ent syst em ) as a t ransform at ional applicat ion. The workshop t eam ident ified an analyt ical applicat ion for t he sam e process ( a cust om er profit abilit y syst em ) and a t ransact ion- processing applicat ion ( an int egrat ed cust om er file) . The int ernal process “ underst and cust om er segm ent s” also needed a cust om er profit abilit y syst em , as well as a separat e cust om er feedback syst em t o support m arket research. The process “ shift t o appropriat e channel” required a st rong foundat ion of t ransact ional syst em s, including a packaged CRM soft ware suit e t hat included m odules for lead m anagem ent , order m anagem ent , and sales force aut om at ion. For t he operat ions process “ provide rapid response,” part icipant s ident ified a t ransform at ional applicat ion ( cust om er self- help) as well as an analyt ic applicat ion ( a best - pract ice com m unit y knowledge m anagem ent syst em ) for sharing successful sales t echniques am ong t elem arket ers. Finally, t he “ m inim ize problem s” process required an analyt ical applicat ion ( service qualit y analysis) t o ident ify problem s and t wo relat ed t ransact ion- level syst em s ( one for incident t racking and anot her for problem m anagem ent ) . Aft er defining it s port folio of I C applicat ions, t he proj ect t eam ident ified several required com ponent s of I T infrast ruct ure. Som e applicat ions needed a CRM t ransact ions dat abase. Ot hers required t hat a Web- enabled infrast ruct ure be int egrat ed int o t he bank’s overall Web sit e archit ect ure. The t eam also learned about t he need for an

int ernal R&D proj ect t o develop a new int eract ive voice- response t echnology. All t oget her, t he bank’s planning process defined an inform at ion capit al port folio m ade up of 14 unique applicat ions ( som e of which support ed m ore t han one int ernal process) and four I T infrast ruct ure proj ect s. ( See t he exhibit “ I nform at ion Capit al Readiness at Consum er Bank.” )

The t eam t hen t urned t o assessing t he readiness of t he bank’s exist ing port folio of I C infrast ruct ure and applicat ions, assigning a num erical indicat or from 1 t o 6 t o each syst em . A score of 1 or 2 indicat es t hat t he syst em is already available and operat ing norm ally, perhaps needing only m inor enhancem ent s. A score of 3 or 4 indicat es t hat t he syst em has been ident ified and funded but is not yet inst alled or operat ional. I n ot her words, current capabilit y does not yet exist but developm ent program s are under way t o close t he gap. A score of 5 or 6 signals t hat a new infrast ruct ure or applicat ion is needed t o support t he st rat egy, but not hing has yet been done t o creat e, fund, and deliver t he capabilit y. Managers responsible for t he I C developm ent program s provided t he subj ect ive j udgm ent s for t his sim ple m easurem ent syst em , and t he CI O was responsible for assessing t he int egrit y of t he report ed num bers. I n t he I C exhibit , we can also see t hat Consum er Bank aggregat ed t he readiness m easures of individual applicat ions and infrast ruct ure program s—designat ing t hem green, yellow, or red, based on t he worst case applicat ion in t he cat egory—t o creat e a port folio st at us report . Wit h such a report ,

m anagers can see t he st rat egic readiness of t he organizat ion’s inform at ion capit al at a glance, easily pinpoint ing t he areas in which m ore resources are needed. I t is an excellent t ool for m onit oring a port folio of inform at ion capit al developm ent program s. Many sophist icat ed I T organizat ions already use m ore quant it at ive, obj ect ive assessm ent s of t heir inform at ion capit al port folios t han t he subj ect ive process we’ve j ust described for Consum er Bank. These organizat ions survey users t o assess t heir sat isfact ion wit h each syst em . They perform financial analyses t o det erm ine t he operat ing and m aint enance cost s of each applicat ion. Som e conduct t echnical audit s t o assess t he underlying qualit y of t he code, ease of use, qualit y of docum ent at ion, and frequency of failure for each applicat ion. From t his profile, an organizat ion can build st rat egies for m anaging it s port folio of exist ing I C asset s j ust as one would m anage a collect ion of physical asset s like m achinery or a fleet of t rucks. Applicat ions wit h high levels of m aint enance can be st ream lined, for exam ple, applicat ions wit h high operat ing cost s can be opt im ized, and applicat ions wit h high levels of user dissat isfact ion can be replaced. This m ore com prehensive approach can be effect ive for m anaging a port folio of applicat ions t hat are already operat ional. Or ga n iza t ion Ca pit a l Re a din e ss Success in perform ing t he crit ical int ernal processes ident ified in an organizat ion’s st rat egy m ap invariably requires an organizat ion t o change in fundam ent al ways. Assessing OC readiness is essent ially about assessing how well t he com pany can m obilize and sust ain t he organizat ion change agenda associat ed wit h it s st rat egy. For inst ance, if t he st rat egy involves focusing on t he cust om er, t he com pany needs t o det erm ine whet her it s exist ing cult ure is cust om er- cent ric, whet her it s leaders have t he requisit e skills t o fost er such a cult ure, whet her em ployees are aware of t he goal and are m ot ivat ed t o deliver except ional cust om er service, and, finally, how well em ployees share wit h ot hers t heir knowledge about t he com pany’s cust om ers. Let ’s explore how com panies can m ake t hese kinds of assessm ent s for each of t he four OC dim ensions. Cu lt u r e . Of t he four, cult ure is perhaps t he m ost com plex and difficult dim ension t o underst and and describe because it encom passes a wider range of behavioral t errit ory t han t he ot hers. That ’s probably why “ shaping t he cult ure” is t he m ost oft en- cit ed obj ect ive in t he Learning and Growt h sect ion of our Balanced Scorecard dat abase. Execut ives generally believe t hat changes in st rat egy require basic changes in t he way business is conduct ed at all levels of t he organizat ion, which m eans, of course, t hat people will need t o develop new at t it udes and behaviors—in ot her words, change t heir cult ure. Assessm ent of cult ural readiness relies heavily on em ployee surveys. But in preparing surveys, com panies need t o dist inguish clearly bet ween t he values t hat all em ployees share—t he com pany’s base cult ure—and t he percept ions t hat em ployees have of t heir exist ing syst em —t he clim at e. The concept of base cult ure has it s root s in ant hropology, which defines an organizat ion’s cult ure as t he sym bols, m yt hs, and rit uals em bedded in t he group consciousness ( or subconscious) . To describe a com pany’s base cult ure, t herefore, you have t o uncover t he organizat ion’s syst em s of shared m eanings, assum pt ions, and values. The concept of clim at e has it s root s in social psychology and is det erm ined by t he way organizat ional influences—such as t he incent ive st ruct ure or t he perceived warm t h and support of superiors and peers—affect em ployees’ m ot ivat ion and behavior. The ant hropological com ponent reflect s em ployees’ shared at t it udes and beliefs independent of t he act ual organizat ional infrast ruct ure, while clim at e reflect s t heir shared percept ion of exist ing organizat ional policies, pract ices, and procedures, bot h form al and inform al. Surveying percept ions of exist ing organizat ional policies and pract ices is a fairly st raight forward t ask, but get t ing at t he base cult ure requires a lit t le m ore digging. Ant hropologist s usually rely on st oryt elling t o ident ify shared beliefs and im ages, but t hat approach is inadequat e for quant ifying t he alignm ent of cult ure t o st rat egy. Organizat ional behavior scholars have developed m easurem ent inst rum ent s, such as Charles O’Reilly and colleagues’ Organizat ional Cult ure Profile, in which em ployees rank 54 value st at em ent s according t o t heir perceived im port ance and relevance in t he organizat ion. Once ranked, an organizat ion’s cult ure can be described wit h a reasonable degree of reliabilit y and validit y. Then t he organizat ion can assess t o what ext ent t he exist ing cult ure is consist ent wit h it s st rat egy and what kinds of changes m ay be needed. One caveat : Managers do need t o be aware t hat som e variat ions in cult ure are necessary and desirable in different operat ing unit s or funct ions. The cult ure of an R&D group, for exam ple, should be different from t he cult ure of a m anufact uring unit ; t he

cult ure of an em ergent business unit should be different from t he cult ure of a m at ure one. Execut ives should st rive for agreem ent t hroughout t he organizat ion about corporat ewide values such as int egrit y, respect , t reat m ent of colleagues, and com m it m ent t o cust om er sat isfact ion. But som e value st at em ent s in t he survey inst rum ent should refer t o t he cult ure of specific operat ing unit s. So, for exam ple, surveys of t he em ployees in operat ions and service- delivery unit s would include st at em ent s about qualit y and cont inuous im provem ent , whereas t he R&D depart m ent survey m ight include st at em ent s about creat ivit y and innovat ion. For em ployees involved in cust om er acquisit ion, st at em ent s m ight relat e t o ret ent ion and growt h or t o a deep underst anding of individual cust om ers’ preferences and needs. Le a de r sh ip. I f com panies change t heir st rat egies, people will have t o do som e t hings different ly as well. I t is t he responsibilit y of leaders at all levels of t he organizat ion—from t he CEO of a ret ail chain down t o t he local st ore m anagers—t o help em ployees ident ify and underst and t he changes needed and t o m ot ivat e and guide t hem t oward t he new ways of working. I n researching t he best pract ices in our Balanced Scorecard dat abase, we were able t o ident ify seven generic t ypes of behavioral changes t hat build organizat ion capit al, and each fell int o one of t wo cat egories: changes t hat support t he creat ion of value—such as increasing people’s focus on t he cust om er—and t hose required t o carry out t he com pany’s st rat egy—such as increasing account abilit y. The sidebar “ Seven Behaviors for Transform at ion” describes t hese behavioral changes in m ore det ail. Se ve n Be h a vior s for Tr a n sfor m a t ion To ensure t hat it get s t he kind of leaders it needs, a com pany should draw up a leadership com pet ency m odel for each of it s leadership posit ions. This is a kind of j ob profile t hat defines t he com pet encies a leader is expect ed t o have t o be effect ive in carrying out t he com pany’s st rat egy. For exam ple, one m anufact uring com pany, at t em pt ing t o creat e t eam s t o solve cust om ers’ problem s, ident ified and defined t hree com pet encies essent ial for people in t eam leadership posit ions: • Cu st om e r Focu s—Out st anding leaders underst and t heir cust om ers. They place t hem selves in t he cust om ers’ m inds and spend t im e wit h t hem t o underst and t heir current and fut ure needs. • Fost e r in g Te a m w or k —Out st anding leaders work collaborat ively wit h t heir own t eam s and across organizat ional and geographic boundaries. They em power t heir t eam s t o achieve excellence. • Ope n Com m u n ica t ion s—Out st anding leaders t ell t he t rut h. They openly share inform at ion wit h peers, m anagers, and subordinat es. They t ell t he whole st ory, not j ust how it looks from t heir posit ion. Oft en, organizat ions will m easure leadership t rait s, such as t hose list ed above, t hrough em ployee surveys. A st aff or ext ernal unit solicit s inform at ion from subordinat es, peers, and superiors about a leader’s m ast ery of t he crit ical skills. This personal feedback is used m ainly for coaching and developing t he leader, but t he unit can also aggregat e t he det ailed ( and confident ial) dat a from t he individual reviews t o creat e a st at us report on t he readiness of key leadership com pet encies needed t hroughout t he organizat ion. Align m e n t . An organizat ion is aligned when all em ployees have a com m onalit y of purpose, a shared vision, and an underst anding of how t heir personal roles support t he overall st rat egy. An aligned organizat ion encourages behaviors such as innovat ion and risk t aking because individuals’ act ions are direct ed t oward achieving high- level obj ect ives. Encouraging and em powering individual init iat ive in an unaligned organizat ion leads t o chaos, as t he innovat ive risk t akers pull t he organizat ion in cont radict ory direct ions. Achieving alignm ent is a t wo- st ep process. First , m anagers com m unicat e t he high- level st rat egic obj ect ives in ways t hat all em ployees can underst and. This involves using a wide range of com m unicat ion m echanism s: brochures, newslet t ers, t own m eet ings, orient at ion and t raining program s, execut ive t alks, com pany int ranet s, and bullet in boards. The goal of t his st ep is t o creat e int rinsic m ot ivat ion, t o inspire em ployees t o int ernalize t he organizat ion’s values and obj ect ives so t hat t hey want t o help t he organizat ion succeed. The next st ep uses ext rinsic m ot ivat ion. The organizat ion has em ployees set explicit personal and t eam obj ect ives aligned t o t he st rat egy and est ablishes incent ives t hat reward em ployees when t hey m eet personal, depart m ent al, business unit , and corporat e t arget s.

Measuring alignm ent readiness is relat ively st raight forward. Many survey inst rum ent s are already available for assessing how m uch em ployees know about and how well t hey underst and high- level st rat egic obj ect ives. I t is also fairly easy t o see whet her or not individuals’ personal obj ect ives and t he com pany’s exist ing incent ive schem es are consist ent wit h t he high- level st rat egy. For exam ple, a large propert y and casualt y insurance com pany adopt ed a new st rat egy int ended t o reduce it s underwrit ing losses by creat ing a t ight er link bet ween t he underwrit ers, who decide whet her t o accept a new piece of business, and t he claim s agent s, who deal wit h t he consequences from poor underwrit ing decisions. Hist orically, t hese specialist s lived in different part s of t he organizat ion, and t heir incent ives were t ot ally unrelat ed t o each ot her, which clearly did lit t le t o fost er cooperat ion bet ween t hem or wit h t he line business unit s t hey support ed. To reflect t he new st rat egy, t he com pany changed t o a t eam - based com pensat ion syst em in which everyone’s incent ive pay was based on a com m on set of m easures ( t heir Balanced Scorecard) . Underwrit ers and claim s agent s, who worked in service depart m ent s shared by t he various business unit s, were now rewarded using t he Balanced Scorecard m easures relat ed t o t he business unit s t hey support ed. The com pany used a survey inst rum ent t o capt ure t he em ployees’ percept ions of t he im proved t eam work creat ed by aligning t he incent ive syst em s. Te a m w or k a n d Kn ow le dge Sh a r in g. There is no great er wast e t han a good idea used only once. Most organizat ions have t o go t hrough a cult ural change t o shift individuals from hoarding t o sharing t heir local knowledge. No asset has great er pot ent ial for an organizat ion t han t he collect ive knowledge possessed by all it s em ployees. That ’s why m any com panies, hoping t o generat e, organize, develop, and dist ribut e knowledge t hroughout t he organizat ion, have spent m illions of dollars t o purchase or creat e form al knowledge m anagem ent syst em s. The challenge in im plem ent ing such syst em s is m ot ivat ing people t o act ually docum ent t heir ideas and knowledge t o m ake t hem available t o ot hers. Most organizat ions in our Balanced Scorecard dat abase at t em pt ed t o develop such m ot ivat ion by select ing “ t eam work” and “ knowledge sharing” as st rat egic priorit ies in t heir Learning and Growt h Perspect ive. Typical m easures for t hese priorit ies included t he num ber of best pract ice ideas t he em ployees ident ified and used, t he percent age of em ployees who t ransferred knowledge in a workout process, t he num ber of people who act ually used t he knowledge m anagem ent syst em , how oft en t he syst em is used, t he percent age of inform at ion in t he knowledge m anagem ent syst em t hat was updat ed, and how m uch was obsolet e. For knowledge sharing t o m at t er, it m ust be aligned wit h t he priorit ies of t he st rat egy m ap. For exam ple, one organizat ion—a chem ical com pany—creat ed several best pract ice com m unit ies t o com plem ent t he int ernal process obj ect ives on it s st rat egy m ap. The I m prove Workplace Safet y com m unit y consist ed of t he safet y direct ors from every facilit y. They st udied t he best pract ices at t he high- perform ing plant s and creat ed a best pract ice–sharing program . The com pany’s out put m easure, “ days away from work,” dropped by 70% . I n anot her exam ple, a children’s hospit al was at t em pt ing t o reduce cost s wit hout reducing t he qualit y of pat ient care. I nt ensive discussions result ed in a t opt en list of best pract ices already being used som ewhere in t he hospit al. The hospit al t hen form ed cross- funct ional m edical pract ice t eam s of physicians, nurses, and adm inist rat ors t o im plem ent as m any of t hese procedures as t hey pract ically could. I t m easured success, t he out put of t his knowledge- sharing process, by t he “ num ber of best pract ices ut ilized.” The effect ive im plem ent at ion of best pract ices over t he next t hree years led t o dram at ic im provem ent s in organizat ional out com es: Readm ission rat es dropped by 50% , cost per case and lengt h of st ay each declined by 25% , and bot h cust om er sat isfact ion and qualit y of care increased. I n t hese and m any ot her exam ples in our case files, organizat ions enhanced t heir perform ance by aligning t he t eam work and knowledgesharing com ponent of t heir organizat ion capit al wit h t heir st rat egy. To get an overview of organizat ional readiness, com panies can put t he inform at ion t hey obt ain from t heir various surveys and assessm ent s t oget her in a report like t he one shown in “ Organizat ion Capit al Readiness Report .” I n t his exhibit , t he leadership m easure, drawn from t he leadership com pet ency m odel, displays t he com pany’s est im at e, based on em ployee surveys, of t he degree t o which t he com pany possesses t he key at t ribut es for leadership. At 92% , t he com pany is above t arget on it s leadership obj ect ive and can be considered st rat egically ready in t erm s of t his dim ension. The com pany’s OC wit h respect t o t eam work and knowledge sharing is also in good shape. But t he firm is perform ing inadequat ely in alignm ent and in developing t he right cult ure, and t hese problem s are lowering it s overall level of organizat ion capit al readiness.

• • • The int angible asset s described in t he Balanced Scorecard’s Learning and Growt h Perspect ive are t he foundat ion of every organizat ion’s st rat egy, and t he m easures in t his perspect ive are t he ult im at e lead indicat ors. Hum an capit al becom es m ost valuable when it is concent rat ed in t he relat ively few st rat egic j ob fam ilies im plem ent ing t he int ernal processes crit ical t o t he organizat ion’s st rat egy. I nform at ion capit al creat es t he great est value when it provides t he requisit e infrast ruct ure and st rat egic applicat ions t hat com plem ent t he hum an capit al. Organizat ions int roducing a new st rat egy m ust creat e a cult ure of corresponding values, a cadre of except ional leaders who can lead t he change agenda, and an inform ed workforce aligned t o t he st rat egy, working t oget her, and sharing knowledge t o help t he st rat egy succeed. Som e m anagers shy away from m easuring t heir int angible asset s because t hese m easures are usually “ soft er,” or m ore subj ect ive, t han t he financial m easures t hey convent ionally use t o m ot ivat e and assess perform ance. The Balanced Scorecard m ovem ent has encouraged organizat ions t o face t he m easurem ent challenge. Using t he syst em at ic approaches set out in t his art icle, com panies can now m easure what t hey want , rat her t han want ing only what t hey can current ly m easure. Even if t he m easures are im precise, t he sim ple act of at t em pt ing t o gauge t he capabilit ies of em ployees, inform at ion syst em s, and organizat ion capit al com m unicat es t he im port ance of t hese drivers for value creat ion. I n t he course of our work, we have seen m any com panies find new ways t o m easure—and consequent ly new ways t o enhance t he value of—t heir int angible asset s. The m easurem ent and m anagem ent of t hese asset s played a prom inent role in t heir t ransform at ion int o successful, st rat egy- focused organizat ions. Reprint Num ber R0402C | Harvard Business Review OnPoint edit ion 5887 | Harvard Business Review OnPoint collect ion 5933

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View Back Issues | February 2004 > Worse Than Enem ies: The CEO’s Dest ruct ive Confidant

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Worse Than Enem ies

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The CEO’s Destructive Confidant

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CEOs n e a r ly a lw a ys n e e d a n in t im a t e cou n se lor . Bu t u n le ss le a de r s e x a m in e t h e ir ow n m ot ive s—a n d t h ose of t h e ir con fida n t s—t h e se r e la t ion sh ips w ill a lm ost ce r t a in ly be da n ge r ou s, a n d som e t im e s e ve n ca t a st r oph ic.

by Ke r r y J. Su lk ow icz

The CEO is oft en t he m ost isolat ed and prot ect ed em ployee in t he organizat ion. No one gives him unfilt ered inform at ion. Many people dissem ble or conceal t hings from him . Few leaders, even vet eran CEOs, can do t he j ob wit hout t alking t o som eone about t heir experiences, which is why m ost develop a close relat ionship wit h a t rust ed colleague—a person wit h whom t hey feel free t o share t heir t hought s and fears. Few leaders speak out about t hese relat ionships, perhaps because t hey don’t like acknowledging t heir dependency on ot hers. But in business and polit ics, m ost leaders rely on t he advice and opinions of a t rust ed insider: a confidant . The need for a close confidant is root ed in childhood. Every child want s t o feel close t o som eone, t o feel underst ood, cared for, and loved. While parent s ordinarily sat isfy such childhood yearnings, t hese needs are never com plet ely sat isfied. I n adolescence, we t ypically resolve t hem by developing a best friend from am ong our peer group, and we usually pick individuals of t he sam e sex. When we find ourselves in dem anding sit uat ions lat er in life, we seek sim ilar refuge wit h a fellow adult . The m ost effect ive CEOs find confidant s who com plem ent t heir st rengt hs and sharpen t heir effect iveness. Bill Gat es uses St eve Ballm er in t his way; Warren Buffet t t urns t o vice chairm an Charlie Munger. I n t he end, bot h t he CEOs and t heir organizat ions benefit from t hese relat ionships. Over t he past eight years as a consult ant t o t op m anagem ent t eam s and as a psychoanalyst who t reat s com pany leaders in privat e pract ice, I have found t hat m any CEO–confidant relat ionships funct ion very well. These confidant s serve t heir leaders and keep t he CEOs’ best int erest s at heart . They derive t heir grat ificat ion vicariously— t hrough t he help t hey provide, not for any personal gain—and are usually quit e aware of t he pot ent ial for abusing t heir access t o t he CEOs’ innerm ost secret s. Unfort unat ely, alm ost as m any confidant s end up hurt ing, underm ining, or ot herwise exploit ing CEOs when t hey are at t heir m ost vulnerable. These confidant s rarely m ake t he headlines, but behind t he scenes t hey do enorm ous dam age t o t he CEO and t o t he organizat ion. What ’s m ore, t he leader is oft en t he last one t o know when and how t he confidant relat ionship becam e t oxic. Dangerous confidant s com e in all shapes and sizes. They are som et im es int ent ionally schem ing and deceit ful. Like Rasput in, t he craft y m anipulat or of t he Russian im perial fam ily, t hese overt ly bad confidant s have sociopat hic personalit ies: They habit ually lie and cheat t o achieve t heir aim s wit hout any apparent const raint s of conscience. Take som eone we’ll call Sanford Anderson. ( I have changed t he nam es in our exam ples t o prot ect t he privacy of t he individuals and com panies depict ed.) The CEO of a privat ely held real est at e business in t he Midwest , a com pany wort h billions, Anderson fell vict im t o j ust such a confidant . Early in his career, Anderson’s corporat e at t orney, Gregg Mayer, had saved t he firm m illions by deft ly handling a discrim inat ion lawsuit , which earned him Anderson’s undying grat it ude and respect . As t he years passed, Anderson cam e t o rely on Mayer’s advice about everyt hing from invest m ent st rat egy, archit ect ure and design, t o personnel developm ent .

Be for e I t 's Too La t e

Ke r r y J. Su lk ow icz, a psychiat rist and psychoanalyst , is t he founder of t he Boswell Group and a senior fellow at Kat zenbach Part ners in New York. He advises and t eaches senior business leaders and boards about t he psychological aspect s of m anagem ent , governance, and corporat e cult ure. He can be reached at k j s@bosw e llgr ou p. com .

Alt hough Anderson was in m ost respect s a highly effect ive CEO, he had never seriously cont em plat ed t he prospect of ret iring. Anderson’s worries about ret irem ent t ook t he form of denial of his own m ort alit y. I nst ead of acknowledging his anxiet y, he m anifest ed it by plunging even m ore deeply int o work, while ignoring his fat igue and gradual loss of passion. Consequent ly, he had never set in place an adequat e succession plan. Given t he t oxic confidant t hat he was, Mayer used t he lack of succession planning as an opport unit y t o advance his own int erest s. Mayer preyed on Anderson’s anxiet ies about aging and ret irem ent by fueling his fears about whom m ight want t o wrest cont rol of his business. Rat her t han encourage Anderson t o slow down aft er he was hospit alized for chest pain, Mayer egged Anderson on in a way calculat ed t o m ake him m ore anxious and afraid. As Mayer put it t o Anderson, “ Now t hat you’ve alm ost had a heart at t ack, t he people you’re up against m ight t ry t o give you a real heart at t ack by m aking you angry.” Just as Mayer planned, his st oking of Anderson’s fears paid off handsom ely. When Anderson st epped down, he im pulsively handed t he reins of power t o Mayer. Shocked by t he announcem ent of t he new CEO, several key m em bers of t he m anagem ent t eam st orm ed out in prot est . Unfort unat ely, wit hout t he skills of t hese key players, t he com pany was soon in t rouble, and Anderson’s legacy was ruined. Dest ruct ive confidant s like Mayer are far m ore com m onplace t han we would like t o believe. But even m ore com m on, and m ore insidious, are confidant s who are convinced t hey are serving t heir CEOs well, people who can’t see t he havoc t hey wreak on t he lives of leaders and t heir organizat ions. These confidant s have blind spot s about t heir own personalit ies and capabilit ies, and lit t le awareness of t he dam age t hey can cause. I have been able t o ident ify t hree dist inct t ypes of dest ruct ive confidant s over t he course of m y work. First are reflect ors, people who m irror t he CEO, const ant ly reassuring him t hat he is t he “ fairest CEO of t hem all.” By cont rast , t he second t ype of dest ruct ive confidant , t he insulat or, buffers t he CEO from t he organizat ion, prevent ing crit ical inform at ion from get t ing out and from get t ing in. Then, as we have j ust seen in t he previous exam ple, t here is t he usurper, t he confidant who cunningly ingrat iat es him self wit h t he CEO in a desperat e bid for power. I n t he following pages, we’ll explore how t he CEO–confidant relat ionship plays out in each case and discuss ways in which CEOs can avoid t hese dest ruct ive relat ionships. As we shall see, t he t rut h is t hat m any leaders have only t hem selves t o blam e for t he confidant s t hey have. Be for e I t 's Too La t e M ir r or , M ir r or on t h e W a ll CEOs are narcissist ic—if t hey weren’t , t hey wouldn’t be leaders. Moreover, wit hout t hat qualit y, t hey couldn’t grow t heir business or provide t he organizat ion wit h t he vision it needs. I n m y experience, CEOs wit h t he best confidant relat ionships have a healt hy dose of narcissism , and t heir confidant s provide posit ive and negat ive feedback, t hey bolst er CEOs’ flagging spirit s, and t hey encourage CEOs t o achieve balance and creat ivit y. But som e CEOs const ant ly need t o be t old wonderful t hings about t hem selves. Typically, t hese leaders are bot h grandiose and ext rem ely vulnerable t o slight s, and t hey oft en have a hard t im e hearing bad news or facing harsh realit ies. They surround t hem selves wit h yes- m en who are unwilling t o t ell t hem t he t rut h; t hese leaders also t end t o have failed m arriages, t rophy wives, or ext ram arit al affairs wit h wom en who feed t heir egos. Som e narcissist ic CEOs, such as Richard Scrushy of Healt hSout h or Dennis Kozlowski of Tyco, t urn t heir organizat ions int o elaborat e m onum ent s t o t hem selves. Unfort unat ely, t hese leaders are also prone t o select ing confidant s who cat er t o t heir fragile selfest eem . These are t he reflect ing confidant s. The reflect or int uit ively knows how t o m ake a narcissist ic CEO feel good. Alt hough all confidant s m ay do t his t o som e ext ent , reflect ors are driven by t heir own neurot ic need t o please aut horit y. That ’s usually because t hey’ve grown up wit h narcissist ic parent s who dem anded t hat t heir children m irror t hem t o an inappropriat e ext ent . These kids feel t hat t hey exist t o t ake care of t heir parent s, rat her t han t he reverse. For exam ple, children wit h depressed m ot hers t ypically feel responsible for t heir m ot hers’ happiness. I n such an environm ent , a child’s self- est eem becom es cont ingent on giving t he parent s what t hey want , rat her t han on developing an aut onom ous personalit y. One confidant t old m e t hat t he first t hing he did each m orning wit h his m ot her, a form er act ress, was t o scrut inize her face t o see if she was having a bad day. I f she was, he used t o t ake it as a signal t hat he needed t o find som e good news quick. As a confidant , he was equally t errified of angry out burst s on t he part of his CEO. Like ot her reflect ors,

t his confidant was ext rem ely sensit ive t o t he lim it ed range of em ot ion t hat a fragile CEO could t olerat e, and he t wist ed him self int o knot s t rying t o avoid upset t ing him . I n ext rem e form s, t he CEO–confidant pair ends up creat ing it s own dist ort ed version of realit y, what is known in t he psychiat ric lit erat ure as folie à deux—or shared m adness. When shared m adness develops and ot her key execut ives see how m uch t he CEO values t he reflect or, som e m ay t ry t o becom e t he CEO’s reflect ors t hem selves. This oft en leads t o a polarizat ion of em ployees: A sm all group of em ployees fiercely defends t he CEO, while a larger group rebels against t he leader and seeks out anot her senior execut ive who serves as it s unofficial leader and t he voice of realit y.

I n e x t r e m e for m s, t h e CEO– con fida n t pa ir e n ds u p cr e a t in g it s ow n dist or t e d ve r sion of r e a lit y, or sh a r e d m a dn e ss. Consider what happened at Regal Soft ware, a developer of video gam ing t echnology. As a first - t im e CEO, Paul Rot hberg alm ost inst ant ly found him self at odds wit h t he com pany’s t alent ed soft ware developers, who resent ed his aut ocrat ic m anagem ent st yle. Rot hberg’s unreasonable expect at ions of R&D event ually creat ed a split bet ween t he organizat ion’s research and business arm s. As t he gulf widened, Rot hberg found him self increasingly but t ing heads wit h m ost of Regal’s em ployees, and so he began t urning for int erpersonal advice t o Frank Jordan, a form er headhunt er t urned execut ive coach. Rot hberg had inst alled Jordan in an office at Regal’s headquart ers, where he spent t hree m ornings a week ost ensibly t o be available t o coach all t he senior execut ives. I n realit y, t hough, Rot hberg was his only client . Rot hberg would call Jordan t wice a day; he also m ade frequent visit s t o his office at Regal. I t soon becam e clear t o ot her em ployees how m uch t he em bat t led CEO depended on his new confidant . For his part , Jordan was seduced int o believing t hat not hing was m ore im port ant for him t o do t han t o keep t he CEO happy. He would list en int ent ly t o Rot hberg’s concerns and t hen color his own observat ions t o m at ch Rot hberg’s. To out siders, t hey looked like coconspirat ors who spent endless hours huddled in conversat ion. I ndeed, Jordan offered Rot hberg const ant reassurance t hat he was doing t he right t hing, when, in fact , Rot hberg was gravely m isguided. Consciously or not , Rot hberg and Jordan creat ed a sym biot ic relat ionship in which t hey relied alm ost ent irely on each ot her’s percept ions about what was happening at Regal. Rot hberg had looked t o Jordan t o be his eyes and ears, but t he m ore Jordan was drawn int o his privileged role, t he m ore unable he was t o accurat ely underst and t he sit uat ion unfolding around him . Unfort unat ely, Jordan supplied flawed advice, such as encouraging Rot hberg t o at t end m ore of his soft ware developers’ creat ive m eet ings, which only m ade him seem even m ore int rusive and cont rolling. At t he sam e t im e, Jordan inadvert ent ly bolst ered Rot hberg’s fundam ent ally harsh and rigid personalit y by consist ent ly praising t he CEO’s j udgm ent rat her t han offering const ruct ive crit icism . A vicious circle ensued, fueling t he polarizat ion of em ployees int o Rot hberg loyalist s or enem ies. Alt hough it isn’t always t he case t hat shared m adness bet ween a CEO and his confidant leads t o paranoia, t hese ingrained at t it udes of m ist rust and negat ivit y are easily m agnified under t hese circum st ances. Rot hberg’s naïvet é, for inst ance, was not t he only cause of Regal’s organizat ional t ensions. Deeper down, t he rift was fueled by com panywide worries about t he feasibilit y of Regal’s developing t echnology. But Rot hberg’s m isuse of his confidant brought organizat ional anxiet ies t o a crisis point . Ult im at ely, as Rot hberg’s m anipulat ions and decept ions cont inued t o escalat e, senior m anagem ent felt bet rayed, and Rot hberg was oust ed. For his part , Jordan had squandered his reput at ion as an independent expert . Lingering suspicions and resent m ent s prevent ed him from funct ioning effect ively as an out side consult ant , and he, t oo, was event ually forced out . You N e e d M e , a n d D on ’t For ge t I t ! While t he reflect or inadvert ent ly j oins wit h t he CEO in creat ing a shared, dist ort ed view of realit y, t he insulat or t ries t o serve as a m ediat or bet ween an ill- suit ed CEO and his organizat ion. CEOs who need insulat ors t end t o be abrasive or abusive leaders. These arrogant leaders oft en deny t he negat ive im pact of t heir personalit y on t hose around t hem . They t hought lessly push away t heir best people, m ake im pulsive business decisions, alienat e large const it uencies wit hin t he com pany, and poison m orale. These leaders quickly find t hem selves at odds wit h t heir subordinat es, senior execut ives, and boards because of t heir lack of em ot ional int elligence. And whet her t hey are quiet ly offput t ing or openly host ile, t hese leaders rarely feel concerned about , or able t o, change t heir int erpersonal st yle.

To com pensat e, t hese abrasive CEOs seek insulat ors, people whom t hey believe can t ranslat e t heir poorly com m unicat ed ideas int o language t heir organizat ions can underst and. They need people willing t o int ercede when t hey m ake self- dest ruct ive m oves. Like t he m ot her of a child abused by his fat her, t he insulat or is const ant ly apologizing t o t he organizat ion on t he CEO’s behalf: “ He didn’t m ean it .” The insulat or is also m uch like t he enabler—t o borrow t he language of Alcoholics Anonym ous—who m akes excuses for t he alcoholic. I nsulat ors have som e special charact erist ics. Many have passive personalit ies and need t o be rescuers. Wom en in senior m anagem ent posit ions are cert ainly not all insulat ors, but , for reasons t hat st ill have not been sufficient ly researched, m ost insulat ors t urn out t o be wom en. And alt hough t hey t ypically harbor no am bit ions t o be CEOs t hem selves, insulat ors crave cont rol over bot h t he leader and t he organizat ion. That cont rast s wit h reflect ors, who unconsciously t ry t o cont rol leaders by pleasing t hem . Thus, while insulat ors can be quit e m anipulat ive, t hey posit ion t heir behavior t o appear as t hough t hey are doing an alt ruist ic service for t heir bosses and com panies. The insulat or’s false hum ilit y can be grat ing, but it is oft en difficult t o see what is t oxic about it . I n t he short run, insulat ors appear t o be helpful, even essent ial, part icularly t o t hose who don’t t rust t he CEO. The problem is t hat over t im e, insulat ors underm ine t he very aut horit y of t he leader t hey are seem ingly t rying t o prot ect . Senior execut ives learn t hat t o get anyt hing subst ant ive done, t hey m ust go t hrough t he insulat ing confidant , who quickly com es t o be seen as t he real power behind t he t hrone. This arrangem ent has t wo problem s. First , because t he insulat or’s form al power inadequat ely reflect s her influence, she is oft en largely unaccount able for her act ions. Second and m ore crucial, insulat ors feed t he CEO filt ered inform at ion about t he organizat ion; as a result , t he CEO becom es dangerously cut off from t he grass root s. Jay St ephens was a CEO whose personalit y cried out for an insulat or. Aft er a successful academ ic career in engineering, he was t apped t o t ake over t he research operat ions of Pant reon, a large energy com pany. St ephens had a reput at ion for being brilliant but im possible, and his vicious t irades and abrasive personalit y were legendary. Aft er m aking several im port ant discoveries t hat had saved t he firm billions of dollars, St ephens becam e t he dark- horse candidat e for CEO. When t he board chose him as t he new leader, he quickly replaced t he old head of HR wit h Louisa At t wood, a j unior HR m anager who had helped him when he first j oined Pant reon. I t soon becam e clear t o senior m anagem ent t hat At t wood was also being prom ot ed t o t he role of CEO confidant . Whenever he felt t he urge, St ephens would call At t wood for lengt hy conversat ions—som et im es in t he m iddle of t he night . Frequent ly, t hese t alks were opport unit ies for St ephens t o vent his frust rat ions and t o disparage whom ever he felt had disappoint ed or bet rayed him . At t wood spent m ost of her t im e list ening and som e occasionally offering t o int ervene in t hese int erpersonal conflict s. She also saw her int eract ions wit h St ephens as opport unit ies t o solidify her increasingly powerful role in t heir relat ionship.

Se n ior e x e cu t ive s le a r n t h a t t o ge t a n yt h in g su bst a n t ive don e , t h e y m u st go t h r ou gh t h e in su la t in g con fida n t , w h o qu ick ly com e s t o be se e n a s t h e r e a l pow e r be h in d t h e t h r on e . At t wood had a privileged relat ionship wit h St ephens in t hat she was t he only m em ber of t he senior m anagem ent t eam who escaped t he CEO’s at t acks. I n no sm all part , At t wood was chosen for t his role because, as head of HR, she was out of t he line of com pet it ion t o succeed St ephens. But she was also chosen because of her int uit ive abilit y t o t em per t he CEO’s personalit y. At t wood learned, over t im e, t o filt er virt ually every significant corporat e init iat ive or com m unicat ion t hat cam e from St ephens. She edit ed all his m em os, coached him on board present at ions, and frequent ly st epped in t o do dam age cont rol aft er St ephens had displayed his t rue colors. One of t he inside j okes at Pant reon was t hat in her previous life, At t wood m ust have been a UN int erpret er. Not t hat she was im part ial. Senior execut ives who learned t o m anage St ephens by going t hrough At t wood were dism ayed when she inj ect ed her own perspect ives int o t heir com m unicat ions. During St ephens’s t enure as CEO of Pant reon, t he com pany’s t radit ion of engineering innovat ion began a gradual but clear decline, and it s m arket ing effort s also slowed. Sales fell flat . Not by accident , t he boardroom becam e m ore fiercely cont ent ious t han ever, in part because of all t he unspoken t ension around St ephens’s behavior and t he unacknowledged effort s t o m anage around it . Several key execut ives left t he organizat ion out of frust rat ion at having an insulat ed and unreachable CEO who forced

t hem t o go t hrough a t hird part y. Because of St ephens’s relent less abrasiveness, At t wood cont inued t o shield him from t he organizat ion—even m anaging t o port ray herself as a long- suffering m art yr in t he process. While St ephens never direct ly acknowledged his dependence on At t wood, he rewarded her wit h generous bonuses and opt ion grant s, which t he rest of t he m anagem ent t eam resent ed deeply. When St ephens finally ret ired—aft er what m any out side observers viewed as a m ixed record at Pant reon’s helm —At t wood sought early ret irem ent and spent a year t raveling, ost ensibly t o recover from her em ot ionally deplet ing role as a kind of cont ainer of t oxic behavior. But from t he organizat ion’s perspect ive, it was good riddance. The execut ives forced t o depend on At t wood had com e t o deeply resent her power and her barely disguised need for cont rol. This all- t oo- com m on form of CEO–confidant relat ionship occurs in businesses of all t ypes and sizes. I t m ay be sym pt om at ic of t he ever- increasing com plexit y of m odern corporat e life, as well as of t he inadequat e screening of pot ent ial CEOs. Leaders who don’t know how t o express anger or crit icism const ruct ively, or who inadvert ent ly m ake provocat ive, dem eaning st at em ent s t o t heir direct report s, probably need som e insulat ion t o preserve t heir role and st at ure. The challenge is prevent ing t hat insulat ion from suffocat ing CEOs and t heir t op m anagem ent t eam m em bers. You a n d M e Aga in st t h e W or ld, Su ck e r I nsulat ors and reflect ors m ay lack t he self- knowledge t o serve t he CEO well, but t hey are not unet hical. The sam e cannot be said of our t hird confidant t ype, t he usurper. Usurpers are dangerous not only t o t he CEO but also t o t he organizat ion as a whole. They are sociopat hs who should be shown t he door as soon as possible. I t ’s im port ant , t hough, t o do t his in a way t hat saves face for t he exploit ed CEO, who m ay, like Rasput in’s czar, com e crashing down along wit h his dangerous confidant . Usurpers are deliberat ely schem ing and am bit ious. Whet her at work or in t heir personal lives, usurpers only last long enough in relat ionships t o get t heir needs m et . When t hey feel t hat people are no longer grat ifying t heir desires, usurpers will abrupt ly end t he relat ionship. Usurpers clearly t reat ot hers badly, and t hey are frequent ly self- dest ruct ive as well. Not surprisingly, t hey oft en have long hist ories of im pulsivit y, as well as subst ance abuse or illegal behavior. And alt hough wom en do act as usurpers, t hese ext rem es of behavior are m ore com m only associat ed wit h m ales. The m aj orit y of usurping confidant s I have observed have been m en. Unlike t he insulat or, t he successful usurper does not want t o em power anyone else: He want s t he power for him self. Quit e oft en, t he usurper act ually aspires t o be t he CEO. One of t he best lit erary exam ples of a usurper is Shakespeare’s I ago, who m ast erfully m anipulat ed Ot hello t o kill Ot hello’s own beloved Desdem ona. As Shakespeare underst ood so well, leaders oft en fall prey t o t hese wicked confidant s because t he usurper is usually a brilliant observer and, t herefore, m anipulat or of t he CEO’s personalit y. Usurpers have an uncanny abilit y t o find a leader’s Achilles’ heel and t o exploit it rut hlessly. I n clinical t erm s, usurpers show varying degrees of sociopat hic behavior, which—while not com m onplace—cert ainly occurs in business and in societ y at large. Of course, t o m ake it up t o an organizat ion’s highest levels, usurping confidant s m ust also be t alent ed, product ive, and charism at ic. When t hey are, t heir bad behavior can go unnot iced for quit e a while, so long as t hey have t heir boss’s prot ect ion.

CEOs a r e j u st a s com plicit in t h e de st r u ct ive r e la t ion sh ip a s t h e con fida n t s. I n m a n y w a ys, t h e y a r e m or e r e spon sible be ca u se t h e y’r e t h e on e s w h o n e e d t h e r e la t ion sh ip m ost . Consider Chris Wolm an and Tony Miller. Wolm an had led a golden life. Blessed wit h good looks and a winning personalit y, he cam e from a t ight - knit fam ily t hat had all t he right social connect ions. He prepped at Exet er before going on t o Princet on and t hen t o Harvard Business School, where he graduat ed as a Baker Scholar. Aft er a decade in invest m ent banking, Wolm an decided t o st art his own hedge fund. Miller, Wolm an’s B- school classm at e, was also ext rem ely bright , but his life had been m uch t ougher t han Wolm an’s. The child of an abusive fat her and an alcoholic m ot her, Miller grew up in t he inner cit y and went t o a local st at e college. Twice divorced, Miller was const ant ly st ruggling t o com pensat e for his hum ble beginnings. Exposed from an early age t o lying and st ealing, he developed a spot t y conscience. As a result , Miller had a lot of bravado and no sham e. But he had a t errific head for num bers—which was a t alent t hat Wolm an was quick t o recognize when he hired Miller t o be his CFO as soon as

t he posit ion cam e open. From t he st art , Miller m ade alm ost superhum an effort s t o win Wolm an over. He showered his boss wit h at t ent ion, all t he while subvert ing ot hers’ effort s t o gain it . When ot her execut ives t ried t o have a word wit h Wolm an at a com pany ret reat , for exam ple, Miller was never m ore t han a st ep away. But given his rare abilit y t o m anipulat e people, Miller was also able t o m odulat e his behavior in such a way t hat it did not im m ediat ely alienat e his colleagues. Not surprisingly, when Wolm an experienced a m aj or success, it was Miller who t hrew t he part y. I t was also Miller who m ade sure t hat t here was plent y of cocaine available for t hose so inclined. Alt hough Miller unct uously insinuat ed him self int o Wolm an’s kit chen cabinet , he was also int ensely envious of his boss and sought const ant ly t o find ways t o use t he CEO for his own gain. On several occasions, and wit hout Wolm an’s direct knowledge, Miller m ade insider t rades using inform at ion obt ained from his boss. And while he pret ended t o Wolm an’s face t o be one of his closest friends since t heir MBA days, Miller showed lit t le regard for Wolm an as a person. For exam ple, Miller didn’t go t o t he funeral of Wolm an’s fat her, who had been chronically ill. By t hen, Wolm an was beginning t o feel exploit ed by his t oxic confidant , but his dependency on Miller led Wolm an t o rat ionalize his confidant ’s flaws ( or inconsist encies) . To quest ion Miller at t his point would have forced Wolm an t o quest ion him self; unfort unat ely, he wasn’t prepared t o do so unt il his confidant ’s behavior becam e even m ore egregious. I f it ’s clear t hat Miller was benefit ing from t he relat ionship, it t akes a lit t le digging t o underst and what was in it for Wolm an. I n part , he enj oyed Miller’s insouciance and envied his apparent freedom . All his life, Wolm an had been deeply risk averse, but he derived im m ense vicarious pleasure from wat ching Miller gam ble on everyt hing from his personal finances t o his social life, where he was a renowned wom anizer and m an- about t own. For his part , Miller repeat edly encouraged Wolm an t o open up about personal m at t ers as he never had t o his m ore convent ional friends. As a result , Wolm an increasingly began t o feel t hat Miller was one of t he few people wit h whom he could really t alk. Of course, Miller was t he m ost dangerous of all Wolm an’s int im at es because he inst illed in his boss a belief t hat everyone was out t o get him . By consist ent ly urging Wolm an t o quest ion ot her people’s m ot ives, Miller also deflect ed at t ent ion from his own. Miller last ed j ust t wo years at Wolm an’s com pany. I nevit ably, t he t wo m en began t o clash as Miller’s bid for power becam e m ore and m ore blat ant . When Wolm an refused t o st ep aside, Miller left abrupt ly t o st art his own firm . Wit hin a few years, Miller was indict ed for securit ies violat ions. Unfort unat ely, Wolm an could only see in ret rospect how seriously he had exposed him self. Be com in g t h e M e sse n ge r Once people realize t hat t he CEO and his confidant are harm ing t he com pany, t hey have t o face t he great er challenge of doing som et hing about it . Dest ruct ive confidant s are usually not very recept ive t o crit icism , even if t hey are aware t hat t he relat ionship is problem at ic for t he organizat ion. And in t he m aj orit y of cases, confidant s are oblivious t o how pat hological t he relat ionship has becom e. They m ay feel t hey have been act ing in t he CEO’s best int erest s all along. For t hese reasons, t oxic confidant s should not be vilified or scapegoat ed. This will only serve t o get t heir backs up. Training and educat ing t he confidant can help. Well- int ent ioned senior execut ives and ot hers who find t hem selves in t his role oft en have no t raining: They have t o rely on int uit ion, high et hical st andards, and good j udgm ent . Yet t he confidant ’s role involves m aneuvering in t he sam e m urky wat ers t hat psychoanalyst s generally navigat e over t he course of t heir daily work. Educat ing confidant s about t he inevit able st orm s would help prevent som e of t hem from blowing off course. I t rain confidant s by speaking wit h t hem about t heir det ailed int eract ions wit h t he CEO, helping t hem gain great er obj ect ivit y about t he nat ure of t he relat ionship and how t he CEO is using t hem . Consult ant s t rained in int erpersonal dynam ics—psychoanalyst s, for inst ance—can serve as supervisors, or confidant s, t o t he confidant s. But in m y experience, t raining confidant s has only lim it ed value. I have never encount ered a fully rehabilit at ed t oxic confidant . The only sure way t o avoid dest ruct ive CEO–confidant relat ionships is for t he CEO t o st ep back and dispassionat ely analyze t he relat ionship and his role in it . As we’ve seen, CEOs are j ust as com plicit in t he dest ruct ive relat ionship as t he confidant s. I n m any ways, t hey are m ore responsible because t hey’re t he ones who need t he relat ionship m ost . The t rouble is, CEOs have a hard t im e wit h t his kind of int rospect ion. Think about it . We all find it difficult t o st ep back from relat ionships and ask, “ What did I do wrong?” I t is part icularly difficult for

CEOs because t he business world frowns on adm issions of personal weakness. Many leaders view int rospect ion as dangerous t o t he goals of corporat e leadership, in which t he capacit y t o t ake decisive act ion is key. To get a CEO t o reevaluat e his confidant , som eone has t o break t he news t o him t hat t here are problem s. Alt hough senior m anagers are quit e close t o t he act ion, and t herefore subj ect t o t heir own need t o deny or dist ort t hese dest ruct ive relat ionships, t hey likely have m ore obj ect ivit y t han t he prim ary players. The m essenger has t o be som eone t he CEO t rust s and respect s, som eone who can speak openly and direct ly t o t he leader wit hout fear of ret ribut ion. This could be anot her execut ive who could describe t o t he CEO, bot h in personal and organizat ional t erm s, what has been observed. Anot her opt ion is for a senior board m em ber or a sm all subcom m it t ee of t he board t o t ake t he lead. I n som e cases, an ext ernal coach or consult ant can m ost easily deliver t he m essage. I f, however, t he t oxic confidant has also been a coach, t he int erpersonal dynam ics can becom e com plicat ed. Whoever bears t he bad news needs t o do so wit h a generous spirit , because how t he feedback is given will largely det erm ine how well it is received. Most CEOs will find feedback couched in t erm s of consequences t o t he organizat ion m uch m ore palat able t han at t acks on t heir personalit y or j udgm ent . Of course, a cert ain am ount of resist ance is nat ural and predict able, and m ost CEOs will st ill find t he discussion ext rem ely uncom fort able. But t he m ore enlight ened ones will be able t o use t he inform at ion product ively rat her t han dism iss it defensively. The CEO m ay even have a reasonable explanat ion, which could change t he board’s opinion. The explanat ion m ay include inform at ion t hat sheds light on t he dependency, such as expert ise on t he part of t he confidant t hat m akes him seem indispensable. At t he very least , t he CEO should t hink hard about t he feedback and give serious considerat ion t o m aking som e difficult changes. I n t he final analysis, resolving a t oxic CEO–confidant relat ionship is m uch m ore difficult t han get t ing rid of a bad adviser, because CEOs have a personal st ake in t heir confidant . I n m any cases t he link becom es so st rong t hat a com pany m ay have t o dit ch t he CEO along wit h t he confidant . The sobering realit y of dest ruct ive CEO–confidant relat ionships is t hat it t akes t wo t o t ango: The worst confidant s are drawn t o t he m ost unaware CEOs. Alt hough it is t em pt ing t o believe t hat if you get rid of t he bad confidant you will get rid of t he problem , all t oo oft en t he CEO will sim ply find anot her like- m inded confidant . Only if t he CEO can be brought t o realize t hat he was st uck in a sym biot ic relat ionship wit h his old confidant will he be likely t o find a new and bet t er one. But unless he can gain som e underst anding as t o why he chose a t oxic confidant in t he first place, he will be doom ed t o repeat t he sam e m ist ake.

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Worse Than Enem ies The CEO’s Destructive Confidant CEOs n e a r ly a lw a ys n e e d a n in t im a t e cou n se lor . Bu t u n le ss le a de r s e x a m in e t h e ir ow n m ot ive s—a n d t h ose of t h e ir con fida n t s—t h e se r e la t ion sh ips w ill a lm ost ce r t a in ly be da n ge r ou s, a n d som e t im e s e ve n ca t a st r oph ic.

by Ke r r y J. Su lk ow icz Ke r r y J. Su lk ow icz, a psychiat rist and psychoanalyst , is t he founder of t he Boswell Group and a senior fellow at Kat zenbach Part ners in New York. He advises and t eaches senior business leaders and boards about t he psychological aspect s of m anagem ent , governance, and corporat e cult ure. He can be reached at k j s@bosw e llgr ou p.com .

The CEO is oft en t he m ost isolat ed and prot ect ed em ployee in t he organizat ion. No one gives him unfilt ered inform at ion. Many people dissem ble or conceal t hings from him . Few leaders, even vet eran CEOs, can do t he j ob wit hout t alking t o som eone about t heir experiences, which is why m ost develop a close relat ionship wit h a t rust ed colleague—a person wit h whom t hey feel free t o share t heir t hought s and fears. Few leaders speak out about t hese relat ionships, perhaps because t hey don’t like acknowledging t heir dependency on ot hers. But in business and polit ics, m ost leaders rely on t he advice and opinions of a t rust ed insider: a confidant . The need for a close confidant is root ed in childhood. Every child want s t o feel close t o som eone, t o feel underst ood, cared for, and loved. While parent s ordinarily sat isfy such childhood yearnings, t hese needs are never com plet ely sat isfied. I n adolescence, we t ypically resolve t hem by developing a best friend from am ong our peer group, and we usually pick individuals of t he sam e sex. When we find ourselves in dem anding sit uat ions lat er in life, we seek sim ilar refuge wit h a fellow adult . The m ost effect ive CEOs find confidant s who com plem ent t heir st rengt hs and sharpen t heir effect iveness. Bill Gat es uses St eve Ballm er in t his way; Warren Buffet t t urns t o vice chairm an Charlie Munger. I n t he end, bot h t he CEOs and t heir organizat ions benefit from t hese relat ionships. Over t he past eight years as a consult ant t o t op m anagem ent t eam s and as a psychoanalyst who t reat s com pany leaders in privat e pract ice, I have found t hat m any CEO–confidant relat ionships funct ion very well. These confidant s serve t heir leaders and keep t he CEOs’ best int erest s at heart . They derive t heir grat ificat ion vicariously— t hrough t he help t hey provide, not for any personal gain—and are usually quit e aware of t he pot ent ial for abusing t heir access t o t he CEOs’ innerm ost secret s. Unfort unat ely, alm ost as m any confidant s end up hurt ing, underm ining, or ot herwise exploit ing CEOs when t hey are at t heir m ost vulnerable. These confidant s rarely m ake

t he headlines, but behind t he scenes t hey do enorm ous dam age t o t he CEO and t o t he organizat ion. What ’s m ore, t he leader is oft en t he last one t o know when and how t he confidant relat ionship becam e t oxic. Dangerous confidant s com e in all shapes and sizes. They are som et im es int ent ionally schem ing and deceit ful. Like Rasput in, t he craft y m anipulat or of t he Russian im perial fam ily, t hese overt ly bad confidant s have sociopat hic personalit ies: They habit ually lie and cheat t o achieve t heir aim s wit hout any apparent const raint s of conscience. Take som eone we’ll call Sanford Anderson. ( I have changed t he nam es in our exam ples t o prot ect t he privacy of t he individuals and com panies depict ed.) The CEO of a privat ely held real est at e business in t he Midwest , a com pany wort h billions, Anderson fell vict im t o j ust such a confidant . Early in his career, Anderson’s corporat e at t orney, Gregg Mayer, had saved t he firm m illions by deft ly handling a discrim inat ion lawsuit , which earned him Anderson’s undying grat it ude and respect . As t he years passed, Anderson cam e t o rely on Mayer’s advice about everyt hing from invest m ent st rat egy, archit ect ure and design, t o personnel developm ent . Alt hough Anderson was in m ost respect s a highly effect ive CEO, he had never seriously cont em plat ed t he prospect of ret iring. Anderson’s worries about ret irem ent t ook t he form of denial of his own m ort alit y. I nst ead of acknowledging his anxiet y, he m anifest ed it by plunging even m ore deeply int o work, while ignoring his fat igue and gradual loss of passion. Consequent ly, he had never set in place an adequat e succession plan. Given t he t oxic confidant t hat he was, Mayer used t he lack of succession planning as an opport unit y t o advance his own int erest s. Mayer preyed on Anderson’s anxiet ies about aging and ret irem ent by fueling his fears about whom m ight want t o wrest cont rol of his business. Rat her t han encourage Anderson t o slow down aft er he was hospit alized for chest pain, Mayer egged Anderson on in a way calculat ed t o m ake him m ore anxious and afraid. As Mayer put it t o Anderson, “ Now t hat you’ve alm ost had a heart at t ack, t he people you’re up against m ight t ry t o give you a real heart at t ack by m aking you angry.” Just as Mayer planned, his st oking of Anderson’s fears paid off handsom ely. When Anderson st epped down, he im pulsively handed t he reins of power t o Mayer. Shocked by t he announcem ent of t he new CEO, several key m em bers of t he m anagem ent t eam st orm ed out in prot est . Unfort unat ely, wit hout t he skills of t hese key players, t he com pany was soon in t rouble, and Anderson’s legacy was ruined. Dest ruct ive confidant s like Mayer are far m ore com m onplace t han we would like t o believe. But even m ore com m on, and m ore insidious, are confidant s who are convinced t hey are serving t heir CEOs well, people who can’t see t he havoc t hey wreak on t he lives of leaders and t heir organizat ions. These confidant s have blind spot s about t heir own personalit ies and capabilit ies, and lit t le awareness of t he dam age t hey can cause. I have been able t o ident ify t hree dist inct t ypes of dest ruct ive confidant s over t he course of m y work. First are reflect ors, people who m irror t he CEO, const ant ly reassuring him t hat he is t he “ fairest CEO of t hem all.” By cont rast , t he second t ype of dest ruct ive confidant , t he insulat or, buffers t he CEO from t he organizat ion, prevent ing crit ical inform at ion from get t ing out and from get t ing in. Then, as we have j ust seen in t he previous exam ple, t here is t he usurper, t he confidant who cunningly ingrat iat es him self wit h t he CEO in a desperat e bid for power. I n t he following pages, we’ll explore how t he CEO–confidant relat ionship plays out in each case and discuss ways in which CEOs can avoid t hese dest ruct ive relat ionships. As we shall see, t he t rut h is t hat m any leaders have only t hem selves t o blam e for t he confidant s t hey have.

Be for e I t 's Too La t e Sidebar R0 4 0 2 D _ A (Locat ed at t he end of t his art icle)

M ir r or , M ir r or on t h e W a ll CEOs are narcissist ic—if t hey weren’t , t hey wouldn’t be leaders. Moreover, wit hout t hat qualit y, t hey couldn’t grow t heir business or provide t he organizat ion wit h t he vision it needs. I n m y experience, CEOs wit h t he best confidant relat ionships have a healt hy dose of narcissism , and t heir confidant s provide posit ive and negat ive feedback, t hey bolst er CEOs’ flagging spirit s, and t hey encourage CEOs t o achieve balance and creat ivit y. But som e CEOs const ant ly need t o be t old wonderful t hings about t hem selves. Typically, t hese leaders are bot h grandiose and ext rem ely vulnerable t o slight s, and t hey oft en have a hard t im e hearing bad news or facing harsh realit ies. They surround t hem selves wit h yes- m en who are unwilling t o t ell t hem t he t rut h; t hese leaders also t end t o have failed m arriages, t rophy wives, or ext ram arit al affairs wit h wom en who feed t heir egos. Som e narcissist ic CEOs, such as Richard Scrushy of Healt hSout h or Dennis Kozlowski of Tyco, t urn t heir organizat ions int o elaborat e m onum ent s t o t hem selves. Unfort unat ely, t hese leaders are also prone t o select ing confidant s who cat er t o t heir fragile selfest eem . These are t he reflect ing confidant s. The reflect or int uit ively knows how t o m ake a narcissist ic CEO feel good. Alt hough all confidant s m ay do t his t o som e ext ent , reflect ors are driven by t heir own neurot ic need t o please aut horit y. That ’s usually because t hey’ve grown up wit h narcissist ic parent s who dem anded t hat t heir children m irror t hem t o an inappropriat e ext ent . These kids feel t hat t hey exist t o t ake care of t heir parent s, rat her t han t he reverse. For exam ple, children wit h depressed m ot hers t ypically feel responsible for t heir m ot hers’ happiness. I n such an environm ent , a child’s self- est eem becom es cont ingent on giving t he parent s what t hey want , rat her t han on developing an aut onom ous personalit y. One confidant t old m e t hat t he first t hing he did each m orning wit h his m ot her, a form er act ress, was t o scrut inize her face t o see if she was having a bad day. I f she was, he used t o t ake it as a signal t hat he needed t o find som e good news quick. As a confidant , he was equally t errified of angry out burst s on t he part of his CEO. Like ot her reflect ors, t his confidant was ext rem ely sensit ive t o t he lim it ed range of em ot ion t hat a fragile CEO could t olerat e, and he t wist ed him self int o knot s t rying t o avoid upset t ing him . I n ext rem e form s, t he CEO–confidant pair ends up creat ing it s own dist ort ed version of realit y, what is known in t he psychiat ric lit erat ure as folie à deux—or shared m adness. When shared m adness develops and ot her key execut ives see how m uch t he CEO values t he reflect or, som e m ay t ry t o becom e t he CEO’s reflect ors t hem selves. This oft en leads t o a polarizat ion of em ployees: A sm all group of em ployees fiercely defends t he CEO, while a larger group rebels against t he leader and seeks out anot her senior execut ive who serves as it s unofficial leader and t he voice of realit y.

I n e x t r e m e for m s, t h e CEO– con fida n t pa ir e n ds u p cr e a t in g it s ow n dist or t e d ve r sion of r e a lit y, or sh a r e d m a dn e ss. Consider what happened at Regal Soft ware, a developer of video gam ing t echnology. As a first - t im e CEO, Paul Rot hberg alm ost inst ant ly found him self at odds wit h t he com pany’s t alent ed soft ware developers, who resent ed his aut ocrat ic m anagem ent st yle. Rot hberg’s unreasonable expect at ions of R&D event ually creat ed a split bet ween t he organizat ion’s research and business arm s. As t he gulf widened, Rot hberg found him self

increasingly but t ing heads wit h m ost of Regal’s em ployees, and so he began t urning for int erpersonal advice t o Frank Jordan, a form er headhunt er t urned execut ive coach. Rot hberg had inst alled Jordan in an office at Regal’s headquart ers, where he spent t hree m ornings a week ost ensibly t o be available t o coach all t he senior execut ives. I n realit y, t hough, Rot hberg was his only client . Rot hberg would call Jordan t wice a day; he also m ade frequent visit s t o his office at Regal. I t soon becam e clear t o ot her em ployees how m uch t he em bat t led CEO depended on his new confidant . For his part , Jordan was seduced int o believing t hat not hing was m ore im port ant for him t o do t han t o keep t he CEO happy. He would list en int ent ly t o Rot hberg’s concerns and t hen color his own observat ions t o m at ch Rot hberg’s. To out siders, t hey looked like coconspirat ors who spent endless hours huddled in conversat ion. I ndeed, Jordan offered Rot hberg const ant reassurance t hat he was doing t he right t hing, when, in fact , Rot hberg was gravely m isguided. Consciously or not , Rot hberg and Jordan creat ed a sym biot ic relat ionship in which t hey relied alm ost ent irely on each ot her’s percept ions about what was happening at Regal. Rot hberg had looked t o Jordan t o be his eyes and ears, but t he m ore Jordan was drawn int o his privileged role, t he m ore unable he was t o accurat ely underst and t he sit uat ion unfolding around him . Unfort unat ely, Jordan supplied flawed advice, such as encouraging Rot hberg t o at t end m ore of his soft ware developers’ creat ive m eet ings, which only m ade him seem even m ore int rusive and cont rolling. At t he sam e t im e, Jordan inadvert ent ly bolst ered Rot hberg’s fundam ent ally harsh and rigid personalit y by consist ent ly praising t he CEO’s j udgm ent rat her t han offering const ruct ive crit icism . A vicious circle ensued, fueling t he polarizat ion of em ployees int o Rot hberg loyalist s or enem ies. Alt hough it isn’t always t he case t hat shared m adness bet ween a CEO and his confidant leads t o paranoia, t hese ingrained at t it udes of m ist rust and negat ivit y are easily m agnified under t hese circum st ances. Rot hberg’s naïvet é, for inst ance, was not t he only cause of Regal’s organizat ional t ensions. Deeper down, t he rift was fueled by com panywide worries about t he feasibilit y of Regal’s developing t echnology. But Rot hberg’s m isuse of his confidant brought organizat ional anxiet ies t o a crisis point . Ult im at ely, as Rot hberg’s m anipulat ions and decept ions cont inued t o escalat e, senior m anagem ent felt bet rayed, and Rot hberg was oust ed. For his part , Jordan had squandered his reput at ion as an independent expert . Lingering suspicions and resent m ent s prevent ed him from funct ioning effect ively as an out side consult ant , and he, t oo, was event ually forced out . You N e e d M e , a n d D on ’t For ge t I t ! While t he reflect or inadvert ent ly j oins wit h t he CEO in creat ing a shared, dist ort ed view of realit y, t he insulat or t ries t o serve as a m ediat or bet ween an ill- suit ed CEO and his organizat ion. CEOs who need insulat ors t end t o be abrasive or abusive leaders. These arrogant leaders oft en deny t he negat ive im pact of t heir personalit y on t hose around t hem . They t hought lessly push away t heir best people, m ake im pulsive business decisions, alienat e large const it uencies wit hin t he com pany, and poison m orale. These leaders quickly find t hem selves at odds wit h t heir subordinat es, senior execut ives, and boards because of t heir lack of em ot ional int elligence. And whet her t hey are quiet ly offput t ing or openly host ile, t hese leaders rarely feel concerned about , or able t o, change t heir int erpersonal st yle. To com pensat e, t hese abrasive CEOs seek insulat ors, people whom t hey believe can t ranslat e t heir poorly com m unicat ed ideas int o language t heir organizat ions can underst and. They need people willing t o int ercede when t hey m ake self- dest ruct ive m oves. Like t he m ot her of a child abused by his fat her, t he insulat or is const ant ly

apologizing t o t he organizat ion on t he CEO’s behalf: “ He didn’t m ean it .” The insulat or is also m uch like t he enabler—t o borrow t he language of Alcoholics Anonym ous—who m akes excuses for t he alcoholic. I nsulat ors have som e special charact erist ics. Many have passive personalit ies and need t o be rescuers. Wom en in senior m anagem ent posit ions are cert ainly not all insulat ors, but , for reasons t hat st ill have not been sufficient ly researched, m ost insulat ors t urn out t o be wom en. And alt hough t hey t ypically harbor no am bit ions t o be CEOs t hem selves, insulat ors crave cont rol over bot h t he leader and t he organizat ion. That cont rast s wit h reflect ors, who unconsciously t ry t o cont rol leaders by pleasing t hem . Thus, while insulat ors can be quit e m anipulat ive, t hey posit ion t heir behavior t o appear as t hough t hey are doing an alt ruist ic service for t heir bosses and com panies. The insulat or’s false hum ilit y can be grat ing, but it is oft en difficult t o see what is t oxic about it . I n t he short run, insulat ors appear t o be helpful, even essent ial, part icularly t o t hose who don’t t rust t he CEO. The problem is t hat over t im e, insulat ors underm ine t he very aut horit y of t he leader t hey are seem ingly t rying t o prot ect . Senior execut ives learn t hat t o get anyt hing subst ant ive done, t hey m ust go t hrough t he insulat ing confidant , who quickly com es t o be seen as t he real power behind t he t hrone. This arrangem ent has t wo problem s. First , because t he insulat or’s form al power inadequat ely reflect s her influence, she is oft en largely unaccount able for her act ions. Second and m ore crucial, insulat ors feed t he CEO filt ered inform at ion about t he organizat ion; as a result , t he CEO becom es dangerously cut off from t he grass root s. Jay St ephens was a CEO whose personalit y cried out for an insulat or. Aft er a successful academ ic career in engineering, he was t apped t o t ake over t he research operat ions of Pant reon, a large energy com pany. St ephens had a reput at ion for being brilliant but im possible, and his vicious t irades and abrasive personalit y were legendary. Aft er m aking several im port ant discoveries t hat had saved t he firm billions of dollars, St ephens becam e t he dark- horse candidat e for CEO. When t he board chose him as t he new leader, he quickly replaced t he old head of HR wit h Louisa At t wood, a j unior HR m anager who had helped him when he first j oined Pant reon. I t soon becam e clear t o senior m anagem ent t hat At t wood was also being prom ot ed t o t he role of CEO confidant . Whenever he felt t he urge, St ephens would call At t wood for lengt hy conversat ions—som et im es in t he m iddle of t he night . Frequent ly, t hese t alks were opport unit ies for St ephens t o vent his frust rat ions and t o disparage whom ever he felt had disappoint ed or bet rayed him . At t wood spent m ost of her t im e list ening and som e occasionally offering t o int ervene in t hese int erpersonal conflict s. She also saw her int eract ions wit h St ephens as opport unit ies t o solidify her increasingly powerful role in t heir relat ionship.

Se n ior e x e cu t ive s le a r n t h a t t o ge t a n yt h in g su bst a n t ive don e , t h e y m u st go t h r ou gh t h e in su la t in g con fida n t , w h o qu ick ly com e s t o be se e n a s t h e r e a l pow e r be h in d t h e t h r on e . At t wood had a privileged relat ionship wit h St ephens in t hat she was t he only m em ber of t he senior m anagem ent t eam who escaped t he CEO’s at t acks. I n no sm all part , At t wood was chosen for t his role because, as head of HR, she was out of t he line of com pet it ion t o succeed St ephens. But she was also chosen because of her int uit ive abilit y t o t em per t he CEO’s personalit y. At t wood learned, over t im e, t o filt er virt ually every significant corporat e init iat ive or com m unicat ion t hat cam e from St ephens. She edit ed all his m em os, coached him on board present at ions, and frequent ly st epped in t o do dam age cont rol aft er St ephens had displayed his t rue colors. One of t he inside j okes at Pant reon

was t hat in her previous life, At t wood m ust have been a UN int erpret er. Not t hat she was im part ial. Senior execut ives who learned t o m anage St ephens by going t hrough At t wood were dism ayed when she inj ect ed her own perspect ives int o t heir com m unicat ions. During St ephens’s t enure as CEO of Pant reon, t he com pany’s t radit ion of engineering innovat ion began a gradual but clear decline, and it s m arket ing effort s also slowed. Sales fell flat . Not by accident , t he boardroom becam e m ore fiercely cont ent ious t han ever, in part because of all t he unspoken t ension around St ephens’s behavior and t he unacknowledged effort s t o m anage around it . Several key execut ives left t he organizat ion out of frust rat ion at having an insulat ed and unreachable CEO who forced t hem t o go t hrough a t hird part y. Because of St ephens’s relent less abrasiveness, At t wood cont inued t o shield him from t he organizat ion—even m anaging t o port ray herself as a long- suffering m art yr in t he process. While St ephens never direct ly acknowledged his dependence on At t wood, he rewarded her wit h generous bonuses and opt ion grant s, which t he rest of t he m anagem ent t eam resent ed deeply. When St ephens finally ret ired—aft er what m any out side observers viewed as a m ixed record at Pant reon’s helm —At t wood sought early ret irem ent and spent a year t raveling, ost ensibly t o recover from her em ot ionally deplet ing role as a kind of cont ainer of t oxic behavior. But from t he organizat ion’s perspect ive, it was good riddance. The execut ives forced t o depend on At t wood had com e t o deeply resent her power and her barely disguised need for cont rol. This all- t oo- com m on form of CEO–confidant relat ionship occurs in businesses of all t ypes and sizes. I t m ay be sym pt om at ic of t he ever- increasing com plexit y of m odern corporat e life, as well as of t he inadequat e screening of pot ent ial CEOs. Leaders who don’t know how t o express anger or crit icism const ruct ively, or who inadvert ent ly m ake provocat ive, dem eaning st at em ent s t o t heir direct report s, probably need som e insulat ion t o preserve t heir role and st at ure. The challenge is prevent ing t hat insulat ion from suffocat ing CEOs and t heir t op m anagem ent t eam m em bers. You a n d M e Aga in st t h e W or ld, Su ck e r I nsulat ors and reflect ors m ay lack t he self- knowledge t o serve t he CEO well, but t hey are not unet hical. The sam e cannot be said of our t hird confidant t ype, t he usurper. Usurpers are dangerous not only t o t he CEO but also t o t he organizat ion as a whole. They are sociopat hs who should be shown t he door as soon as possible. I t ’s im port ant , t hough, t o do t his in a way t hat saves face for t he exploit ed CEO, who m ay, like Rasput in’s czar, com e crashing down along wit h his dangerous confidant . Usurpers are deliberat ely schem ing and am bit ious. Whet her at work or in t heir personal lives, usurpers only last long enough in relat ionships t o get t heir needs m et . When t hey feel t hat people are no longer grat ifying t heir desires, usurpers will abrupt ly end t he relat ionship. Usurpers clearly t reat ot hers badly, and t hey are frequent ly self- dest ruct ive as well. Not surprisingly, t hey oft en have long hist ories of im pulsivit y, as well as subst ance abuse or illegal behavior. And alt hough wom en do act as usurpers, t hese ext rem es of behavior are m ore com m only associat ed wit h m ales. The m aj orit y of usurping confidant s I have observed have been m en. Unlike t he insulat or, t he successful usurper does not want t o em power anyone else: He want s t he power for him self. Quit e oft en, t he usurper act ually aspires t o be t he CEO. One of t he best lit erary exam ples of a usurper is Shakespeare’s I ago, who m ast erfully m anipulat ed Ot hello t o kill Ot hello’s own beloved Desdem ona. As Shakespeare underst ood so well, leaders oft en fall prey t o t hese wicked confidant s because t he usurper is usually a brilliant observer and, t herefore, m anipulat or of t he CEO’s

personalit y. Usurpers have an uncanny abilit y t o find a leader’s Achilles’ heel and t o exploit it rut hlessly. I n clinical t erm s, usurpers show varying degrees of sociopat hic behavior, which—while not com m onplace—cert ainly occurs in business and in societ y at large. Of course, t o m ake it up t o an organizat ion’s highest levels, usurping confidant s m ust also be t alent ed, product ive, and charism at ic. When t hey are, t heir bad behavior can go unnot iced for quit e a while, so long as t hey have t heir boss’s prot ect ion.

CEOs a r e j u st a s com plicit in t h e de st r u ct ive r e la t ion sh ip a s t h e con fida n t s. I n m a n y w a ys, t h e y a r e m or e r e spon sible be ca u se t h e y’r e t h e on e s w h o n e e d t h e r e la t ion sh ip m ost . Consider Chris Wolm an and Tony Miller. Wolm an had led a golden life. Blessed wit h good looks and a winning personalit y, he cam e from a t ight - knit fam ily t hat had all t he right social connect ions. He prepped at Exet er before going on t o Princet on and t hen t o Harvard Business School, where he graduat ed as a Baker Scholar. Aft er a decade in invest m ent banking, Wolm an decided t o st art his own hedge fund. Miller, Wolm an’s B- school classm at e, was also ext rem ely bright , but his life had been m uch t ougher t han Wolm an’s. The child of an abusive fat her and an alcoholic m ot her, Miller grew up in t he inner cit y and went t o a local st at e college. Twice divorced, Miller was const ant ly st ruggling t o com pensat e for his hum ble beginnings. Exposed from an early age t o lying and st ealing, he developed a spot t y conscience. As a result , Miller had a lot of bravado and no sham e. But he had a t errific head for num bers—which was a t alent t hat Wolm an was quick t o recognize when he hired Miller t o be his CFO as soon as t he posit ion cam e open. From t he st art , Miller m ade alm ost superhum an effort s t o win Wolm an over. He showered his boss wit h at t ent ion, all t he while subvert ing ot hers’ effort s t o gain it . When ot her execut ives t ried t o have a word wit h Wolm an at a com pany ret reat , for exam ple, Miller was never m ore t han a st ep away. But given his rare abilit y t o m anipulat e people, Miller was also able t o m odulat e his behavior in such a way t hat it did not im m ediat ely alienat e his colleagues. Not surprisingly, when Wolm an experienced a m aj or success, it was Miller who t hrew t he part y. I t was also Miller who m ade sure t hat t here was plent y of cocaine available for t hose so inclined. Alt hough Miller unct uously insinuat ed him self int o Wolm an’s kit chen cabinet , he was also int ensely envious of his boss and sought const ant ly t o find ways t o use t he CEO for his own gain. On several occasions, and wit hout Wolm an’s direct knowledge, Miller m ade insider t rades using inform at ion obt ained from his boss. And while he pret ended t o Wolm an’s face t o be one of his closest friends since t heir MBA days, Miller showed lit t le regard for Wolm an as a person. For exam ple, Miller didn’t go t o t he funeral of Wolm an’s fat her, who had been chronically ill. By t hen, Wolm an was beginning t o feel exploit ed by his t oxic confidant , but his dependency on Miller led Wolm an t o rat ionalize his confidant ’s flaws ( or inconsist encies) . To quest ion Miller at t his point would have forced Wolm an t o quest ion him self; unfort unat ely, he wasn’t prepared t o do so unt il his confidant ’s behavior becam e even m ore egregious. I f it ’s clear t hat Miller was benefit ing from t he relat ionship, it t akes a lit t le digging t o underst and what was in it for Wolm an. I n part , he enj oyed Miller’s insouciance and envied his apparent freedom . All his life, Wolm an had been deeply risk averse, but he derived im m ense vicarious pleasure from wat ching Miller gam ble on everyt hing from his personal finances t o his social life, where he was a renowned wom anizer and m an- about t own. For his part , Miller repeat edly encouraged Wolm an t o open up about personal m at t ers as he never had t o his m ore convent ional friends. As a result , Wolm an

increasingly began t o feel t hat Miller was one of t he few people wit h whom he could really t alk. Of course, Miller was t he m ost dangerous of all Wolm an’s int im at es because he inst illed in his boss a belief t hat everyone was out t o get him . By consist ent ly urging Wolm an t o quest ion ot her people’s m ot ives, Miller also deflect ed at t ent ion from his own. Miller last ed j ust t wo years at Wolm an’s com pany. I nevit ably, t he t wo m en began t o clash as Miller’s bid for power becam e m ore and m ore blat ant . When Wolm an refused t o st ep aside, Miller left abrupt ly t o st art his own firm . Wit hin a few years, Miller was indict ed for securit ies violat ions. Unfort unat ely, Wolm an could only see in ret rospect how seriously he had exposed him self. Be com in g t h e M e sse n ge r Once people realize t hat t he CEO and his confidant are harm ing t he com pany, t hey have t o face t he great er challenge of doing som et hing about it . Dest ruct ive confidant s are usually not very recept ive t o crit icism , even if t hey are aware t hat t he relat ionship is problem at ic for t he organizat ion. And in t he m aj orit y of cases, confidant s are oblivious t o how pat hological t he relat ionship has becom e. They m ay feel t hey have been act ing in t he CEO’s best int erest s all along. For t hese reasons, t oxic confidant s should not be vilified or scapegoat ed. This will only serve t o get t heir backs up. Training and educat ing t he confidant can help. Well- int ent ioned senior execut ives and ot hers who find t hem selves in t his role oft en have no t raining: They have t o rely on int uit ion, high et hical st andards, and good j udgm ent . Yet t he confidant ’s role involves m aneuvering in t he sam e m urky wat ers t hat psychoanalyst s generally navigat e over t he course of t heir daily work. Educat ing confidant s about t he inevit able st orm s would help prevent som e of t hem from blowing off course. I t rain confidant s by speaking wit h t hem about t heir det ailed int eract ions wit h t he CEO, helping t hem gain great er obj ect ivit y about t he nat ure of t he relat ionship and how t he CEO is using t hem . Consult ant s t rained in int erpersonal dynam ics—psychoanalyst s, for inst ance—can serve as supervisors, or confidant s, t o t he confidant s. But in m y experience, t raining confidant s has only lim it ed value. I have never encount ered a fully rehabilit at ed t oxic confidant . The only sure way t o avoid dest ruct ive CEO–confidant relat ionships is for t he CEO t o st ep back and dispassionat ely analyze t he relat ionship and his role in it . As we’ve seen, CEOs are j ust as com plicit in t he dest ruct ive relat ionship as t he confidant s. I n m any ways, t hey are m ore responsible because t hey’re t he ones who need t he relat ionship m ost . The t rouble is, CEOs have a hard t im e wit h t his kind of int rospect ion. Think about it . We all find it difficult t o st ep back from relat ionships and ask, “ What did I do wrong?” I t is part icularly difficult for CEOs because t he business world frowns on adm issions of personal weakness. Many leaders view int rospect ion as dangerous t o t he goals of corporat e leadership, in which t he capacit y t o t ake decisive act ion is key. To get a CEO t o reevaluat e his confidant , som eone has t o break t he news t o him t hat t here are problem s. Alt hough senior m anagers are quit e close t o t he act ion, and t herefore subj ect t o t heir own need t o deny or dist ort t hese dest ruct ive relat ionships, t hey likely have m ore obj ect ivit y t han t he prim ary players. The m essenger has t o be som eone t he CEO t rust s and respect s, som eone who can speak openly and direct ly t o t he leader wit hout fear of ret ribut ion. This could be anot her execut ive who could describe t o t he CEO, bot h in personal and organizat ional t erm s, what has been observed. Anot her opt ion is for a senior board m em ber or a sm all subcom m it t ee of t he board t o t ake t he lead. I n som e cases, an ext ernal coach or consult ant can m ost easily deliver t he m essage. I f, however, t he t oxic confidant has also been a coach, t he int erpersonal

dynam ics can becom e com plicat ed. Whoever bears t he bad news needs t o do so wit h a generous spirit , because how t he feedback is given will largely det erm ine how well it is received. Most CEOs will find feedback couched in t erm s of consequences t o t he organizat ion m uch m ore palat able t han at t acks on t heir personalit y or j udgm ent . Of course, a cert ain am ount of resist ance is nat ural and predict able, and m ost CEOs will st ill find t he discussion ext rem ely uncom fort able. But t he m ore enlight ened ones will be able t o use t he inform at ion product ively rat her t han dism iss it defensively. The CEO m ay even have a reasonable explanat ion, which could change t he board’s opinion. The explanat ion m ay include inform at ion t hat sheds light on t he dependency, such as expert ise on t he part of t he confidant t hat m akes him seem indispensable. At t he very least , t he CEO should t hink hard about t he feedback and give serious considerat ion t o m aking som e difficult changes. I n t he final analysis, resolving a t oxic CEO–confidant relat ionship is m uch m ore difficult t han get t ing rid of a bad adviser, because CEOs have a personal st ake in t heir confidant . I n m any cases t he link becom es so st rong t hat a com pany m ay have t o dit ch t he CEO along wit h t he confidant . The sobering realit y of dest ruct ive CEO–confidant relat ionships is t hat it t akes t wo t o t ango: The worst confidant s are drawn t o t he m ost unaware CEOs. Alt hough it is t em pt ing t o believe t hat if you get rid of t he bad confidant you will get rid of t he problem , all t oo oft en t he CEO will sim ply find anot her like- m inded confidant . Only if t he CEO can be brought t o realize t hat he was st uck in a sym biot ic relat ionship wit h his old confidant will he be likely t o find a new and bet t er one. But unless he can gain som e underst anding as t o why he chose a t oxic confidant in t he first place, he will be doom ed t o repeat t he sam e m ist ake.

Reprint Num ber R0402D

Be for e I t 's Too La t e

Sidebar R0 4 0 2 D _ A

Because of t he unconscious fact ors t hat det erm ine whom you choose as your confidant , you m ay oft en be t he last one t o know if yours is t oxic. To find out if you are get t ing t rapped in a poisonous relat ionship wit h a t rust ed adviser, look for t hese warning signs: • Pe ople com pla in t h a t you ’r e in a cce ssible . Your own difficult personalit y m ay explain why you need a confidant , but choosing som eone who dist ances you from your organizat ion is a poor solut ion. Address head- on t he issues t hat surround your int erpersonal st yle. • You fe e l t h a t n o on e bu t you r con fida n t u n de r st a n ds you . While it ’s nat ural for a leader t o have a few t rust ed advisers, a CEO who overvalues t he opinions of a part icular individual is in danger of get t ing int o m urky wat ers, m aybe even of court ing disast er. Overreliance on a single person suggest s he has undue influence, which should raise a red flag. Seek out ot her people who “ get ” you. • You r con fida n t discou r a ge s you fr om se e k in g ot h e r cou n se l. When your t rust ed adviser want s t o m ake sure nobody else get s close t o you, he m ay be t rying t o wrest power from you. Such confidant s prey on your dist rust and suspicion and are am ong t he m ost insidious confidant s of all. Show t hem t he door quickly. • You r a dvise r st a r t s t o ca ll t h e sh ot s. Confidant s who t ell you what t o do are

behaving like t hey are t he real power, and not necessarily j ust t he power behind t he t hrone. Svengali- like confidant s are dangerous t o you and your reput at ion. Find som eone who can genuinely list en t o you and can offer you const ruct ive crit icism . • You r con fida n t pr a ise s you t o t h e h e a ve n s. I f your confidant lays it on t hick and is afraid t o t ell you t he unvarnished t rut h, you m ay already have t rouble on your hands. Look around for som eone who doesn’t feel com pelled t o inflat e your self- est eem .

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Fe br u a r y 2 0 0 4

Th e H BR List Br e a k t h r ou gh I de a s for 2 0 0 4 Reprint R0402A > | Read Ent ire Art icle

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HBR’s edit ors searched for t he best new ideas relat ed t o t he pract ice of m anagem ent and cam e up wit h a collect ion t hat is as diverse as it is provocat ive. The 2004 HBR List includes em ergent concept s from biology, net work science, m anagem ent t heory, and m ore. A few highlight s: Rich a r d Flor ida wonders why U.S. societ y doesn’t seem t o be t hinking about t he flow of people as t he key t o Am erica’s advant age in t he “ creat ive age.” D ia n e L. Cou t u describes how t he revolut ion in neurosciences will have a m aj or im pact on business. Cla yt on M . Ch r ist e n se n explains t he law of conservat ion of at t ract ive profit s: When at t ract ive profit s disappear at one st age in t he value chain because a product becom es com m odit ized, t he opport unit y t o earn at t ract ive profit s wit h propriet ary product s usually em erges at an adj acent st age. Joe l Ku r t zm a n asks where t he “ st upid m oney” is headed. Robe r t Su t t on report s on t he em ergence of “ no asshole” —excuse t he crude language—rules. D a n ie l H . Pin k explains why t he m ast er of fine art s is t he new MBA. Jose ph Fu lle r asks whet her t he useful life of t he public com pany is over. H e r m in ia I ba r r a describes how com panies can get t he m ost out of m anagers ret urning from leadership- developm ent program s. I qba l Qu a dir suggest s a radical fix for t he t hird world’s t rade problem s: Get t he World Bank t o lend t o rich count ries so t hat t here are resources for ret raining workers in dying indust ries. Cla y Sh ir k y describes how t echnology will allow com panies t o get vast am ount s of realt im e dat a from social net works. Th om a s A. St e w a r t shows how j okes const it ut e a t rove of inform at ion about what ’s really going on in a com pany. And Ra y Ku r zw e il m akes t he case t hat while high- t ech st ocks have seesawed, t echnology has m arched st eadily forward—and will cont inue t o do so.

H BR Ca se St u dy Give M y Re gr e t s t o W a ll St r e e t

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I t ’s been only four years since First Rangeway Consult ing went public, but t o CEO Kennet h Charles, it seem s like a lifet im e. I n t he grand old days of it s I PO, t he com pany couldn’t grow fast enough t o m eet cust om er dem and; t op t alent answered t he siren call of it s opt ions; and t he owners gleefully wat ched t heir wealt h escalat e along wit h t he st ock. Post - bubble, First Rangeway’s st ock is down 80% from it s peak value, pot ent ial hires are wary, and t he com pany feels beleaguered by Sarbanes- Oxley and SEC requirem ent s. I n addit ion, Kennet h worries t hat pressure t o m ake quart erly result s is com prom ising his relat ionship wit h cust om ers. And did we m ent ion t hat he loat hes analyst calls? That said, First Rangeway’s st ock price is on t he m end, and t here are som e ext rem ely t em pt ing opport unit ies on t he horizon t hat will require a heap of capit al. Rangeway’s CFO speculat es t hat t hese opport unit ies could m ean as m uch as 30% growt h over t he next several years.

Com in g in M a r ch 2 0 0 4 Re cla im You r Job Sum ant ra Ghoshal and Heike Bruch I t ’s Tim e t o Re t ir e Re t ir e m e n t Ken Dycht wald, Tam ara Erickson, and Bob Morison St r a t e gy a s Ecology Marco I ansit i and Roy Levien

H a r va r d Bu sin e ss Re vie w On Poin t a r t icle s a n d colle ct ion s Many art icles are available in H a r va r d Bu sin e ss Re vie w e n h a n ce d On Poin t e dit ion s, which include a sum m ary of key point s t o help you quickly absorb and apply t he concept s, t he full- t ext art icle, and a bibliography t o guide furt her explorat ion. Specially priced H a r va r d Bu sin e ss Re vie w On Poin t colle ct ion s include t hree OnPoint art icles wit h an overview com paring different perspect ives on a t opic.

Should First Rangeway rem ain public or go privat e? What are t he advant ages and disadvant ages of each alt ernat ive? Four expert s weigh in on t his fict ional case st udy: Tom Copeland, t he form er chair of UCLA’s finance depart m ent and m anaging direct or of corporat e finance at Monit or Group; Chan Suh, t he cofounder, CEO, and chairm an of Agency.com ; Ed Nusbaum , t he CEO of Grant Thornt on; and John J. Mulherin, t he president and CEO of t he Ziegler Com panies.

Fe a t u r e s M e a su r in g t h e St r a t e gic Re a din e ss of I n t a n gible Asse t s

Robert S. Kaplan and David P. Nort on Reprint R0402C; Harvard Business Review OnPoint edit ion 5887; Harvard Business Review OnPoint collect ion 5933 “ Focusing Your Organizat ion on St rat egy—wit h t he Balanced Scorecard, 2nd Edit ion” > | Read Ent ire Art icle > | Purchase Reprint > | Purchase Harvard Business Review OnPoint edit ion > | Purchase Harvard Business Review OnPoint collect ion

Measuring t he value of int angible asset s such as com pany cult ure, knowledge m anagem ent syst em s, and em ployees’ skills is t he holy grail of account ing. Execut ives know t hat t hese int angibles, being hard t o im it at e, are powerful sources of sust ainable com pet it ive advant age. I f m anagers could m easure t hem , t hey could m anage t he com pany’s com pet it ive posit ion m ore easily and accurat ely. I n one sense, t he challenge is im possible. I nt angible asset s are unlike financial and physical resources in t hat t heir value depends on how well t hey serve t he organizat ions t hat own t hem . But while t his prevent s an independent valuat ion of int angible asset s, it also point s t o an alt oget her different approach for assessing t heir wort h. I n t his art icle, t he creat ors of t he Balanced Scorecard draw on it s t ools and fram ework— in part icular, a t ool called t he st rat egy m ap—t o present a st ep- by- st ep way t o det erm ine “ st rat egic readiness,” which refers t o t he alignm ent of an organizat ion’s hum an, inform at ion, and organizat ion capit al wit h it s st rat egy. I n t he m et hod t he aut hors describe, t he firm ident ifies t he processes m ost crit ical t o creat ing and delivering it s value proposit ion and det erm ines t he hum an, inform at ion, and organizat ion capit al t he processes require. Som e m anagers shy away from m easuring int angible asset s because t hey seem so subj ect ive. But by using t he syst em at ic approaches set out in t his art icle, com panies can now m easure what t hey want , rat her t han want ing only what t hey can current ly m easure.

W or se Th a n En e m ie s: Th e CEO’s D e st r u ct ive Con fida n t

Kerry J. Sulkowicz Reprint R0402D > | Read Ent ire Art icle

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The CEO is oft en t he m ost isolat ed and prot ect ed em ployee in t he organizat ion. Few leaders, even vet eran CEOs, can do t he j ob wit hout t alking t o som eone about t heir experiences, which is why m ost develop a close relat ionship wit h a t rust ed colleague, a confidant t o whom t hey can t ell t heir t hought s and fears. I n his work wit h leaders, t he aut hor has found t hat m any CEO–confidant relat ionships funct ion very well. The confidant s keep t heir leaders’ best int erest s at heart . They derive t heir grat ificat ion vicariously, t hrough t he help t hey provide rat her t han t hrough any personal gain, and t hey are usually quit e aware t hat a person in t heir posit ion can pot ent ially abuse access t o t he CEO’s innerm ost secret s. Unfort unat ely, alm ost as m any confidant s will end up hurt ing, underm ining, or ot herwise exploit ing CEOs when t he execut ives are at t heir m ost vulnerable. These confidant s rarely m ake t he headlines, but behind t he scenes t hey do enorm ous dam age t o t he CEO and t o t he organizat ion as a whole. What ’s m ore, t he leader is oft en t he last one t o know when or how t he confidant relat ionship becam e t oxic. The aut hor has ident ified t hree t ypes of dest ruct ive confidant s. The reflect or m irrors t he CEO, const ant ly reassuring him t hat he is t he “ fairest CEO of t hem all.” The insulat or buffers t he CEO from t he organizat ion, prevent ing crit ical inform at ion from get t ing in or out . And t he usurper cunningly ingrat iat es him self wit h t he CEO in a desperat e bid for power. This art icle explores how t he CEO–confidant relat ionship plays out wit h each t ype

of adviser and suggest s ways CEOs can avoid t hese dest ruct ive relat ionships.

Ge t t in g I T Righ t

Charlie S. Feld and Donna B. St oddard Reprint R0402E; Harvard Business Review OnPoint edit ion 5905; Harvard Business Review OnPoint collect ion 5895 “ Making I T Mat t er” > | Read Ent ire Art icle > | Purchase Reprint > | Purchase Harvard Business Review OnPoint edit ion > | Purchase Harvard Business Review OnPoint collect ion

Modern inform at ion t echnology st art ed four decades ago, yet in m ost m aj or corporat ions, I T rem ains an expensive m ess. This is part ly because t he relat ively young and rapidly evolving pract ice of I T cont inues t o be eit her grossly m isunderst ood or blindly ignored by t op m anagem ent . Senior m anagers know how t o t alk about finances because t hey all speak or underst and t he language of profit and loss and balance sheet s. But when t hey allow t hem selves t o be befuddled by I T discussions or bedazzled by t hreelet t er acronym s, t hey shirk a crit ical responsibilit y. I n t his art icle, t he aut hors say a syst em at ic approach t o underst anding and execut ing I T can and should be im plem ent ed, and it should be organized along t hree int erconnect ed principles: A Long- Term I T Renewal Plan Linked t o Corporat e St rat egy. Such a plan focuses t he ent ire I T group on t he com pany’s overarching goals during a m ult iyear period, m akes appropriat e invest m ent s direct ed t oward cut t ing cost s in t he near t erm , and generat es a det ailed blueprint for long- t erm syst em s rej uvenat ion and value creat ion. A Sim plified, Unifying Corporat e Technology Plat form . I nst ead of relying on vert ically orient ed dat a silos t hat serve individual corporat e unit s ( HR, account ing, and so on) , com panies adopt a clean, horizont ally orient ed archit ect ure designed t o serve t he whole organizat ion. A Highly Funct ional, Perform ance- Orient ed I T Organizat ion. I nst ead of funct ioning as if it were different from t he rest of t he firm or as a loose confederat ion of t ribes, t he I T depart m ent works as a t eam and operat es according t o corporat e perform ance st andards. Get t ing I T right dem ands t he sam e inspired leadership and superb execut ion t hat ot her part s of t he business require. By st icking t o t he t hree cent ral principles out lined in t his art icle, com panies can t urn I T from a quagm ire int o a powerful weapon.

H ow t o H a ve a n H on e st Con ve r sa t ion Abou t You r Bu sin e ss St r a t e gy

Michael Beer and Russell A. Eisenst at Reprint R0402F; Harvard Business Review OnPoint edit ion 5925; Harvard Business Review OnPoint collect ion 5917 “ Honest y I s t he Best St rat egy” > | Read Ent ire Art icle > | Purchase Reprint > | Purchase Harvard Business Review OnPoint edit ion > | Purchase Harvard Business Review OnPoint collect ion

Too m any organizat ions descend int o underperform ance because t hey can’t confront t he painful gap bet ween t heir st rat egy and t he realit y of t heir capabilit ies, t heir behaviors, and t heir m arket s. That ’s because senior m anagers don’t know how t o engage in t rut hful conversat ions about t he problem s t hat t hreat en t he business—and because lower- level m anagers are afraid t o speak up. These fact ors lie behind m any failures t o im plem ent st rat egy. I ndeed, t he dynam ics in alm ost any organizat ion are such t hat it ’s ext rem ely difficult for senior people t o hear t he unfilt ered t rut h from m anagers lower down. Beer and Eisenst at present t he m et hodology t hey’ve developed for get t ing t he t rut h about an organizat ion’s problem s ( and t he t rut h is always em bedded wit hin t he organizat ion) ont o t he t able in a way t hat allows senior m anagem ent t o do som et hing useful wit h it . By assem bling a t ask force of t he m ost effect ive m anagers t o collect dat a about st rat egic and organizat ional problem s, t he senior t eam sends a clear m essage t hat it is serious about uncovering t he t rut h. Task force m em bers present t heir findings t o t he senior t eam in t he form of a discussion. This conversat ion needs t o m ove back and fort h bet ween advocacy and inquiry; it has t o be about t he issues t hat m at t er m ost ; it has t o be collect ive and public; it has t o allow em ployees t o be honest wit hout risking t heir j obs; and it has t o be st ruct ured. This direct feedback from a handful of t heir best people m oves senior t eam s t o m ake changes t hey ot herwise m ight not have. Senior t eam s t hat have engaged in t his process have m ade dram at ic changes in how t heir businesses are organized and m anaged—and in t heir bot t om - line result s. Success

t hat begins wit h honest conversat ions beget s fut ure conversat ions t hat furt her im prove perform ance.

La u n ch in g a W or ld- Cla ss Join t Ve n t u r e

Jam es Bam ford, David Ernst , and David G. Fubini Reprint R0402G > | Read Ent ire Art icle

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More t han 5,000 j oint vent ures, and m any m ore cont ract ual alliances, have been launched worldwide in t he past five years. Com panies are realizing t hat JVs and alliances can be lucrat ive vehicles for developing new product s, m oving int o new m arket s, and increasing revenues. The problem is, t he success rat e for JVs and alliances is on a par wit h t hat for m ergers and acquisit ions—which is t o say not very good. The aut hors, all McKinsey consult ant s, argue t hat JV success rem ains elusive for m ost com panies because t hey don’t pay enough at t ent ion t o launch planning and execut ion. Most com panies are highly disciplined about int egrat ing t he com panies t hey t arget t hrough M&A, but t hey rarely com m it sufficient resources t o launching sim ilarly sized j oint vent ures or alliances. As a result , t he parent com panies experience st rat egic conflict s, governance gridlock, and m issed operat ional synergies. Oft en, t hey walk away from t he deal. The launch phase begins wit h t he parent com panies’ signing of a m em orandum of underst anding and cont inues t hrough t he first 100 days of t he JV or alliance’s operat ion. During t his period, it ’s crit ical for t he parent s t o convene a t eam dedicat ed t o exposing inherent t ensions early. Specifically, t he launch t eam m ust t ackle four basic challenges. First , build and m aint ain st rat egic alignm ent across t he separat e corporat e ent it ies, each of which has it s own goals, m arket pressures, and shareholders. Second, creat e a shared governance syst em for t he t wo parent com panies. Third, m anage t he econom ic int erdependencies bet ween t he corporat e parent s and t he JV. And fourt h, build a cohesive, high- perform ing organizat ion ( t he JV or alliance) —not a sim ple t ask, since m ost m anagers com e from , will want t o ret urn t o, and m ay even hold sim ult aneous posit ions in t he parent com panies. Using real- world exam ples, t he aut hors offer t heir suggest ions for m eet ing t hese challenges.

M a n a gin g You r se lf Su cce ss Th a t La st s

Laura Nash and Howard St evenson Reprint R0402H > | Read Ent ire Art icle

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Pursuing success can feel like shoot ing in a landscape of m oving t arget s: Every t im e you hit one, five m ore pop up from anot her direct ion. We are under const ant pressure t o do m ore, get m ore, be m ore. But is t hat really what success is all about ? Laura Nash and Howard St evenson int erviewed and surveyed hundreds of professionals t o st udy t he assum pt ions behind t he idea of success. They t hen built a pract ical fram ework for a new way of t hinking about success—a way t hat leads t o personal and professional fulfillm ent inst ead of feelings of anxiet y and st ress. The aut hors’ research uncovered four irreducible com ponent s of success: happiness ( feelings of pleasure or cont ent m ent about your life) ; achievem ent ( accom plishm ent s t hat com pare favorably against sim ilar goals ot hers have st rived for) ; significance ( t he sense t hat you’ve m ade a posit ive im pact on people you care about ) ; and legacy ( a way t o est ablish your values or accom plishm ent s so as t o help ot hers find fut ure success) . Unless you hit on all four cat egories wit h regularit y, any one win will fail t o sat isfy. People who achieve last ing success, t he aut hors learned, t end t o rely on a kaleidoscope st rat egy t o st ruct ure t heir aspirat ions and act ivit ies. This art icle explains how t o build your own kaleidoscope fram ework. The process can help you det erm ine which t asks you should undert ake t o fulfill t he different com ponent s of success and uncover areas where t here are holes. I t can also help you m ake bet t er choices about what you spend your t im e on and t he level of energy you put int o each act ivit y. According t o Nash and St evenson, successful people who experience real sat isfact ion achieve it t hrough t he deliberat e im posit ion of lim it s. Cult ivat ing your sense of “ j ust enough” can help you set reachable goals, t ally up m ore t rue wins, and enj oy last ing

success.

Be st Pr a ct ice Tu r n in g Ga dflie s in t o Allie s

Michael Yazij i Reprint R0402J > | Read Ent ire Art icle

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Mult inat ional com panies are t he driving force behind globalizat ion, but t hey are also t he source of m any of it s m ost painful consequences, including currency crises, cross- border pollut ion, and overfishing. These problem s rem ain unsolved because t hey are beyond t he scope of individual governm ent s; t ransnat ional organizat ions have also proved unequal t o t he t ask. Nonprofit , nongovernm ent al organizat ions have leaped int o t he breach. To force policy changes, t hey have seized on all form s of m odern persuasion t o influence public sent im ent t oward global t raders, m anufact urers, and invest ors. By part nering wit h NGOs inst ead of opposing t hem , com panies can avoid cost ly conflict and can use NGOs’ asset s t o gain com pet it ive advant age. So far, however, m ost com panies have proved ill equipped t o deal wit h NGOs. Large com panies know how t o com pet e on t he basis of product at t ribut es and price. But NGO at t acks focus on product ion m et hods and t heir spillover effect s, which are oft en noneconom ic. Sim ilarly, NGOs are able t o convert com panies’ st andard com pet it ive st rengt hs—such as size and wide m arket awareness of t heir brands—int o liabilit ies. That ’s because t he wealt hier and bet t er known a com pany is, t he j uicier t he t arget it m akes. Em boldened by t heir successes, NGOs cont inue t o t ake on new causes. By part nering wit h NGOs inst ead of reflexively opposing t hem , com panies could draw on NGOs’ key st rengt hs—legit im acy, awareness of social forces, dist inct net works, and specialized t echnical expert ise—which m ost com panies could use m ore of. And wit h NGOs as allies and guides, com panies should also be able t o accelerat e innovat ion, foresee shift s in dem and, shape legislat ion affect ing t hem , and, in effect , set t echnical and regulat ory st andards for t heir indust ries.

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Breakthrough Ideas for 2004

> | Ex e cu t ive Su m m a r y

Fr om t h e fie lds of biology, n e u r oscie n ce , e con om ics, posit ive psych ology, n e t w or k scie n ce , m a r k e t in g, m a n a ge m e n t t h e or y, a n d m or e —h e r e a r e t h e e m e r ge n t ide a s t h a t a r e ch a n gin g t h e w a y bu sin e ss is don e .

There’s not hing like a new idea t o shake t hings up. Last fall, when we got t o work rounding up 20 provocat ive new ideas in m anagem ent , som e people said it was t oo am bit ious. I t was a t im e of hunkering down, t hey said, not a t im e of im agining. Managers and t hose who st udy effect ive m anagem ent were focused on t he basics, t he blocking and t ackling of cost cut t ing and cont rollership. I f anyt hing, t hey claim ed, we would discover a kind of ant i- int ellect ualism out t here. They couldn’t have been m ore wrong. When we put out t he call for new ideas, we were inundat ed. Som e of t he best concept s seem t o have sprung from t he m uck of t he past few years. We have Rakesh Khurana plot t ing t he redem pt ion of m anagem ent , Chris Meyer proposing a new m odel for ensuring securit y, and Bob Sut t on im ploring us not t o t olerat e bad people—even if t hey bring in good m oney. Ot her writ ers pick up on prom ising t rends in t echnology, neuroscience, sociology, and psychology. Taken t oget her, t hese 20 ideas cover a lot of ground. Turn t he page, and you’ll see in no uncert ain t erm s t hat far from lying fallow, t he ground in t he business world is as fert ile as ever.

1 . You Got a Lice n se t o Ru n Th a t Com pa n y?

Rakesh Khurana Managem ent t oday cannot properly be called a “ profession.” But given it s dom inance in Am erican societ y, it m ust becom e one—and t hat m eans m anagers m ust serve a higher purpose t han j ust m axim izing shareholder ret urns. 2 . N o M on opoly on Cr e a t ivit y

Richard Florida The power behind t he U.S. econom y is it s “ creat ive class” —scient ist s, art ist s, engineers, t echnologist s, and designers, t o nam e a few. The creat ive sect or account s for nearly half of Am erican wage incom e, but t he Unit ed St at es is suddenly in danger of losing it s edge. 3 . Th e St r a t e gy I s t h e St r u ct u r e

Adrian Slywot zky and David Nadler Tradit ionally, st rat egy has dict at ed st ruct ure. But if you let st rat egy and organizat ional change evolve in parallel and influence each ot her, your com pany will have a bet t er chance of keeping up wit h it s m arket s. 4 . Bu sin e ss on t h e Br a in

Diane L. Cout u Advances in drug developm ent , genet ic m apping, and neuroim aging t echnologies have shift ed our at t ent ion from t he m ind t o t he brain. How will t he new hard- science approach affect leadership, cooperat ion, and ot her dim ensions of business?

5 . Th e La w of Con se r va t ion of At t r a ct ive Pr ofit s

Clayt on M. Christ ensen When a product st art s t o becom e a com m odit y, a decom m odit izat ion process is oft en t riggered som ewhere else in t he value chain. Managers m ight t herefore be able t o predict which act ivit ies will generat e t he m ost at t ract ive profit s in t he fut ure. 6 . Th e For ce Be h in d Gigli

Joel Kurt zm an I nvest ors are always scram bling t o find out where t he “ sm art m oney” is going. I t ’s also im port ant , whet her you’re an invest or or a business m anager, t o know where t he st upid m oney is going. 7 . M or e Tr ou ble Th a n Th e y’r e W or t h

Robert Sut t on When it com es t o hiring and prom ot ing people, a sim ple but revolut ionary idea is t aking hold in t he ranks of m anagem ent : t he “ no asshole” rule. Organizat ions j ust shouldn’t t olerat e t he fear and loat hing t hese j erks leave in t heir wake. 8 . Fin a lly, M a r k e t Re se a r ch You Ca n Use

Duncan Sim est er Execut ives com plain t hat t heir com panies’ invest m ent s in m arket research are rarely put t o good use. Market researchers can m ake t heir work a lot m ore valuable by focusing on long- t erm field research and ot her m et hods t hat can lead direct ly t o opt im ized profit s for organizat ions. 9 . Th e M FA I s t h e N e w M BA

Daniel H. Pink Businesses have com e t o realize t hat t he only way t o different iat e t heir offerings is t o m ake t hem beaut iful and em ot ionally com pelling—which explains why an art s degree is now such a hot credent ial in m anagem ent . Meanwhile, MBA graduat es are becom ing t his cent ury’s blue- collar workers: They ent ered a workforce t hat was full of prom ise only t o see t heir j obs m ove overseas. 1 0 . Re qu ie m for t h e Pu blic Cor por a t ion

Joseph Fuller The public lim it ed com pany is t he world’s m ost com m on corporat e organizat ion. But is t he useful life of t he public com pany—at least in t he form we have known it for m ore t han a cent ury—over? 1 1 . Acce n t u a t e t h e Posit ive

Bronwyn Fryer Organizat ional psychologist s have always focused on t he problem s t hat bring com panies t o t heir knees: m anagerial abuse, greed, dist rust , poor m orale, burnout , office polit ics, and so on. The new field of “ posit ive organizat ional scholarship,” creat ed in t he aft erm at h of t he Sept em ber 11, 2001, at t acks, m easures t he values and processes t hat m ake som e organizat ions inspiring places t o work. 1 2 . Biologica l Block

Chris Meyer The im m une syst em operat es on som e broad principles: ubiquit ous det ect ion capabilit y, a sophist icat ed abilit y t o discrim inat e friend from foe, and accum ulat ed learning. These fact ors const it ut e an archit ect ure for securit y t hat we can also use in societ y and business. 1 3 . H ow You Gon n a Ke e p ’Em D ow n on t h e Fa r m Aft e r Th e y’ve Se e n I n se a d?

Herm inia I barra Once your valued execut ive ret urns from an inspiring leadership program and plugs back int o t he old rout ine, t here’s a good chance you’ll lose her—unless you’ve carefully m anaged t he “ t akeoff” period before her depart ure and have a good plan for her “ reent ry.” 1 4 . You D on ’t H a ve a N a n ost r a t e gy?

Gardiner Morse Nanot echnology product s—dim e- sized com put ers and ult ralight t ext iles st ronger t han Kevlar—will cert ainly disrupt , t ransform , and creat e whole indust ries. I f you don’t already have a lookout wat ching for how and when t his new field will becom e im port ant for your business, it ’s t im e t o get one. 1 5 . Th e Loa n Ra n ge r

I qbal Quadir What is it t hat keeps rich count ries’ governm ent s from living up t o t heir rhet oric about free t rade? Lobbyist s for dying indust ries who wail about lost j obs. The World Bank should t herefore lend t o t he rich count ries so t hey can ret rain t hose workers—and be free t o pursue genuine free t rade, which will benefit everyone. 1 6 . Cosm e t ic Psych oph a r m a cology

Ellen Peebles Your em ployees now have access t o m edicat ions—like Prozac—t hat not only alleviat e depression but also alt er personalit ies in ways t hat are good for business. Will am bit ious m anagers be able t o leave well enough alone? 1 7 . W a t ch in g t h e Pa t t e r n s Em e r ge

Clay Shirky Managers m anage what t hey can see, but unt il now t hey’ve never been able t o “ see” int o t he inform al social net works t hat have always driven business. Bet t er dat a and new research are finally giving com panies a chance t o leverage real people’s int eract ions, for everyt hing from t rend spot t ing t o ident ifying int ernal expert s wit hin a depart m ent . 1 8 . La u gh t e r , t h e Be st Con su lt a n t

Thom as A. St ewart You can learn a lot about a com pany by paying at t ent ion t o it s hum or. Skit s at sales conferences, wisecracks during m eet ings, j okes in e- m ails: These const it ut e an ext raordinary t rove of inform at ion about what ’s really going on. 1 9 . W a t ch You r Ba ck

Leigh Buchanan Fear of risk can cripple a com pany’s abilit y t o com pet e aggressively. But a new fram ework for ent erprise risk m anagem ent m ay finally convince businesses t hat t hey can syst em at ically assess hazards on all front s, wit hout dam ping t heir m anagers’ ent repreneurial zeal. 2 0 . I T D oe sn ’t Sca t t e r

Ray Kurzweil I f you asked m ost people t o describe t he past decade of I T, t hey would call it boom and bust —a roller coast er ride. The realit y is t hat despit e t he st ock swings, t he burst ing bubbles, t he scandals, and t he count less ot her disappoint m ent s, t echnology has m arched sm oot hly and relent lessly ahead.

• • • Br e a k t h r ou gh I de a s for 2 0 0 4

What ’s t he best idea you’ve heard lat ely t hat ’s relat ed t o t he pract ice of m anagem ent ? HBR’s edit ors asked around, t hen put t heir heads t oget her, and t he result is t he 2004 HBR List . I t ’s a com pendium of new t hinking as diverse as it is provocat ive. Perspect ives from econom ics and sociology sit side by side wit h developm ent s in brain science and urban planning. Not es of caut ion—even cont rit ion—m ix wit h calls t o act ion. You’ll find insight s on how t o form ulat e st rat egy, spur innovat ion, spot danger, m anage risk, and get t he highest perform ance from t he people in your organizat ion. There are new findings about large- scale t rends and fresh t hought s on day- t o- day decision m aking. I f t here is a crosscurrent running t hrough t hem , it is only t his: t hat m anagers wit h open m inds and access t o new t hinking can m ake a difference, t o t he com pet it iveness of t heir organizat ions and t he well- being of t he world. Since t he beginning, HBR has sought t o present not j ust ideas, but ideas wit h im pact . Wit h t he 2004 List , we deliver a bum per crop of t hem . Consider t hem , debat e t hem , let t hem inspire your own t hinking. Then go and m ake an im pact . 1 . You Got a Lice n se t o Ru n Th a t Com pa n y? Managem ent , for a brief period in t he last cent ury, was well on it s way t o becom ing a profession. But m anagers have been ret reat ing from t hat goal for t he past 60 years, and we have an unparalleled wave of corporat e scandals in recent t im es t o show for it . What is a “ profession” ? I n ordinary parlance, t he t erm refers t o an occupat ion t hat requires a high degree of t echnical skill and com pet ence. A m ore t radit ional definit ion, however, also encom passes m ast ery of an abst ract , syst em at ic body of knowledge—and a prim ary orient at ion t oward et hical service t o societ y. I t was t hat com prehensive not ion of professionalism t hat inspired t he founders of t he Whart on School of t he Universit y of Pennsylvania, t he Tuck School at Dart m out h, and Harvard Business School—Am erica’s first business schools—in t he early years of t he t went iet h cent ury. They int ended not only t o st andardize t he product ion of m anagers for t he nat ion’s corporat ions but also t o professionalize t he occupat ion of m anagem ent it self. I f t hey had succeeded, m anagers m ight have com e t o play a role in t he businessdom inat ed societ y of t he t went iet h cent ury analogous t o t he role of t he clergy in preindust rial Am erica. However, t he “ professionalizat ion” proj ect lost st eam aft er World War I I . As t he dem and for t rained m anagers exploded, t he num ber of business program s rose and t heir cont ent becam e dilut ed. By 1959, bot h t he Ford Foundat ion and t he Carnegie Corporat ion had issued highly crit ical report s on t he st at e of Am erican business schools, decrying t heir purely vocat ional curricula. Bot h called for m ore em phasis on t he social and behavioral sciences and on t he use of quant it at ive m et hods. Those direct ives, along wit h t he funding provided by t he t wo foundat ions, led t o t he recruit m ent of new facult y, m any of whom were t rained in econom ics. This saw t he developm ent of m any of t he econom ic t heories t hat form t he st aple fare of MBA courses t oday. By t he t im e concept s like agency t heory and efficient - m arket t heory found t heir way int o t he classroom in t he 1980s, anot her fundam ent al shift was occurring: Managerial capit alism was giving way t o a new syst em of invest or capit alism . MBA st udent s were t aught t hat as m anagers, t hey were m erely agent s, bound by arm ’s- lengt h cont ract ual relat ionships t o a single set of const it uent s: shareholders.

An e t h ic of pu r e se lf- in t e r e st h a s r e pla ce d t h e pr ofe ssion a l e t h ics t h a t bu sin e ss sch ools on ce t r ie d t o t e a ch . What went unnot iced was t hat such a view of t he m anager’s role and responsibilit ies was ut t erly incom pat ible wit h t he t radit ional concept of professionalism . The post war at t em pt t o reform Am erican business educat ion had creat ed unint ended consequences. A Hobbesian et hic of pure self- int erest , backed by t he power of t he highly abst ract and syst em at ic “ science” of econom ics, replaced t he professional et hics t hat t he business schools had once t ried t o t each. That is part icularly t roublesom e because business execut ives are unrivaled by any ot her group in t heir cont rol over m at erial and hum an resources and t heir dom inance in Am erican societ y. What ’s m ore, execut ives have succeeded in im posing t heir values, norm s, and m et hods on older, m ore aut onom ous professions such as law and m edicine. I t is t im e t o reacquaint m anagers wit h t he concept of professionalism . Along wit h t hat should com e a fundam ent al reassessm ent of business educat ion and how well it serves

societ y’s int erest s. The Am erican business school has becom e an inst it ut ion t hat serves a very different purpose t han was originally int ended. That t ransform at ion has had a profound effect on Am erican m anagem ent ’s evolut ion t oward it s present condit ion, where it is ripe for reexam inat ion. Ra k e sh Kh u r a n a ( r k h u r a n a @h bs.e du ) is an assist ant professor at Harvard Business School in Bost on. He is writ ing a book, scheduled t o be published by Princet on Universit y Press in 2005, on m anagem ent as a profession. 2 . N o M on opoly on Cr e a t ivit y Creat ivit y is a virt ually lim it less resource: Every hum an being has creat ive pot ent ial t hat can be t urned t o valuable ends. The num ber of people doing creat ive work—t he scient ist s, engineers, t echnologist s, art ist s, and designers and t he various professionals in healt h care, finance, law, and ot her fields who m ake up t he “ creat ive class” —has increased vast ly over t he past cent ury. I n 1900, fewer t han 10% of U.S. workers were doing creat ive work. I n 1980, t hat figure was slight ly m ore t han 15% . But by 2000, t he creat ive class included alm ost a t hird of t he workforce. The creat ive sect or account s for nearly half of all wage and salary incom e in t he Unit ed St at es—$1.7 t rillion, as m uch as t he m anufact uring and service sect ors com bined. I m agine how m uch wealt h could be generat ed if t he creat ive capacit ies of t he rem aining t wo- t hirds of t he workforce were harnessed, t oo. I n t he past year I ’ve been hit by a harsh realizat ion: The Unit ed St at es, while ret aining an edge in t his regard, is far from unbeat able. I n fact , it s posit ion is m ore t enuous t han com m only t hought . For m ost of hum an hist ory, wealt h cam e from a place’s endowm ent of nat ural resources, like fert ile soil or raw m at erials. But t oday, t he key econom ic resource, creat ive people, is highly m obile. And it gravit at es t oward places wit h cert ain underlying condit ions. To achieve growt h, a region m ust have what I call t he t hree Ts: t echnology, t alent , and t olerance. So t he Creat ivit y I ndex t hat Kevin St olarick and I creat ed is based on t hree com ponent scores, each a m at t er of obj ect ive count ing. To det erm ine, for exam ple, if a place is likely t o have a cult ure of t olerance, we look at t he concent rat ions of gay, “ bohem ian,” and foreign- born people and t he degree of racial int egrat ion. The t olerance and openness im plied by t hese concent rat ions form a crit ical elem ent in a place’s abilit y t o at t ract different kinds of people and generat e new ideas. What ’s fright ening is t hat , far from cult ivat ing it s creat ive advant age, our societ y at a nat ional level seem s det erm ined t o undercut it . Today in t he Unit ed St at es, t here is considerable concern over t he out sourcing of soft ware and inform at ion t echnology j obs t o I ndia and over China’s rise as a m anufact uring power. But t he real t hreat t o our com pet it iveness lies in new rest rict ions on research, scient ific disclosure, im m igrat ion, and flows of people, because t hose lim it s are st art ing t o affect our abilit y t o at t ract creat ive and t alent ed people from around t he world. An em inent oceanographer in San Diego recent ly t old m e, “ We can’t hold a scient ific m eet ing here because we can’t get visas for people.” No one seem s t o be t hinking about t he flow of people as t he key t o our advant age in t he creat ive age. The econom ic leaders of t he fut ure will not necessarily be em erging giant s like I ndia and China. They cert ainly won’t be count ries t hat focus on being cost - effect ive cent ers for m anufact uring and basic business processing. Rat her, t hey will be t he count ries t hat are able t o at t ract creat ive people and com e up wit h next - generat ion product s and business processes as a result . Wit h I rene Tinagli, a Carnegie Mellon Universit y doct oral st udent , I recent ly com pared 14 European and Scandinavian nat ions t o t he Unit ed St at es. Sweden, Finland, Denm ark, and t he Net herlands had Creat ivit y I ndex scores t hat closely m at ched t hat of t he Unit ed St at es, and I reland is gaining quickly ( see t he exhibit “ The Creat ivit y I ndex” ) . Ot her research indicat es t hat Canada, Aust ralia, and New Zealand have built dynam ic creat ive clim at es. Toront o and Vancouver, Canada, and Sydney and Melbourne in Aust ralia com pet e very well wit h m aj or U.S. regions like Chicago and Washingt on, DC.

Leads in t he creat ive age are very easily won and lost —Aust in, Texas, and Seat t le have recent ly shot up t he Creat ivit y I ndex while Pit t sburgh and Cleveland have fallen. No one place has a preordained posit ion at t he t op of t he heap. Am ericans m ust wake up t o t he fact t hat econom ies are fluid and t hat creat ivit y is an asset t hat m ust be const ant ly cult ivat ed. Rich a r d Flor ida is t he H. John Heinz I I I Professor of Regional Econom ic Developm ent at t he Heinz School of Public Policy and Managem ent at Carnegie Mellon Universit y in Pit t sburgh. He is t he aut hor of The Rise of t he Creat ive Class ( Basic Books, 2002) . He can be cont act ed at flor ida @cm u .e du . 3 . Th e St r a t e gy I s t h e St r u ct u r e Tradit ionally, st rat egy dict at ed st ruct ure: You st art ed by defining a st rat egic goal, t hen recast your organizat ion t o serve it . But for a host of reasons, including t he ever decreasing half- life of st rat egic advant age, t his sequent ial, com part m ent alized process now seem s obsolet e. Consider t he experience of Air Liquide, t he French producer of indust rial gases, where a successful new st rat egy was act ually driven in large part by t he organizat ion’s changing st ruct ure. Air Liquide had found a way t o produce gases in sm all plant s on- sit e at cust om ers’ fact ories. I n short order, growing num bers of Air Liquide st aff were being st at ioned perm anent ly at client sit es—which put t he st aff in a posit ion t o not ice ways in which t heir com pany could help cust om ers im prove operat ing efficiency, increase out put qualit y, and reduce t he capit al requirem ent s of various processes. A com panywide reorganizat ion ( inst it ut ed for unrelat ed reasons) gave t hese on- sit e t eam s great er aut onom y, and suddenly t hey were able t o act on t he new opport unit ies. Oft en t his involved t aking on act ivit ies t hat had been m anaged by cust om ers, such as handling hazardous m at erials, t roubleshoot ing qualit y- cont rol syst em s, and m anaging invent ory. Today, t hese relat ively high- m argin services const it ut e about 25% of Air Liquide’s revenues, com pared t o 7% in 1991, before t he reorganizat ion. Wit hout t he reorganizat ion, t his pot ent new st rat egy—t he ant idot e t o t he com m odit izat ion t hat was t hreat ening Air Liquide’s product lines—would not have em erged. The form erly cent ralized hierarchy would have hindered t he field st aff from m aking decisions or even accessing inform at ion about cust om ers. When t he seeds of t his new growt h opport unit y sprout ed in part s of t he organizat ion t hat were closest t o t he

cust om er, t he ent ire organizat ion was able t o adapt and execut e well because t he precondit ions, in t he form of t he new st ruct ure, were t here t o do so. Alt hough m ism at ches of organizat ion and st rat egy are oft en obvious in hindsight , t hey are never obvious prospect ively. Team s t hat are charged wit h developing new businesses t ypically m ake overopt im ist ic proj ect ions and downplay t he difficult ies of execut ion. Think of all t he com put er hardware and soft ware firm s t hat have pursued st rat egies t o becom e com plet e I T solut ion providers. Most have failed; t hey sim ply do not have t he skills, relat ionships, m ind- set , and organizat ional st ruct ures required for a broad- based, “ syst em s- agnost ic” approach. At t he very least , t his suggest s t hat , if an organizat ion is not prepared t o execut e st rat egy A, it ’s bet t er t o choose st rat egy B, perhaps as an int erim opt ion. But we would go furt her t o suggest t hat st rat egy and organizat ional change should happen in parallel and t hey should be allowed t o influence each ot her. A new m odel, concurrent ent erprise design, m ight be t he best hope of enabling organizat ions t o m ove at least as fast as t heir m arket s. Adr ia n Slyw ot zk y is a Bost on- based m anaging direct or of Mercer Managem ent Consult ing. D a vid N a dle r is t he CEO and chairm an of Mercer Delt a Organizat ional Consult ing and is based in New York. 4 . Bu sin e ss on t h e Br a in Psychoanalysis—t he t alking cure—was t he m ost popular form of m ent al t herapy for m ost of t he t went iet h cent ury, for good reason. For a st art , analysis seem ed a far m ore hum ane t reat m ent t han it s prim it ive alt ernat ives such as lobot om y or early form s of elect ric shock. More dram at ically, however, t he horrors of Hit ler’s Germ any, where m onst ers like Josef Mengele conduct ed cruel experim ent s on Jews, hom osexuals, Gypsies, and t he m ent ally ill, out raged people and generat ed st iff resist ance t o any form of experim ent at ion involving hum an beings. But t he 1960s t urned t he world on it s head. Newly discovered m edicat ions m ade huge st rides against debilit at ing illnesses such as m anic depression and schizophrenia. The asylum s em pt ied out , and m ent al illness finally cam e t o be underst ood as largely a funct ion of genet ic inherit ance and chem ical im balance. By t he 1990s, scient ist s all over t he world were unit ed in t he Hum an Genom e Proj ect , a m assive effort t o m ap all t he hum an genes, m aking t hem accessible for st udy—and m anipulat ion.

M RI t e ch n ology a lr e a dy h e lps r e se a r ch e r s de t e r m in e h ow pot e n t ia l cu st om e r s r e spon d t o pr odu ct s a n d a dve r t ise m e n t s. Drugs and genes are not t he only scient ific changes t hat are t urning our at t ent ion t oward t he brain and away from t he m ind. One of t he great est m edical breakt hroughs of t he past few decades has been t he developm ent of powerful im aging t ools such as MRI and PET scans, which have m ade it possible for scient ist s t o “ see” t he brain in act ion. For inst ance, scient ist s can now m ap how different st im uli affect different part s of t he brain, which gives t hem powerful inform at ion about what people t hink and feel and rem em ber. For t heir cont ribut ions in invent ing t he MRI , Am erican Paul C. Laut erburg and Brit on Sir Pet er Mansfield were awarded t he 2003 Nobel Prize in m edicine last Oct ober. I nevit ably, t he revolut ion in t he neurosciences will have a m aj or im pact on business. I n m arket ing, for exam ple, MRI t echnology already helps researchers det erm ine how pot ent ial cust om ers respond t o product s and advert isem ent s. But t he im pact of t he new changes in science doesn’t end t here. Brain research will inevit ably affect ot her business subj ect s, such as leadership and cooperat ion. The field of organizat ional behavior, for exam ple, owes a great debt t o t he t radit ional social sciences of psychology and psychoanalysis. Many of t he t ools m anagers have grown up wit h—such as our t heories of m ot ivat ion and personalit y—are root ed in t hese social sciences. But t he new “ hard” sciences will inevit ably bring new t ools and solut ions t o challenge—and m aybe even t o replace—t hese old favorit es. As Harvard Business School professor Nit in Nohria, coaut hor wit h Paul R. Lawrence of Driven: How Hum an Nat ure Shapes Our Choices, put s it : “ I t hink t he social- science lem on has been squeezed dry. There m ay be som e drops of j uice left , but t he fruit of t he neurosciences has barely begun t o be t ouched. Businesspeople are t urning t o t hem now because we see a m uch richer opport unit y for ourselves in t he fut ure.” D ia n e L. Cou t u ( dcou t u @h bsp.h a r va r d.e du ) is a senior edit or at HBR.

5 . Th e La w of Con se r va t ion of At t r a ct ive Pr ofit s I n m y recent book—and in an earlier HBR art icle—I explored a couple of linked ideas having t o do wit h how profit abilit y in a value chain shift s over t im e. Briefly ( and way t oo sim plist ically as a result of space const raint s here! ) , t he t hinking went som et hing like t his: • Product s are m ost profit able when t hey’re st ill not “ good enough” t o sat isfy consum ers. This is because t o m ake t hem perform ance com pet it ive, engineers m ust use int erdependent , propriet ary archit ect ures. Use of such archit ect ures m akes product different iat ion st raight forward, because each com pany pieces it s part s t oget her in a unique way. • Once a product ’s perform ance is good enough, com panies m ust change t he way t hey com pet e. The innovat ions for which cust om ers will pay prem ium prices becom e speed t o m arket and t he abilit y responsively and convenient ly t o give cust om ers exact ly what t hey need, when t hey need it . To com pet e in t his way, com panies are forced t o em ploy m odular archit ect ures for product s. Modularit y causes t he product s t o becom e undifferent iable and com m odit ized. At t ract ive profit s don’t evaporat e, however… • They m ove elsewhere in t he value chain, oft en t o subsyst em s from which t he m odular product is assem bled. This is because it is im provem ent s in t he subsyst em s, rat her t han t he m odular product ’s archit ect ure, t hat drive t he assem bler’s abilit y t o m ove upm arket t oward m ore at t ract ive profit m argins. Hence, t he subsyst em s becom e decom m odit ized and at t ract ively profit able. My sense is t hat t hese shift s are m ore t han coincident al; I suspect t hat when m ost product s st art t o becom e com m odit ized or m odularized, t his t urn of event s kick- st art s a decom m odit izat ion process som ewhere else in t he value chain. As a general rule, one side of an int erface in t he value chain m ust be m odular t o allow t he side t hat ’s not yet good enough t o be opt im ized. My friend Chris Rowen, CEO of Tensilica, suggest ed t hat we call t his phenom enon t he law of conservat ion of at t ract ive profit s. ( He was playing off t he law of conservat ion of energy, which st at es t hat energy cannot be creat ed or dest royed, t hough it m ay be changed from one form t o anot her.) Translat ed int o m anagerial t erm s, t he law goes som et hing like t his: When at t ract ive profit s disappear at one st age in t he value chain because a product becom es m odular and com m odit ized, t he opport unit y t o earn at t ract ive profit s wit h propriet ary product s will usually em erge at an adj acent st age. I f t hat ’s t he case ( and I hast en t o add t hat it ’s st ill a hypot hesis) , it suggest s t hat t here is a dynam ic dim ension t o Michael Port er’s five- forces fram ework. Because t he hypot hesis suggest s t hat t he locat ion in t he value chain where at t ract ive profit s can be earned shift s in a predict able way over t im e, com panies t hat out source act ivit ies t hat are not t oday’s core com pet encies m ay well m iss t he boat . This “ law” m ight help m anagers foresee which act ivit ies in t he value chain will generat e t he m ost at t ract ive profit s in t he fut ure so t hat t hey can develop or acquire com pet encies where t he m ost m oney will be.

Com pa n ie s ou t sou r cin g a ct ivit ie s t h a t a r e n ot t oda y’s cor e com pe t e n cie s m a y w e ll m iss t h e boa t . Cla yt on M . Ch r ist e n se n is t he Robert and Jane Cizik Professor of Business Adm inist rat ion at Harvard Business School. His m ost recent book is The I nnovat or’s Solut ion: Creat ing and Sust aining Successful Growt h ( Harvard Business School Press, 2003) . He can be reached at cch r ist e n se n @h bs.e du . 6 . Th e For ce Be h in d Gigli I nvest ors are always scram bling t o find out where t he “ sm art m oney” is going. But it ’s also im port ant , whet her you’re an invest or or a business m anager, t o know where t he st upid m oney is going. I t ’s a well- est ablished phenom enon t hat ’s gone t oo long wit hout a nam e: Com panies, indust ries, and even whole sect ors have a st upid- m oney problem when t hey are suddenly flooded wit h capit al seeking irrat ional rat es of ret urn or wit h invest ors whose int erest s run cont rary t o t hose of a norm ally operat ing m arket . Sounds like a nice problem t o have? I t ’s not , because it prom pt s com panies t o alt er t heir business m odels in ways t hat are not sust ainable over t he long haul.

“St u pid m on e y” pr om pt s com pa n ie s t o a lt e r t h e ir bu sin e ss m ode ls in w a ys t h a t a r e n ot su st a in a ble . Think of t he 1970s, when t ens of billions of dollars of st upid m oney flowed from t he OPEC count ries t o t he m oney cent er banks in London and New York. From t here it was lent t o Argent ina, Brazil, Mexico, Nigeria, I ndonesia, and ot her developing count ries for infrast ruct ure proj ect s such as power plant s, bridges, and dam s. But when t his episode ended, t ens of billions of st upid- m oney loans could not be repaid by t he borrowers wit hout help from t he Unit ed St at es and ot her governm ent s. More t han one m oney cent er bank t eet ered on t he brink of insolvency. Or t hink of t he 1980s, when billions of dollars of st upid m oney flowed int o t he U.S. real est at e m arket via t he savings and loan indust ry. Large spreads bet ween t he int erest paid on deposit s and t hat received on m ort gages—as well as plent iful capit al from t he j unk bond m arket —creat ed incent ives for S&Ls t o shovel m oney out t he door. Condom inium s, count ry clubs, hot els, offices, and shopping cent ers wit h dubious econom ic value were built . Though som e m oney was m ade by “ flipping” t hese proj ect s and from fees charged by developers and financial inst it ut ions, m any billions were lost when t he st upid m oney fled t he scene. The savings and loan indust ry collapsed and wit h it m uch of t he com m ercial real est at e m arket . I t t ook nearly a decade for t he governm ent t o clean up t he m ess. Right now, t here’s at least one place where t he st upid m oney is sloshing around like San Pellegrino: Hollywood. The problem t here is t hat a large proport ion of m ovies have been financed wit h m oney from European t ax shelt ers—which creat e larger ret urns for t heir invest ors when a proj ect loses m oney t han when it m akes m oney. According t o indust ry est im at es, Germ any, t he largest source of t hese funds, provided Hollywood wit h about $2.3 billion in t ax shelt er m oney in 2002, m ore t han 20% of Hollywood’s overall invest m ent budget . A few indust ries have adapt ed t o living wit h st upid m oney t he way cert ain species of fish have adapt ed t o living near deep- wat er sulfur chim neys. Hollywood is a perfect exam ple. Rat her t han focusing on profit s from m ovies, t he indust ry has been prodded by lossseeking capit al int o focusing on increasing cost s. St udios m ake m oney from fees from independent producers based on a percent age of a proj ect ’s product ion, dist ribut ion, and m arket ing cost s, rat her t han by relying exclusively on a film ’s revenue. I n t he fee- based m odel t hat has evolved in Hollywood, profit s are about as rare as an int erview wit h Robert DeNiro. What can m anagers do ( short of t aking t he m oney and running) t o survive t he dist ort ing effect s of st upid m oney? For Hollywood, right ing t he business m odel would m ean changing t he way t he st udios go aft er t heir m ult iple st ream s of revenue. Rat her t han produce a handful of $200 m illion blockbust er m ovies each year, t he st udios m ight do bet t er by focusing on m aking m ore, sm aller- budget m ovies. And where is t he st upid m oney going next ? Given it s predilect ion for glam our, glit z, and new ideas, I ’d say nanot echnology and t he life sciences are ripe for an infest at ion. These are fields where we’re seeing not only federal funding but also feverish invest m ent by people looking t o get in on t he next big t hing. I f it happens, we know how it will go. St upid m oney will begin by running aft er t he sect or’s Seabiscuit s and end up st alking it s nags. The sm art m oney will show up again only aft er t he inevit able downt urn, t he shakeout , and t he reform of t he business m odels. Joe l Ku r t zm a n ( Joe l.A.Ku r t zm a n @u s.pw cgloba l.com ) is t he global lead part ner for t hought leadership and innovat ion at Pricewat erhouseCoopers and president of t he Tangible Group, based in Concord, Massachuset t s. His lat est book is How t he Market s Really Work ( Crown, 2002) . 7 . M or e Tr ou ble Th a n Th e y’r e W or t h There’s a sim ple pract ice t hat can m ake an organizat ion bet t er, but while m any m anagers t alk about it , few writ e it down. They enforce “ no asshole” rules. I apologize for t he crudeness of t he t erm —you m ight prefer t o call t hem t yrant s, bullies, boors, cruel bast ards, or dest ruct ive narcissist s, and so do I , at t im es. Som e behavioral scient ist s refer t o t hem in t erm s of psychological abuse, which t hey define as “ t he sust ained display of host ile verbal and nonverbal behaviors, excluding physical cont act .” But all t hat cold precision m asks t he fear and loat hing t hese j erks leave in t heir wake. Som ehow, when I see a m ean- spirit ed person dam aging ot hers, no ot her t erm seem s quit e right .

I first encount ered an explicit rule against t hem about 15 years ago. I t was during a facult y m eet ing of m y academ ic depart m ent , and our chairm an was leading a discussion about which candidat e we should hire. A facult y m em ber proposed t hat we hire a renowned researcher from anot her school, a suggest ion t hat prom pt ed anot her t o rem ark, “ I don’t care if he won t he Nobel Prize, I don’t want any assholes ruining our group.” From t hat m om ent on, it was com plet ely legit im at e for any of us t o quest ion a hiring decision on t hose grounds. And it m ade t he depart m ent a bet t er place. Since t hen, I ’ve heard of m any organizat ions t hat use t his rule. McDerm ot t , Will & Em ery, an int ernat ional law firm wit h headquart ers in Chicago, is ( or at least was) known as a bet t er place t o work t han ot her firm s, and it has been quit e profit able in recent years. A survey from Vault , a Web- based provider of career inform at ion, report s t hat McDerm ot t has a t im e- honored no asshole rule, which holds t hat “ you’re not allowed t o yell at your secret ary or yell at each ot her” —alt hough t he survey also report s t hat t he firm has been growing so fast lat ely t hat t he rule is st art ing t o fall by t he wayside. Sim ilarly, a Phoenix- based law firm provides t his writ t en guideline t o sum m er associat es: “ At Snell & Wilm er, we also have a ‘no j erk rule,’ which m eans t hat your abilit y t o get along wit h t he ot her sum m er associat es and our at t orneys and st aff fact ors int o our ult im at e assessm ent .” And t he president of a soft ware firm t old m e a couple of m ont hs back, “ I keep rem inding everyone, ‘Make sure we don’t hire any assholes, we don’t want t o ruin t he com pany.’” All t his m ight lead you t o believe t hat t his rule bears m ainly on em ployee select ion. I t doesn’t . I t ’s a deeper st at em ent about an organizat ion’s cult ure and what kind of person survives and t hrives in it . All of us, including m e, have t hat inner asshole wait ing t o get out . The difference is t hat som e organizat ions allow people ( especially “ st ars” ) t o get away wit h abusing one person aft er anot her and even reward t hem for it . Ot hers sim ply won’t t olerat e such behavior, no m at t er how powerful or profit able t he j erk happens t o be. I rem em ber when m y daught er swit ched schools a few years back. Aft er a couple of m ont hs, she t old m e, “ I n our old school, when t hey said you had t o be nice, t hey m eant it . I n m y new school, t hey say it but don’t really m ean it .”

Som e or ga n iza t ion s a llow “st a r s” t o ge t a w a y w it h a bu sin g pe ople . Ot h e r s sim ply w on ’t t ole r a t e it . I acknowledge t hat t here is a subj ect ive elem ent t o t his rule. Cert ainly, a person can look like, or even be, a sinner t o one person and a saint t o anot her. But I ’ve found t wo useful t est s. The first is: Aft er t alking t o t he alleged asshole, do people consist ent ly feel oppressed and belit t led by t he person, and, especially, do t hey feel dram at ically worse about t hem selves? The second is: Does t he person consist ent ly direct his or her venom at people seen as powerless and rarely, if ever, at people who are powerful? I ndeed, t he difference bet ween t he ways a person t reat s t he powerless and t he powerful is as good a m easure of hum an charact er as I know. I ’ll close wit h an odd t wist : I t m ight be even bet t er if a com pany could im plem ent a “ one asshole” rule. Research on bot h deviance and norm violat ions shows t hat if one exam ple of m isbehavior is kept on display—and is seen t o be rej ect ed, shunned, and punished— everyone else is m ore conscient ious about adhering t o writ t en and unwrit t en rules. I ’ve never heard of a com pany t hat t ried t o hire a t oken asshole. But I ’ve worked wit h a few organizat ions t hat accident ally hired and even prom ot ed one or t wo, who t hen unwit t ingly showed everyone else what not t o do. The problem is t hat people can hide t heir dark sides unt il t hey are hired, or even are prom ot ed t o part ner or t enured professor. So by aim ing t o hire no assholes at all, you j ust m ight get t he one or t wo you need. Robe r t Su t t on is a professor of m anagem ent science and engineering at St anford Universit y’s School of Engineering in California. He is also t he aut hor of Weird I deas That Work: 11½ Pract ices for Prom ot ing, Managing, and Su st aining I nnovat ion ( Free Press, 2002) . He can be reached at bobsu t @st a n for d.e du . 8 . Fin a lly, M a r k e t Re se a r ch You Ca n Use Execut ives oft en com plain t hat t he findings generat ed by t heir com panies’ invest m ent s in m arket research are rarely put t o use. The problem could be solved if m arket ers m ade t heir research m ore useful. How? By shift ing t heir perspect ive in t hree im port ant ways. First , m arket researchers should aim beyond m easurem ent t o opt im izat ion. The m arket ing lit erat ure is full of sophist icat ed m et hods for m easuring cust om er behavior, but m anagers have a bigger problem t han t racking cust om ers’ buying pat t erns: They need t o decide what act ion t he firm should t ake t o profit from t hat behavior. Deciding

which response will yield t he best result is an opt im izat ion problem . Many im pressive t ools and m et hods for opt im izat ion have been developed t o solve engineering and m anufact uring problem s. For t hese m et hods t o work wit h m arket ing problem s, t hey m ust be m odified. These m odificat ions are being m ade, as opt im izat ion expert s realize t hat m arket ing offers m eat y, significant problem s and access t o large am ount s of dat a. The earliest successes were in pricing, wit h t he developm ent of sophist icat ed yield- m anagem ent syst em s in t he airline and hot el indust ries. Ot her work involved t he developm ent of m odels t o predict credit wort hiness in t he credit card indust ry. More recent ly, I nt ernet ret ailers have begun t o develop opt im izat ion syst em s t o ident ify which product s t o show t o different cust om ers. Exam ples of current t arget s for opt im izat ion research include syst em s for det erm ining who should receive direct - m ail prom ot ions and which product s and prices t o highlight in t hose prom ot ions. I n product developm ent , opt im izat ion m ay help com panies design product lines t o sat isfy cust om ers wit h diverse needs. A focus on opt im izat ion requires t hat m anagers choose a t im e fram e over which t o opt im ize. This brings m e t o t he second shift in perspect ive: More st udies should focus on t he long t erm . Decisions on pricing, advert ising, and ot her m arket ing m at t ers oft en have lingering im pact s on dem and and profit s, yet t he vast m aj orit y of m arket ing st udies lim it at t ent ion t o t he im m ediat e out com e. To underst and how t his can underm ine good decision m aking,consider t he findings of a few recent st udies. A publishing firm st udying t he im pact of price prom ot ions over t wo years discovered effect s t hat were im port ant for it s pricing st rat egies: I t found t hat if deep discount s were offered, est ablished cust om ers st ocked up and t hen purchased less lat er on, whereas first - t im e cust om ers t ended t o com e back and purchase m ore oft en in subsequent periods. A st udy of 20,000 people who used a hom e furnishings cat alog found t hat 10% discount s t o cust om ers who ordered out - of- st ock it em s increased revenue in t he short t erm but decreased t he rat e at which t hose cust om ers ordered different it em s lat er. And ot her st udies have concluded t hat m oving from a short - t erm t o a long- t erm focus on cat alog m ailings could increase profit s for m ail order com panies by as m uch as 40% . Clearly, m arket researchers m ust st udy such long- t erm effect s if t heir findings are t o guide opt im al decision m aking. So why haven’t t hey? I n part , it ’s because of t he difficult y of collect ing dat a over t im e. But t hat hurdle is about t o be lowered. New m et hods current ly in developm ent will m ake it possible t o use hist orical dat a t o reliably est im at e long- run effect s. The t hird change m arket researchers should m ake is t o st art t est ing t heir t heories in t he field. What we usually see in t he m arket ing lit erat ure is t he result s of experim ent s conduct ed on college st udent s or analyses of hist orical dat a collect ed from public or propriet ary sources. There has been a st riking absence of field t est s in which com panies deliberat ely vary how t hey int eract wit h cust om ers engaged in real t ransact ions and m easure t he responses. But t his, t oo, has been changing recent ly, as m anagers are increasingly collaborat ing wit h academ ics t o conduct large- scale experim ent s involving act ual cust om ers. Exam ples include st udies t hat vary t he act ions of a com pany’s sales force, t he pages shown t o cust om ers on a com pany’s Web sit e, and t he cont ent of cat alogs and ot her direct - m ail prom ot ions. Cat alog com panies are part icularly well placed t o t est different m arket ing act ions. For inst ance, t hey can easily conduct split - sam ple st udies, in which different versions of a cat alog are sent t o large, random sam ples of cust om ers. This t ype of research m eet s a high st andard of rigor because it explicit ly cont rols for alt ernat ive explanat ions due t o int ervening event s or syst em at ic differences bet ween sam ples. I t also yields findings t hat are easy t o com m unicat e. Even t he least sophist icat ed pract it ioners can appreciat e t he conclusions when shown how profit s differ across experim ent al condit ions. For all t hese reasons, t he cat alog indust ry has been t he quickest t o em brace field t est ing, but m anagers in ot her indust ries are beginning t o cat ch on. I nvest m ent will be required in order t o develop t he infrast ruct ure and expert ise necessary t o conduct field t est s. Most com panies will need t o invest in m easurem ent t echnologies t o ensure t hat out com es are m easured correct ly, and t hey will need t o creat e a process for dissem inat ing and inst it ut ionalizing t he findings. But if t hey do m anage t o st age rigorous field experim ent s—and use t he findings t o opt im ize profit s—t hey can right fully claim t o be t reat ing m arket ing as a science. D u n ca n Sim e st e r ( sim e st e r @m it .e du ) is an associat e professor of m anagem ent science at MI T’s Sloan School of Managem ent in Cam bridge, Massachuset t s.

9 . Th e M FA I s t h e N e w M BA Get t ing adm it t ed t o Harvard Business School is a cinch. At least t hat ’s what several hundred people m ust have t hought last year aft er t hey applied t o t he graduat e program of t he UCLA Depart m ent of Art —and didn’t get in. While Harvard’s MBA program adm it t ed about 10% of it s applicant s, UCLA’s fine art s graduat e school adm it t ed only 3% . Why? An art s degree is now perhaps t he hot t est credent ial in t he world of business. Corporat e recruit ers have begun visit ing t he t op art s grad schools—places such as t he Rhode I sland School of Design, t he School of t he Art I nst it ut e of Chicago, Michigan’s Cranbrook Academ y of Art —in search of t alent . And t his broadened approach has oft en com e at t he expense of m ore t radit ional business graduat es. For inst ance, in 1993, 61% of McKinsey’s hires had MBA degrees. Less t han a decade lat er, it was down t o 43% , because McKinsey says ot her disciplines are j ust as valuable in helping new hires perform well at t he firm . Wit h applicat ions clim bing and ever m ore art s grads occupying key corporat e posit ions, t he m ast er of fine art s is becom ing t he new business degree.

Cor por a t e r e cr u it e r s h a ve be gu n visit in g t op a r t s gr a d sch ools. Th is a ppr oa ch h a s oft e n com e a t t h e e x pe n se of t r a dit ion a l bu sin e ss gr a du a t e s. The reasons are t wofold—supply and dem and. The supply of people wit h basic MBA skills is expanding and t herefore driving down t heir value. Meanwhile, t he dem and for art ist ic apt it ude is surging. I n m any ways, MBA graduat es are becom ing t his cent ury’s bluecollar workers—people who ent ered a workforce t hat was full of prom ise only t o see t heir j obs m ove overseas. For exam ple, Lehm an Brot hers and Bear St earns have begun t o hire MBAs in I ndia for financial analysis and ot her num ber- crunching work. St art ing salaries: around $800 per m ont h. A.T. Kearney est im at es t hat in t he next five years, U. S. financial services com panies will t ransfer a half- m illion j obs t o low- cost locales such as I ndia—saving t he indust ry som e $30 billion but displacing 8% of t heir Am erican workforce. As t he Econom ist recent ly put it , t he sort s of ent ry- level MBA t asks t hat “ would once have been foist ed on am bit ious but inexperienced young recruit s, working long hours t o earn t heir spurs in Wall St reet or t he Cit y of London, are, t hanks t o t he m iracle of fibre- opt ic cable, foist ed on t heir lower- paid I ndian count erpart s.” At t he sam e t im e, businesses are realizing t hat t he only way t o different iat e t heir goods and services in t oday’s overst ocked, m at erially abundant m arket place is t o m ake t heir offerings t ranscendent —physically beaut iful and em ot ionally com pelling. Think iMac com put ers, Design Wit hin Reach, and Target aisles full of I saac Mizrahi wom en’s wear and Michael Graves t oilet brushes. Or j ust list en t o aut o indust ry legend Robert Lut z. When Lut z t ook over as chairm an of General Mot ors Nort h Am erica, a j ournalist asked him how his approach would differ from his predecessor’s. Here’s what he said: “ I t ’s m ore right brain.… I see us as being in t he art business. Art , ent ert ainm ent , and m obile sculpt ure, which, coincident ally, also happens t o provide t ransport at ion.” General Mot ors —General Mot ors! —is in t he art business. So, now, are we all. D a n ie l H . Pin k ( dp@da n pin k .com ) is t he aut hor of Free Agent Nat ion ( Warner Business Books, 2001) and A Whole New Mind ( fort hcom ing from Riverhead Books) . 1 0 . Re qu ie m for t h e Pu blic Cor por a t ion Over t he last t hree years, execut ives, polit icians, and shareholders in t he Unit ed St at es have valiant ly t ried t o fix t he problem s of t he public lim it ed com pany, t he world’s m ost com m on corporat e organizat ion. They have enact ed m ore laws for com panies t o follow, set higher st andards for t he select ion of board m em bers, and insist ed t hat audit firm s com ply wit h st ringent new rules. Yet t hese post - Enron reform s beg one fundam ent al quest ion: I s t he useful life of t he public com pany, at least in t he form we have known it for m ore t han a cent ury, over? I am not , of course, t he first person t o quest ion t he viabilit y of t he widely held com pany. Two decades ago, shareholders in t he Unit ed St at es accused execut ives of being m ore int erest ed in prot ect ing t heir j obs t han generat ing higher profit s. The shareholders support ed raids by t akeover art ist s t o dislodge incum bent CEOs, and t hey hoped t he new m anagers would deliver higher ret urns. The shareholder revolt becam e so widespread t hat in 1989, Harvard Business School’s Michael Jensen argued t hat new kinds of organizat ions m ight som eday eclipse t he public lim it ed corporat ion. Jensen, now a colleague of m ine at Monit or, focused on agency problem s, t he conflict s t hat arise when t he int erest s of m anagers and shareholders diverge. At t he t im e he wrot e, t he st ruggle pit t ed shareholders and execut ives in a fight over low invest or

ret urns and execut ive inert ia. Now, t he clash focuses on high execut ive com pensat ion levels ( at Tyco, for inst ance) and risky invest m ent s ( by Enron, for exam ple) . Corporat e Am erica has responded by rest ruct uring salary packages, increasing t he t ransparency of financial report s, and st rengt hening t he supervisory role of boards of direct ors. Have agency problem s been resolved? Hardly. They can never be resolved, for t he int erest s of m anagers and shareholders will always differ t o a degree. The problem s go beyond t hose posed by agency. The cost s of being a public com pany have risen st eadily over t he years, wit h new laws like Sarbanes- Oxley adding t o overhead cost s. At t he sam e t im e, public com panies have t o deal wit h m ore lawsuit s from aggressive lawyers. I t is also get t ing hard t o recruit and ret ain t opflight t alent for public com panies as execut ives increasingly see t he cost s of being in t he spot light —in reput at ion dam age and personal liabilit y—out weighing t he benefit s. Most problem at ic, t he financial benefit s of going public have eluded m any com panies. We’ve seen t he em ergence of t wo t iers of com panies in t he st ock m arket . A few big com panies such as GE wit h large m arket s for t heir shares do benefit from t he liquidit y t hat t he st ock m arket provides. However, a large num ber of sm all com panies have st ruggled t o gain invest ors’ at t ent ion. Their st ocks rem ain st agnant , followed by only a few second- and t hird- t ier invest m ent banks. That leaves t hese m idcap com panies in public purgat ory. On t he one hand, inst it ut ional invest ors do not buy t heir shares out of fear t hat t hey will find it im possible t o escape a st ock for which t hey have est ablished a new m arket price. On t he ot her, t hese com panies cannot issue m ore shares in t he prim ary m arket , due t o t he dilut ive effect s and t he lack of invest or int erest . The sum of t hese forces explains why expert s predict ed a record num ber of firm s would deregist er in 2003, t aking advant age of a legal loophole t hat allows Am erican com panies t o rem ain public but not m ake financial disclosures. So why do com panies rem ain wedded t o t he not ion of public ownership? Most com panies choose t o go public because it yields higher ret urns and great er liquidit y. When it does not , t hey m ust reexam ine t heir opt ions. Alt hough it is not clear what t hose m ight be, t he t im e has com e t o ret hink rat her t han reform t he public corporat ion. Jose ph Fu lle r is t he CEO of Monit or Group, a fam ily of professional service firm s based in Cam bridge, Massachuset t s. A longer version of t his art icle appears in t he wint er 2004 edit ion of Direct ors & Boards ( www.direct orsandboards.com ) . 1 1 . Acce n t u a t e t h e Posit ive Ever since organizat ional psychologist s and m anagem ent scholars began st udying workplace behavior, t hey have focused on a long list of problem s t hat can bring organizat ions t o t heir knees: m anagerial abuse, greed, dist rust , poor m orale, burnout , office polit ics, and so on. This focus on t he negat ive aspect s of working life has m ade sense for t wo reasons. First , organizat ional scholarship is grounded in t he field of psychology, which has perennially concent rat ed on m ent al illness and social pat hology. Second, scholars since t he t im e of Dant e have generally found t hat t he t ort ures of hell yield m ore int erest ing book m at erial t han do t he blisses of heaven. Thus it m ay com e as a surprise t o learn t hat com panies where t he focus is on am plifying posit ive at t ribut es such as loyalt y, resilience, t rust wort hiness, hum ilit y and com passion— rat her t han com bat ing t he negat ives—perform bet t er, financially and ot herwise. A new field of inquiry called posit ive organizat ional scholarship ( POS) , spearheaded by organizat ional behavior and psychology researchers at t he Universit y of Michigan, t he Universit y of Pennsylvania, t he Universit y of Brit ish Colum bia, and elsewhere, is shedding prom ising new light on t he out com es of various approaches t o m anaging behavior in t he workplace. On t he face of it , POS doesn’t sound new. Ever since 1952, when Norm an Vincent Peale published t he self- help classic The Power of Posit ive Thinking, t he benefit s of an opt im ist ic out look have been t out ed ad nauseum . Addit ionally, aut hors such as Tom Pet ers and Jim Collins have long st udied t he leadership at t ribut es t hat help com panies excel. What m akes POS different is it s focus: Rat her t han zeroing in on t he posit ive qualit ies of individuals, POS t akes a rigorous look at t he m ore widespread social const ruct s, values, and processes t hat m ake organizat ions great . And because it m easures result s, posit ive organizat ional scholarship goes beyond plat it udinous t alk about t he virt ues of being good. Sout hwest Airlines, for exam ple, isn’t t he envy of t he airline indust ry m erely because it has a com pet it ive cost st ruct ure or because founder Herb Kelleher, now ret ired, was a cool guy. The com pany is successful, t hese researchers cont end, because it carefully prot ect s and nurt ures it s em ployees. According t o Kim Cam eron, a professor of organizat ional behavior and hum an resource

m anagem ent at t he Universit y of Michigan Business School who has st udied “ virt uous” firm s, Sout hwest —despit e it s no- layoffs policy—was t he only m aj or airline t o escape devast at ing long- t erm financial losses following t he Sept em ber 11, 2001, t errorist at t acks. Sout hwest ’s overall passenger loads and st ock price rem ained com parat ively high. Why is t his field of st udy em erging now? The germ of POS was, in fact , plant ed on 9/ 11, when t he m edia focused on t he qualit ies of em pat hy, courage, and resilience in t he workplace. I n 2002, t he debacles at Enron, WorldCom , and ot hers renewed conversat ions about et hics and governance. Suddenly, scholars began t o ask: How can com panies fost er honest y and t rust at work? How do organizat ions t hat replenish workers’ energy, build collect ive st rengt h, and fost er em ot ionally int elligent cult ures operat e? And how do t hese firm s perform , bot h com pet it ively and financially, over t im e?

Som e or ga n iza t ion s m a n a ge t o fost e r e m ot ion a lly in t e llige n t cu lt u r e s. Sch ola r s a r e be gin n in g t o a sk : H ow do t h e se fir m s ope r a t e ? Posit ive organizat ional scholarship is inspiring researchers t o look at work in a whole new light —and t hey are finding t hat em ployee happiness really does pay. I t ’s beginning t o look as if a posit ive workplace at m osphere is wort h developing, and not m erely for it s own sake; it m ay be t he foundat ion of t rue organizat ional success. Br on w yn Fr ye r ( bfr ye r @h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 2 . Biologica l Block On t he Massachuset t s Turnpike in Bost on, a hundred- foot - long billboard asks: “ I s your neighbor’s gun locked?” The point , of course, is t hat everyone in t he vicinit y of a gun should be engaged in t he t ask of cont aining t he t hreat . There’s a bigger idea here, and it ’s cropping up all over t he place—t he im m une syst em as an archit ect ure for securit y. The vert ebrat e im m une syst em , st ill far from well underst ood, operat es on a few broad principles: a ubiquit ous det ect ion capabilit y, a sophist icat ed abilit y t o discrim inat e friend from foe, a diverse repert oire of defensive responses, t he abilit y t o recognize and deal wit h novel t hreat s, and accum ulat ed learning. These principles have already been built int o “ digit al im m une syst em s” —if you use Sym ant ec’s corporat e ant iviral product , you’re soaking in it . Using t echnology developed at I BM’s Wat son Labs, t his syst em prot ect s com put er net works by recognizing “ m alware” anywhere in t he net work, quarant ining it , and sending it t o an analysis cent er, where Sym ant ec develops and deploys digit al ant ibodies, not j ust on t he infect ed com put er but t hroughout t he net work—in as lit t le as an hour. Then t he net work rem em bers t he response, so t he inoculat ion confers perm anent im m unit y. Three m ore signs: Mat hem at ician St ephen St rogat z described t he 2003 power grid m elt down t hat blacked out part s of eight st at es as “ a m assive allergic react ion” t o a problem in t he grid—t hat is, a kind of aut oim m une failure of t he net work. Financial inst it ut ions are exploring whet her fraud can be prevent ed by t reat ing it as a det ect able infect ion—T- m en, not T cells. And a new discipline has been born: “ Theoret ical im m unology” explicit ly brings t oget her t he st udy of nat ural, “ wet ” im m une syst em s and t he developm ent of m at hem at ical m odels t hat can bot h im prove our underst anding of our own wet ware and aid in t he design of im m une syst em s for ot her host s under t hreat .

Fin a n cia l in st it u t ion s a r e e x plor in g w h e t h e r fr a u d ca n be pr e ve n t e d by t r e a t in g it a s a de t e ct a ble in fe ct ion . I m m une response is an idea whose t im e has com e. We have new capabilit ies: Our biological underst anding and our in silico sim ulat ion t echnology are growing. And we have newly pressing needs: The m ost urgent problem of our day—t errorism —requires an im m une syst em , not a series of firewalls, for effect ive prot ect ion. Success will com e when every cell of t he body polit ic has t he capabilit y and t he will t o det ect t error in t he offing and t he abilit y t o t rigger a let hal im m une response. Are your neighbor’s WMDs locked? Ch r is M e ye r ’s m ost recent book ( wit h St an Davis) is I t ’s Alive: The Com ing Convergence of I nform at ion, Biology, and Business ( Crown Business, 2003) . He can be reached at ch r is.m e ye r @it sa live book .com . 1 3 . H ow You Gon n a Ke e p ’Em D ow n on t h e Fa r m Aft e r Th e y’ve Se e n I n se a d?

Com panies t hat want t o m ake serious invest m ent s in leadership developm ent have num erous opt ions. They can send t heir high- pot ent ial m anagers t o program s offered t hrough business schools like Harvard and I nsead, t o facilit ies like t he Cent er for Creat ive Leadership, or t o sessions designed by int ernal corporat e t raining groups. But despit e all t he com pet it ion in t he m arket , m any com panies aren’t convinced t hey are get t ing t heir m oney’s wort h. The problem m ay not be t he program s. I n fact , t he personal learning cat alyzed by a t opnot ch program can be t rem endous. The problem , m y research suggest s, is what happens when a m anager com es back t o t he day- t o- day rout ine of t he office. Having been inspired by exposure t o new m odels and net works, he or she ret urns t ransform ed, but t o an organizat ion t hat has not experienced a parallel m akeover. The clash of expect at ions— t he m anager’s and t he com pany’s—can be brut al. And so, paradoxically, t he bet t er t he m anagem ent developm ent program , t he m ore likely it m ay be t o precipit at e a valued em ployee’s depart ure. How can organizat ions—and individual m anagers—get t he full value of leadership developm ent ? I t ’s a quest ion of em phasizing t he “ t akeoff” and “ reent ry” phases of t he experience. I n preparat ion, for exam ple, a m anager should spend t im e wit h t he boss and ot her key st akeholders, engaging in a dialogue about his or her st rengt hs, weaknesses, and fut ure t raj ect ory. Having done so, t he m anager will be in a m uch bet t er posit ion, when he or she ret urns, t o get a developm ent assignm ent t hat will serve as a t raining ground for t he new skills and approaches suggest ed in t he program . I t ’s am azing how few m anagers seize t he opport unit y ( or excuse) t hat is creat ed by an upcom ing developm ent program t o init iat e such a conversat ion wit h t he boss. But whet her t hey do or not , t he boss should ensure t hat it happens. Sim ilarly, on reent ry, m anagers m ust t ake t he t im e t o repriorit ize goals and fine- t une t heir st rat egies. What should he or she aim t o accom plish in t he first week? The first m ont h? Wit hin six m ont hs? This reflect ion and planning should happen im m ediat ely aft er reent ry—even if it m eans let t ing voice m ails and e- m ails pile up for yet anot her day. I n a series of st udies ranging from t he int roduct ion of new t echnologies t o m anagers’ approaches t o t aking on new roles, behavioral scient ist s have found a consist ent “ window of opport unit y” effect : We have only a short t im e t o m ake a real change aft er any break from rout ine. Aft er t hat , t hings slip quickly int o business as usual. Finally, t here is t he quest ion of how t he individual should t ransfer his or her new knowledge t o t he rest of t he t eam at t he organizat ion. I ’ve seen m any part icipant s leave a program excit ed by t heir learning, having t aken volum es of not es about what t hey plan t o do different ly, only t o be bewildered when t he people back hom e are not as quick t o see t he light . The key is t o recognize t hat t he power of t he learning experience is not j ust int ellect ual. I t ’s also em ot ional. While it ’s easiest t o pass along t he ideas and t he readings, t he m anager m ust devise ways t o share t he experience m ore fully. People oft en speak of execut ive program s as having been t ransform at ive. But t he benefit shouldn’t end t here, at t he event and wit hin t he individual. By t hought fully m anaging a m anager’s t akeoff and reent ry, an organizat ion can hope t o be t ransform ed by t he experience as well. H e r m in ia I ba r r a is t he I nsead Chaired Professor in Organizat ional Behavior at I nsead in Font ainebleau, France. She is t he aut hor of Working I dent it y: Unconvent ional St rat egies for Reinvent ing Your Career ( Harvard Business School Press, 2003) . She can be reached at H e r m in ia .I ba r r a @in se a d.e du . 1 4 . You D on ’t H a ve a N a n ost r a t e gy? Lost in t he hype about nanot echnology—som ewhere bet ween t he t hreat of ooblecky nano- goo and t he prom ise of cancer- curing m icrobot s—lies t he real st ory: Nanot echnologies will event ually disrupt , t ransform , and creat e whole indust ries. Mihail Roco, key archit ect of t he robust ly funded U.S. Nat ional Nanot echnology I nit iat ive, est im at es t hat by 2015, t he global m arket for nanot ech- based product s will reach $1 t rillion and em ploy 800,000 workers in t he Unit ed St at es and 2 m illion worldwide. The quest ion isn’t whet her your indust ry will be affect ed, but when and how. Nanot ech isn’t a single field so m uch as a sprawling idea t hat cut s across disciplines, including engineering, physics, chem ist ry, biology, and m at erials science. The concept is t hat by m anipulat ing m at t er at t he m olecular level, lit erally rearranging at om s and m olecules, you can creat e new m at erials and product s wit h ext raordinary propert ies— fibers wit h 30 t im es t he t ensile st rengt h of st eel at a fract ion of it s weight , chem ical det ect ors t hat can sense a single m olecule, precision- guided sm art drugs, and com put er

m em ories 1,000 t im es denser t han any we have t oday.

N a n ot e ch isn ’t a sin gle fie ld so m u ch a s a spr a w lin g ide a t h a t cu t s a cr oss disciplin e s, fr om ph ysics t o biology. Nat han Myrhvold, Microsoft ’s form er CTO and now t he m anaging direct or of I nt ellect ual Vent ures, a privat e ent repreneurial firm , caut ions com panies t o keep t his fant ast ical nanofut ure in perspect ive. “ Nanot echnology m ay give rise t o t he next indust rial revolut ion—m aybe—but m ost nanot ech applicat ions aren’t going t o sneak up on you. The first indust rial revolut ion didn’t sneak up on us eit her,” he says. “ The broad vision is right , but som e of t hese applicat ions m ay be 50 years off. So what you want t o do is keep your ear t o t he ground.” For som e indust ries, nanot ech’s im plicat ions are near t erm and obvious. Any com pany wit h a m aj or st ake in I T ought t o be act ively involved in nanot ech R&D and invest m ent if it has t he resources, as indust ry leaders I BM and HP are. The sam e is t rue for m at erials m anufact urers. At t he ot her end of t he spect rum are com panies in t he service indust ries and elsewhere t hat will be nanot echnology’s end users, t he beneficiaries of dim e- sized supercom put ers and ult ralight t ext iles st ronger t han Kevlar. A com pany’s responses t o nanot echnology opport unit ies, of course, will depend on where it falls on t his spect rum . The m aj or players’ aggressive st rat egy- developm ent program s include scenario planning and int ensive “ boot cam ps” in which t eam s develop t heoret ical nanoproduct s, says George Day, direct or of Whart on’s em erging t echnologies m anagem ent resource program . Ot her com panies are ret aining indust ry scout s and consult ing firm s wit h nanot ech expert ise and assem bling int ernal “ crow’s nest ” t eam s charged wit h t racking nanot ech developm ent s. Less aggressive surveillance st rat egies include t apping t he resources of t rade associat ions such as t he New York–based NanoBusiness Alliance and invit ing in various out side research scient ist s, cust om ers, and suppliers wit h nanot ech experience t o discuss t he t echnology’s pot ent ial im pact on business. At t he very least , if you don’t have a lookout now, get one. Have an insider shinny up t o t he crow’s nest and t ake a look around. You m ight be surprised by what she sees on t he horizon. Ga r din e r M or se ( gm or se @h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 5 . Th e Loa n Ra n ge r Why does widespread povert y persist in so m any part s of t he world? Because poor count ries need t rade and inst ead get aid. A sim ple, if surprising, change could fix t he sit uat ion. We all know t hat t rade is what ’s needed t o propel count ries. When t wo count ries engage in t rade, bot h benefit . But rich count ries discourage t rade wit h poor count ries in t hree m aj or ways. First , t hey hold fast t o t he t rading principle of reciprocit y; t hat is, t hey offer anot her count ry a t ariff reduct ion on a product in ret urn for t he sam e t reat m ent on anot her it em t hat t hey are hoping t o sell t o t hat count ry. Because t he poor count ry’s econom y is vast ly sm aller, t his “ equal t reat m ent ” prevent s it from bargaining for t he reduct ions in t rade barriers it needs t o com pet e in rich count ries. This is why, for inst ance, t he Unit ed St at es put s a t ariff on im port s from Bangladesh t hat is nearly t en t im es higher t han t hat on im port s from France. At t he sam e t im e, rich count ries spend, collect ively, nearly $1 billion a day subsidizing t he part of t heir econom ies where poor count ries m ay have a real com pet it ive advant age: agricult ure. For m ost poor count ries, a boost in agricult ure would m ake a crit ical difference. Genuine econom ic developm ent t ends t o be bot t om - up; a surplus in agricult ure produces t he purchasing power and invest m ent capit al for m anufact ured goods, and surpluses in m anufact uring sim ilarly lead t o m ore com plex consum pt ion and product ion. Finally, rich count ries use t heir leverage t o prom ot e free t rade where t hey have an advant age. I nst ead of buying from poor count ries, t hey’re m ore int erest ed in selling t o t hem . I t ’s a short - sight ed st rat egy. When rich count ries buy from poor count ries, t hey not only bring cost s down for t heir own consum ers, t hey also raise purchasing power nat urally in t he poor count ries—leading t o larger m arket s for t he rich count ries’ goods. I nst ead, rich count ries t ry t o art ificially boost poor count ries’ purchasing power by providing “ aid” —t o t he t une of nearly $1 billion a week—t hrough various bilat eral channels and m ult ilat eral inst it ut ions. When aid is given t o a poor count ry’s governm ent ( and m ost aid does go t o governm ent s) , it has t he added effect of prom ot ing st at ism —it

cont ribut es t o t he cent ralizat ion of power, whereas decent ralizat ion fost ers dem ocrat izat ion and econom ic growt h. By t aking pressure off t hat governm ent t o achieve great er t ax revenues t hrough econom ic growt h, it allows t he poor count ry t o live wit h wrong policies and t herefore cont ribut es t o worsening governance. Solving t he problem requires a fresh focus on t he act ual bot t leneck. What is it t hat keeps rich count ries’ governm ent s from living up t o t heir rhet oric about free t rade? Just t his: a lim it ed num ber of special int erest s t hat lobby aggressively on t he part of dying indust ries. People who work in t hese sect ors, we hear, will suffer; t hey will have t o be ret rained, rehabilit at ed. But t hat , we know, can be done—provided t here is sufficient funding for relat ed proj ect s. And t here, I would propose, is where inst it ut ions like t he World Bank should be offering t heir aid. Let ’s st art lending t o t he rich count ries, so t hey can m ake t heir own people whole. Then t hey can pursue genuine free t rade, benefit ing bot h rich and poor econom ies. Wit h good access t o rich m arket s, poor econom ies would m ake subst ant ial gains and earn access t o capit al and know- how nat urally. I qba l Qu a dir ( I qba l_ Qu a dir @h a r va r d.e du ) is t he founder of Gram eenPhone, which provides t elephone access t hroughout Bangladesh, including t o it s rural poor. He lect ures in public policy at Harvard’s John F. Kennedy School of Governm ent in Cam bridge, Massachuset t s. 1 6 . Cosm e t ic Psych oph a r m a cology Your em ployees now have access t o m edicat ions—not ably, SSRI s ( select ive serot onin reupt ake inhibit ors) like Prozac—t hat not only offer effect ive t reat m ent for cert ain t ypes of depression but also have t he power t o alt er personalit y in ways t hat are good for business. I n his 1993 best seller, List ening t o Prozac, psychiat rist Pet er Kram er t old st ories of pat ient s who, when m edicat ed, becam e “ bet t er t han well” —showing, for exam ple, great er assert iveness, bet t er bargaining skills, and im proved social com pet ence. One pat ient , no longer depressed and already well regarded in her workplace, asked t o have her dose increased so she’d have t he confidence t o request a prom ot ion. More recent ly, Brian Knut son of St anford and his colleagues at t he Universit y of California–San Francisco Medical School’s Langley Port er Psychiat ric I nst it ut e looked at t he short - t erm effect s of SSRI s on people wit h no m ood or personalit y disorders. Subj ect s were given a daily dose of eit her Paxil or a placebo and aft er a m ont h were asked t o perform a t ricky negot iat ion. The people on Paxil perform ed best —perhaps because t hey were less host ile. Now t here’s a t em pt ing prospect . Get t ing ready t o close a deal? Bet t er drug up t he t eam in advance. Aft er all, you don’t know what t he ot her side is on. The pot ent ial for such use led Kram er t o speculat e about t he role “ cosm et ic psychopharm acology” ( a t erm he coined) could play in t he world of business. Aft er all, who wouldn’t want t o be bet t er t han well? Who wouldn’t want t o be less dist ract ible, m ore opt im ist ic, m ore socially adept ? “ I ’ve cert ainly been asked,” says Harvard psychiat rist Joe Glenm ullen. “ But t hat ’s t he one t hing I won’t prescribe a drug for. I ’ve heard st ories of people who are in t he office lat e at night , and t hey go t o t he Xerox room and are surprised t o find people sharing t heir Prozac or Rit alin.”

Ge t t in g r e a dy t o close a de a l? Be t t e r dr u g u p t h e t e a m in a dva n ce . Aft e r a ll, you don ’t k n ow w h a t t h e ot h e r side is on . Kram er says pat ient s aren’t beat ing down his door for pills t hey don’t really need. At least not yet . To som e ext ent , he at t ribut es t he rest raint t o a fear of side effect s. A large num ber of Prozac users report sexual dysfunct ion, for exam ple. For ot her m edicat ions like Zoloft and Celexa, users can becom e seriously ill if t hey go off t oo quickly or even if t hey m iss a couple of doses. More difficult t o pin down is t he nagging fear t hat , j ust as cosm et ic surgery can deprive a face of charact er, cosm et ic use of t hese m edicat ions will level out t em peram ent . Som e ant idepressant users have com plained t hat t he sam e drug t hat allows t hem t o cope wit h t he daily st resses of life robs t hem of t heir creat ive “ edge.” But Kram er sees anot her reason for t he rest raint : an at t it ude described by t he lat e Gerald Klerm an as pharm acological Calvinism . “ I f you look at st udies of m edicat ion, t he rule is t hat people t ake less t han t heir doct or prescribes. We j ust don’t like t aking m edicine,” Kram er says. For business, t hat m ay be a bigger problem t han t he danger t hat som e people will pop pills t hey don’t need. St udies have shown t hat lost work t im e due t o depression cost s com panies a fort une, wit h est im at es ranging from $31 billion t o $44 billion per year in lost product ivit y in t he U.S. alone. “ At least half of depression goes unt reat ed,” says Brookline, Massachuset t s, psychot herapist Joanna Volpe-

Vart anian. “ People are worried about what t heir bosses will t hink, and t hey’re afraid t o use t heir em ployee assist ance program or insurance benefit s lest a record st ay on a com put er som ewhere.” But t hat at t it ude m ay change as t he im age of psychopharm acology m oves from problem fixer t o advant age provider. At hlet es have st eroids. Fight er pilot s have t heir “ go pills.” Will am bit ious m anagers be able t o leave well enough alone? Elle n Pe e ble s ( e pe e ble s@h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 7 . W a t ch in g t h e Pa t t e r n s Em e r ge We’ve known for decades t hat inform al social net works drive business—from em ployees at t he wat ercooler t o j ob seekers canvassing acquaint ances t o com m unit ies of pract ice. But it is m uch harder t o m ap a net work t han t o draw an org chart , and unlike org chart s, social net works are self- alt ering. Knowing t hat net works are valuable doesn’t help t ell us how t hey are valuable or how t o use t hem . That is changing. Three big forces are at work: our underst anding of t he m echanics of social net works, wit hin and bet ween businesses; t he growing cloud of dat a t hat surrounds our every t ransact ion; and t he speed at which we’re able t o react t o t hose dat a. Be t t e r M ode ls of Socia l N e t w or k s. St anley Milgram gave us t he phrase “ six degrees of separat ion” in a 1967 paper, but we didn’t underst and how t he six- degrees phenom enon worked for anot her 30 years, unt il Duncan Wat t s and St eve St rogat z finally worked out t he det ails, described in Wat t s’s 2003 book, Six Degrees. This work, along wit h t hat of t heir peers, such as Albert - László Barabási of Not re Dam e and Bernardo Huberm an of HP, am ount s t o a revolut ion in our underst anding of how social net works operat e. Be t t e r Re a l- W or ld D a t a . Our lives are increasingly m ediat ed by t he I nt ernet , from booking flight s t o m aking dat es, and Web act ivit ies generat e a cloud of m et adat a, t he dat a t hat describe obj ect s or t ransact ions. One of t he surprises wit h m et adat a is how lit t le we need before we can st art divining useful inform at ion. Am azon’s book recom m endat ions, Blogdex.net ’s list s of conversat ional t rends on Web logs, Huberm an’s m aps of social net works derived from e- m ail t raffic—all t hese t hings and m any m ore com e from t he m ining of sim ple m et adat a. Fa st e r Re fle x e s. We can now work wit h t he dat a in real t im e. Unt il recent ly, all m apping of social net works was like phot ography. You’d t ake a snapshot of a group’s relat ionships, develop it , and weeks or m ont hs lat er, you’d see how it cam e out . Wit h bet t er t ools for m ining social m et adat a, we can st art t o t reat our social net works like m irrors, get t ing t he inform at ion we need as we need it . Social net working sit es like LinkedI n and Friendst er let individuals figure out who is in t heir friend- of- a- friend net works, while soft ware applicat ions like Spoke and Visible Pat h m ap com panies’ social net works t o help businesses figure out whom t o t ap when t rying t o pit ch a product or close a sale. I n what Kevin Werbach has called t he era of “ post m odern knowledge m anagem ent ,” it ’s becom ing clear t hat viewing a com pany’s knowledge as som et hing separat e from it s em ployees is im possible. Our growing underst anding of social net works m ay help us leverage real people’s int eract ions, for everyt hing from t rend spot t ing by scouring public conversat ions t o ident ifying int ernal expert s wit hin a depart m ent t o ensuring t hat a m erger act ually result s in cooperat ion am ong em ployees, not j ust a change in logo. Social net works can’t sim ply be st rip- m ined of t heir value, however. A social net work is a living t hing t hat is alt ered by use. There are report s t hat t he value of net working for j ob possibilit ies is weakening, in part because so m any em ploym ent expert s have recom m ended t his very st rat egy. Likewise, privacy concerns and em ployees’ inclinat ion t o see t heir social net works as personal asset s will lead t o t ension bet ween m anagem ent and rank- and- file workers about bot h t he observat ion and use of social net works. Many of t he social net working t ools being proposed t oday will fail, because t he obvious ideas are t echnologically sim ple but socially unworkable. ( “ I f we all dum p our address books int o one big dat abase, everybody will know everybody! ” ) As we get sm art er about building social net working t ools, however, we will t ake it for grant ed t hat our social net works have m easurable value, as do ot her int angibles such as brand, and we will find ways t o recognize it . Managers m anage what t hey can see, and as t hey begin t o see social net works, t he long- t erm effect on t he business landscape will be profound.

Cla y Sh ir k y ( cla y@sh ir k y.com ) is a consult ant and t eaches at New York Universit y’s graduat e I nt eract ive Telecom m unicat ions Program , where he works on t he social and econom ic effect s of I nt ernet t echnologies. His writ ings are archived at www.shirky.com . 1 8 . La u gh t e r , t h e Be st Con su lt a n t Long before—four full years before—t he once- rocket ing Enron im ploded in m idair, a group of em ployees in t he com pany’s int ernat ional division got t oget her for t heir annual powwow. As well as list ening t o present at ions about past perform ance and exhort at ions t o reach new height s, t he Enronians ent ert ained t hem selves by put t ing on skit s, wit h a prize going t o t he t eam t hat st aged t he best show. I n 1997, t he t hem e was m ent al t oughness. That year Sherron Wat kins, lat er fam ous as t he wom an whose let t er t o CEO Ken Lay warned him t hat account ing scandals could doom t he com pany, was cast as t he Wicked Wit ch of t he West in a parody of The Wizard of Oz. I n t he skit , Dorot hy needed t o find t he wizard t o get a deal approved. Of t he execut ives accom panying her, one had no brain, one had no heart , and t he t hird, t he Cowardly Lion, was padding cont ract s because he wasn’t brave enough t o get earnings on his own. As for t he wizard, t he m an who could approve t he deal, t he m an behind t he curt ain—well, it t urned out he had no sophist icat ed com put er m odels, no special financial acum en. He was a fake. And his nam e, he said when he was discovered, was Andy Fast ow. You don’t need a brain or a heart t o succeed at Enron, t he fict ional Fast ow declared; and t o t he corrupt Cowardly Lion, he said: “ You’re m y kind of guy.” That was fict ion. The real Andy Fast ow was, of course, t he m an who soon becam e Enron’s chief financial officer and, if t he charges against him are accurat e, t he chief archit ect of a series of decept ive deals t hat hid Enron’s det eriorat ing financial condit ion from t he public. When t he curt ain was pulled back on t he real Enron’s real finances, t he com pany collapsed. Most em ployees and alm ost all of t he business world were t aken t ot ally by surprise. But it was all t here in t he skit . Just as it was t here in t he wisecrack t hat went around t he office aft er t he publicat ion of Enron’s 1997 annual report , whose cover showed a t ropical forest wit h a large leaf sm ack in t he m iddle. “ The fig leaf,” t he wags called it . There’s a lesson here, or m aybe it ’s a m anagem ent t ip: You can learn a lot about a com pany by paying at t ent ion t o it s hum or. People t ell j okes, oft en, as a way of revealing uncom fort able t rut hs. Monarchs em ployed court j est ers t o cut t hrough t heir court iers’ unct uous sycophancy, for exam ple. These days, it ’s edit orial cart oonist s and lat e- night TV host s who lam poon t he powerful. The sam e im pulses are at work in every corporat ion on eart h. Skit s at sales conferences, wisecracks in m eet ings, j okes in e- m ails: These const it ut e an ext raordinary t rove of inform at ion about what ’s really going on. Th om a s A. St e w a r t ( e dit or s@h bsp.h a r va r d.e du ) is t he edit or of HBR. His m ost recent book is The Wealt h of Knowledge: I nt ellect ual Capit al and t he Twent y- First Cent ury Organizat ion ( Doubleday, 2001) . 1 9 . W a t ch You r Ba ck Cruising t hrough t he draft of a pot ent ially influent ial new fram ework for ent erprise risk m anagem ent , I am rem inded of t he t housand nat ural ( and unnat ural) shocks t hat com panies are heir t o. Those risks include, but are nowhere near lim it ed t o, em erging com pet it ion and price m ovem ent s; polit ical agendas and new regulat ions; changes in dem ographics and work/ life priorit ies; unexpect ed repair cost s; qualit y deficiencies; ut ilit y or com put er service downt im e; and good old hum an frailt y. Toss in fire, flood, and eart hquake—as t his docum ent does—and you have a port rait of t he organizat ion as a quivering m ass of vulnerabilit ies. And t hat ’s exact ly t he view you need t o t ake t o prevent or m it igat e nast y surprises t hat wallop st ock prices, sales, and reput at ions, according t o t he Com m it t ee of Sponsoring Organizat ions of t he Treadway Com m ission ( COSO) , which is publishing t he fram ework in t he first quart er of t his year ( t he draft is available at www. coso.org) . COSO are t he folks who brought us t he int ernal cont rol fram ework adopt ed by m any public com panies scram bling t o com ply wit h Sarbanes- Oxley. The organizat ion’s t radit ional purview is financial report ing; t hat it has now em braced risk in all it s infinit e variet y speaks t o t he growing dem and for a cross- com pany, senior- execut ive- led approach t o ent erprise risk m anagem ent ( ERM) , which goes well beyond t radit ional risk m anagem ent ’s focus on a lim it ed num ber of t hreat s wit hin funct ional silos. ERM t akes a port folio approach t hat recognizes t he variet y and int erdependence of organizat ional vulnerabilit ies. “ Sarbanes- Oxley has direct ed at t ent ion t o risk, but t he Enrons were really

about account ing fraud,” says John J. Flahert y, t he chairm an of COSO and ret ired chief audit or for PepsiCo. “ We’re focused m ore on risks t hat creep up on an organizat ion and handicap it or put it out of business—where t hey never saw it com ing.” Ent erprise risk m anagem ent is oldish hat in Brit ain, where t he Turnbull I nit iat ive of 1999 required public com panies t o regularly report on all significant exposures—ranging from I T t o brand—as well as on t he int ernal cont rols designed t o m inim ize t hem . Today, UK com panies perform com prehensive risk audit s at least t wice a year, and a few conduct t hem in real t im e, according t o Richard Sharm an, direct or of KPMG’s ent erprise risk m anagem ent group in London. The m aj orit y of Brit ain’s 100 largest com panies em ploy a chief risk officer or direct or of risk m anagem ent who is responsible for em bedding risk awareness in t he cult ure, change- m anagem ent st yle. Alt hough m ost of Europe is sim ilarly up t o snuff, t he Unit ed St at es lags by 18 m ont hs or so. A st udy by m anagem ent consult ing firm Tillinghast - Towers Perrin found t hat 11% of U.S. com panies, m ainly in t he financial services, insurance, and ut ilit ies sect ors, have full- fledged ERM program s. Sharm an t hinks t he COSO fram ework m ay cat alyze U.S. businesses t o syst em at ically bring all of t heir Achilles’ heels t o heel. I n addit ion, t he new Basel I I Accord is prom pt ing banks t o develop best pract ices around risk, and t hose pract ices are m igrat ing int o ot her indust ries. “ Som e of your global organizat ions are st art ing t o t hink along t he lines of European organizat ions around risk,” says Sharm an. “ I t doesn’t j ust m ean buying insurance. I t doesn’t j ust m ean financial cont rol. I t is a CEO issue. And it does affect t he brand.”

A st u dy fou n d t h a t on ly 1 1 % of U.S. com pa n ie s h a ve fu ll- fle dge d e n t e r pr ise r isk m a n a ge m e n t pr ogr a m s. But ERM serves desire as well as fear; com panies t hat adopt it for com pliance purposes only are m issing t he larger point . Badly done, syst em ic risk assessm ent could put t he brakes on aggressive behavior, but it need not result in what SEC Chairm an William H. Donaldson described in a Financial Tim es int erview as “ a loss of risk- t aking zeal.” Rat her, ERM should allow com panies t o m ake decisions wit h great er speed and confidence. “ Having risk under cont rol gives a com pany agilit y, flexibilit y,” says St even Hunt , a vice president of research at Forrest er Research who specializes in securit y. “ I t ’s like driving a car: You can only go fast if you know you have good brakes.” Le igh Bu ch a n a n is a senior edit or at HBR. She can be reached at

lbu ch a n a n @h bsp.h a r va r d.

e du .

2 0 . I T D oe sn ’t Sca t t e r Take a look at t he accom panying chart s. Have you ever seen t rend lines so sm oot h? This has been t he realit y of inform at ion- based t echnologies. Yet if you asked m ost people t o describe I T’s past decade, t hey would call it boom and bust —a roller coast er ride.

Let ’s look first at t he business- t o- consum er ( B2C) and business- t o- business ( B2B) dat a. Act ual B2C revenues grew sm oot hly from $1.8 billion in 1997 t o $70 billion in 2002. B2B had sim ilarly sm oot h growt h from $56 billion in 1999 t o $482 billion in 2002. We see t he sam e t rends in t elecom m unicat ions, where t he num ber of U.S. cell phone subscribers grew sm oot hly and exponent ially from 340,000 in 1985 t o 140 m illion in 2002. The num ber of I nt ernet host s rose from 213 in 1981 t o 162 m illion in 2002.

> | Ex e cu t ive Su m m a r y > | Pu r ch a se Re pr in t > | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

The price- perform ance and capacit y of t he underlying t echnologies have grown even m ore rapidly t han t he m arket penet rat ion. You could buy one t ransist or for a dollar in 1968 versus 10 m illion t ransist ors for a dollar t oday. And unlike Gert rude St ein’s roses, a t ransist or is not a t ransist or is not a t ransist or. As t hey’ve becom e sm aller and less expensive, t hey’ve also becom e dram at ically fast er—by a fact or of about 1,000 over t he past 28 years. So t he cost per t ransist or cycle has dropped regularly by half every 1.1 years. The exponent ial growt h of t he power of inform at ion t echnologies ( broadly defined) goes

far beyond t he well- known paradigm of t he m iniat urizat ion of t ransist ors on an int egrat ed circuit described by Moore’s Law. We see t he sam e phenom enon in m any ot her areas of t echnology t hat deal wit h or creat e inform at ion. For exam ple, m agnet ic dat a st orage has doubled in price- perform ance every 15 m ont hs over t he past halfcent ury. We see sim ilar exponent ial growt h in t he price- perform ance and capacit y of such diverse t echnologies as wired and wireless com m unicat ions, DNA sequencing, and brain scanning. So why have t he capit al m arket s been so volat ile? First , because as m uch as I T has delivered, Wall St reet expect ed even m ore. The percept ion was t hat t he I nt ernet and t elecom m unicat ions t echnologies represent ed revolut ions t hat would overt urn t he business m odels for m any indust ries. That was and is correct —but t hese t rends t ake t im e t o develop. Second, t here was a profound lack of com m unicat ion wit hin t he invest m ent com m unit y. This allowed, for exam ple, m assive overinvest m ent in cert ain areas ( such as fiber) , while ot her areas ( such as t he “ last m ile” of t he com m unicat ion infrast ruct ure) were ignored. The result was m ore t han $2 t rillion of lost m arket capit alizat ion.

W h y h a ve t h e h igh - t e ch ca pit a l m a r k e t s be e n so vola t ile ? Be ca u se a s m u ch a s I T h a s de live r e d, W a ll St r e e t e x pe ct e d e ve n m or e . Regardless of whet her your port folio or m ine suffers anot her set back, we’d do well t o keep in m ind t hat t echnology will cont inue t o m arch ahead. I f everyone involved wit h inform at ion t echnology—and t hese days, who isn’t ?—underst ood t he t rends underlying t hese t echnologies, t he painful episodes of boom and bust in invest m ent values m ight , at long last , begin t o subside. Ra y Ku r zw e il ( r a ym on d@k u r zw e ilt e ch .com ) is an invent or and expert on art ificial int elligence. His lat est book is The Age of Spirit ual Machines: When Com put ers Exceed Hum an I nt elligence ( Viking Press, 1999) . Reprint Num ber R0402A

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The HBR List Breakthrough Ideas for 2004 Fr om t h e fie lds of biology, n e u r oscie n ce , e con om ics, posit ive psych ology, n e t w or k scie n ce , m a r k e t in g, m a n a ge m e n t t h e or y, a n d m or e —h e r e a r e t h e e m e r ge n t ide a s t h a t a r e ch a n gin g t h e w a y bu sin e ss is don e .

There’s not hing like a new idea t o shake t hings up. Last fall, when we got t o work rounding up 20 provocat ive new ideas in m anagem ent , som e people said it was t oo am bit ious. I t was a t im e of hunkering down, t hey said, not a t im e of im agining. Managers and t hose who st udy effect ive m anagem ent were focused on t he basics, t he blocking and t ackling of cost cut t ing and cont rollership. I f anyt hing, t hey claim ed, we would discover a kind of ant i- int ellect ualism out t here. They couldn’t have been m ore wrong. When we put out t he call for new ideas, we were inundat ed. Som e of t he best concept s seem t o have sprung from t he m uck of t he past few years. We have Rakesh Khurana plot t ing t he redem pt ion of m anagem ent , Chris Meyer proposing a new m odel for ensuring securit y, and Bob Sut t on im ploring us not t o t olerat e bad people—even if t hey bring in good m oney. Ot her writ ers pick up on prom ising t rends in t echnology, neuroscience, sociology, and psychology. Taken t oget her, t hese 20 ideas cover a lot of ground. Turn t he page, and you’ll see in no uncert ain t erm s t hat far from lying fallow, t he ground in t he business world is as fert ile as ever.

1 . You Got a Lice n se t o Ru n Th a t Com pa n y? Rakesh Khurana Managem ent t oday cannot properly be called a “ profession.” But given it s dom inance in Am erican societ y, it m ust becom e one—and t hat m eans m anagers m ust serve a higher purpose t han j ust m axim izing shareholder ret urns. 2 . N o M on opoly on Cr e a t ivit y Richard Florida The power behind t he U.S. econom y is it s “ creat ive class” —scient ist s, art ist s, engineers, t echnologist s, and designers, t o nam e a few. The creat ive sect or account s for nearly half of Am erican wage incom e, but t he Unit ed St at es is suddenly in danger of losing it s edge. 3 . Th e St r a t e gy I s t h e St r u ct u r e

Adrian Slywot zky and David Nadler Tradit ionally, st rat egy has dict at ed st ruct ure. But if you let st rat egy and organizat ional change evolve in parallel and influence each ot her, your com pany will have a bet t er chance of keeping up wit h it s m arket s. 4 . Bu sin e ss on t h e Br a in Diane L. Cout u Advances in drug developm ent , genet ic m apping, and neuroim aging t echnologies have shift ed our at t ent ion from t he m ind t o t he brain. How will t he new hard- science approach affect leadership, cooperat ion, and ot her dim ensions of business? 5 . Th e La w of Con se r va t ion of At t r a ct ive Pr ofit s Clayt on M. Christ ensen When a product st art s t o becom e a com m odit y, a decom m odit izat ion process is oft en t riggered som ewhere else in t he value chain. Managers m ight t herefore be able t o predict which act ivit ies will generat e t he m ost at t ract ive profit s in t he fut ure. 6 . Th e For ce Be h in d Gigli Joel Kurt zm an I nvest ors are always scram bling t o find out where t he “ sm art m oney” is going. I t ’s also im port ant , whet her you’re an invest or or a business m anager, t o know where t he st upid m oney is going. 7 . M or e Tr ou ble Th a n Th e y’r e W or t h Robert Sut t on When it com es t o hiring and prom ot ing people, a sim ple but revolut ionary idea is t aking hold in t he ranks of m anagem ent : t he “ no asshole” rule. Organizat ions j ust shouldn’t t olerat e t he fear and loat hing t hese j erks leave in t heir wake. 8 . Fin a lly, M a r k e t Re se a r ch You Ca n Use Duncan Sim est er Execut ives com plain t hat t heir com panies’ invest m ent s in m arket research are rarely put t o good use. Market researchers can m ake t heir work a lot m ore valuable by focusing on long- t erm field research and ot her m et hods t hat can lead direct ly t o opt im ized profit s for organizat ions. 9 . Th e M FA I s t h e N e w M BA Daniel H. Pink Businesses have com e t o realize t hat t he only way t o different iat e t heir offerings is t o m ake t hem beaut iful and em ot ionally com pelling—which explains why an art s degree is now such a hot credent ial in m anagem ent . Meanwhile, MBA graduat es are becom ing t his cent ury’s blue- collar workers: They ent ered a workforce t hat was full of prom ise only t o see t heir j obs m ove overseas. 1 0 . Re qu ie m for t h e Pu blic Cor por a t ion

Joseph Fuller The public lim it ed com pany is t he world’s m ost com m on corporat e organizat ion. But is t he useful life of t he public com pany—at least in t he form we have known it for m ore t han a cent ury—over? 1 1 . Acce n t u a t e t h e Posit ive Bronwyn Fryer Organizat ional psychologist s have always focused on t he problem s t hat bring com panies t o t heir knees: m anagerial abuse, greed, dist rust , poor m orale, burnout , office polit ics, and so on. The new field of “ posit ive organizat ional scholarship,” creat ed in t he aft erm at h of t he Sept em ber 11, 2001, at t acks, m easures t he values and processes t hat m ake som e organizat ions inspiring places t o work. 1 2 . Biologica l Block Chris Meyer The im m une syst em operat es on som e broad principles: ubiquit ous det ect ion capabilit y, a sophist icat ed abilit y t o discrim inat e friend from foe, and accum ulat ed learning. These fact ors const it ut e an archit ect ure for securit y t hat we can also use in societ y and business. 1 3 . H ow You Gon n a Ke e p ’Em D ow n on t h e Fa r m Aft e r Th e y’ve Se e n I n se a d? Herm inia I barra Once your valued execut ive ret urns from an inspiring leadership program and plugs back int o t he old rout ine, t here’s a good chance you’ll lose her—unless you’ve carefully m anaged t he “ t akeoff” period before her depart ure and have a good plan for her “ reent ry.” 1 4 . You D on ’t H a ve a N a n ost r a t e gy? Gardiner Morse Nanot echnology product s—dim e- sized com put ers and ult ralight t ext iles st ronger t han Kevlar—will cert ainly disrupt , t ransform , and creat e whole indust ries. I f you don’t already have a lookout wat ching for how and when t his new field will becom e im port ant for your business, it ’s t im e t o get one. 1 5 . Th e Loa n Ra n ge r I qbal Quadir What is it t hat keeps rich count ries’ governm ent s from living up t o t heir rhet oric about free t rade? Lobbyist s for dying indust ries who wail about lost j obs. The World Bank should t herefore lend t o t he rich count ries so t hey can ret rain t hose workers—and be free t o pursue genuine free t rade, which will benefit everyone. 1 6 . Cosm e t ic Psych oph a r m a cology Ellen Peebles Your em ployees now have access t o m edicat ions—like Prozac—t hat not only alleviat e

depression but also alt er personalit ies in ways t hat are good for business. Will am bit ious m anagers be able t o leave well enough alone? 1 7 . W a t ch in g t h e Pa t t e r n s Em e r ge Clay Shirky Managers m anage what t hey can see, but unt il now t hey’ve never been able t o “ see” int o t he inform al social net works t hat have always driven business. Bet t er dat a and new research are finally giving com panies a chance t o leverage real people’s int eract ions, for everyt hing from t rend spot t ing t o ident ifying int ernal expert s wit hin a depart m ent . 1 8 . La u gh t e r , t h e Be st Con su lt a n t Thom as A. St ewart You can learn a lot about a com pany by paying at t ent ion t o it s hum or. Skit s at sales conferences, wisecracks during m eet ings, j okes in e- m ails: These const it ut e an ext raordinary t rove of inform at ion about what ’s really going on. 1 9 . W a t ch You r Ba ck Leigh Buchanan Fear of risk can cripple a com pany’s abilit y t o com pet e aggressively. But a new fram ework for ent erprise risk m anagem ent m ay finally convince businesses t hat t hey can syst em at ically assess hazards on all front s, wit hout dam ping t heir m anagers’ ent repreneurial zeal. 2 0 . I T D oe sn ’t Sca t t e r Ray Kurzweil I f you asked m ost people t o describe t he past decade of I T, t hey would call it boom and bust —a roller coast er ride. The realit y is t hat despit e t he st ock swings, t he burst ing bubbles, t he scandals, and t he count less ot her disappoint m ent s, t echnology has m arched sm oot hly and relent lessly ahead.

• • • Br e a k t h r ou gh I de a s for 2 0 0 4 What ’s t he best idea you’ve heard lat ely t hat ’s relat ed t o t he pract ice of m anagem ent ? HBR’s edit ors asked around, t hen put t heir heads t oget her, and t he result is t he 2004 HBR List . I t ’s a com pendium of new t hinking as diverse as it is provocat ive. Perspect ives from econom ics and sociology sit side by side wit h developm ent s in brain science and urban planning. Not es of caut ion—even cont rit ion—m ix wit h calls t o act ion. You’ll find insight s on how t o form ulat e st rat egy, spur innovat ion, spot danger, m anage risk, and get t he highest perform ance from t he people in your organizat ion. There are new findings about large- scale t rends and fresh t hought s on day- t o- day decision m aking. I f t here is a crosscurrent running t hrough t hem , it is only t his: t hat m anagers wit h open m inds and access t o new t hinking can m ake a difference, t o t he com pet it iveness of t heir organizat ions and t he well- being of t he world. Since t he beginning, HBR has sought t o present not j ust ideas, but ideas wit h im pact . Wit h t he 2004 List , we deliver a bum per

crop of t hem . Consider t hem , debat e t hem , let t hem inspire your own t hinking. Then go and m ake an im pact . 1 . You Got a Lice n se t o Ru n Th a t Com pa n y? Managem ent , for a brief period in t he last cent ury, was well on it s way t o becom ing a profession. But m anagers have been ret reat ing from t hat goal for t he past 60 years, and we have an unparalleled wave of corporat e scandals in recent t im es t o show for it . What is a “ profession” ? I n ordinary parlance, t he t erm refers t o an occupat ion t hat requires a high degree of t echnical skill and com pet ence. A m ore t radit ional definit ion, however, also encom passes m ast ery of an abst ract , syst em at ic body of knowledge—and a prim ary orient at ion t oward et hical service t o societ y. I t was t hat com prehensive not ion of professionalism t hat inspired t he founders of t he Whart on School of t he Universit y of Pennsylvania, t he Tuck School at Dart m out h, and Harvard Business School—Am erica’s first business schools—in t he early years of t he t went iet h cent ury. They int ended not only t o st andardize t he product ion of m anagers for t he nat ion’s corporat ions but also t o professionalize t he occupat ion of m anagem ent it self. I f t hey had succeeded, m anagers m ight have com e t o play a role in t he businessdom inat ed societ y of t he t went iet h cent ury analogous t o t he role of t he clergy in preindust rial Am erica. However, t he “ professionalizat ion” proj ect lost st eam aft er World War I I . As t he dem and for t rained m anagers exploded, t he num ber of business program s rose and t heir cont ent becam e dilut ed. By 1959, bot h t he Ford Foundat ion and t he Carnegie Corporat ion had issued highly crit ical report s on t he st at e of Am erican business schools, decrying t heir purely vocat ional curricula. Bot h called for m ore em phasis on t he social and behavioral sciences and on t he use of quant it at ive m et hods. Those direct ives, along wit h t he funding provided by t he t wo foundat ions, led t o t he recruit m ent of new facult y, m any of whom were t rained in econom ics. This saw t he developm ent of m any of t he econom ic t heories t hat form t he st aple fare of MBA courses t oday. By t he t im e concept s like agency t heory and efficient - m arket t heory found t heir way int o t he classroom in t he 1980s, anot her fundam ent al shift was occurring: Managerial capit alism was giving way t o a new syst em of invest or capit alism . MBA st udent s were t aught t hat as m anagers, t hey were m erely agent s, bound by arm ’s- lengt h cont ract ual relat ionships t o a single set of const it uent s: shareholders.

An e t h ic of pu r e se lf- in t e r e st h a s r e pla ce d t h e pr ofe ssion a l e t h ics t h a t bu sin e ss sch ools on ce t r ie d t o t e a ch . What went unnot iced was t hat such a view of t he m anager’s role and responsibilit ies was ut t erly incom pat ible wit h t he t radit ional concept of professionalism . The post war at t em pt t o reform Am erican business educat ion had creat ed unint ended consequences. A Hobbesian et hic of pure self- int erest , backed by t he power of t he highly abst ract and syst em at ic “ science” of econom ics, replaced t he professional et hics t hat t he business schools had once t ried t o t each. That is part icularly t roublesom e because business execut ives are unrivaled by any ot her group in t heir cont rol over m at erial and hum an resources and t heir dom inance in Am erican societ y. What ’s m ore, execut ives have succeeded in im posing t heir values, norm s, and m et hods on older, m ore aut onom ous professions such as law and m edicine. I t is t im e t o reacquaint m anagers wit h t he concept of professionalism . Along wit h t hat should com e a fundam ent al reassessm ent of business educat ion and how well it serves

societ y’s int erest s. The Am erican business school has becom e an inst it ut ion t hat serves a very different purpose t han was originally int ended. That t ransform at ion has had a profound effect on Am erican m anagem ent ’s evolut ion t oward it s present condit ion, where it is ripe for reexam inat ion. Ra k e sh Kh u r a n a ( r k h u r a n a @h bs.e du ) is an assist ant professor at Harvard Business School in Bost on. He is writ ing a book, scheduled t o be published by Princet on Universit y Press in 2005, on m anagem ent as a profession. 2 . N o M on opoly on Cr e a t ivit y Creat ivit y is a virt ually lim it less resource: Every hum an being has creat ive pot ent ial t hat can be t urned t o valuable ends. The num ber of people doing creat ive work—t he scient ist s, engineers, t echnologist s, art ist s, and designers and t he various professionals in healt h care, finance, law, and ot her fields who m ake up t he “ creat ive class” —has increased vast ly over t he past cent ury. I n 1900, fewer t han 10% of U.S. workers were doing creat ive work. I n 1980, t hat figure was slight ly m ore t han 15% . But by 2000, t he creat ive class included alm ost a t hird of t he workforce. The creat ive sect or account s for nearly half of all wage and salary incom e in t he Unit ed St at es—$1.7 t rillion, as m uch as t he m anufact uring and service sect ors com bined. I m agine how m uch wealt h could be generat ed if t he creat ive capacit ies of t he rem aining t wo- t hirds of t he workforce were harnessed, t oo. I n t he past year I ’ve been hit by a harsh realizat ion: The Unit ed St at es, while ret aining an edge in t his regard, is far from unbeat able. I n fact , it s posit ion is m ore t enuous t han com m only t hought . For m ost of hum an hist ory, wealt h cam e from a place’s endowm ent of nat ural resources, like fert ile soil or raw m at erials. But t oday, t he key econom ic resource, creat ive people, is highly m obile. And it gravit at es t oward places wit h cert ain underlying condit ions. To achieve growt h, a region m ust have what I call t he t hree Ts: t echnology, t alent , and t olerance. So t he Creat ivit y I ndex t hat Kevin St olarick and I creat ed is based on t hree com ponent scores, each a m at t er of obj ect ive count ing. To det erm ine, for exam ple, if a place is likely t o have a cult ure of t olerance, we look at t he concent rat ions of gay, “ bohem ian,” and foreign- born people and t he degree of racial int egrat ion. The t olerance and openness im plied by t hese concent rat ions form a crit ical elem ent in a place’s abilit y t o at t ract different kinds of people and generat e new ideas. What ’s fright ening is t hat , far from cult ivat ing it s creat ive advant age, our societ y at a nat ional level seem s det erm ined t o undercut it . Today in t he Unit ed St at es, t here is considerable concern over t he out sourcing of soft ware and inform at ion t echnology j obs t o I ndia and over China’s rise as a m anufact uring power. But t he real t hreat t o our com pet it iveness lies in new rest rict ions on research, scient ific disclosure, im m igrat ion, and flows of people, because t hose lim it s are st art ing t o affect our abilit y t o at t ract creat ive and t alent ed people from around t he world. An em inent oceanographer in San Diego recent ly t old m e, “ We can’t hold a scient ific m eet ing here because we can’t get visas for people.” No one seem s t o be t hinking about t he flow of people as t he key t o our advant age in t he creat ive age. The econom ic leaders of t he fut ure will not necessarily be em erging giant s like I ndia and China. They cert ainly won’t be count ries t hat focus on being cost - effect ive cent ers for m anufact uring and basic business processing. Rat her, t hey will be t he count ries t hat are able t o at t ract creat ive people and com e up wit h next - generat ion product s and business processes as a result . Wit h I rene Tinagli, a Carnegie Mellon Universit y doct oral st udent , I recent ly com pared 14 European and Scandinavian nat ions t o t he Unit ed St at es. Sweden,

Finland, Denm ark, and t he Net herlands had Creat ivit y I ndex scores t hat closely m at ched t hat of t he Unit ed St at es, and I reland is gaining quickly ( see t he exhibit “ The Creat ivit y I ndex” ) . Ot her research indicat es t hat Canada, Aust ralia, and New Zealand have built dynam ic creat ive clim at es. Toront o and Vancouver, Canada, and Sydney and Melbourne in Aust ralia com pet e very well wit h m aj or U.S. regions like Chicago and Washingt on, DC.

Leads in t he creat ive age are very easily won and lost —Aust in, Texas, and Seat t le have recent ly shot up t he Creat ivit y I ndex while Pit t sburgh and Cleveland have fallen. No one place has a preordained posit ion at t he t op of t he heap. Am ericans m ust wake up t o t he fact t hat econom ies are fluid and t hat creat ivit y is an asset t hat m ust be const ant ly cult ivat ed. Rich a r d Flor ida is t he H. John Heinz I I I Professor of Regional Econom ic Developm ent at t he Heinz School of Public Policy and Managem ent at Carnegie Mellon Universit y in Pit t sburgh. He is t he aut hor of The Rise of t he Creat ive Class ( Basic Books, 2002) . He can be cont act ed at flor ida @cm u .e du . 3 . Th e St r a t e gy I s t h e St r u ct u r e Tradit ionally, st rat egy dict at ed st ruct ure: You st art ed by defining a st rat egic goal, t hen recast your organizat ion t o serve it . But for a host of reasons, including t he ever decreasing half- life of st rat egic advant age, t his sequent ial, com part m ent alized process now seem s obsolet e.

Consider t he experience of Air Liquide, t he French producer of indust rial gases, where a successful new st rat egy was act ually driven in large part by t he organizat ion’s changing st ruct ure. Air Liquide had found a way t o produce gases in sm all plant s on- sit e at cust om ers’ fact ories. I n short order, growing num bers of Air Liquide st aff were being st at ioned perm anent ly at client sit es—which put t he st aff in a posit ion t o not ice ways in which t heir com pany could help cust om ers im prove operat ing efficiency, increase out put qualit y, and reduce t he capit al requirem ent s of various processes. A com panywide reorganizat ion ( inst it ut ed for unrelat ed reasons) gave t hese on- sit e t eam s great er aut onom y, and suddenly t hey were able t o act on t he new opport unit ies. Oft en t his involved t aking on act ivit ies t hat had been m anaged by cust om ers, such as handling hazardous m at erials, t roubleshoot ing qualit y- cont rol syst em s, and m anaging invent ory. Today, t hese relat ively high- m argin services const it ut e about 25% of Air Liquide’s revenues, com pared t o 7% in 1991, before t he reorganizat ion. Wit hout t he reorganizat ion, t his pot ent new st rat egy—t he ant idot e t o t he com m odit izat ion t hat was t hreat ening Air Liquide’s product lines—would not have em erged. The form erly cent ralized hierarchy would have hindered t he field st aff from m aking decisions or even accessing inform at ion about cust om ers. When t he seeds of t his new growt h opport unit y sprout ed in part s of t he organizat ion t hat were closest t o t he cust om er, t he ent ire organizat ion was able t o adapt and execut e well because t he precondit ions, in t he form of t he new st ruct ure, were t here t o do so. Alt hough m ism at ches of organizat ion and st rat egy are oft en obvious in hindsight , t hey are never obvious prospect ively. Team s t hat are charged wit h developing new businesses t ypically m ake overopt im ist ic proj ect ions and downplay t he difficult ies of execut ion. Think of all t he com put er hardware and soft ware firm s t hat have pursued st rat egies t o becom e com plet e I T solut ion providers. Most have failed; t hey sim ply do not have t he skills, relat ionships, m ind- set , and organizat ional st ruct ures required for a broad- based, “ syst em s- agnost ic” approach. At t he very least , t his suggest s t hat , if an organizat ion is not prepared t o execut e st rat egy A, it ’s bet t er t o choose st rat egy B, perhaps as an int erim opt ion. But we would go furt her t o suggest t hat st rat egy and organizat ional change should happen in parallel and t hey should be allowed t o influence each ot her. A new m odel, concurrent ent erprise design, m ight be t he best hope of enabling organizat ions t o m ove at least as fast as t heir m arket s. Adr ia n Slyw ot zk y is a Bost on- based m anaging direct or of Mercer Managem ent Consult ing. D a vid N a dle r is t he CEO and chairm an of Mercer Delt a Organizat ional Consult ing and is based in New York. 4 . Bu sin e ss on t h e Br a in Psychoanalysis—t he t alking cure—was t he m ost popular form of m ent al t herapy for m ost of t he t went iet h cent ury, for good reason. For a st art , analysis seem ed a far m ore hum ane t reat m ent t han it s prim it ive alt ernat ives such as lobot om y or early form s of elect ric shock. More dram at ically, however, t he horrors of Hit ler’s Germ any, where m onst ers like Josef Mengele conduct ed cruel experim ent s on Jews, hom osexuals, Gypsies, and t he m ent ally ill, out raged people and generat ed st iff resist ance t o any form of experim ent at ion involving hum an beings. But t he 1960s t urned t he world on it s head. Newly discovered m edicat ions m ade huge st rides against debilit at ing illnesses such as m anic depression and schizophrenia. The asylum s em pt ied out , and m ent al illness finally cam e t o be underst ood as largely a

funct ion of genet ic inherit ance and chem ical im balance. By t he 1990s, scient ist s all over t he world were unit ed in t he Hum an Genom e Proj ect , a m assive effort t o m ap all t he hum an genes, m aking t hem accessible for st udy—and m anipulat ion.

M RI t e ch n ology a lr e a dy h e lps r e se a r ch e r s de t e r m in e h ow pot e n t ia l cu st om e r s r e spon d t o pr odu ct s a n d a dve r t ise m e n t s. Drugs and genes are not t he only scient ific changes t hat are t urning our at t ent ion t oward t he brain and away from t he m ind. One of t he great est m edical breakt hroughs of t he past few decades has been t he developm ent of powerful im aging t ools such as MRI and PET scans, which have m ade it possible for scient ist s t o “ see” t he brain in act ion. For inst ance, scient ist s can now m ap how different st im uli affect different part s of t he brain, which gives t hem powerful inform at ion about what people t hink and feel and rem em ber. For t heir cont ribut ions in invent ing t he MRI , Am erican Paul C. Laut erburg and Brit on Sir Pet er Mansfield were awarded t he 2003 Nobel Prize in m edicine last Oct ober. I nevit ably, t he revolut ion in t he neurosciences will have a m aj or im pact on business. I n m arket ing, for exam ple, MRI t echnology already helps researchers det erm ine how pot ent ial cust om ers respond t o product s and advert isem ent s. But t he im pact of t he new changes in science doesn’t end t here. Brain research will inevit ably affect ot her business subj ect s, such as leadership and cooperat ion. The field of organizat ional behavior, for exam ple, owes a great debt t o t he t radit ional social sciences of psychology and psychoanalysis. Many of t he t ools m anagers have grown up wit h—such as our t heories of m ot ivat ion and personalit y—are root ed in t hese social sciences. But t he new “ hard” sciences will inevit ably bring new t ools and solut ions t o challenge—and m aybe even t o replace—t hese old favorit es. As Harvard Business School professor Nit in Nohria, coaut hor wit h Paul R. Lawrence of Driven: How Hum an Nat ure Shapes Our Choices, put s it : “ I t hink t he social- science lem on has been squeezed dry. There m ay be som e drops of j uice left , but t he fruit of t he neurosciences has barely begun t o be t ouched. Businesspeople are t urning t o t hem now because we see a m uch richer opport unit y for ourselves in t he fut ure.” D ia n e L. Cou t u ( dcou t u @h bsp.h a r va r d.e du ) is a senior edit or at HBR. 5 . Th e La w of Con se r va t ion of At t r a ct ive Pr ofit s I n m y recent book—and in an earlier HBR art icle—I explored a couple of linked ideas having t o do wit h how profit abilit y in a value chain shift s over t im e. Briefly ( and way t oo sim plist ically as a result of space const raint s here! ) , t he t hinking went som et hing like t his: • Product s are m ost profit able when t hey’re st ill not “ good enough” t o sat isfy consum ers. This is because t o m ake t hem perform ance com pet it ive, engineers m ust use int erdependent , propriet ary archit ect ures. Use of such archit ect ures m akes product different iat ion st raight forward, because each com pany pieces it s part s t oget her in a unique way. • Once a product ’s perform ance is good enough, com panies m ust change t he way t hey com pet e. The innovat ions for which cust om ers will pay prem ium prices becom e speed t o m arket and t he abilit y responsively and convenient ly t o give cust om ers exact ly what t hey need, when t hey need it . To com pet e in t his way, com panies are forced t o em ploy m odular archit ect ures for product s. Modularit y causes t he product s t o becom e undifferent iable and com m odit ized. At t ract ive profit s don’t evaporat e, however…

• They m ove elsewhere in t he value chain, oft en t o subsyst em s from which t he m odular product is assem bled. This is because it is im provem ent s in t he subsyst em s, rat her t han t he m odular product ’s archit ect ure, t hat drive t he assem bler’s abilit y t o m ove upm arket t oward m ore at t ract ive profit m argins. Hence, t he subsyst em s becom e decom m odit ized and at t ract ively profit able. My sense is t hat t hese shift s are m ore t han coincident al; I suspect t hat when m ost product s st art t o becom e com m odit ized or m odularized, t his t urn of event s kick- st art s a decom m odit izat ion process som ewhere else in t he value chain. As a general rule, one side of an int erface in t he value chain m ust be m odular t o allow t he side t hat ’s not yet good enough t o be opt im ized. My friend Chris Rowen, CEO of Tensilica, suggest ed t hat we call t his phenom enon t he law of conservat ion of at t ract ive profit s. ( He was playing off t he law of conservat ion of energy, which st at es t hat energy cannot be creat ed or dest royed, t hough it m ay be changed from one form t o anot her.) Translat ed int o m anagerial t erm s, t he law goes som et hing like t his: When at t ract ive profit s disappear at one st age in t he value chain because a product becom es m odular and com m odit ized, t he opport unit y t o earn at t ract ive profit s wit h propriet ary product s will usually em erge at an adj acent st age. I f t hat ’s t he case ( and I hast en t o add t hat it ’s st ill a hypot hesis) , it suggest s t hat t here is a dynam ic dim ension t o Michael Port er’s five- forces fram ework. Because t he hypot hesis suggest s t hat t he locat ion in t he value chain where at t ract ive profit s can be earned shift s in a predict able way over t im e, com panies t hat out source act ivit ies t hat are not t oday’s core com pet encies m ay well m iss t he boat . This “ law” m ight help m anagers foresee which act ivit ies in t he value chain will generat e t he m ost at t ract ive profit s in t he fut ure so t hat t hey can develop or acquire com pet encies where t he m ost m oney will be.

Com pa n ie s ou t sou r cin g a ct ivit ie s t h a t a r e n ot t oda y’s cor e com pe t e n cie s m a y w e ll m iss t h e boa t . Cla yt on M . Ch r ist e n se n is t he Robert and Jane Cizik Professor of Business Adm inist rat ion at Harvard Business School. His m ost recent book is The I nnovat or’s Solut ion: Creat ing and Sust aining Successful Growt h ( Harvard Business School Press, 2003) . He can be reached at cch r ist e n se n @h bs.e du . 6 . Th e For ce Be h in d Gigli I nvest ors are always scram bling t o find out where t he “ sm art m oney” is going. But it ’s also im port ant , whet her you’re an invest or or a business m anager, t o know where t he st upid m oney is going. I t ’s a well- est ablished phenom enon t hat ’s gone t oo long wit hout a nam e: Com panies, indust ries, and even whole sect ors have a st upid- m oney problem when t hey are suddenly flooded wit h capit al seeking irrat ional rat es of ret urn or wit h invest ors whose int erest s run cont rary t o t hose of a norm ally operat ing m arket . Sounds like a nice problem t o have? I t ’s not , because it prom pt s com panies t o alt er t heir business m odels in ways t hat are not sust ainable over t he long haul.

“St u pid m on e y” pr om pt s com pa n ie s t o a lt e r t h e ir bu sin e ss m ode ls in w a ys t h a t a r e n ot su st a in a ble . Think of t he 1970s, when t ens of billions of dollars of st upid m oney flowed from t he OPEC count ries t o t he m oney cent er banks in London and New York. From t here it was lent t o Argent ina, Brazil, Mexico, Nigeria, I ndonesia, and ot her developing count ries for

infrast ruct ure proj ect s such as power plant s, bridges, and dam s. But when t his episode ended, t ens of billions of st upid- m oney loans could not be repaid by t he borrowers wit hout help from t he Unit ed St at es and ot her governm ent s. More t han one m oney cent er bank t eet ered on t he brink of insolvency. Or t hink of t he 1980s, when billions of dollars of st upid m oney flowed int o t he U.S. real est at e m arket via t he savings and loan indust ry. Large spreads bet ween t he int erest paid on deposit s and t hat received on m ort gages—as well as plent iful capit al from t he j unk bond m arket —creat ed incent ives for S&Ls t o shovel m oney out t he door. Condom inium s, count ry clubs, hot els, offices, and shopping cent ers wit h dubious econom ic value were built . Though som e m oney was m ade by “ flipping” t hese proj ect s and from fees charged by developers and financial inst it ut ions, m any billions were lost when t he st upid m oney fled t he scene. The savings and loan indust ry collapsed and wit h it m uch of t he com m ercial real est at e m arket . I t t ook nearly a decade for t he governm ent t o clean up t he m ess. Right now, t here’s at least one place where t he st upid m oney is sloshing around like San Pellegrino: Hollywood. The problem t here is t hat a large proport ion of m ovies have been financed wit h m oney from European t ax shelt ers—which creat e larger ret urns for t heir invest ors when a proj ect loses m oney t han when it m akes m oney. According t o indust ry est im at es, Germ any, t he largest source of t hese funds, provided Hollywood wit h about $2.3 billion in t ax shelt er m oney in 2002, m ore t han 20% of Hollywood’s overall invest m ent budget . A few indust ries have adapt ed t o living wit h st upid m oney t he way cert ain species of fish have adapt ed t o living near deep- wat er sulfur chim neys. Hollywood is a perfect exam ple. Rat her t han focusing on profit s from m ovies, t he indust ry has been prodded by lossseeking capit al int o focusing on increasing cost s. St udios m ake m oney from fees from independent producers based on a percent age of a proj ect ’s product ion, dist ribut ion, and m arket ing cost s, rat her t han by relying exclusively on a film ’s revenue. I n t he fee- based m odel t hat has evolved in Hollywood, profit s are about as rare as an int erview wit h Robert DeNiro. What can m anagers do ( short of t aking t he m oney and running) t o survive t he dist ort ing effect s of st upid m oney? For Hollywood, right ing t he business m odel would m ean changing t he way t he st udios go aft er t heir m ult iple st ream s of revenue. Rat her t han produce a handful of $200 m illion blockbust er m ovies each year, t he st udios m ight do bet t er by focusing on m aking m ore, sm aller- budget m ovies. And where is t he st upid m oney going next ? Given it s predilect ion for glam our, glit z, and new ideas, I ’d say nanot echnology and t he life sciences are ripe for an infest at ion. These are fields where we’re seeing not only federal funding but also feverish invest m ent by people looking t o get in on t he next big t hing. I f it happens, we know how it will go. St upid m oney will begin by running aft er t he sect or’s Seabiscuit s and end up st alking it s nags. The sm art m oney will show up again only aft er t he inevit able downt urn, t he shakeout , and t he reform of t he business m odels. Joe l Ku r t zm a n ( Joe l.A.Ku r t zm a n @u s.pw cgloba l.com ) is t he global lead part ner for t hought leadership and innovat ion at Pricewat erhouseCoopers and president of t he Tangible Group, based in Concord, Massachuset t s. His lat est book is How t he Market s Really Work ( Crown, 2002) . 7 . M or e Tr ou ble Th a n Th e y’r e W or t h There’s a sim ple pract ice t hat can m ake an organizat ion bet t er, but while m any m anagers t alk about it , few writ e it down. They enforce “ no asshole” rules. I apologize

for t he crudeness of t he t erm —you m ight prefer t o call t hem t yrant s, bullies, boors, cruel bast ards, or dest ruct ive narcissist s, and so do I , at t im es. Som e behavioral scient ist s refer t o t hem in t erm s of psychological abuse, which t hey define as “ t he sust ained display of host ile verbal and nonverbal behaviors, excluding physical cont act .” But all t hat cold precision m asks t he fear and loat hing t hese j erks leave in t heir wake. Som ehow, when I see a m ean- spirit ed person dam aging ot hers, no ot her t erm seem s quit e right . I first encount ered an explicit rule against t hem about 15 years ago. I t was during a facult y m eet ing of m y academ ic depart m ent , and our chairm an was leading a discussion about which candidat e we should hire. A facult y m em ber proposed t hat we hire a renowned researcher from anot her school, a suggest ion t hat prom pt ed anot her t o rem ark, “ I don’t care if he won t he Nobel Prize, I don’t want any assholes ruining our group.” From t hat m om ent on, it was com plet ely legit im at e for any of us t o quest ion a hiring decision on t hose grounds. And it m ade t he depart m ent a bet t er place. Since t hen, I ’ve heard of m any organizat ions t hat use t his rule. McDerm ot t , Will & Em ery, an int ernat ional law firm wit h headquart ers in Chicago, is ( or at least was) known as a bet t er place t o work t han ot her firm s, and it has been quit e profit able in recent years. A survey from Vault , a Web- based provider of career inform at ion, report s t hat McDerm ot t has a t im e- honored no asshole rule, which holds t hat “ you’re not allowed t o yell at your secret ary or yell at each ot her” —alt hough t he survey also report s t hat t he firm has been growing so fast lat ely t hat t he rule is st art ing t o fall by t he wayside. Sim ilarly, a Phoenix- based law firm provides t his writ t en guideline t o sum m er associat es: “ At Snell & Wilm er, we also have a ‘no j erk rule,’ which m eans t hat your abilit y t o get along wit h t he ot her sum m er associat es and our at t orneys and st aff fact ors int o our ult im at e assessm ent .” And t he president of a soft ware firm t old m e a couple of m ont hs back, “ I keep rem inding everyone, ‘Make sure we don’t hire any assholes, we don’t want t o ruin t he com pany.’” All t his m ight lead you t o believe t hat t his rule bears m ainly on em ployee select ion. I t doesn’t . I t ’s a deeper st at em ent about an organizat ion’s cult ure and what kind of person survives and t hrives in it . All of us, including m e, have t hat inner asshole wait ing t o get out . The difference is t hat som e organizat ions allow people ( especially “ st ars” ) t o get away wit h abusing one person aft er anot her and even reward t hem for it . Ot hers sim ply won’t t olerat e such behavior, no m at t er how powerful or profit able t he j erk happens t o be. I rem em ber when m y daught er swit ched schools a few years back. Aft er a couple of m ont hs, she t old m e, “ I n our old school, when t hey said you had t o be nice, t hey m eant it . I n m y new school, t hey say it but don’t really m ean it .”

Som e or ga n iza t ion s a llow “st a r s” t o ge t a w a y w it h a bu sin g pe ople . Ot h e r s sim ply w on ’t t ole r a t e it . I acknowledge t hat t here is a subj ect ive elem ent t o t his rule. Cert ainly, a person can look like, or even be, a sinner t o one person and a saint t o anot her. But I ’ve found t wo useful t est s. The first is: Aft er t alking t o t he alleged asshole, do people consist ent ly feel oppressed and belit t led by t he person, and, especially, do t hey feel dram at ically worse about t hem selves? The second is: Does t he person consist ent ly direct his or her venom at people seen as powerless and rarely, if ever, at people who are powerful? I ndeed, t he difference bet ween t he ways a person t reat s t he powerless and t he powerful is as good a m easure of hum an charact er as I know. I ’ll close wit h an odd t wist : I t m ight be even bet t er if a com pany could im plem ent a “ one asshole” rule. Research on bot h deviance and norm violat ions shows t hat if one exam ple of m isbehavior is kept on display—and is seen t o be rej ect ed, shunned, and punished—

everyone else is m ore conscient ious about adhering t o writ t en and unwrit t en rules. I ’ve never heard of a com pany t hat t ried t o hire a t oken asshole. But I ’ve worked wit h a few organizat ions t hat accident ally hired and even prom ot ed one or t wo, who t hen unwit t ingly showed everyone else what not t o do. The problem is t hat people can hide t heir dark sides unt il t hey are hired, or even are prom ot ed t o part ner or t enured professor. So by aim ing t o hire no assholes at all, you j ust m ight get t he one or t wo you need. Robe r t Su t t on is a professor of m anagem ent science and engineering at St anford Universit y’s School of Engineering in California. He is also t he aut hor of Weird I deas That Work: 11½ Pract ices for Prom ot ing, Managing, and Su st aining I nnovat ion ( Free Press, 2002) . He can be reached at bobsu t @st a n for d.e du . 8 . Fin a lly, M a r k e t Re se a r ch You Ca n Use Execut ives oft en com plain t hat t he findings generat ed by t heir com panies’ invest m ent s in m arket research are rarely put t o use. The problem could be solved if m arket ers m ade t heir research m ore useful. How? By shift ing t heir perspect ive in t hree im port ant ways. First , m arket researchers should aim beyond m easurem ent t o opt im izat ion. The m arket ing lit erat ure is full of sophist icat ed m et hods for m easuring cust om er behavior, but m anagers have a bigger problem t han t racking cust om ers’ buying pat t erns: They need t o decide what act ion t he firm should t ake t o profit from t hat behavior. Deciding which response will yield t he best result is an opt im izat ion problem . Many im pressive t ools and m et hods for opt im izat ion have been developed t o solve engineering and m anufact uring problem s. For t hese m et hods t o work wit h m arket ing problem s, t hey m ust be m odified. These m odificat ions are being m ade, as opt im izat ion expert s realize t hat m arket ing offers m eat y, significant problem s and access t o large am ount s of dat a. The earliest successes were in pricing, wit h t he developm ent of sophist icat ed yield- m anagem ent syst em s in t he airline and hot el indust ries. Ot her work involved t he developm ent of m odels t o predict credit wort hiness in t he credit card indust ry. More recent ly, I nt ernet ret ailers have begun t o develop opt im izat ion syst em s t o ident ify which product s t o show t o different cust om ers. Exam ples of current t arget s for opt im izat ion research include syst em s for det erm ining who should receive direct - m ail prom ot ions and which product s and prices t o highlight in t hose prom ot ions. I n product developm ent , opt im izat ion m ay help com panies design product lines t o sat isfy cust om ers wit h diverse needs. A focus on opt im izat ion requires t hat m anagers choose a t im e fram e over which t o opt im ize. This brings m e t o t he second shift in perspect ive: More st udies should focus on t he long t erm . Decisions on pricing, advert ising, and ot her m arket ing m at t ers oft en have lingering im pact s on dem and and profit s, yet t he vast m aj orit y of m arket ing st udies lim it at t ent ion t o t he im m ediat e out com e. To underst and how t his can underm ine good decision m aking,consider t he findings of a few recent st udies. A publishing firm st udying t he im pact of price prom ot ions over t wo years discovered effect s t hat were im port ant for it s pricing st rat egies: I t found t hat if deep discount s were offered, est ablished cust om ers st ocked up and t hen purchased less lat er on, whereas first - t im e cust om ers t ended t o com e back and purchase m ore oft en in subsequent periods. A st udy of 20,000 people who used a hom e furnishings cat alog found t hat 10% discount s t o cust om ers who ordered out - of- st ock it em s increased revenue in t he short t erm but decreased t he rat e at which t hose cust om ers ordered different it em s lat er. And ot her st udies have concluded t hat m oving from a short - t erm t o a long- t erm focus on cat alog m ailings could increase profit s for m ail order com panies by as m uch as 40% .

Clearly, m arket researchers m ust st udy such long- t erm effect s if t heir findings are t o guide opt im al decision m aking. So why haven’t t hey? I n part , it ’s because of t he difficult y of collect ing dat a over t im e. But t hat hurdle is about t o be lowered. New m et hods current ly in developm ent will m ake it possible t o use hist orical dat a t o reliably est im at e long- run effect s. The t hird change m arket researchers should m ake is t o st art t est ing t heir t heories in t he field. What we usually see in t he m arket ing lit erat ure is t he result s of experim ent s conduct ed on college st udent s or analyses of hist orical dat a collect ed from public or propriet ary sources. There has been a st riking absence of field t est s in which com panies deliberat ely vary how t hey int eract wit h cust om ers engaged in real t ransact ions and m easure t he responses. But t his, t oo, has been changing recent ly, as m anagers are increasingly collaborat ing wit h academ ics t o conduct large- scale experim ent s involving act ual cust om ers. Exam ples include st udies t hat vary t he act ions of a com pany’s sales force, t he pages shown t o cust om ers on a com pany’s Web sit e, and t he cont ent of cat alogs and ot her direct - m ail prom ot ions. Cat alog com panies are part icularly well placed t o t est different m arket ing act ions. For inst ance, t hey can easily conduct split - sam ple st udies, in which different versions of a cat alog are sent t o large, random sam ples of cust om ers. This t ype of research m eet s a high st andard of rigor because it explicit ly cont rols for alt ernat ive explanat ions due t o int ervening event s or syst em at ic differences bet ween sam ples. I t also yields findings t hat are easy t o com m unicat e. Even t he least sophist icat ed pract it ioners can appreciat e t he conclusions when shown how profit s differ across experim ent al condit ions. For all t hese reasons, t he cat alog indust ry has been t he quickest t o em brace field t est ing, but m anagers in ot her indust ries are beginning t o cat ch on. I nvest m ent will be required in order t o develop t he infrast ruct ure and expert ise necessary t o conduct field t est s. Most com panies will need t o invest in m easurem ent t echnologies t o ensure t hat out com es are m easured correct ly, and t hey will need t o creat e a process for dissem inat ing and inst it ut ionalizing t he findings. But if t hey do m anage t o st age rigorous field experim ent s—and use t he findings t o opt im ize profit s—t hey can right fully claim t o be t reat ing m arket ing as a science. D u n ca n Sim e st e r ( sim e st e r @m it .e du ) is an associat e professor of m anagem ent science at MI T’s Sloan School of Managem ent in Cam bridge, Massachuset t s. 9 . Th e M FA I s t h e N e w M BA Get t ing adm it t ed t o Harvard Business School is a cinch. At least t hat ’s what several hundred people m ust have t hought last year aft er t hey applied t o t he graduat e program of t he UCLA Depart m ent of Art —and didn’t get in. While Harvard’s MBA program adm it t ed about 10% of it s applicant s, UCLA’s fine art s graduat e school adm it t ed only 3% . Why? An art s degree is now perhaps t he hot t est credent ial in t he world of business. Corporat e recruit ers have begun visit ing t he t op art s grad schools—places such as t he Rhode I sland School of Design, t he School of t he Art I nst it ut e of Chicago, Michigan’s Cranbrook Academ y of Art —in search of t alent . And t his broadened approach has oft en com e at t he expense of m ore t radit ional business graduat es. For inst ance, in 1993, 61% of McKinsey’s hires had MBA degrees. Less t han a decade lat er, it was down t o 43% , because McKinsey says ot her disciplines are j ust as valuable in helping new hires perform well at t he firm . Wit h applicat ions clim bing and ever m ore art s grads occupying key corporat e posit ions, t he m ast er of fine art s is becom ing t he new business degree.

Cor por a t e r e cr u it e r s h a ve be gu n visit in g t op a r t s gr a d sch ools. Th is a ppr oa ch h a s oft e n com e a t t h e e x pe n se of t r a dit ion a l bu sin e ss gr a du a t e s. The reasons are t wofold—supply and dem and. The supply of people wit h basic MBA skills is expanding and t herefore driving down t heir value. Meanwhile, t he dem and for art ist ic apt it ude is surging. I n m any ways, MBA graduat es are becom ing t his cent ury’s bluecollar workers—people who ent ered a workforce t hat was full of prom ise only t o see t heir j obs m ove overseas. For exam ple, Lehm an Brot hers and Bear St earns have begun t o hire MBAs in I ndia for financial analysis and ot her num ber- crunching work. St art ing salaries: around $800 per m ont h. A.T. Kearney est im at es t hat in t he next five years, U. S. financial services com panies will t ransfer a half- m illion j obs t o low- cost locales such as I ndia—saving t he indust ry som e $30 billion but displacing 8% of t heir Am erican workforce. As t he Econom ist recent ly put it , t he sort s of ent ry- level MBA t asks t hat “ would once have been foist ed on am bit ious but inexperienced young recruit s, working long hours t o earn t heir spurs in Wall St reet or t he Cit y of London, are, t hanks t o t he m iracle of fibre- opt ic cable, foist ed on t heir lower- paid I ndian count erpart s.” At t he sam e t im e, businesses are realizing t hat t he only way t o different iat e t heir goods and services in t oday’s overst ocked, m at erially abundant m arket place is t o m ake t heir offerings t ranscendent —physically beaut iful and em ot ionally com pelling. Think iMac com put ers, Design Wit hin Reach, and Target aisles full of I saac Mizrahi wom en’s wear and Michael Graves t oilet brushes. Or j ust list en t o aut o indust ry legend Robert Lut z. When Lut z t ook over as chairm an of General Mot ors Nort h Am erica, a j ournalist asked him how his approach would differ from his predecessor’s. Here’s what he said: “ I t ’s m ore right brain.… I see us as being in t he art business. Art , ent ert ainm ent , and m obile sculpt ure, which, coincident ally, also happens t o provide t ransport at ion.” General Mot ors —General Mot ors! —is in t he art business. So, now, are we all. D a n ie l H . Pin k ( dp@da n pin k .com ) is t he aut hor of Free Agent Nat ion ( Warner Business Books, 2001) and A Whole New Mind ( fort hcom ing from Riverhead Books) . 1 0 . Re qu ie m for t h e Pu blic Cor por a t ion Over t he last t hree years, execut ives, polit icians, and shareholders in t he Unit ed St at es have valiant ly t ried t o fix t he problem s of t he public lim it ed com pany, t he world’s m ost com m on corporat e organizat ion. They have enact ed m ore laws for com panies t o follow, set higher st andards for t he select ion of board m em bers, and insist ed t hat audit firm s com ply wit h st ringent new rules. Yet t hese post - Enron reform s beg one fundam ent al quest ion: I s t he useful life of t he public com pany, at least in t he form we have known it for m ore t han a cent ury, over? I am not , of course, t he first person t o quest ion t he viabilit y of t he widely held com pany. Two decades ago, shareholders in t he Unit ed St at es accused execut ives of being m ore int erest ed in prot ect ing t heir j obs t han generat ing higher profit s. The shareholders support ed raids by t akeover art ist s t o dislodge incum bent CEOs, and t hey hoped t he new m anagers would deliver higher ret urns. The shareholder revolt becam e so widespread t hat in 1989, Harvard Business School’s Michael Jensen argued t hat new kinds of organizat ions m ight som eday eclipse t he public lim it ed corporat ion. Jensen, now a colleague of m ine at Monit or, focused on agency problem s, t he conflict s t hat arise when t he int erest s of m anagers and shareholders diverge. At t he t im e he wrot e, t he st ruggle pit t ed shareholders and execut ives in a fight over low invest or ret urns and execut ive inert ia. Now, t he clash focuses on high execut ive com pensat ion levels ( at Tyco, for inst ance) and risky invest m ent s ( by Enron, for exam ple) . Corporat e

Am erica has responded by rest ruct uring salary packages, increasing t he t ransparency of financial report s, and st rengt hening t he supervisory role of boards of direct ors. Have agency problem s been resolved? Hardly. They can never be resolved, for t he int erest s of m anagers and shareholders will always differ t o a degree. The problem s go beyond t hose posed by agency. The cost s of being a public com pany have risen st eadily over t he years, wit h new laws like Sarbanes- Oxley adding t o overhead cost s. At t he sam e t im e, public com panies have t o deal wit h m ore lawsuit s from aggressive lawyers. I t is also get t ing hard t o recruit and ret ain t opflight t alent for public com panies as execut ives increasingly see t he cost s of being in t he spot light —in reput at ion dam age and personal liabilit y—out weighing t he benefit s. Most problem at ic, t he financial benefit s of going public have eluded m any com panies. We’ve seen t he em ergence of t wo t iers of com panies in t he st ock m arket . A few big com panies such as GE wit h large m arket s for t heir shares do benefit from t he liquidit y t hat t he st ock m arket provides. However, a large num ber of sm all com panies have st ruggled t o gain invest ors’ at t ent ion. Their st ocks rem ain st agnant , followed by only a few second- and t hird- t ier invest m ent banks. That leaves t hese m idcap com panies in public purgat ory. On t he one hand, inst it ut ional invest ors do not buy t heir shares out of fear t hat t hey will find it im possible t o escape a st ock for which t hey have est ablished a new m arket price. On t he ot her, t hese com panies cannot issue m ore shares in t he prim ary m arket , due t o t he dilut ive effect s and t he lack of invest or int erest . The sum of t hese forces explains why expert s predict ed a record num ber of firm s would deregist er in 2003, t aking advant age of a legal loophole t hat allows Am erican com panies t o rem ain public but not m ake financial disclosures. So why do com panies rem ain wedded t o t he not ion of public ownership? Most com panies choose t o go public because it yields higher ret urns and great er liquidit y. When it does not , t hey m ust reexam ine t heir opt ions. Alt hough it is not clear what t hose m ight be, t he t im e has com e t o ret hink rat her t han reform t he public corporat ion. Jose ph Fu lle r is t he CEO of Monit or Group, a fam ily of professional service firm s based in Cam bridge, Massachuset t s. A longer version of t his art icle appears in t he wint er 2004 edit ion of Direct ors & Boards ( www.direct orsandboards.com ) . 1 1 . Acce n t u a t e t h e Posit ive Ever since organizat ional psychologist s and m anagem ent scholars began st udying workplace behavior, t hey have focused on a long list of problem s t hat can bring organizat ions t o t heir knees: m anagerial abuse, greed, dist rust , poor m orale, burnout , office polit ics, and so on. This focus on t he negat ive aspect s of working life has m ade sense for t wo reasons. First , organizat ional scholarship is grounded in t he field of psychology, which has perennially concent rat ed on m ent al illness and social pat hology. Second, scholars since t he t im e of Dant e have generally found t hat t he t ort ures of hell yield m ore int erest ing book m at erial t han do t he blisses of heaven. Thus it m ay com e as a surprise t o learn t hat com panies where t he focus is on am plifying posit ive at t ribut es such as loyalt y, resilience, t rust wort hiness, hum ilit y and com passion— rat her t han com bat ing t he negat ives—perform bet t er, financially and ot herwise. A new field of inquiry called posit ive organizat ional scholarship ( POS) , spearheaded by organizat ional behavior and psychology researchers at t he Universit y of Michigan, t he Universit y of Pennsylvania, t he Universit y of Brit ish Colum bia, and elsewhere, is shedding prom ising new light on t he out com es of various approaches t o m anaging behavior in t he workplace. On t he face of it , POS doesn’t sound new. Ever since 1952, when Norm an Vincent Peale

published t he self- help classic The Power of Posit ive Thinking, t he benefit s of an opt im ist ic out look have been t out ed ad nauseum . Addit ionally, aut hors such as Tom Pet ers and Jim Collins have long st udied t he leadership at t ribut es t hat help com panies excel. What m akes POS different is it s focus: Rat her t han zeroing in on t he posit ive qualit ies of individuals, POS t akes a rigorous look at t he m ore widespread social const ruct s, values, and processes t hat m ake organizat ions great . And because it m easures result s, posit ive organizat ional scholarship goes beyond plat it udinous t alk about t he virt ues of being good. Sout hwest Airlines, for exam ple, isn’t t he envy of t he airline indust ry m erely because it has a com pet it ive cost st ruct ure or because founder Herb Kelleher, now ret ired, was a cool guy. The com pany is successful, t hese researchers cont end, because it carefully prot ect s and nurt ures it s em ployees. According t o Kim Cam eron, a professor of organizat ional behavior and hum an resource m anagem ent at t he Universit y of Michigan Business School who has st udied “ virt uous” firm s, Sout hwest —despit e it s no- layoffs policy—was t he only m aj or airline t o escape devast at ing long- t erm financial losses following t he Sept em ber 11, 2001, t errorist at t acks. Sout hwest ’s overall passenger loads and st ock price rem ained com parat ively high. Why is t his field of st udy em erging now? The germ of POS was, in fact , plant ed on 9/ 11, when t he m edia focused on t he qualit ies of em pat hy, courage, and resilience in t he workplace. I n 2002, t he debacles at Enron, WorldCom , and ot hers renewed conversat ions about et hics and governance. Suddenly, scholars began t o ask: How can com panies fost er honest y and t rust at work? How do organizat ions t hat replenish workers’ energy, build collect ive st rengt h, and fost er em ot ionally int elligent cult ures operat e? And how do t hese firm s perform , bot h com pet it ively and financially, over t im e?

Som e or ga n iza t ion s m a n a ge t o fost e r e m ot ion a lly in t e llige n t cu lt u r e s. Sch ola r s a r e be gin n in g t o a sk : H ow do t h e se fir m s ope r a t e ? Posit ive organizat ional scholarship is inspiring researchers t o look at work in a whole new light —and t hey are finding t hat em ployee happiness really does pay. I t ’s beginning t o look as if a posit ive workplace at m osphere is wort h developing, and not m erely for it s own sake; it m ay be t he foundat ion of t rue organizat ional success. Br on w yn Fr ye r ( bfr ye r @h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 2 . Biologica l Block On t he Massachuset t s Turnpike in Bost on, a hundred- foot - long billboard asks: “ I s your neighbor’s gun locked?” The point , of course, is t hat everyone in t he vicinit y of a gun should be engaged in t he t ask of cont aining t he t hreat . There’s a bigger idea here, and it ’s cropping up all over t he place—t he im m une syst em as an archit ect ure for securit y. The vert ebrat e im m une syst em , st ill far from well underst ood, operat es on a few broad principles: a ubiquit ous det ect ion capabilit y, a sophist icat ed abilit y t o discrim inat e friend from foe, a diverse repert oire of defensive responses, t he abilit y t o recognize and deal wit h novel t hreat s, and accum ulat ed learning. These principles have already been built int o “ digit al im m une syst em s” —if you use Sym ant ec’s corporat e ant iviral product , you’re soaking in it . Using t echnology developed at I BM’s Wat son Labs, t his syst em prot ect s com put er net works by recognizing “ m alware” anywhere in t he net work, quarant ining it , and sending it t o an analysis cent er, where Sym ant ec develops and deploys digit al ant ibodies, not j ust on t he infect ed com put er but t hroughout t he net work—in as lit t le as an hour. Then t he net work rem em bers t he response, so t he inoculat ion confers perm anent im m unit y.

Three m ore signs: Mat hem at ician St ephen St rogat z described t he 2003 power grid m elt down t hat blacked out part s of eight st at es as “ a m assive allergic react ion” t o a problem in t he grid—t hat is, a kind of aut oim m une failure of t he net work. Financial inst it ut ions are exploring whet her fraud can be prevent ed by t reat ing it as a det ect able infect ion—T- m en, not T cells. And a new discipline has been born: “ Theoret ical im m unology” explicit ly brings t oget her t he st udy of nat ural, “ wet ” im m une syst em s and t he developm ent of m at hem at ical m odels t hat can bot h im prove our underst anding of our own wet ware and aid in t he design of im m une syst em s for ot her host s under t hreat .

Fin a n cia l in st it u t ion s a r e e x plor in g w h e t h e r fr a u d ca n be pr e ve n t e d by t r e a t in g it a s a de t e ct a ble in fe ct ion . I m m une response is an idea whose t im e has com e. We have new capabilit ies: Our biological underst anding and our in silico sim ulat ion t echnology are growing. And we have newly pressing needs: The m ost urgent problem of our day—t errorism —requires an im m une syst em , not a series of firewalls, for effect ive prot ect ion. Success will com e when every cell of t he body polit ic has t he capabilit y and t he will t o det ect t error in t he offing and t he abilit y t o t rigger a let hal im m une response. Are your neighbor’s WMDs locked? Ch r is M e ye r ’s m ost recent book ( wit h St an Davis) is I t ’s Alive: The Com ing Convergence of I nform at ion, Biology, and Business ( Crown Business, 2003) . He can be reached at ch r is.m e ye r @it sa live book .com . 1 3 . H ow You Gon n a Ke e p ’Em D ow n on t h e Fa r m Aft e r Th e y’ve Se e n I n se a d? Com panies t hat want t o m ake serious invest m ent s in leadership developm ent have num erous opt ions. They can send t heir high- pot ent ial m anagers t o program s offered t hrough business schools like Harvard and I nsead, t o facilit ies like t he Cent er for Creat ive Leadership, or t o sessions designed by int ernal corporat e t raining groups. But despit e all t he com pet it ion in t he m arket , m any com panies aren’t convinced t hey are get t ing t heir m oney’s wort h. The problem m ay not be t he program s. I n fact , t he personal learning cat alyzed by a t opnot ch program can be t rem endous. The problem , m y research suggest s, is what happens when a m anager com es back t o t he day- t o- day rout ine of t he office. Having been inspired by exposure t o new m odels and net works, he or she ret urns t ransform ed, but t o an organizat ion t hat has not experienced a parallel m akeover. The clash of expect at ions— t he m anager’s and t he com pany’s—can be brut al. And so, paradoxically, t he bet t er t he m anagem ent developm ent program , t he m ore likely it m ay be t o precipit at e a valued em ployee’s depart ure. How can organizat ions—and individual m anagers—get t he full value of leadership developm ent ? I t ’s a quest ion of em phasizing t he “ t akeoff” and “ reent ry” phases of t he experience. I n preparat ion, for exam ple, a m anager should spend t im e wit h t he boss and ot her key st akeholders, engaging in a dialogue about his or her st rengt hs, weaknesses, and fut ure t raj ect ory. Having done so, t he m anager will be in a m uch bet t er posit ion, when he or she ret urns, t o get a developm ent assignm ent t hat will serve as a t raining ground for t he new skills and approaches suggest ed in t he program . I t ’s am azing how few m anagers seize t he opport unit y ( or excuse) t hat is creat ed by an upcom ing developm ent program t o init iat e such a conversat ion wit h t he boss. But whet her t hey do or not , t he boss should ensure t hat it happens. Sim ilarly, on reent ry, m anagers m ust t ake t he t im e t o repriorit ize goals and fine- t une

t heir st rat egies. What should he or she aim t o accom plish in t he first week? The first m ont h? Wit hin six m ont hs? This reflect ion and planning should happen im m ediat ely aft er reent ry—even if it m eans let t ing voice m ails and e- m ails pile up for yet anot her day. I n a series of st udies ranging from t he int roduct ion of new t echnologies t o m anagers’ approaches t o t aking on new roles, behavioral scient ist s have found a consist ent “ window of opport unit y” effect : We have only a short t im e t o m ake a real change aft er any break from rout ine. Aft er t hat , t hings slip quickly int o business as usual. Finally, t here is t he quest ion of how t he individual should t ransfer his or her new knowledge t o t he rest of t he t eam at t he organizat ion. I ’ve seen m any part icipant s leave a program excit ed by t heir learning, having t aken volum es of not es about what t hey plan t o do different ly, only t o be bewildered when t he people back hom e are not as quick t o see t he light . The key is t o recognize t hat t he power of t he learning experience is not j ust int ellect ual. I t ’s also em ot ional. While it ’s easiest t o pass along t he ideas and t he readings, t he m anager m ust devise ways t o share t he experience m ore fully. People oft en speak of execut ive program s as having been t ransform at ive. But t he benefit shouldn’t end t here, at t he event and wit hin t he individual. By t hought fully m anaging a m anager’s t akeoff and reent ry, an organizat ion can hope t o be t ransform ed by t he experience as well. H e r m in ia I ba r r a is t he I nsead Chaired Professor in Organizat ional Behavior at I nsead in Font ainebleau, France. She is t he aut hor of Working I dent it y: Unconvent ional St rat egies for Reinvent ing Your Career ( Harvard Business School Press, 2003) . She can be reached at H e r m in ia .I ba r r a @in se a d.e du . 1 4 . You D on ’t H a ve a N a n ost r a t e gy? Lost in t he hype about nanot echnology—som ewhere bet ween t he t hreat of ooblecky nano- goo and t he prom ise of cancer- curing m icrobot s—lies t he real st ory: Nanot echnologies will event ually disrupt , t ransform , and creat e whole indust ries. Mihail Roco, key archit ect of t he robust ly funded U.S. Nat ional Nanot echnology I nit iat ive, est im at es t hat by 2015, t he global m arket for nanot ech- based product s will reach $1 t rillion and em ploy 800,000 workers in t he Unit ed St at es and 2 m illion worldwide. The quest ion isn’t whet her your indust ry will be affect ed, but when and how. Nanot ech isn’t a single field so m uch as a sprawling idea t hat cut s across disciplines, including engineering, physics, chem ist ry, biology, and m at erials science. The concept is t hat by m anipulat ing m at t er at t he m olecular level, lit erally rearranging at om s and m olecules, you can creat e new m at erials and product s wit h ext raordinary propert ies— fibers wit h 30 t im es t he t ensile st rengt h of st eel at a fract ion of it s weight , chem ical det ect ors t hat can sense a single m olecule, precision- guided sm art drugs, and com put er m em ories 1,000 t im es denser t han any we have t oday.

N a n ot e ch isn ’t a sin gle fie ld so m u ch a s a spr a w lin g ide a t h a t cu t s a cr oss disciplin e s, fr om ph ysics t o biology. Nat han Myrhvold, Microsoft ’s form er CTO and now t he m anaging direct or of I nt ellect ual Vent ures, a privat e ent repreneurial firm , caut ions com panies t o keep t his fant ast ical nanofut ure in perspect ive. “ Nanot echnology m ay give rise t o t he next indust rial revolut ion—m aybe—but m ost nanot ech applicat ions aren’t going t o sneak up on you. The first indust rial revolut ion didn’t sneak up on us eit her,” he says. “ The broad vision is right , but som e of t hese applicat ions m ay be 50 years off. So what you want t o do is keep your ear t o t he ground.” For som e indust ries, nanot ech’s im plicat ions are near t erm

and obvious. Any com pany wit h a m aj or st ake in I T ought t o be act ively involved in nanot ech R&D and invest m ent if it has t he resources, as indust ry leaders I BM and HP are. The sam e is t rue for m at erials m anufact urers. At t he ot her end of t he spect rum are com panies in t he service indust ries and elsewhere t hat will be nanot echnology’s end users, t he beneficiaries of dim e- sized supercom put ers and ult ralight t ext iles st ronger t han Kevlar. A com pany’s responses t o nanot echnology opport unit ies, of course, will depend on where it falls on t his spect rum . The m aj or players’ aggressive st rat egy- developm ent program s include scenario planning and int ensive “ boot cam ps” in which t eam s develop t heoret ical nanoproduct s, says George Day, direct or of Whart on’s em erging t echnologies m anagem ent resource program . Ot her com panies are ret aining indust ry scout s and consult ing firm s wit h nanot ech expert ise and assem bling int ernal “ crow’s nest ” t eam s charged wit h t racking nanot ech developm ent s. Less aggressive surveillance st rat egies include t apping t he resources of t rade associat ions such as t he New York–based NanoBusiness Alliance and invit ing in various out side research scient ist s, cust om ers, and suppliers wit h nanot ech experience t o discuss t he t echnology’s pot ent ial im pact on business. At t he very least , if you don’t have a lookout now, get one. Have an insider shinny up t o t he crow’s nest and t ake a look around. You m ight be surprised by what she sees on t he horizon. Ga r din e r M or se ( gm or se @h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 5 . Th e Loa n Ra n ge r Why does widespread povert y persist in so m any part s of t he world? Because poor count ries need t rade and inst ead get aid. A sim ple, if surprising, change could fix t he sit uat ion. We all know t hat t rade is what ’s needed t o propel count ries. When t wo count ries engage in t rade, bot h benefit . But rich count ries discourage t rade wit h poor count ries in t hree m aj or ways. First , t hey hold fast t o t he t rading principle of reciprocit y; t hat is, t hey offer anot her count ry a t ariff reduct ion on a product in ret urn for t he sam e t reat m ent on anot her it em t hat t hey are hoping t o sell t o t hat count ry. Because t he poor count ry’s econom y is vast ly sm aller, t his “ equal t reat m ent ” prevent s it from bargaining for t he reduct ions in t rade barriers it needs t o com pet e in rich count ries. This is why, for inst ance, t he Unit ed St at es put s a t ariff on im port s from Bangladesh t hat is nearly t en t im es higher t han t hat on im port s from France. At t he sam e t im e, rich count ries spend, collect ively, nearly $1 billion a day subsidizing t he part of t heir econom ies where poor count ries m ay have a real com pet it ive advant age: agricult ure. For m ost poor count ries, a boost in agricult ure would m ake a crit ical difference. Genuine econom ic developm ent t ends t o be bot t om - up; a surplus in agricult ure produces t he purchasing power and invest m ent capit al for m anufact ured goods, and surpluses in m anufact uring sim ilarly lead t o m ore com plex consum pt ion and product ion. Finally, rich count ries use t heir leverage t o prom ot e free t rade where t hey have an advant age. I nst ead of buying from poor count ries, t hey’re m ore int erest ed in selling t o t hem . I t ’s a short - sight ed st rat egy. When rich count ries buy from poor count ries, t hey not only bring cost s down for t heir own consum ers, t hey also raise purchasing power nat urally in t he poor count ries—leading t o larger m arket s for t he rich count ries’ goods. I nst ead, rich count ries t ry t o art ificially boost poor count ries’ purchasing power by providing “ aid” —t o t he t une of nearly $1 billion a week—t hrough various bilat eral channels and m ult ilat eral inst it ut ions. When aid is given t o a poor count ry’s governm ent

( and m ost aid does go t o governm ent s) , it has t he added effect of prom ot ing st at ism —it cont ribut es t o t he cent ralizat ion of power, whereas decent ralizat ion fost ers dem ocrat izat ion and econom ic growt h. By t aking pressure off t hat governm ent t o achieve great er t ax revenues t hrough econom ic growt h, it allows t he poor count ry t o live wit h wrong policies and t herefore cont ribut es t o worsening governance. Solving t he problem requires a fresh focus on t he act ual bot t leneck. What is it t hat keeps rich count ries’ governm ent s from living up t o t heir rhet oric about free t rade? Just t his: a lim it ed num ber of special int erest s t hat lobby aggressively on t he part of dying indust ries. People who work in t hese sect ors, we hear, will suffer; t hey will have t o be ret rained, rehabilit at ed. But t hat , we know, can be done—provided t here is sufficient funding for relat ed proj ect s. And t here, I would propose, is where inst it ut ions like t he World Bank should be offering t heir aid. Let ’s st art lending t o t he rich count ries, so t hey can m ake t heir own people whole. Then t hey can pursue genuine free t rade, benefit ing bot h rich and poor econom ies. Wit h good access t o rich m arket s, poor econom ies would m ake subst ant ial gains and earn access t o capit al and know- how nat urally. I qba l Qu a dir ( I qba l_ Qu a dir @h a r va r d.e du ) is t he founder of Gram eenPhone, which provides t elephone access t hroughout Bangladesh, including t o it s rural poor. He lect ures in public policy at Harvard’s John F. Kennedy School of Governm ent in Cam bridge, Massachuset t s. 1 6 . Cosm e t ic Psych oph a r m a cology Your em ployees now have access t o m edicat ions—not ably, SSRI s ( select ive serot onin reupt ake inhibit ors) like Prozac—t hat not only offer effect ive t reat m ent for cert ain t ypes of depression but also have t he power t o alt er personalit y in ways t hat are good for business. I n his 1993 best seller, List ening t o Prozac, psychiat rist Pet er Kram er t old st ories of pat ient s who, when m edicat ed, becam e “ bet t er t han well” —showing, for exam ple, great er assert iveness, bet t er bargaining skills, and im proved social com pet ence. One pat ient , no longer depressed and already well regarded in her workplace, asked t o have her dose increased so she’d have t he confidence t o request a prom ot ion. More recent ly, Brian Knut son of St anford and his colleagues at t he Universit y of California–San Francisco Medical School’s Langley Port er Psychiat ric I nst it ut e looked at t he short - t erm effect s of SSRI s on people wit h no m ood or personalit y disorders. Subj ect s were given a daily dose of eit her Paxil or a placebo and aft er a m ont h were asked t o perform a t ricky negot iat ion. The people on Paxil perform ed best —perhaps because t hey were less host ile. Now t here’s a t em pt ing prospect . Get t ing ready t o close a deal? Bet t er drug up t he t eam in advance. Aft er all, you don’t know what t he ot her side is on. The pot ent ial for such use led Kram er t o speculat e about t he role “ cosm et ic psychopharm acology” ( a t erm he coined) could play in t he world of business. Aft er all, who wouldn’t want t o be bet t er t han well? Who wouldn’t want t o be less dist ract ible, m ore opt im ist ic, m ore socially adept ? “ I ’ve cert ainly been asked,” says Harvard psychiat rist Joe Glenm ullen. “ But t hat ’s t he one t hing I won’t prescribe a drug for. I ’ve heard st ories of people who are in t he office lat e at night , and t hey go t o t he Xerox room and are surprised t o find people sharing t heir Prozac or Rit alin.”

Ge t t in g r e a dy t o close a de a l? Be t t e r dr u g u p t h e t e a m in a dva n ce . Aft e r a ll, you don ’t k n ow w h a t t h e ot h e r side is on . Kram er says pat ient s aren’t beat ing down his door for pills t hey don’t really need. At

least not yet . To som e ext ent , he at t ribut es t he rest raint t o a fear of side effect s. A large num ber of Prozac users report sexual dysfunct ion, for exam ple. For ot her m edicat ions like Zoloft and Celexa, users can becom e seriously ill if t hey go off t oo quickly or even if t hey m iss a couple of doses. More difficult t o pin down is t he nagging fear t hat , j ust as cosm et ic surgery can deprive a face of charact er, cosm et ic use of t hese m edicat ions will level out t em peram ent . Som e ant idepressant users have com plained t hat t he sam e drug t hat allows t hem t o cope wit h t he daily st resses of life robs t hem of t heir creat ive “ edge.” But Kram er sees anot her reason for t he rest raint : an at t it ude described by t he lat e Gerald Klerm an as pharm acological Calvinism . “ I f you look at st udies of m edicat ion, t he rule is t hat people t ake less t han t heir doct or prescribes. We j ust don’t like t aking m edicine,” Kram er says. For business, t hat m ay be a bigger problem t han t he danger t hat som e people will pop pills t hey don’t need. St udies have shown t hat lost work t im e due t o depression cost s com panies a fort une, wit h est im at es ranging from $31 billion t o $44 billion per year in lost product ivit y in t he U.S. alone. “ At least half of depression goes unt reat ed,” says Brookline, Massachuset t s, psychot herapist Joanna VolpeVart anian. “ People are worried about what t heir bosses will t hink, and t hey’re afraid t o use t heir em ployee assist ance program or insurance benefit s lest a record st ay on a com put er som ewhere.” But t hat at t it ude m ay change as t he im age of psychopharm acology m oves from problem fixer t o advant age provider. At hlet es have st eroids. Fight er pilot s have t heir “ go pills.” Will am bit ious m anagers be able t o leave well enough alone? Elle n Pe e ble s ( e pe e ble s@h bsp.h a r va r d.e du ) is a senior edit or at HBR. 1 7 . W a t ch in g t h e Pa t t e r n s Em e r ge We’ve known for decades t hat inform al social net works drive business—from em ployees at t he wat ercooler t o j ob seekers canvassing acquaint ances t o com m unit ies of pract ice. But it is m uch harder t o m ap a net work t han t o draw an org chart , and unlike org chart s, social net works are self- alt ering. Knowing t hat net works are valuable doesn’t help t ell us how t hey are valuable or how t o use t hem . That is changing. Three big forces are at work: our underst anding of t he m echanics of social net works, wit hin and bet ween businesses; t he growing cloud of dat a t hat surrounds our every t ransact ion; and t he speed at which we’re able t o react t o t hose dat a. Be t t e r M ode ls of Socia l N e t w or k s. St anley Milgram gave us t he phrase “ six degrees of separat ion” in a 1967 paper, but we didn’t underst and how t he six- degrees phenom enon worked for anot her 30 years, unt il Duncan Wat t s and St eve St rogat z finally worked out t he det ails, described in Wat t s’s 2003 book, Six Degrees. This work, along wit h t hat of t heir peers, such as Albert - László Barabási of Not re Dam e and Bernardo Huberm an of HP, am ount s t o a revolut ion in our underst anding of how social net works operat e. Be t t e r Re a l- W or ld D a t a . Our lives are increasingly m ediat ed by t he I nt ernet , from booking flight s t o m aking dat es, and Web act ivit ies generat e a cloud of m et adat a, t he dat a t hat describe obj ect s or t ransact ions. One of t he surprises wit h m et adat a is how lit t le we need before we can st art divining useful inform at ion. Am azon’s book recom m endat ions, Blogdex.net ’s list s of conversat ional t rends on Web logs, Huberm an’s m aps of social net works derived from e- m ail t raffic—all t hese t hings and m any m ore com e from t he m ining of sim ple m et adat a. Fa st e r Re fle x e s. We can now work wit h t he dat a in real t im e. Unt il recent ly, all

m apping of social net works was like phot ography. You’d t ake a snapshot of a group’s relat ionships, develop it , and weeks or m ont hs lat er, you’d see how it cam e out . Wit h bet t er t ools for m ining social m et adat a, we can st art t o t reat our social net works like m irrors, get t ing t he inform at ion we need as we need it . Social net working sit es like LinkedI n and Friendst er let individuals figure out who is in t heir friend- of- a- friend net works, while soft ware applicat ions like Spoke and Visible Pat h m ap com panies’ social net works t o help businesses figure out whom t o t ap when t rying t o pit ch a product or close a sale. I n what Kevin Werbach has called t he era of “ post m odern knowledge m anagem ent ,” it ’s becom ing clear t hat viewing a com pany’s knowledge as som et hing separat e from it s em ployees is im possible. Our growing underst anding of social net works m ay help us leverage real people’s int eract ions, for everyt hing from t rend spot t ing by scouring public conversat ions t o ident ifying int ernal expert s wit hin a depart m ent t o ensuring t hat a m erger act ually result s in cooperat ion am ong em ployees, not j ust a change in logo. Social net works can’t sim ply be st rip- m ined of t heir value, however. A social net work is a living t hing t hat is alt ered by use. There are report s t hat t he value of net working for j ob possibilit ies is weakening, in part because so m any em ploym ent expert s have recom m ended t his very st rat egy. Likewise, privacy concerns and em ployees’ inclinat ion t o see t heir social net works as personal asset s will lead t o t ension bet ween m anagem ent and rank- and- file workers about bot h t he observat ion and use of social net works. Many of t he social net working t ools being proposed t oday will fail, because t he obvious ideas are t echnologically sim ple but socially unworkable. ( “ I f we all dum p our address books int o one big dat abase, everybody will know everybody! ” ) As we get sm art er about building social net working t ools, however, we will t ake it for grant ed t hat our social net works have m easurable value, as do ot her int angibles such as brand, and we will find ways t o recognize it . Managers m anage what t hey can see, and as t hey begin t o see social net works, t he long- t erm effect on t he business landscape will be profound. Cla y Sh ir k y ( cla y@sh ir k y.com ) is a consult ant and t eaches at New York Universit y’s graduat e I nt eract ive Telecom m unicat ions Program , where he works on t he social and econom ic effect s of I nt ernet t echnologies. His writ ings are archived at www.shirky.com . 1 8 . La u gh t e r , t h e Be st Con su lt a n t Long before—four full years before—t he once- rocket ing Enron im ploded in m idair, a group of em ployees in t he com pany’s int ernat ional division got t oget her for t heir annual powwow. As well as list ening t o present at ions about past perform ance and exhort at ions t o reach new height s, t he Enronians ent ert ained t hem selves by put t ing on skit s, wit h a prize going t o t he t eam t hat st aged t he best show. I n 1997, t he t hem e was m ent al t oughness. That year Sherron Wat kins, lat er fam ous as t he wom an whose let t er t o CEO Ken Lay warned him t hat account ing scandals could doom t he com pany, was cast as t he Wicked Wit ch of t he West in a parody of The Wizard of Oz. I n t he skit , Dorot hy needed t o find t he wizard t o get a deal approved. Of t he execut ives accom panying her, one had no brain, one had no heart , and t he t hird, t he Cowardly Lion, was padding cont ract s because he wasn’t brave enough t o get earnings on his own. As for t he wizard, t he m an who could approve t he deal, t he m an behind t he curt ain—well, it t urned out he had no sophist icat ed com put er m odels, no special financial acum en. He was a fake. And his nam e, he said when he was discovered, was Andy Fast ow. You don’t need a brain or a heart t o succeed at Enron, t he fict ional Fast ow declared; and t o t he corrupt Cowardly Lion, he said: “ You’re m y kind of guy.”

That was fict ion. The real Andy Fast ow was, of course, t he m an who soon becam e Enron’s chief financial officer and, if t he charges against him are accurat e, t he chief archit ect of a series of decept ive deals t hat hid Enron’s det eriorat ing financial condit ion from t he public. When t he curt ain was pulled back on t he real Enron’s real finances, t he com pany collapsed. Most em ployees and alm ost all of t he business world were t aken t ot ally by surprise. But it was all t here in t he skit . Just as it was t here in t he wisecrack t hat went around t he office aft er t he publicat ion of Enron’s 1997 annual report , whose cover showed a t ropical forest wit h a large leaf sm ack in t he m iddle. “ The fig leaf,” t he wags called it . There’s a lesson here, or m aybe it ’s a m anagem ent t ip: You can learn a lot about a com pany by paying at t ent ion t o it s hum or. People t ell j okes, oft en, as a way of revealing uncom fort able t rut hs. Monarchs em ployed court j est ers t o cut t hrough t heir court iers’ unct uous sycophancy, for exam ple. These days, it ’s edit orial cart oonist s and lat e- night TV host s who lam poon t he powerful. The sam e im pulses are at work in every corporat ion on eart h. Skit s at sales conferences, wisecracks in m eet ings, j okes in e- m ails: These const it ut e an ext raordinary t rove of inform at ion about what ’s really going on. Th om a s A. St e w a r t ( e dit or s@h bsp.h a r va r d.e du ) is t he edit or of HBR. His m ost recent book is The Wealt h of Knowledge: I nt ellect ual Capit al and t he Twent y- First Cent ury Organizat ion ( Doubleday, 2001) . 1 9 . W a t ch You r Ba ck Cruising t hrough t he draft of a pot ent ially influent ial new fram ework for ent erprise risk m anagem ent , I am rem inded of t he t housand nat ural ( and unnat ural) shocks t hat com panies are heir t o. Those risks include, but are nowhere near lim it ed t o, em erging com pet it ion and price m ovem ent s; polit ical agendas and new regulat ions; changes in dem ographics and work/ life priorit ies; unexpect ed repair cost s; qualit y deficiencies; ut ilit y or com put er service downt im e; and good old hum an frailt y. Toss in fire, flood, and eart hquake—as t his docum ent does—and you have a port rait of t he organizat ion as a quivering m ass of vulnerabilit ies. And t hat ’s exact ly t he view you need t o t ake t o prevent or m it igat e nast y surprises t hat wallop st ock prices, sales, and reput at ions, according t o t he Com m it t ee of Sponsoring Organizat ions of t he Treadway Com m ission ( COSO) , which is publishing t he fram ework in t he first quart er of t his year ( t he draft is available at www. coso.org) . COSO are t he folks who brought us t he int ernal cont rol fram ework adopt ed by m any public com panies scram bling t o com ply wit h Sarbanes- Oxley. The organizat ion’s t radit ional purview is financial report ing; t hat it has now em braced risk in all it s infinit e variet y speaks t o t he growing dem and for a cross- com pany, senior- execut ive- led approach t o ent erprise risk m anagem ent ( ERM) , which goes well beyond t radit ional risk m anagem ent ’s focus on a lim it ed num ber of t hreat s wit hin funct ional silos. ERM t akes a port folio approach t hat recognizes t he variet y and int erdependence of organizat ional vulnerabilit ies. “ Sarbanes- Oxley has direct ed at t ent ion t o risk, but t he Enrons were really about account ing fraud,” says John J. Flahert y, t he chairm an of COSO and ret ired chief audit or for PepsiCo. “ We’re focused m ore on risks t hat creep up on an organizat ion and handicap it or put it out of business—where t hey never saw it com ing.” Ent erprise risk m anagem ent is oldish hat in Brit ain, where t he Turnbull I nit iat ive of 1999 required public com panies t o regularly report on all significant exposures—ranging from I T t o brand—as well as on t he int ernal cont rols designed t o m inim ize t hem . Today, UK com panies perform com prehensive risk audit s at least t wice a year, and a few conduct t hem in real t im e, according t o Richard Sharm an, direct or of KPMG’s ent erprise risk

m anagem ent group in London. The m aj orit y of Brit ain’s 100 largest com panies em ploy a chief risk officer or direct or of risk m anagem ent who is responsible for em bedding risk awareness in t he cult ure, change- m anagem ent st yle. Alt hough m ost of Europe is sim ilarly up t o snuff, t he Unit ed St at es lags by 18 m ont hs or so. A st udy by m anagem ent consult ing firm Tillinghast - Towers Perrin found t hat 11% of U.S. com panies, m ainly in t he financial services, insurance, and ut ilit ies sect ors, have full- fledged ERM program s. Sharm an t hinks t he COSO fram ework m ay cat alyze U.S. businesses t o syst em at ically bring all of t heir Achilles’ heels t o heel. I n addit ion, t he new Basel I I Accord is prom pt ing banks t o develop best pract ices around risk, and t hose pract ices are m igrat ing int o ot her indust ries. “ Som e of your global organizat ions are st art ing t o t hink along t he lines of European organizat ions around risk,” says Sharm an. “ I t doesn’t j ust m ean buying insurance. I t doesn’t j ust m ean financial cont rol. I t is a CEO issue. And it does affect t he brand.”

A st u dy fou n d t h a t on ly 1 1 % of U.S. com pa n ie s h a ve fu ll- fle dge d e n t e r pr ise r isk m a n a ge m e n t pr ogr a m s. But ERM serves desire as well as fear; com panies t hat adopt it for com pliance purposes only are m issing t he larger point . Badly done, syst em ic risk assessm ent could put t he brakes on aggressive behavior, but it need not result in what SEC Chairm an William H. Donaldson described in a Financial Tim es int erview as “ a loss of risk- t aking zeal.” Rat her, ERM should allow com panies t o m ake decisions wit h great er speed and confidence. “ Having risk under cont rol gives a com pany agilit y, flexibilit y,” says St even Hunt , a vice president of research at Forrest er Research who specializes in securit y. “ I t ’s like driving a car: You can only go fast if you know you have good brakes.” Le igh Bu ch a n a n is a senior edit or at HBR. She can be reached at e du .

lbu ch a n a n @h bsp.h a r va r d.

2 0 . I T D oe sn ’t Sca t t e r Take a look at t he accom panying chart s. Have you ever seen t rend lines so sm oot h? This has been t he realit y of inform at ion- based t echnologies. Yet if you asked m ost people t o describe I T’s past decade, t hey would call it boom and bust —a roller coast er ride.

Let ’s look first at t he business- t o- consum er ( B2C) and business- t o- business ( B2B) dat a.

Act ual B2C revenues grew sm oot hly from $1.8 billion in 1997 t o $70 billion in 2002. B2B had sim ilarly sm oot h growt h from $56 billion in 1999 t o $482 billion in 2002. We see t he sam e t rends in t elecom m unicat ions, where t he num ber of U.S. cell phone subscribers grew sm oot hly and exponent ially from 340,000 in 1985 t o 140 m illion in 2002. The num ber of I nt ernet host s rose from 213 in 1981 t o 162 m illion in 2002. The price- perform ance and capacit y of t he underlying t echnologies have grown even m ore rapidly t han t he m arket penet rat ion. You could buy one t ransist or for a dollar in 1968 versus 10 m illion t ransist ors for a dollar t oday. And unlike Gert rude St ein’s roses, a t ransist or is not a t ransist or is not a t ransist or. As t hey’ve becom e sm aller and less expensive, t hey’ve also becom e dram at ically fast er—by a fact or of about 1,000 over t he past 28 years. So t he cost per t ransist or cycle has dropped regularly by half every 1.1 years. The exponent ial growt h of t he power of inform at ion t echnologies ( broadly defined) goes far beyond t he well- known paradigm of t he m iniat urizat ion of t ransist ors on an int egrat ed circuit described by Moore’s Law. We see t he sam e phenom enon in m any ot her areas of t echnology t hat deal wit h or creat e inform at ion. For exam ple, m agnet ic dat a st orage has doubled in price- perform ance every 15 m ont hs over t he past halfcent ury. We see sim ilar exponent ial growt h in t he price- perform ance and capacit y of such diverse t echnologies as wired and wireless com m unicat ions, DNA sequencing, and brain scanning. So why have t he capit al m arket s been so volat ile? First , because as m uch as I T has delivered, Wall St reet expect ed even m ore. The percept ion was t hat t he I nt ernet and t elecom m unicat ions t echnologies represent ed revolut ions t hat would overt urn t he business m odels for m any indust ries. That was and is correct —but t hese t rends t ake t im e t o develop. Second, t here was a profound lack of com m unicat ion wit hin t he invest m ent com m unit y. This allowed, for exam ple, m assive overinvest m ent in cert ain areas ( such as fiber) , while ot her areas ( such as t he “ last m ile” of t he com m unicat ion infrast ruct ure) were ignored. The result was m ore t han $2 t rillion of lost m arket capit alizat ion.

W h y h a ve t h e h igh - t e ch ca pit a l m a r k e t s be e n so vola t ile ? Be ca u se a s m u ch a s I T h a s de live r e d, W a ll St r e e t e x pe ct e d e ve n m or e . Regardless of whet her your port folio or m ine suffers anot her set back, we’d do well t o keep in m ind t hat t echnology will cont inue t o m arch ahead. I f everyone involved wit h inform at ion t echnology—and t hese days, who isn’t ?—underst ood t he t rends underlying t hese t echnologies, t he painful episodes of boom and bust in invest m ent values m ight , at long last , begin t o subside. Ra y Ku r zw e il ( r a ym on d@k u r zw e ilt e ch .com ) is an invent or and expert on art ificial int elligence. His lat est book is The Age of Spirit ual Machines: When Com put ers Exceed Hum an I nt elligence ( Viking Press, 1999) .

Reprint Num ber R0402A Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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I n cr e a se d pu blic scr u t in y, de cr e a se d st ock - opt ion a ppe a l, a n d t h e r e le n t le ss e x pe ct a t ion s of W a ll St r e e t a r e t a k in g t h e ir t oll on a on ce h igh flyin g con su lt a n cy. I s goin g pr iva t e t h e w a y ou t ?

by M a r k L. Fr igo a n d Joe l Lit m a n

Kennet h Charles and Mat t hew Phair sat on opposit e sides of t he conference room t able, scrat ching away on t heir legal pads. As one voice aft er anot her leaked from t he st arfishshaped phone, Mat t hew, t he CFO of First Rangeway Consult ing, t ook copious not es. Kennet h, t he CEO, energet ically doodled anim als, as he oft en did when alone or wit h close associat es. “ During a conference call, no one can t ell t hat you’re drawing a dog,” he liked t o say, beam ing approval on t hose who got t he j oke. Doodling helped Ken focus, and his pen skit t ered across t he paper as he list ened t o Vict oria Michaels, a t op- ranked sell- side analyst covering professional services st ocks. Vict oria was com m ending First Rangeway for it s cost - cont rol work and consequent increase in earnings. “ But revenues are st ill flat quart er over quart er,” she went on in a clipped voice t hat j ust m issed being an English accent . “ When and from where do you see revenue growt h, and at what levels?” “ You know, Vict oria, we’ve been holding client proj ect s st eady over t he past year,” Ken replied. “ But proposal act ivit y and engagem ent t ypes point t o an upt ick next quart er, when corporat e spending for our services should really kick in.” “ We’ve already seen signs t hat we’ll easily reach t he t arget s we m ent ioned earlier,” added Mat t , j ot t ing a num ber in t he m argin and drawing a box around it . “ To reit erat e, we st at ed a 10% quart er- over- quart er increase beginning next quart er.” The next quest ion, from Kevin Danville of LRL I nvest m ent s, was t ougher. “ Could you com m ent on how fruit ful t he business process out sourcing space m ight be over and above t radit ional consult ing revenues?” Kevin asked, as Mat t et ched “ BPO” int o his paper, followed by t hree quest ion m arks. Ken racked his brain for a response t hat would sound bot h encouraging and noncom m it t al. Not finding one, he set t led for noncom m it t al. “ We are invest igat ing m ult iple revenue st ream s as we have in t he past ,” he said, “ and are prepared t o m ove int o t hose t hat com plem ent our consult ing work. However,” he added, cringing inwardly at t he necessarily oblique language, “ it would be prem at ure at t his point t o m ake any specific announcem ent .” That answer wasn’t what t he analyst s want ed t o hear, he knew. Alt hough Ken had been a part ner at First Rangeway since 1997—t wo years before t he 2,800- em ployee consult ancy’s I PO and subsequent m arket t rium ph—he had been CEO for less t han a year, and t he quart erly analyst calls st ill m ade him sweat . On t he day he accept ed t he t op j ob, his wife, Cara, had present ed him wit h a plaque t hat read sim ply, “ All Things t o All People,” and for m ont hs it held pride of place on his office wall. Lat ely, however, t he words seem ed m ore like a com m and t han a pleasant ry, and Ken had banished t he plaque t o t he net her regions of a desk drawer. Thirt y quest ion- filled m inut es lat er, t he call operat or finally rang down t he curt ain. Ken capped his pen and leaned back, puffing out his cheeks in relief. Mat t t apped t he on/ off but t on on t he speakerphone t o m ake sure t hey were clear. The reassuring hum of a dial t one filled t he air. “ Have I ever m ent ioned how m uch I love analyst calls?” said Ken, as Mat t gat hered his papers int o a neat st ack. “ Because if I did, I was lying. How do you t hink m y BPO response went over?”

M a r k L. Fr igo ( m fr igo@de pa u l.e du ) is t he Eichenbaum Foundat ion Dist inguished Professor of St rat egy and Leadership and t he direct or of t he Cent er for St rat egy, Execut ion, and Valuat ion at DePaul Universit y’s Kellst adt Graduat e School of Business in Chicago. Joe l Lit m a n ( j oe l. lit m a n @csfb.com ) is a direct or wit h CSFB HOLT at Credit Suisse First Bost on and Clinical Professor of Business St rat egy in t he Kellst adt MBA Program .

Mat t shrugged. “ Kevin didn’t m ent ion Locklin- Ladd Associat es by nam e, but you know t hat ’s who he m eant . They’ve been all over out sourcing, and t hey’ve hired som e t op guns t o m ake it happen. There’s m oney t here, Ken. I t could easily m ean 30% growt h for us for several years. Plus, Mark and Am y and som e ot her part ners have serious experience in t hat area.” “ I t would also m ean a t on of up- front capit al,” replied t he CEO. “ But yes, it ’s wort h considering.” Cert ainly t he prospect was t ant alizing, and Ken couldn’t deny feeling t hat residual dream - big it ch, which, wit hout access t o heaps of m oney, t he com pany was unlikely t o scrat ch. None of t he new m arket s First Rangeway was cont em plat ing were frivolous; all represent ed direct ions in which it s cust om ers were heading. Five years ago, pursuing such opport unit ies would have been a no- brainer. But aft er t he m arket ’s fall, it was definit ely a brainer. For t hat reason and ot hers, Ken was no longer convinced t hat public st at us rem ained a com pelling proposit ion. “ Of course,” he m used out loud, “ t he whole equat ion changes if we…”

“W e a r e pr ofit a ble . Pr oposa l in t e r e st is u p. Th e e con om y is u p, a n d w e ’r e in a gr e a t posit ion t o t a k e a dva n t a ge of t h a t . W it h ou t t h e I PO, w e w ou ldn ’t h a ve h a d t h e se ga in s.” “ I f we go privat e,” concluded Mat t . “ I t ’s it em num ber one at t he next m anagem ent t eam m eet ing—and t he big it em at t he board m eet ing.” Leaning across t he t able, he t ore t he t op sheet off Ken’s pad and eyeballed it . “ Nice giraffe,” he com m ent ed, t ossing t he paper back t oward t he CEO. A Tr ou blin g Ex ch a n ge An hour lat er in t he lobby, Ken st opped by t he recept ion desk t o order a cab and snit ch a handful of Hershey’s Miniat ures from t he cut - glass j ar. “ I t hought you were on a diet ?” said Lindsey Carrut hers, com ing up behind him . One of First Rangeway’s rising st ars, Lindsey was also Ken’s self- appoint ed conscience. The CEO raised his hands in m ock surrender and put back t he candy. The t wo walked out t oget her t hrough t he big glass double doors. “ I ’m glad I ran int o you,” said Ken, scanning t he st reet for his t axi. “ I ’m off t o your alm a m at er in Bost on t o do a present at ion at t he B- school—t rying t o rust le up som e t op- not ch MBAs. You’ve done a lot of recruit ing t here, right ? What will t hey t hrow at m e?” Lindsey t hought for a m om ent . “ Well, t hey’re st ill int erest ed in First Rangeway, definit ely,” she said. “ But I had lunch wit h a couple pot ent ial recruit s last week, and t hey were concerned about t he st ock price. I ’m not surprised, because we’re so opt ion- and st ock- based, but t hey asked quest ions about t he st ock’s pot ent ial I really couldn’t answer. Want m e t o com e wit h?” “ No, you j ust enj oy your lunch,” said Ken, as his cab pulled up. Through t he window, he wat ched Lindsey walk t oward t he corner salad bar. She was one of his best people and would probably m ake part ner soon. I n it s glory years, First Rangeway had recruit ed a lot of great people from her school, m any at t ract ed by t hose very st ock opt ions t hat were giving t his crop of MBAs t he willies. And why shouldn’t opt ions m ake t hem uncom fort able, Ken t hought . First Rangeway’s price was m ore t han 80% off it s highs, and volat ile t o boot . Wit h t he precipit ous drop in global business, t hey’d downsized dram at ically, laying people off, freezing hires. But t hings were looking up now. I t was t im e t o refocus on t he people—on finding new blood t o drive t he business and hanging on t o t hose part ners who had m ade it successful so far. Unfort unat ely, t hey would have t o divert som e of t hose new hires t oward act ivit ies t hat would do not hing t o build t he com pany. Before t hat m orning’s analyst call, Mat t had laid out t he resources First Rangeway needed t o st ay up t o snuff wit h Sarbanes- Oxley, SEC filings, and ot her cost - of- being- public requirem ent s. The business was becom ing m ore com plicat ed: I nnovat ive revenue and gain- sharing agreem ent s wit h client s had m ade financial report ing a m are’s nest . Mat t est im at ed t hey’d need 12 m ore people, including in- house at t orneys, audit st aff, and dedicat ed syst em s folk t o upgrade soft ware for int ernal cont rols. He had ballparked t he t ot al at over a m illion dollars annually. Cut t ing corners wasn’t an opt ion, Ken knew. Anyt hing rem ot ely quest ionable about t heir report ing could hinder a pot ent ial rebound in st ock price or—worst of worst - case

scenarios—land him and Mat t in j ail for willfully cert ifying bad financial st at em ent s. “ Neit her of us want s t o sign off on t hose filings unless t hey’re 100% kosher,” Mat t had rem inded him . “ And by t he way, we could also use t wo or t hree m ore bodies in invest or relat ions.” The cab lurched, and a wave of nausea seized t he CEO. Car sickness, nerves, or an em pt y st om ach? Ken unwrapped t he single chocolat e bar he had secret ed in one of his pocket s and popped it int o his m out h. Too Bu llish t o Be a r ? The present at ion t o t he MBAs went swim m ingly. Ken was j ust ifiably proud of his orat ory skills: The abilit y t o m ot ivat e people was one fact or in his professional rise. So inspirat ional was t he CEO’s descript ion of his com pany’s st arry fut ure t hat he was t em pt ed t o run out and apply for a j ob at First Rangeway him self. Crossing t he quad aft erward, Ken not iced a t all wom an in head- t o- t oe Brooks Brot hers st riding ahead of him . He quickened his pace and a m om ent lat er fell in beside Nancy West view. Nancy was a prom inent business personalit y, adored by t he press, and had m ore pies t han she had fingers t o put in t hem . She was on cam pus t hat day guest lect uring at an ent repreneurship sem inar. “ I went in wit h six pages of not es and cam e out wit h 600 pages wort h of business plans,” she t old Ken, waving a t hick folder. “ My favorit e so far is an exercise service for sm all pet s.” But sm all t alk was a very sm all part of Nancy’s conversat ional repert oire. One of First Rangeway’s original invest ors ( she st ill held a sizable posit ion) and a m em ber of it s board, she soon swit ched t o a subj ect of vit al int erest t o t he shareholders—and, m ost part icularly, t o Nancy West view. “ I know t here’s been a lot of t alk recent ly about going privat e,” she said, st epping neat ly off t he pat h t o avoid a young professor on a Segway, “ and I t hink it would be a m ist ake. The m aj or indexes are all up for t he year, and our st ock is up t wice t hat . The econom y looks as if it ’s gaining st eam , and I don’t want it leaving t he st at ion wit hout us.” Ken list ened pat ient ly as Nancy launched int o a t ut orial on t he st at e of t echnology consult ing. As expect ed, it was a st udy in upsides. Nancy’s est im at es of pot ent ial revenues from out sourcing slight ly exceeded Mat t ’s, and she knew from her prodigious net working t hat som e of First Rangeway’s com pet it ors were ent ering ot her prom ising areas. There was also t alk of indust ry consolidat ion: Nancy nam ed t hree pot ent ial acquisit ions t hat she deem ed “ t ast y.” “ There is no way we can t alk about going privat e wit hout t aking t hese t hings int o account —serious account ,” said Nancy, as t hey em erged from t he grassy enclave ont o a revvingup- for- rush- hour st reet . “ I want t o know what we’re doing about t hese opport unit ies. The board m eet ing is Wednesday. I expect t o hear answers.” “ And answers you will have, Nancy,” prom ised Ken, t he first words he’d been able t o get out in alm ost t en m inut es. “ Mat t and I are st ill in research m ode, but a direct ion is becom ing clear.” The last bit wasn’t t rue, but Nancy, he knew, had a hat e- hat e relat ionship wit h am biguit y. Anxious t o avoid a furt her m onologue, he handed her int o t he first cab t hat pulled up, declining her offer t o share t he ride. As Ken raised his hand t o hail anot her t axi, a bus rolled by, belching exhaust at him . Pu blic En e m y N u m be r On e Ken arrived at his club at t en m inut es past seven and hurried t o t he rest aurant . The floor- t o- ceiling windows were awash wit h night , and wait ers slipped unobt rusively from t able t o t able, light ing candles. Greg O’Keefe was already seat ed in t heir usual spot . Ken dropped int o his chair and brushed away t he leat her- bound m enu being proffered by a wait er. “ Flam e- grilled rib eye, black- and- blue. No pot at oes. No bread. Glass of t he house red.” “ At kins, Ken?” asked Greg, raising an eyebrow. “ Ten pounds so far,” replied Ken, not m ent ioning t hat t wo of t hose t en had recent ly m ade a reappearance. “ And how about you?” he asked, not icing t he t aut ness of his form er colleague’s j acket across his increasingly barrel- like chest . “ Evidence of life in t he slow lane?” “ Not hing slow about it ,” said Greg. “ I ’ve got plent y of consult ing work, and, seeing as I ’m a bred- in- t he- bone consult ant , t hat t ends t o m ake m e happy. Can you say t he sam e?”

“ Of course,” replied Ken, slight ly annoyed. “ First Rangeway is st ill a consult ing firm t hrough and t hrough.” “ Oh yes?” said Greg. “ And a consult ing firm t hrough and t hrough needs access t o all t hat capit al why? Consult ing is a cash- based business, old friend. The m at h is sim ple: I f 200 part ners generat e $200 m illion in profit s, t hey each m ake a m illion dollars. All being public does is dilut e t hat .” Ken sighed, wondering how t hey had m anaged t o get off on t his t rack so early in t he evening. They’d been having t he sam e argum ent for t hree years, beginning on t he day Greg resigned from First Rangeway in t he second wave of part ner defect ions aft er t he business downt urn. Ken had bought int o t he form er CEO’s am bit ious vision. But Greg saw only what was lost : an unwavering focus on consult ing. Greg had launched int o his by- now fam iliar int erpret at ion of event s. “ Because we were so fant ast ic at what we did, we were able t o pull off a successful I PO, which gave us lot s of m oney t o spend on t hings ot her t han what we did and were fant ast ic at . I t ’s a cat ch22 or a perfect st orm or a t ipping point …I can never rem em ber which. I ’m not arguing t here isn’t value in float ing a sm all percent age of st ock and gaining liquidit y. But aft er t hat , what ’s t he use?” he cont inued as t he wait er placed a couple of green salads in front of t hem . He paused t o fork som e arugula int o his m out h. “ Privat e m ay not be sexy, but t hese days public isn’t anyt hing t o get hot and bot hered about eit her. The privat ely owned consult ing m odel has been working for decades. Decades from now, it will st ill be working.” Ken scooped his crout ons ont o a spoon and deposit ed t hem ont o his bread plat e. “ Look, Greg, do I really need t o st at e t he obvious here? We are profit able. Proposal int erest is up. The econom y is up, and we’re in a great posit ion t o t ake advant age of t hat . Wit hout t he I PO, we wouldn’t have had t hese gains. And if we go privat e now, we’ll m iss out on a lot of opport unit ies t hat t he board—t hat t he board and I —see in t he com ing year.” He paused, realizing he was repeat ing som e of t he sam e rah- rah rhet oric he’d used on t he MBA candidat es a few hours earlier. “ Anyway, you know t he door is always open if you want t o com e back,” he said m ore gent ly. “ Well, Ken, if anyone can m ake it work, it ’s you,” said Greg, conciliat orily. “ Personally, I t hink First Rangeway’s gonna do great t hings. But it ’s going t o have t o do t hem wit hout m e.” He sm iled. “ Unless of course, you change your m ind about t he privat e t hing. Are you going t o eat t hose crout ons?” P.O.’d Closing t he door of his den t o st ifle t he sound of t he Cart oon Net work m arat hon unfolding in t he next room , Ken sat at his desk and swit ched on t he PC. He had an hour before t he Sat urday rout ine of soccer gam es and birt hday part ies kicked in, and about 100 e- m ails t o plow t hrough. One from his brot her in Maine. One from Am azon announcing t hat a recent order was on it s way. The t hird e- m ail was from Tracy Durham , president of Bardwell I ncorporat ed, and a longt im e client of Ken’s. The previous year, Bardwell had init iat ed a m ult im illion- dollar engagem ent , and t he e- m ail bore glad t idings of it s progress. Tracy report ed t hat she was pleased wit h t he Rangeway part ner running t he proj ect . The t eam of em ployees from bot h com panies had proven innovat ive and collaborat ive, it s result s solid. “ I do, however, have one issue I ’d like t o discuss,” t he e- m ail concluded. “ Call m e when you can.” Ken checked t he dat e and t im e st am p: 10/ 11/ 03 08: 32 am . Tracy was hard at it on a Sat urday m orning; it wouldn’t hurt t o let her know Ken was hard at it , t oo. Anyway, Ken couldn’t enj oy t he day knowing t here was som e problem out t here preparing t o bit e. He had Tracy’s cell num ber and had been inst ruct ed t o use it any t im e. Ken picked up t he t elephone. Two rings. “ Hello?” “ Hey, Tracy, I hope it ’s OK t o call you on a weekend…” “ Not a problem , Ken. I guess you saw m y e- m ail. As I said, t hings in general are going well. But som e of our people have com plained t hat som e of your people are pushing t hem t oo hard t o reach cert ain m ilest ones on t he program m ing proj ect before end of quart er.”

Unconsciously, Ken picked up a pad and began doodling. Bardwell’s com pensat ion and cult ure, Tracy was explaining, sim ply weren’t designed t o accom m odat e 75- hour- plus workweeks. And t he lead part ner—whose energy and expert ise she had praised in t he em ail—had been a lit t le t oo aggressive about collect ing on a bill ( “ and I let him know it , t oo,” said Tracy, sounding peeved.) “ I don’t obj ect t o wrapping t hings up quickly,” she cont inued. “ But all of t he pressure m akes us wonder, Whose quart er are we t rying t o m ake: Bardwell’s or Rangeway’s? “ Making a quart er can’t help a firm as m uch as losing a client could hurt it ,” Tracy said. “ Right now t his is not a huge t hing.” She paused, wait ed a beat . “ Let ’s j ust m ake sure it doesn’t becom e one.” Ken’s pen was leaking, leaving m oist blot ches all over t he page. This wasn’t t he first t im e a proj ect t eam had been pressured in t he nam e of quart erly revenue t arget s. And client s weren’t t he only ones hurt ing: His own em ployees were com plaining of burnout as well. “ I prom ise I ’ll speak t o t he engagem ent part ner personally,” he said hast ily. “ You’ve known m e a long t im e, Tracy. You know we’ll do right by you.”

Th is w a sn ’t t h e fir st t im e t h a t clie n t s h a d be e n pr e ssu r e d in t h e n a m e of qu a r t e r ly r e ve n u e t a r ge t s. An d Ke n ’s ow n e m ploye e s w e r e com pla in in g of bu r n ou t a s w e ll. As Ken hung up, a chorus of voices sum m oned him int o t he living room t o j oin t he search for cleat s. Tim e t o Yie ld? On Monday m orning, Ken’s conversat ion wit h t he lead part ner on t he Bardwell engagem ent went as well as could be expect ed. ( “ Did I really use t he word ‘unseem ly’?” he asked him self lat er.) By 11 am , t he CEO had m oved on t o ot her t hings. Specifically, he was back in t he conference room wit h Mat t , t he speakerphone bet ween t hem . Only t his t im e, it was channeling t he voice of invest m ent banker Charlie Grem ley. “ Going privat e is a pret t y st raight forward process,” Charlie was explaining, “ but t hat doesn’t m ean it ’s easy. I f you plan t o raise capit al from financial sponsors, we can help you do t hat . I f you’re looking t o raise t he capit al yourselves, we can help t here, t oo. We’ll st art running valuat ion m odels now if you like. Needless t o say, we’re t alking about som et hing in excess of a couple of hundred m illion dollars.” As t he invest m ent banker spoke, Ken speculat ed on j ust how m uch m oney t he part ners could or would raise if t hey went t his rout e. Aft er First Rangeway’s I PO, t he owners’ net wort h skyrocket ed, and m any had sold som e piece of t heir ownership. But ot hers held on as paper gains gave way t o paper losses. Then Charlie st art ed t o enum erat e t he people t hey’d need t o st eer t he deal, and Ken pict ured at t orneys and account ant s swarm ing over t he com pany’s headquart ers like ant s on a dropped popsicle. Talk about a dist ract ion from t he business…and t he cost … “ There’s som et hing ext rem ely Alice Through t he Looking Glass about all t his,” rem arked Mat t as he swit ched off t he phone. “ I recall sit t ing right here five years ago list ening t o Charlie walk us t hrough t he I PO. Rem em ber how helpful he was?” “ What I rem em ber is how encouraging he was,” replied Ken, wit h a t ouch of sourness. “ Did I m ent ion how m uch I love invest m ent bankers? Because if I did…” “ Yes, I know, t hen you were lying,” finished Mat t . Pr iva t e Aye , or N a y The m anagem ent t eam m eet ing convened wit h t he int roduct ion of a t ray of bagels and j ugs of fresh- squeezed j uice. I t was 7: 30, Tuesday m orning. Ken gazed around t he execut ive boardroom : The com pany’s bright est and m ost seasoned players gazed back at him . “ So,” said t he CEO, “ m ay I direct your at t ent ion t o t he elephant in t he room ?” Ken had am bit ious goals for t his m eet ing. Facing one of t he m ost im port ant decisions t hey would ever m ake, t he t eam m em bers couldn’t sim ply react t o current m arket condit ions or focus on t heir own careers and wealt h. Rat her, he needed t hem t o st ep int o t he ring for a lit t le out - of- t he- boxing. They had t o consider t he issue from m any different perspect ives. The CEO nodded t oward Laura Leadbet t er, a senior part ner sipping a t all cup of

St arbucks’s st rongest . “ Laura, if a client of our own st rat egy consult ing group were wrest ling wit h t his issue, how m ight we advise t hem ?” As a 20- year vet eran of business, Laura had facilit at ed m ore execut ive ret reat s t han she could t hrow a creat ivit y consult ant at . St ill, she m ulled over t he quest ion a while before responding. “ We all know t here are big- m oney im plicat ions t o eit her direct ion,” she said finally. “ We want t o do what is financially best for t he business as a whole and, yes, for us individually. But —forgive m e if I get a lit t le Business St rat egy 101 here—wealt h com es t hrough fulfilling client needs. So if I were advising a business, t hat ’s what I would say: First , define your client s’ needs, and t hen align your genuine asset s and business st rat egy, including capit al st ruct ure, accordingly.” That was t he right answer, and Ken sm iled his approbat ion. Cust om er focus had always been t he CEO’s m ant ra. The t eam could paint t his pict ure any num ber of ways, but First Rangeway’s client s had t o provide t he fram e. Confident , now, t hat t he discussion would proceed t oward t he best possible conclusion, Ken t hrew out t his challenge: “ Being a publicly t raded com pany affect s us in alm ost everyt hing we do. We have t o consider not only what kind of business t his can be, but also what it should be. What we are discussing now, and what I will present t o t he board t om orrow, is no less t han t he fut ure of First Rangeway. Let ’s t alk.”

H BR Ca se Com m e n t a r y

Sh ou ld Fir st Ra n ge w a y r e m a in pu blic or go pr iva t e ? Fou r com m e n t a t or s offe r e x pe r t a dvice . Ch a n Su h is cofounder, CEO, and chairm an of Agency.com , an int eract ive m arket ing and t echnology com pany headquart ered in New York. Agency.com went public in 1999 and privat e in 2001. Suh can be reached at ch a n @a ge n cy.com . Ken m ay not want t o hear t his, but I see no com pelling financial reasons why First Rangeway should go privat e. The business opport unit ies before it are at t ract ive. The com pany is profit able, and it s cash flow appears healt hy. ( When m y com pany, Agency. com , went privat e, t he m ost im port ant fact or in m y decision was t he cash flow beyond 24 m ont hs.) So long as First Rangeway can rem ain profit able and keep cust om ers happy, it should do j ust fine as a public com pany in t he long t erm . Going privat e, by cont rast , could be hugely disrupt ive. The biggest challenge lies not wit h lawyers and account ant s but rat her wit h Ken’s own people. I n a service com pany, as I ’m sure Ken m ust know, people are everyt hing. First Rangeway has been at t ract ing t op t alent wit h a heavy reliance on t he lure of opt ions. I f t hose opt ions disappear because t he com pany goes privat e, how will m anagem ent induce t hose folks t o st ay? Opt ions weren’t a disproport ionat e part of com pensat ion at Agency.com , but we st ill had t o com e up wit h a bonus program t o ret ain our key st aff. And even t hen we lost a few, including our CFO. I t ’s not a quest ion of loyalt y. Those people signed on for one t hing, and t hey ended up wit h som et hing else.

I f Fir st Ra n ge w a y st a ys pu blic, I ’m n ot su r e Ke n is it s be st possible CEO. I f you don ’t e n j oy r u n n in g a pu blic com pa n y, t h e n you sh ou ldn ’t be doin g it . But if First Rangeway st ays public, I ’m not sure Ken is it s best possible CEO. I f you don’t enj oy running a public com pany, t hen you shouldn’t be doing it . Ken should have known t he realit ies going in: t he em phasis on short - t erm result s, t he scrut iny. Wit h every quart er com es t hat call of reckoning, and even when your result s are bad or t he quest ions are difficult , you have t o enj oy at least t he challenge of answering t hose quest ions. I act ually did enj oy it , as well as t he t rem endous discipline required t o m eet expect at ions about report ing and perform ance. As a public- com pany CEO, you’ve also got t o be ext rem ely st raight forward. The analyst s didn’t like t he way Ken hedged on his response about business process out sourcing, and I don’t blam e t hem . He should have j ust said, “ Yes, we’ve t hought about it . No, we haven’t m ade any decisions yet .” There’s a large difference bet ween being a publiccom pany CEO and playing a public- com pany CEO. The form er t ells t he hard t rut hs and t akes his lum ps; t he lat t er spins everyt hing, like a polit ician. I t hink Ken is st ill playing a public- com pany CEO. He’s am bivalent about com m unicat ing wit h t he shareholder base, and t hat ’s a huge part of his j ob.

To be fair, he also seem s t o regret all t he t im e he’s spending away from his cust om ers. Public com panies have t wo set s of m ast ers—shareholders and cust om ers—and t heir CEOs m ust t end t o bot h. When Agency.com was public, I spent about 40% of m y t im e on shareholder- relat ed m at t ers; now t hat ’s down t o 10% , which is great . I f First Rangeway is having t rouble focusing on cust om ers because it s people are fixat ed on t he st ock m arket , t hen t hat m ight be a reason t o privat ize. That ’s anot her people issue peculiar t o service com panies: When your sellable goods expire every hour, you can’t afford t o have your people dist ract ed from t he client work. I f Ken insist s on t aking t he com pany privat e, t he first t hing he has t o do is st art kissing som e deep- pocket ed frogs. And he m ust keep in m ind t hat , whet her he get s t he m oney from exist ing part ners or from new sources, t hose invest ors m ay be wit h him for a long t im e. And t hey won’t rest rict t heir phone calls t o once a quart er. Or even t o business hours. So, m y recom m endat ion st ands. Ken, keep t he com pany public, and learn t o love t he j ob. I t can be very rewarding. Ed N u sba u m is t he chief execut ive officer of Grant Thornt on, a global account ing firm focused on m idsize privat e com panies and m id- cap public com panies. He is also a m em ber of t he Financial Account ing St andards Board Advisory Council. He can be reached at Edw a r d.N u sba u m @Gt .com .

I n con side r in g w h e t h e r or n ot t o st a y pu blic, Ke n sh ou ld w or r y n ot on ly a bou t a t t r a ct in g t h e n e w t a le n t h e n e e ds t o dr ive t h e bu sin e ss bu t a lso a bou t r e t a in in g t h e t a le n t h e a lr e a dy h a s. Going privat e is an at t ract ive scenario for First Rangeway, assum ing t hat it is able t o raise t he necessary cash. ( Charlie Grem ley, t he invest m ent banker, sounds opt im ist ic on t hat score.) A num ber of fact ors support t hat j udgm ent . As Ken has clearly discovered, it is easier t o m anage im port ant decisions when you are not under public scrut iny. Privat e com panies worry about profit s, of course, but t he pressure surrounding quart erly report ing is obviously hurt ing First Rangeway’s cust om ers. I t has also begun t o t ake it s t oll on em ployees, who are working long hours and com plaining about burnout . The analyst calls are creat ing st ress for m anagem ent and are proving a dist ract ion from t he com pany’s core business. I n addit ion, t he im pact of new legislat ion and report ing requirem ent s on a com pany of t his size is enorm ous. I would est im at e t hat it cost s First Rangeway som ewhere bet ween $250,000 and $1 m illion a year t o rem ain public. The st ock price for a relat ively sm all t echnology consult ing firm such as First Rangeway is also likely t o be very volat ile in t he fut ure, and t hat m ay cause m aj or financial and business disrupt ions. I t ’s not surprising t hat m any of Ken’s best people were lured t o First Rangeway by st ock opt ions. Opt ions, as we know, are great when em ployees t hink t heir value is going t o rise. But if it doesn’t , t hey are likely t o becom e discouraged. I n considering whet her or not t o st ay public, Ken should worry not only about at t ract ing t he new t alent he needs t o drive t he business but also about ret aining t he t alent he already has. Finally, t he leadership t eam doesn’t seem t o be chom ping at t he bit over t he prospect of m ergers or acquisit ions, so First Rangeway is under lit t le pressure t o use it s st ock as currency. I f First Rangeway does decide t o privat ize, however, it will need t o feel secure about it s profit s as it goes forward. The com pany is going t o have t o raise a couple hundred m illion dollars in financing—presum ably in debt financing—and t hat will have an int erest cost . I f t he com pany’s profit s exceed t hat int erest cost , t hen t he difference will flow direct ly t o First Rangeway’s part ners or privat e equit y holders. But if t here are no profit s, or if cash flow is not sufficient t o m ake t he principal and t he int erest paym ent s, it will put a t rem endous burden on t he com pany. Analyst s can and do get angry over poor perform ance, and Ken is underst andably concerned about t hat . But privat e debt holders can put you out of business. The final deciding fact or in t his scenario is First Rangeway’s board. I believe t hat t he board will support a privat izat ion st rat egy if such a st rat egy m akes sense from bot h an

econom ic and a business st andpoint . I t s m em bers have a fiduciary responsibilit y t o do what is in t he best int erest s of t he shareholders, and Ken can m ake a st rong case t hat , because of t he volat ilit y of t he m arket and t he indust ry, it is in t he shareholders’ best int erest s t o be bought out . I f Ken is convincing on t hat point , even Nancy West view, t he board m em ber who st rongly advocat es t hat First Rangeway rem ain public ( and whose opinions m ay not be represent at ive of t hose of t he ot her m em bers) , will be unable t o effect ively obj ect t o t he com pany pursuing a privat izat ion st rat egy. First Rangeway Consult ing could undoubt edly cont inue t o operat e as a public com pany, and Ken and Mat t st ill need t o run som e econom ic m odels and draw up t heir own list of pros and cons before m aking any crit ical decisions. But if I were in t heir shoes, I would soon begin t he push t oward going privat e. Joh n J. M u lh e r in is t he president and chief execut ive officer of t he Ziegler Com panies, a bout ique invest m ent - banking firm serving t he not - for- profit sect ors of senior living, hospit als, educat ion, and churches. The com pany is based in Milwaukee. Mulherin can be reached at j m u lh e r in @zie gle r .com .

W h a t m igh t w or k for Fir st Ra n ge w a y is t o r e m a in pu blic bu t list on t h e Pin k Sh e e t s, a pr im a r ily ove r - t h e - cou n t e r m e ch a n ism for t r a din g com pa n ie s t h a t a r e n ot on t h e m a j or e x ch a n ge s. My business, t he Ziegler Com panies, t raded for t en years on t he Am erican Exchange, and we would st ill be t rading t here t oday if it weren’t for t he passage of Sarbanes- Oxley. Yes, t he syst em needs real reform wit h t eet h in it . But one size does not fit all, and m icro- caps are suffering disproport ionat ely. First Rangeway’s CFO, Mat t , put a $1 m illion price t ag on com plying wit h new and exist ing regulat ions, and he didn’t even address t he high level of dist ract ion SarbanesOxley fom ent s. Had Ziegler rem ained on t he Am ex under Sarbanes, we would have had t o recreat e our audit com m it t ee pract ices and chart er. These m andat es would also have m eant adding num erous m eet ings and com m it t ees, as well as im plem ent ing som e cost ly financial- risk and com pliance processes t hat overlap wit h our exist ing and m ore- efficient processes. Our st art - up cost s for com pliance are est im at ed at $700,000; we believe t hat ongoing cost s would have run $400,000 annually. Taken t oget her, t hat ’s 20% t o 25% of our bot t om line for 2003. I t sounds as t hough First Rangeway would be sim ilarly hit . What Ziegler ult im at ely chose t o do—and what m ight work for First Rangeway as well—is t o rem ain public but list on t he Pink Sheet s, a prim arily over- t he- count er m echanism for t rading com panies t hat are not on t he m aj or exchanges. Long considered t he refuge of penny st ocks and fallen angels, t he Pink Sheet s, which is elect ronic and I nt ernet accessible, has lat ely at t ract ed a growing num ber of reput able firm s and st rong perform ers. As m any as five t o t en com panies a week are signing on specifically t o avoid t he cost s im posed by Sarbanes- Oxley. However, m any people are unaware of t he service’s im provem ent s and rem ain suspicious of it s reput at ion, so Ken m ay have difficult y persuading his board t hat t he Pink Sheet s is an opt ion. But t he first quest ion t hat Ken faces isn’t whet her t he Pink Sheet s is a bet t er venue for st aying public t han First Rangeway’s current exchange. Rat her, it is, who are First Rangeway’s shareholders, and what is t he com pany really doing for t hem ? The CEO offers lit t le insight int o how he int ends t o build shareholder value, and t hat m ay be because he doesn’t have m uch in t hat way t o offer. First Rangeway, aft er all, is a consult ancy. That m eans it s revenues are largely nonrecurring, and it has neit her significant t angible asset s such as invent ory, nor int ellect ual propert y such as pat ent s. At it s core, t he com pany is com prised of a group of people laboring t oget her for t heir m ut ual benefit . I s t here really a com pelling reason for a com pany wit h t his business m odel t o be public at all? Som e m em bers of m y execut ive t eam argued t he very sam e t hing about Ziegler when we were debat ing it s privat izat ion last fall. I would also quest ion whet her privat izat ion is t he m ost im port ant issue for debat e. During m y t enure at Ziegler, I have spent less t im e m ulling over our capit al st ruct ure t han our business st rat egy. I s our st rat egy working? I f not , how do we fix it ? Do we close exist ing businesses? St art new ones? Redirect our resources? I m prove our m arket ing? Ken appears t o be focusing m ost of his at t ent ion on t he public- privat e quandary inst ead of on t hose issues m ost likely t o build sust ainable value for

shareholders. I f Ken believes t hat First Rangeway is t ruly creat ing value, t hen by all m eans it should rem ain public ( but consider list ing on t he Pink Sheet s in order t o escape t he excessive burdens of Sarbanes- Oxley) . I f he can’t m ake t hat argum ent —and I suspect he can’t — t hen privat izing is t he bet t er choice. Tom Cope la n d, form erly t he chair of t he finance depart m ent at UCLA, is t he m anaging direct or of corporat e finance at t he Monit or Group, a m anagem ent consult ing firm based in Cam bridge, Massachuset t s. He is coaut hor of Real Opt ions: A Pract it ioner’s Guide ( Texere, 2001) . He can be reached at Tom _ Cope la n d@m on it or .com . A consult ing firm funct ions best as a part nership because it depends on creat ive solut ions t o high- level problem s. Because inform at ion is inalienable ( once shared it cannot be ret urned t o it s owner) and because new ideas m ust be quickly dissem inat ed, a flat st ruct ure based on t rust works best . From an organizat ional st andpoint , t herefore, First Rangeway’s I PO did t he com pany no favors. I t also caused significant increases in agency cost s ( m onit oring, public report ing, perform ance expect at ions, and incent ive st ruct ure) t hat m ay have driven a wedge bet ween t he public shareholders who own but do not m anage t he firm and t he rem aining post - I PO part ners who m anage but do not own it . First Rangeway’s I PO m ost likely t ransferred wealt h from j unior t o senior part ners, who owned a disproport ionat ely large percent age of t he firm . I n addit ion, by creat ing a new class of out side owners, t he I PO raised agency cost s in t hree ways. First , t he out siders need t o m onit or m anagem ent : First Rangeway spends $1 m illion annually on SEC com pliance and relat ed charges. Act ual opport unit y cost s will be a significant m ult iple of t hat . Second, senior part ners’ incent ive t o push harder evaporat es because t hey have essent ially cashed out . Third, t he rem aining part ners’ incent ive declines subst ant ially because t hey now keep only a fract ion of t he fruit of t heir effort s. Things would have been different had t he I PO m oney been reinvest ed in growt h, but t hat didn’t seem t o happen. The $200 m illion of profit would have been paid out as addit ional bonuses when t he firm was a part nership. Senior part ners creat ed a wealt h t ransfer and init iat ed agency cost s by selling t he claim on t he st ream of profit s t o out side owners. Post - I PO, it m ust have becom e harder t o at t ract and ret ain t op t alent because t he percent age of t he t ot al pie allot t ed t o t he part nership declined, as did t he size of t he pie. While debat ing what First Rangeway’s st at us should be in 2004, Ken and Mat t should underst and what m ight have been done different ly in 1999. Back t hen, t he senior part ners should have sold t heir shares t o t he j unior part ners rat her t han t o t he public. The firm ’s chart er should have separat ed ownership from cont rol wit hin t he ranks of t he part nership t o solve a classic int ergenerat ional problem : t ransfer of ownership. This can be facilit at ed by separat ing vot ing right s from st ock ownership. When j unior consult ant s are elect ed t o part nership, t hey m ust buy shares from senior part ners, who are required t o sell. Over t im e, t he num ber of shares owned by individual part ners increases, t hen declines as ret irem ent approaches. The num ber of vot es, m eanwhile, increases wit h seniorit y. Thus, cont rol rest s wit h senior part ners, but t heir econom ic incent ive t o sell t he firm t o out siders dim inishes t o zero as t hey prepare t o ret ire. Capit al for growt h should be raised prim arily via borrowing. I f First Rangeway’s rem aining part ners can elim inat e t he agency problem s creat ed by t he I PO, t hen t he firm ’s value aft er privat izat ion will exceed t he buyback price. Monit oring cost s will disappear, and int ernal incent ives will im prove. I f t he part ners cannot resolve t hose issues, t hen t he public- privat e dilem m a will cont inue t o haunt t hem . Wit h a second I PO likely, t he agency cost would rem ain and privat izat ion would creat e lit t le or no value.

I f Fir st Ra n ge w a y’s r e m a in in g pa r t n e r s ca n e lim in a t e t h e a ge n cy pr oble m s cr e a t e d by t h e I PO, t h e n t h e fir m ’s va lu e a ft e r pr iva t iza t ion w ill e x ce e d t h e bu yba ck pr ice . The rem aining part ners m ust decide whet her it is easier t o exceed expect at ions as a publicly held com pany or as a part nership. Will increased incent ives im prove consult ant s’ perform ance? I believe so. The part ners m ust also be sure t hat t hey can im prove current expect at ions of t he key value drivers: growt h and operat ing m argins. I f t hey have t o borrow t o finance t he buyback, t hey m ay have a debt burden for years t o com e.

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Give My Regret s t o Wall St reet I n cr e a se d pu blic scr u t in y, de cr e a se d st ock - opt ion a ppe a l, a n d t h e r e le n t le ss e x pe ct a t ion s of W a ll St r e e t a r e t a k in g t h e ir t oll on a on ce h igh flyin g con su lt a n cy. I s goin g pr iva t e t h e w a y ou t ?

by M a r k L. Fr igo a n d Joe l Lit m a n M a r k L. Fr igo ( m fr igo@de pa u l.e du ) is t he Eichenbaum Foundat ion Dist inguished Professor of St rat egy and Leadership and t he direct or of t he Cent er for St rat egy, Execut ion, and Valuat ion at DePaul Universit y’s Kellst adt Graduat e School of Business in Chicago. Joe l Lit m a n ( j oe l.lit m a n @csfb.com ) is a direct or wit h CSFB HOLT at Credit Suisse First Bost on and Clinical Professor of Business St rat egy in t he Kellst adt MBA Program .

Kennet h Charles and Mat t hew Phair sat on opposit e sides of t he conference room t able, scrat ching away on t heir legal pads. As one voice aft er anot her leaked from t he st arfishshaped phone, Mat t hew, t he CFO of First Rangeway Consult ing, t ook copious not es. Kennet h, t he CEO, energet ically doodled anim als, as he oft en did when alone or wit h close associat es. “ During a conference call, no one can t ell t hat you’re drawing a dog,” he liked t o say, beam ing approval on t hose who got t he j oke. Doodling helped Ken focus, and his pen skit t ered across t he paper as he list ened t o Vict oria Michaels, a t op- ranked sell- side analyst covering professional services st ocks. Vict oria was com m ending First Rangeway for it s cost - cont rol work and consequent increase in earnings. “ But revenues are st ill flat quart er over quart er,” she went on in a clipped voice t hat j ust m issed being an English accent . “ When and from where do you see revenue growt h, and at what levels?” “ You know, Vict oria, we’ve been holding client proj ect s st eady over t he past year,” Ken replied. “ But proposal act ivit y and engagem ent t ypes point t o an upt ick next quart er, when corporat e spending for our services should really kick in.” “ We’ve already seen signs t hat we’ll easily reach t he t arget s we m ent ioned earlier,” added Mat t , j ot t ing a num ber in t he m argin and drawing a box around it . “ To reit erat e, we st at ed a 10% quart er- over- quart er increase beginning next quart er.” The next quest ion, from Kevin Danville of LRL I nvest m ent s, was t ougher. “ Could you com m ent on how fruit ful t he business process out sourcing space m ight be over and above t radit ional consult ing revenues?” Kevin asked, as Mat t et ched “ BPO” int o his paper, followed by t hree quest ion m arks. Ken racked his brain for a response t hat would sound bot h encouraging and noncom m it t al. Not finding one, he set t led for noncom m it t al. “ We are invest igat ing m ult iple revenue st ream s as we have in t he past ,” he said, “ and are prepared t o m ove int o t hose t hat com plem ent our consult ing work. However,” he added, cringing inwardly at t he necessarily oblique language, “ it would be prem at ure at t his point t o m ake any

specific announcem ent .” That answer wasn’t what t he analyst s want ed t o hear, he knew. Alt hough Ken had been a part ner at First Rangeway since 1997—t wo years before t he 2,800- em ployee consult ancy’s I PO and subsequent m arket t rium ph—he had been CEO for less t han a year, and t he quart erly analyst calls st ill m ade him sweat . On t he day he accept ed t he t op j ob, his wife, Cara, had present ed him wit h a plaque t hat read sim ply, “ All Things t o All People,” and for m ont hs it held pride of place on his office wall. Lat ely, however, t he words seem ed m ore like a com m and t han a pleasant ry, and Ken had banished t he plaque t o t he net her regions of a desk drawer. Thirt y quest ion- filled m inut es lat er, t he call operat or finally rang down t he curt ain. Ken capped his pen and leaned back, puffing out his cheeks in relief. Mat t t apped t he on/ off but t on on t he speakerphone t o m ake sure t hey were clear. The reassuring hum of a dial t one filled t he air. “ Have I ever m ent ioned how m uch I love analyst calls?” said Ken, as Mat t gat hered his papers int o a neat st ack. “ Because if I did, I was lying. How do you t hink m y BPO response went over?” Mat t shrugged. “ Kevin didn’t m ent ion Locklin- Ladd Associat es by nam e, but you know t hat ’s who he m eant . They’ve been all over out sourcing, and t hey’ve hired som e t op guns t o m ake it happen. There’s m oney t here, Ken. I t could easily m ean 30% growt h for us for several years. Plus, Mark and Am y and som e ot her part ners have serious experience in t hat area.” “ I t would also m ean a t on of up- front capit al,” replied t he CEO. “ But yes, it ’s wort h considering.” Cert ainly t he prospect was t ant alizing, and Ken couldn’t deny feeling t hat residual dream - big it ch, which, wit hout access t o heaps of m oney, t he com pany was unlikely t o scrat ch. None of t he new m arket s First Rangeway was cont em plat ing were frivolous; all represent ed direct ions in which it s cust om ers were heading. Five years ago, pursuing such opport unit ies would have been a no- brainer. But aft er t he m arket ’s fall, it was definit ely a brainer. For t hat reason and ot hers, Ken was no longer convinced t hat public st at us rem ained a com pelling proposit ion. “ Of course,” he m used out loud, “ t he whole equat ion changes if we…”

“W e a r e pr ofit a ble . Pr oposa l in t e r e st is u p. Th e e con om y is u p, a n d w e ’r e in a gr e a t posit ion t o t a k e a dva n t a ge of t h a t . W it h ou t t h e I PO, w e w ou ldn ’t h a ve h a d t h e se ga in s.” “ I f we go privat e,” concluded Mat t . “ I t ’s it em num ber one at t he next m anagem ent t eam m eet ing—and t he big it em at t he board m eet ing.” Leaning across t he t able, he t ore t he t op sheet off Ken’s pad and eyeballed it . “ Nice giraffe,” he com m ent ed, t ossing t he paper back t oward t he CEO. A Tr ou blin g Ex ch a n ge An hour lat er in t he lobby, Ken st opped by t he recept ion desk t o order a cab and snit ch a handful of Hershey’s Miniat ures from t he cut - glass j ar. “ I t hought you were on a diet ?” said Lindsey Carrut hers, com ing up behind him . One of First Rangeway’s rising st ars, Lindsey was also Ken’s self- appoint ed conscience. The CEO raised his hands in m ock surrender and put back t he candy. The t wo walked out t oget her t hrough t he big glass double doors.

“ I ’m glad I ran int o you,” said Ken, scanning t he st reet for his t axi. “ I ’m off t o your alm a m at er in Bost on t o do a present at ion at t he B- school—t rying t o rust le up som e t op- not ch MBAs. You’ve done a lot of recruit ing t here, right ? What will t hey t hrow at m e?” Lindsey t hought for a m om ent . “ Well, t hey’re st ill int erest ed in First Rangeway, definit ely,” she said. “ But I had lunch wit h a couple pot ent ial recruit s last week, and t hey were concerned about t he st ock price. I ’m not surprised, because we’re so opt ion- and st ock- based, but t hey asked quest ions about t he st ock’s pot ent ial I really couldn’t answer. Want m e t o com e wit h?” “ No, you j ust enj oy your lunch,” said Ken, as his cab pulled up. Through t he window, he wat ched Lindsey walk t oward t he corner salad bar. She was one of his best people and would probably m ake part ner soon. I n it s glory years, First Rangeway had recruit ed a lot of great people from her school, m any at t ract ed by t hose very st ock opt ions t hat were giving t his crop of MBAs t he willies. And why shouldn’t opt ions m ake t hem uncom fort able, Ken t hought . First Rangeway’s price was m ore t han 80% off it s highs, and volat ile t o boot . Wit h t he precipit ous drop in global business, t hey’d downsized dram at ically, laying people off, freezing hires. But t hings were looking up now. I t was t im e t o refocus on t he people—on finding new blood t o drive t he business and hanging on t o t hose part ners who had m ade it successful so far. Unfort unat ely, t hey would have t o divert som e of t hose new hires t oward act ivit ies t hat would do not hing t o build t he com pany. Before t hat m orning’s analyst call, Mat t had laid out t he resources First Rangeway needed t o st ay up t o snuff wit h Sarbanes- Oxley, SEC filings, and ot her cost - of- being- public requirem ent s. The business was becom ing m ore com plicat ed: I nnovat ive revenue and gain- sharing agreem ent s wit h client s had m ade financial report ing a m are’s nest . Mat t est im at ed t hey’d need 12 m ore people, including in- house at t orneys, audit st aff, and dedicat ed syst em s folk t o upgrade soft ware for int ernal cont rols. He had ballparked t he t ot al at over a m illion dollars annually. Cut t ing corners wasn’t an opt ion, Ken knew. Anyt hing rem ot ely quest ionable about t heir report ing could hinder a pot ent ial rebound in st ock price or—worst of worst - case scenarios—land him and Mat t in j ail for willfully cert ifying bad financial st at em ent s. “ Neit her of us want s t o sign off on t hose filings unless t hey’re 100% kosher,” Mat t had rem inded him . “ And by t he way, we could also use t wo or t hree m ore bodies in invest or relat ions.” The cab lurched, and a wave of nausea seized t he CEO. Car sickness, nerves, or an em pt y st om ach? Ken unwrapped t he single chocolat e bar he had secret ed in one of his pocket s and popped it int o his m out h. Too Bu llish t o Be a r ? The present at ion t o t he MBAs went swim m ingly. Ken was j ust ifiably proud of his orat ory skills: The abilit y t o m ot ivat e people was one fact or in his professional rise. So inspirat ional was t he CEO’s descript ion of his com pany’s st arry fut ure t hat he was t em pt ed t o run out and apply for a j ob at First Rangeway him self. Crossing t he quad aft erward, Ken not iced a t all wom an in head- t o- t oe Brooks Brot hers st riding ahead of him . He quickened his pace and a m om ent lat er fell in beside Nancy West view. Nancy was a prom inent business personalit y, adored by t he press, and had m ore pies t han she had fingers t o put in t hem . She was on cam pus t hat day guest lect uring at an ent repreneurship sem inar. “ I went in wit h six pages of not es and cam e out wit h 600 pages wort h of business plans,” she t old Ken, waving a t hick folder. “ My

favorit e so far is an exercise service for sm all pet s.” But sm all t alk was a very sm all part of Nancy’s conversat ional repert oire. One of First Rangeway’s original invest ors ( she st ill held a sizable posit ion) and a m em ber of it s board, she soon swit ched t o a subj ect of vit al int erest t o t he shareholders—and, m ost part icularly, t o Nancy West view. “ I know t here’s been a lot of t alk recent ly about going privat e,” she said, st epping neat ly off t he pat h t o avoid a young professor on a Segway, “ and I t hink it would be a m ist ake. The m aj or indexes are all up for t he year, and our st ock is up t wice t hat . The econom y looks as if it ’s gaining st eam , and I don’t want it leaving t he st at ion wit hout us.” Ken list ened pat ient ly as Nancy launched int o a t ut orial on t he st at e of t echnology consult ing. As expect ed, it was a st udy in upsides. Nancy’s est im at es of pot ent ial revenues from out sourcing slight ly exceeded Mat t ’s, and she knew from her prodigious net working t hat som e of First Rangeway’s com pet it ors were ent ering ot her prom ising areas. There was also t alk of indust ry consolidat ion: Nancy nam ed t hree pot ent ial acquisit ions t hat she deem ed “ t ast y.” “ There is no way we can t alk about going privat e wit hout t aking t hese t hings int o account —serious account ,” said Nancy, as t hey em erged from t he grassy enclave ont o a revvingup- for- rush- hour st reet . “ I want t o know what we’re doing about t hese opport unit ies. The board m eet ing is Wednesday. I expect t o hear answers.” “ And answers you will have, Nancy,” prom ised Ken, t he first words he’d been able t o get out in alm ost t en m inut es. “ Mat t and I are st ill in research m ode, but a direct ion is becom ing clear.” The last bit wasn’t t rue, but Nancy, he knew, had a hat e- hat e relat ionship wit h am biguit y. Anxious t o avoid a furt her m onologue, he handed her int o t he first cab t hat pulled up, declining her offer t o share t he ride. As Ken raised his hand t o hail anot her t axi, a bus rolled by, belching exhaust at him . Pu blic En e m y N u m be r On e Ken arrived at his club at t en m inut es past seven and hurried t o t he rest aurant . The floor- t o- ceiling windows were awash wit h night , and wait ers slipped unobt rusively from t able t o t able, light ing candles. Greg O’Keefe was already seat ed in t heir usual spot . Ken dropped int o his chair and brushed away t he leat her- bound m enu being proffered by a wait er. “ Flam e- grilled rib eye, black- and- blue. No pot at oes. No bread. Glass of t he house red.” “ At kins, Ken?” asked Greg, raising an eyebrow. “ Ten pounds so far,” replied Ken, not m ent ioning t hat t wo of t hose t en had recent ly m ade a reappearance. “ And how about you?” he asked, not icing t he t aut ness of his form er colleague’s j acket across his increasingly barrel- like chest . “ Evidence of life in t he slow lane?” “ Not hing slow about it ,” said Greg. “ I ’ve got plent y of consult ing work, and, seeing as I ’m a bred- in- t he- bone consult ant , t hat t ends t o m ake m e happy. Can you say t he sam e?” “ Of course,” replied Ken, slight ly annoyed. “ First Rangeway is st ill a consult ing firm t hrough and t hrough.” “ Oh yes?” said Greg. “ And a consult ing firm t hrough and t hrough needs access t o all t hat capit al why? Consult ing is a cash- based business, old friend. The m at h is sim ple: I f 200 part ners generat e $200 m illion in profit s, t hey each m ake a m illion dollars. All being

public does is dilut e t hat .” Ken sighed, wondering how t hey had m anaged t o get off on t his t rack so early in t he evening. They’d been having t he sam e argum ent for t hree years, beginning on t he day Greg resigned from First Rangeway in t he second wave of part ner defect ions aft er t he business downt urn. Ken had bought int o t he form er CEO’s am bit ious vision. But Greg saw only what was lost : an unwavering focus on consult ing. Greg had launched int o his by- now fam iliar int erpret at ion of event s. “ Because we were so fant ast ic at what we did, we were able t o pull off a successful I PO, which gave us lot s of m oney t o spend on t hings ot her t han what we did and were fant ast ic at . I t ’s a cat ch22 or a perfect st orm or a t ipping point …I can never rem em ber which. I ’m not arguing t here isn’t value in float ing a sm all percent age of st ock and gaining liquidit y. But aft er t hat , what ’s t he use?” he cont inued as t he wait er placed a couple of green salads in front of t hem . He paused t o fork som e arugula int o his m out h. “ Privat e m ay not be sexy, but t hese days public isn’t anyt hing t o get hot and bot hered about eit her. The privat ely owned consult ing m odel has been working for decades. Decades from now, it will st ill be working.” Ken scooped his crout ons ont o a spoon and deposit ed t hem ont o his bread plat e. “ Look, Greg, do I really need t o st at e t he obvious here? We are profit able. Proposal int erest is up. The econom y is up, and we’re in a great posit ion t o t ake advant age of t hat . Wit hout t he I PO, we wouldn’t have had t hese gains. And if we go privat e now, we’ll m iss out on a lot of opport unit ies t hat t he board—t hat t he board and I —see in t he com ing year.” He paused, realizing he was repeat ing som e of t he sam e rah- rah rhet oric he’d used on t he MBA candidat es a few hours earlier. “ Anyway, you know t he door is always open if you want t o com e back,” he said m ore gent ly. “ Well, Ken, if anyone can m ake it work, it ’s you,” said Greg, conciliat orily. “ Personally, I t hink First Rangeway’s gonna do great t hings. But it ’s going t o have t o do t hem wit hout m e.” He sm iled. “ Unless of course, you change your m ind about t he privat e t hing. Are you going t o eat t hose crout ons?” P.O.’d Closing t he door of his den t o st ifle t he sound of t he Cart oon Net work m arat hon unfolding in t he next room , Ken sat at his desk and swit ched on t he PC. He had an hour before t he Sat urday rout ine of soccer gam es and birt hday part ies kicked in, and about 100 e- m ails t o plow t hrough. One from his brot her in Maine. One from Am azon announcing t hat a recent order was on it s way. The t hird e- m ail was from Tracy Durham , president of Bardwell I ncorporat ed, and a longt im e client of Ken’s. The previous year, Bardwell had init iat ed a m ult im illion- dollar engagem ent , and t he e- m ail bore glad t idings of it s progress. Tracy report ed t hat she was pleased wit h t he Rangeway part ner running t he proj ect . The t eam of em ployees from bot h com panies had proven innovat ive and collaborat ive, it s result s solid. “ I do, however, have one issue I ’d like t o discuss,” t he e- m ail concluded. “ Call m e when you can.” Ken checked t he dat e and t im e st am p: 10/ 11/ 03 08: 32 am . Tracy was hard at it on a Sat urday m orning; it wouldn’t hurt t o let her know Ken was hard at it , t oo. Anyway, Ken couldn’t enj oy t he day knowing t here was som e problem out t here preparing t o bit e. He had Tracy’s cell num ber and had been inst ruct ed t o use it any t im e. Ken picked up t he t elephone. Two rings. “ Hello?”

“ Hey, Tracy, I hope it ’s OK t o call you on a weekend…” “ Not a problem , Ken. I guess you saw m y e- m ail. As I said, t hings in general are going well. But som e of our people have com plained t hat som e of your people are pushing t hem t oo hard t o reach cert ain m ilest ones on t he program m ing proj ect before end of quart er.” Unconsciously, Ken picked up a pad and began doodling. Bardwell’s com pensat ion and cult ure, Tracy was explaining, sim ply weren’t designed t o accom m odat e 75- hour- plus workweeks. And t he lead part ner—whose energy and expert ise she had praised in t he em ail—had been a lit t le t oo aggressive about collect ing on a bill ( “ and I let him know it , t oo,” said Tracy, sounding peeved.) “ I don’t obj ect t o wrapping t hings up quickly,” she cont inued. “ But all of t he pressure m akes us wonder, Whose quart er are we t rying t o m ake: Bardwell’s or Rangeway’s? “ Making a quart er can’t help a firm as m uch as losing a client could hurt it ,” Tracy said. “ Right now t his is not a huge t hing.” She paused, wait ed a beat . “ Let ’s j ust m ake sure it doesn’t becom e one.” Ken’s pen was leaking, leaving m oist blot ches all over t he page. This wasn’t t he first t im e a proj ect t eam had been pressured in t he nam e of quart erly revenue t arget s. And client s weren’t t he only ones hurt ing: His own em ployees were com plaining of burnout as well. “ I prom ise I ’ll speak t o t he engagem ent part ner personally,” he said hast ily. “ You’ve known m e a long t im e, Tracy. You know we’ll do right by you.”

Th is w a sn ’t t h e fir st t im e t h a t clie n t s h a d be e n pr e ssu r e d in t h e n a m e of qu a r t e r ly r e ve n u e t a r ge t s. An d Ke n ’s ow n e m ploye e s w e r e com pla in in g of bu r n ou t a s w e ll. As Ken hung up, a chorus of voices sum m oned him int o t he living room t o j oin t he search for cleat s. Tim e t o Yie ld? On Monday m orning, Ken’s conversat ion wit h t he lead part ner on t he Bardwell engagem ent went as well as could be expect ed. ( “ Did I really use t he word ‘unseem ly’?” he asked him self lat er.) By 11 am , t he CEO had m oved on t o ot her t hings. Specifically, he was back in t he conference room wit h Mat t , t he speakerphone bet ween t hem . Only t his t im e, it was channeling t he voice of invest m ent banker Charlie Grem ley. “ Going privat e is a pret t y st raight forward process,” Charlie was explaining, “ but t hat doesn’t m ean it ’s easy. I f you plan t o raise capit al from financial sponsors, we can help you do t hat . I f you’re looking t o raise t he capit al yourselves, we can help t here, t oo. We’ll st art running valuat ion m odels now if you like. Needless t o say, we’re t alking about som et hing in excess of a couple of hundred m illion dollars.” As t he invest m ent banker spoke, Ken speculat ed on j ust how m uch m oney t he part ners could or would raise if t hey went t his rout e. Aft er First Rangeway’s I PO, t he owners’ net wort h skyrocket ed, and m any had sold som e piece of t heir ownership. But ot hers held on as paper gains gave way t o paper losses. Then Charlie st art ed t o enum erat e t he people t hey’d need t o st eer t he deal, and Ken pict ured at t orneys and account ant s swarm ing over t he com pany’s headquart ers like ant s on a dropped popsicle. Talk about a dist ract ion from t he business…and t he cost …

“ There’s som et hing ext rem ely Alice Through t he Looking Glass about all t his,” rem arked Mat t as he swit ched off t he phone. “ I recall sit t ing right here five years ago list ening t o Charlie walk us t hrough t he I PO. Rem em ber how helpful he was?” “ What I rem em ber is how encouraging he was,” replied Ken, wit h a t ouch of sourness. “ Did I m ent ion how m uch I love invest m ent bankers? Because if I did…” “ Yes, I know, t hen you were lying,” finished Mat t . Pr iva t e Aye , or N a y The m anagem ent t eam m eet ing convened wit h t he int roduct ion of a t ray of bagels and j ugs of fresh- squeezed j uice. I t was 7: 30, Tuesday m orning. Ken gazed around t he execut ive boardroom : The com pany’s bright est and m ost seasoned players gazed back at him . “ So,” said t he CEO, “ m ay I direct your at t ent ion t o t he elephant in t he room ?” Ken had am bit ious goals for t his m eet ing. Facing one of t he m ost im port ant decisions t hey would ever m ake, t he t eam m em bers couldn’t sim ply react t o current m arket condit ions or focus on t heir own careers and wealt h. Rat her, he needed t hem t o st ep int o t he ring for a lit t le out - of- t he- boxing. They had t o consider t he issue from m any different perspect ives. The CEO nodded t oward Laura Leadbet t er, a senior part ner sipping a t all cup of St arbucks’s st rongest . “ Laura, if a client of our own st rat egy consult ing group were wrest ling wit h t his issue, how m ight we advise t hem ?” As a 20- year vet eran of business, Laura had facilit at ed m ore execut ive ret reat s t han she could t hrow a creat ivit y consult ant at . St ill, she m ulled over t he quest ion a while before responding. “ We all know t here are big- m oney im plicat ions t o eit her direct ion,” she said finally. “ We want t o do what is financially best for t he business as a whole and, yes, for us individually. But —forgive m e if I get a lit t le Business St rat egy 101 here—wealt h com es t hrough fulfilling client needs. So if I were advising a business, t hat ’s what I would say: First , define your client s’ needs, and t hen align your genuine asset s and business st rat egy, including capit al st ruct ure, accordingly.” That was t he right answer, and Ken sm iled his approbat ion. Cust om er focus had always been t he CEO’s m ant ra. The t eam could paint t his pict ure any num ber of ways, but First Rangeway’s client s had t o provide t he fram e. Confident , now, t hat t he discussion would proceed t oward t he best possible conclusion, Ken t hrew out t his challenge: “ Being a publicly t raded com pany affect s us in alm ost everyt hing we do. We have t o consider not only what kind of business t his can be, but also what it should be. What we are discussing now, and what I will present t o t he board t om orrow, is no less t han t he fut ure of First Rangeway. Let ’s t alk.”

H BR Ca se Com m e n t a r y

Sh ou ld Fir st Ra n ge w a y r e m a in pu blic or go pr iva t e ? Fou r com m e n t a t or s offe r e x pe r t a dvice .

Ch a n Su h is cofounder, CEO, and chairm an of Agency.com , an int eract ive m arket ing and t echnology com pany headquart ered in New York. Agency.com went public in 1999 and privat e in 2001. Suh can be reached at ch a n @a ge n cy.com . Ken m ay not want t o hear t his, but I see no com pelling financial reasons why First Rangeway should go privat e. The business opport unit ies before it are at t ract ive. The com pany is profit able, and it s cash flow appears healt hy. ( When m y com pany, Agency. com , went privat e, t he m ost im port ant fact or in m y decision was t he cash flow beyond 24 m ont hs.) So long as First Rangeway can rem ain profit able and keep cust om ers happy, it should do j ust fine as a public com pany in t he long t erm . Going privat e, by cont rast , could be hugely disrupt ive. The biggest challenge lies not wit h lawyers and account ant s but rat her wit h Ken’s own people. I n a service com pany, as I ’m sure Ken m ust know, people are everyt hing. First Rangeway has been at t ract ing t op t alent wit h a heavy reliance on t he lure of opt ions. I f t hose opt ions disappear because t he com pany goes privat e, how will m anagem ent induce t hose folks t o st ay? Opt ions weren’t a disproport ionat e part of com pensat ion at Agency.com , but we st ill had t o com e up wit h a bonus program t o ret ain our key st aff. And even t hen we lost a few, including our CFO. I t ’s not a quest ion of loyalt y. Those people signed on for one t hing, and t hey ended up wit h som et hing else.

I f Fir st Ra n ge w a y st a ys pu blic, I ’m n ot su r e Ke n is it s be st possible CEO. I f you don ’t e n j oy r u n n in g a pu blic com pa n y, t h e n you sh ou ldn ’t be doin g it . But if First Rangeway st ays public, I ’m not sure Ken is it s best possible CEO. I f you don’t enj oy running a public com pany, t hen you shouldn’t be doing it . Ken should have known t he realit ies going in: t he em phasis on short - t erm result s, t he scrut iny. Wit h every quart er com es t hat call of reckoning, and even when your result s are bad or t he quest ions are difficult , you have t o enj oy at least t he challenge of answering t hose quest ions. I act ually did enj oy it , as well as t he t rem endous discipline required t o m eet expect at ions about report ing and perform ance. As a public- com pany CEO, you’ve also got t o be ext rem ely st raight forward. The analyst s didn’t like t he way Ken hedged on his response about business process out sourcing, and I don’t blam e t hem . He should have j ust said, “ Yes, we’ve t hought about it . No, we haven’t m ade any decisions yet .” There’s a large difference bet ween being a publiccom pany CEO and playing a public- com pany CEO. The form er t ells t he hard t rut hs and t akes his lum ps; t he lat t er spins everyt hing, like a polit ician. I t hink Ken is st ill playing a public- com pany CEO. He’s am bivalent about com m unicat ing wit h t he shareholder base, and t hat ’s a huge part of his j ob. To be fair, he also seem s t o regret all t he t im e he’s spending away from his cust om ers. Public com panies have t wo set s of m ast ers—shareholders and cust om ers—and t heir CEOs m ust t end t o bot h. When Agency.com was public, I spent about 40% of m y t im e on shareholder- relat ed m at t ers; now t hat ’s down t o 10% , which is great . I f First Rangeway is having t rouble focusing on cust om ers because it s people are fixat ed on t he st ock m arket , t hen t hat m ight be a reason t o privat ize. That ’s anot her people issue peculiar t o service com panies: When your sellable goods expire every hour, you can’t afford t o have your people dist ract ed from t he client work. I f Ken insist s on t aking t he com pany privat e, t he first t hing he has t o do is st art kissing som e deep- pocket ed frogs. And he m ust keep in m ind t hat , whet her he get s t he m oney from exist ing part ners or from new sources, t hose invest ors m ay be wit h him for a long t im e. And t hey won’t rest rict t heir phone calls t o once a quart er. Or even t o business

hours. So, m y recom m endat ion st ands. Ken, keep t he com pany public, and learn t o love t he j ob. I t can be very rewarding. Ed N u sba u m is t he chief execut ive officer of Grant Thornt on, a global account ing firm focused on m idsize privat e com panies and m id- cap public com panies. He is also a m em ber of t he Financial Account ing St andards Board Advisory Council. He can be reached at Edw a r d.N u sba u m @Gt .com .

I n con side r in g w h e t h e r or n ot t o st a y pu blic, Ke n sh ou ld w or r y n ot on ly a bou t a t t r a ct in g t h e n e w t a le n t h e n e e ds t o dr ive t h e bu sin e ss bu t a lso a bou t r e t a in in g t h e t a le n t h e a lr e a dy h a s. Going privat e is an at t ract ive scenario for First Rangeway, assum ing t hat it is able t o raise t he necessary cash. ( Charlie Grem ley, t he invest m ent banker, sounds opt im ist ic on t hat score.) A num ber of fact ors support t hat j udgm ent . As Ken has clearly discovered, it is easier t o m anage im port ant decisions when you are not under public scrut iny. Privat e com panies worry about profit s, of course, but t he pressure surrounding quart erly report ing is obviously hurt ing First Rangeway’s cust om ers. I t has also begun t o t ake it s t oll on em ployees, who are working long hours and com plaining about burnout . The analyst calls are creat ing st ress for m anagem ent and are proving a dist ract ion from t he com pany’s core business. I n addit ion, t he im pact of new legislat ion and report ing requirem ent s on a com pany of t his size is enorm ous. I would est im at e t hat it cost s First Rangeway som ewhere bet ween $250,000 and $1 m illion a year t o rem ain public. The st ock price for a relat ively sm all t echnology consult ing firm such as First Rangeway is also likely t o be very volat ile in t he fut ure, and t hat m ay cause m aj or financial and business disrupt ions. I t ’s not surprising t hat m any of Ken’s best people were lured t o First Rangeway by st ock opt ions. Opt ions, as we know, are great when em ployees t hink t heir value is going t o rise. But if it doesn’t , t hey are likely t o becom e discouraged. I n considering whet her or not t o st ay public, Ken should worry not only about at t ract ing t he new t alent he needs t o drive t he business but also about ret aining t he t alent he already has. Finally, t he leadership t eam doesn’t seem t o be chom ping at t he bit over t he prospect of m ergers or acquisit ions, so First Rangeway is under lit t le pressure t o use it s st ock as currency. I f First Rangeway does decide t o privat ize, however, it will need t o feel secure about it s profit s as it goes forward. The com pany is going t o have t o raise a couple hundred m illion dollars in financing—presum ably in debt financing—and t hat will have an int erest cost . I f t he com pany’s profit s exceed t hat int erest cost , t hen t he difference will flow direct ly t o First Rangeway’s part ners or privat e equit y holders. But if t here are no profit s, or if cash flow is not sufficient t o m ake t he principal and t he int erest paym ent s, it will put a t rem endous burden on t he com pany. Analyst s can and do get angry over poor perform ance, and Ken is underst andably concerned about t hat . But privat e debt holders can put you out of business. The final deciding fact or in t his scenario is First Rangeway’s board. I believe t hat t he

board will support a privat izat ion st rat egy if such a st rat egy m akes sense from bot h an econom ic and a business st andpoint . I t s m em bers have a fiduciary responsibilit y t o do what is in t he best int erest s of t he shareholders, and Ken can m ake a st rong case t hat , because of t he volat ilit y of t he m arket and t he indust ry, it is in t he shareholders’ best int erest s t o be bought out . I f Ken is convincing on t hat point , even Nancy West view, t he board m em ber who st rongly advocat es t hat First Rangeway rem ain public ( and whose opinions m ay not be represent at ive of t hose of t he ot her m em bers) , will be unable t o effect ively obj ect t o t he com pany pursuing a privat izat ion st rat egy. First Rangeway Consult ing could undoubt edly cont inue t o operat e as a public com pany, and Ken and Mat t st ill need t o run som e econom ic m odels and draw up t heir own list of pros and cons before m aking any crit ical decisions. But if I were in t heir shoes, I would soon begin t he push t oward going privat e. Joh n J. M u lh e r in is t he president and chief execut ive officer of t he Ziegler Com panies, a bout ique invest m ent - banking firm serving t he not - for- profit sect ors of senior living, hospit als, educat ion, and churches. The com pany is based in Milwaukee. Mulherin can be reached at j m u lh e r in @zie gle r .com .

W h a t m igh t w or k for Fir st Ra n ge w a y is t o r e m a in pu blic bu t list on t h e Pin k Sh e e t s, a pr im a r ily ove r - t h e - cou n t e r m e ch a n ism for t r a din g com pa n ie s t h a t a r e n ot on t h e m a j or e x ch a n ge s. My business, t he Ziegler Com panies, t raded for t en years on t he Am erican Exchange, and we would st ill be t rading t here t oday if it weren’t for t he passage of Sarbanes- Oxley. Yes, t he syst em needs real reform wit h t eet h in it . But one size does not fit all, and m icro- caps are suffering disproport ionat ely. First Rangeway’s CFO, Mat t , put a $1 m illion price t ag on com plying wit h new and exist ing regulat ions, and he didn’t even address t he high level of dist ract ion SarbanesOxley fom ent s. Had Ziegler rem ained on t he Am ex under Sarbanes, we would have had t o recreat e our audit com m it t ee pract ices and chart er. These m andat es would also have m eant adding num erous m eet ings and com m it t ees, as well as im plem ent ing som e cost ly financial- risk and com pliance processes t hat overlap wit h our exist ing and m ore- efficient processes. Our st art - up cost s for com pliance are est im at ed at $700,000; we believe t hat ongoing cost s would have run $400,000 annually. Taken t oget her, t hat ’s 20% t o 25% of our bot t om line for 2003. I t sounds as t hough First Rangeway would be sim ilarly hit . What Ziegler ult im at ely chose t o do—and what m ight work for First Rangeway as well—is t o rem ain public but list on t he Pink Sheet s, a prim arily over- t he- count er m echanism for t rading com panies t hat are not on t he m aj or exchanges. Long considered t he refuge of penny st ocks and fallen angels, t he Pink Sheet s, which is elect ronic and I nt ernet accessible, has lat ely at t ract ed a growing num ber of reput able firm s and st rong perform ers. As m any as five t o t en com panies a week are signing on specifically t o avoid t he cost s im posed by Sarbanes- Oxley. However, m any people are unaware of t he service’s im provem ent s and rem ain suspicious of it s reput at ion, so Ken m ay have difficult y persuading his board t hat t he Pink Sheet s is an opt ion. But t he first quest ion t hat Ken faces isn’t whet her t he Pink Sheet s is a bet t er venue for st aying public t han First Rangeway’s current exchange. Rat her, it is, who are First Rangeway’s shareholders, and what is t he com pany really doing for t hem ?

The CEO offers lit t le insight int o how he int ends t o build shareholder value, and t hat m ay be because he doesn’t have m uch in t hat way t o offer. First Rangeway, aft er all, is a consult ancy. That m eans it s revenues are largely nonrecurring, and it has neit her significant t angible asset s such as invent ory, nor int ellect ual propert y such as pat ent s. At it s core, t he com pany is com prised of a group of people laboring t oget her for t heir m ut ual benefit . I s t here really a com pelling reason for a com pany wit h t his business m odel t o be public at all? Som e m em bers of m y execut ive t eam argued t he very sam e t hing about Ziegler when we were debat ing it s privat izat ion last fall. I would also quest ion whet her privat izat ion is t he m ost im port ant issue for debat e. During m y t enure at Ziegler, I have spent less t im e m ulling over our capit al st ruct ure t han our business st rat egy. I s our st rat egy working? I f not , how do we fix it ? Do we close exist ing businesses? St art new ones? Redirect our resources? I m prove our m arket ing? Ken appears t o be focusing m ost of his at t ent ion on t he public- privat e quandary inst ead of on t hose issues m ost likely t o build sust ainable value for shareholders. I f Ken believes t hat First Rangeway is t ruly creat ing value, t hen by all m eans it should rem ain public ( but consider list ing on t he Pink Sheet s in order t o escape t he excessive burdens of Sarbanes- Oxley) . I f he can’t m ake t hat argum ent —and I suspect he can’t — t hen privat izing is t he bet t er choice. Tom Cope la n d, form erly t he chair of t he finance depart m ent at UCLA, is t he m anaging direct or of corporat e finance at t he Monit or Group, a m anagem ent consult ing firm based in Cam bridge, Massachuset t s. He is coaut hor of Real Opt ions: A Pract it ioner’s Guide ( Texere, 2001) . He can be reached at Tom _ Cope la n d@m on it or .com . A consult ing firm funct ions best as a part nership because it depends on creat ive solut ions t o high- level problem s. Because inform at ion is inalienable ( once shared it cannot be ret urned t o it s owner) and because new ideas m ust be quickly dissem inat ed, a flat st ruct ure based on t rust works best . From an organizat ional st andpoint , t herefore, First Rangeway’s I PO did t he com pany no favors. I t also caused significant increases in agency cost s ( m onit oring, public report ing, perform ance expect at ions, and incent ive st ruct ure) t hat m ay have driven a wedge bet ween t he public shareholders who own but do not m anage t he firm and t he rem aining post - I PO part ners who m anage but do not own it . First Rangeway’s I PO m ost likely t ransferred wealt h from j unior t o senior part ners, who owned a disproport ionat ely large percent age of t he firm . I n addit ion, by creat ing a new class of out side owners, t he I PO raised agency cost s in t hree ways. First , t he out siders need t o m onit or m anagem ent : First Rangeway spends $1 m illion annually on SEC com pliance and relat ed charges. Act ual opport unit y cost s will be a significant m ult iple of t hat . Second, senior part ners’ incent ive t o push harder evaporat es because t hey have essent ially cashed out . Third, t he rem aining part ners’ incent ive declines subst ant ially because t hey now keep only a fract ion of t he fruit of t heir effort s. Things would have been different had t he I PO m oney been reinvest ed in growt h, but t hat didn’t seem t o happen. The $200 m illion of profit would have been paid out as addit ional bonuses when t he firm was a part nership. Senior part ners creat ed a wealt h t ransfer and init iat ed agency cost s by selling t he claim on t he st ream of profit s t o out side owners. Post - I PO, it m ust have becom e harder t o at t ract and ret ain t op t alent because t he percent age of t he t ot al pie allot t ed t o t he part nership declined, as did t he size of t he pie.

While debat ing what First Rangeway’s st at us should be in 2004, Ken and Mat t should underst and what m ight have been done different ly in 1999. Back t hen, t he senior part ners should have sold t heir shares t o t he j unior part ners rat her t han t o t he public. The firm ’s chart er should have separat ed ownership from cont rol wit hin t he ranks of t he part nership t o solve a classic int ergenerat ional problem : t ransfer of ownership. This can be facilit at ed by separat ing vot ing right s from st ock ownership. When j unior consult ant s are elect ed t o part nership, t hey m ust buy shares from senior part ners, who are required t o sell. Over t im e, t he num ber of shares owned by individual part ners increases, t hen declines as ret irem ent approaches. The num ber of vot es, m eanwhile, increases wit h seniorit y. Thus, cont rol rest s wit h senior part ners, but t heir econom ic incent ive t o sell t he firm t o out siders dim inishes t o zero as t hey prepare t o ret ire. Capit al for growt h should be raised prim arily via borrowing. I f First Rangeway’s rem aining part ners can elim inat e t he agency problem s creat ed by t he I PO, t hen t he firm ’s value aft er privat izat ion will exceed t he buyback price. Monit oring cost s will disappear, and int ernal incent ives will im prove. I f t he part ners cannot resolve t hose issues, t hen t he public- privat e dilem m a will cont inue t o haunt t hem . Wit h a second I PO likely, t he agency cost would rem ain and privat izat ion would creat e lit t le or no value.

I f Fir st Ra n ge w a y’s r e m a in in g pa r t n e r s ca n e lim in a t e t h e a ge n cy pr oble m s cr e a t e d by t h e I PO, t h e n t h e fir m ’s va lu e a ft e r pr iva t iza t ion w ill e x ce e d t h e bu yba ck pr ice . The rem aining part ners m ust decide whet her it is easier t o exceed expect at ions as a publicly held com pany or as a part nership. Will increased incent ives im prove consult ant s’ perform ance? I believe so. The part ners m ust also be sure t hat t hey can im prove current expect at ions of t he key value drivers: growt h and operat ing m argins. I f t hey have t o borrow t o finance t he buyback, t hey m ay have a debt burden for years t o com e. Reprint Num ber R0402B Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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Execut ive Sum m aries Th e H BR List Br e a k t h r ou gh I de a s for 2 0 0 4 Reprint R0402A

HBR’s edit ors searched for t he best new ideas relat ed t o t he pract ice of m anagem ent and cam e up wit h a collect ion t hat is as diverse as it is provocat ive. The 2004 HBR List includes em ergent concept s from biology, net work science, m anagem ent t heory, and m ore. A few highlight s: Rich a r d Flor ida wonders why U.S. societ y doesn’t seem t o be t hinking about t he flow of people as t he key t o Am erica’s advant age in t he “ creat ive age.” D ia n e L. Cou t u describes how t he revolut ion in neurosciences will have a m aj or im pact on business. Cla yt on M . Ch r ist e n se n explains t he law of conservat ion of at t ract ive profit s: When at t ract ive profit s disappear at one st age in t he value chain because a product becom es com m odit ized, t he opport unit y t o earn at t ract ive profit s wit h propriet ary product s usually em erges at an adj acent st age. Joe l Ku r t zm a n asks where t he “ st upid m oney” is headed. Robe r t Su t t on report s on t he em ergence of “ no asshole” —excuse t he crude language—rules. D a n ie l H . Pin k explains why t he m ast er of fine art s is t he new MBA. Jose ph Fu lle r asks whet her t he useful life of t he public com pany is over. H e r m in ia I ba r r a describes how com panies can get t he m ost out of m anagers ret urning from leadership- developm ent program s. I qba l Qu a dir suggest s a radical fix for t he t hird world’s t rade problem s: Get t he World Bank t o lend t o rich count ries so t hat t here are resources for ret raining workers in dying indust ries. Cla y Sh ir k y describes how t echnology will allow com panies t o get vast am ount s of realt im e dat a from social net works. Th om a s A. St e w a r t shows how j okes const it ut e a t rove of inform at ion about what ’s really going on in a com pany. And Ra y Ku r zw e il m akes t he case t hat while high- t ech st ocks have seesawed, t echnology has m arched st eadily forward—and will cont inue t o do so.

H BR Ca se St u dy Give M y Re gr e t s t o W a ll St r e e t

Mark L. Frigo and Joel Lit m an Reprint R0402B

I t ’s been only four years since First Rangeway Consult ing went public, but t o CEO Kennet h Charles, it seem s like a lifet im e. I n t he grand old days of it s I PO, t he com pany couldn’t grow fast enough t o m eet cust om er dem and; t op t alent answered t he siren call of it s opt ions; and t he owners gleefully wat ched t heir wealt h escalat e along wit h t he st ock. Post - bubble, First Rangeway’s st ock is down 80% from it s peak value, pot ent ial hires are wary, and t he com pany feels beleaguered by Sarbanes- Oxley and SEC requirem ent s. I n addit ion, Kennet h worries t hat pressure t o m ake quart erly result s is com prom ising his relat ionship wit h cust om ers. And did we m ent ion t hat he loat hes analyst calls? That said, First Rangeway’s st ock price is on t he m end, and t here are som e ext rem ely t em pt ing opport unit ies on t he horizon t hat will require a heap of capit al. Rangeway’s CFO speculat es t hat t hese opport unit ies could m ean as m uch as 30% growt h over t he next several years. Should First Rangeway rem ain public or go privat e? What are t he advant ages and disadvant ages of each alt ernat ive? Four expert s weigh in on t his fict ional case st udy: Tom Copeland, t he form er chair of UCLA’s finance depart m ent and m anaging direct or of corporat e finance at Monit or Group; Chan Suh, t he cofounder, CEO, and chairm an of Agency.com ; Ed Nusbaum , t he CEO of Grant Thornt on; and John J. Mulherin, t he president and CEO of t he Ziegler Com panies.

Fe a t u r e s M e a su r in g t h e St r a t e gic Re a din e ss of I n t a n gible Asse t s

Robert S. Kaplan and David P. Nort on Reprint R0402C; Harvard Business Review OnPoint edit ion 5887; Harvard Business Review OnPoint collect ion 5933 “ Focusing Your Organizat ion on St rat egy—wit h t he Balanced Scorecard, 2nd Edit ion”

Measuring t he value of int angible asset s such as com pany cult ure, knowledge m anagem ent syst em s, and em ployees’ skills is t he holy grail of account ing. Execut ives know t hat t hese int angibles, being hard t o im it at e, are powerful sources of sust ainable com pet it ive advant age. I f m anagers could m easure t hem , t hey could m anage t he com pany’s com pet it ive posit ion m ore easily and accurat ely. I n one sense, t he challenge is im possible. I nt angible asset s are unlike financial and physical resources in t hat t heir value depends on how well t hey serve t he organizat ions t hat own t hem . But while t his prevent s an independent valuat ion of int angible asset s, it also point s t o an alt oget her different approach for assessing t heir wort h. I n t his art icle, t he creat ors of t he Balanced Scorecard draw on it s t ools and fram ework— in part icular, a t ool called t he st rat egy m ap—t o present a st ep- by- st ep way t o det erm ine “ st rat egic readiness,” which refers t o t he alignm ent of an organizat ion’s hum an, inform at ion, and organizat ion capit al wit h it s st rat egy. I n t he m et hod t he aut hors describe, t he firm ident ifies t he processes m ost crit ical t o creat ing and delivering it s value proposit ion and det erm ines t he hum an, inform at ion, and organizat ion capit al t he processes require. Som e m anagers shy away from m easuring int angible asset s because t hey seem so subj ect ive. But by using t he syst em at ic approaches set out in t his art icle, com panies can now m easure what t hey want , rat her t han want ing only what t hey can current ly m easure.

W or se Th a n En e m ie s: Th e CEO’s D e st r u ct ive Con fida n t

Kerry J. Sulkowicz Reprint R0402D

The CEO is oft en t he m ost isolat ed and prot ect ed em ployee in t he organizat ion. Few leaders, even vet eran CEOs, can do t he j ob wit hout t alking t o som eone about t heir experiences, which is why m ost develop a close relat ionship wit h a t rust ed colleague, a confidant t o whom t hey can t ell t heir t hought s and fears. I n his work wit h leaders, t he aut hor has found t hat m any CEO–confidant relat ionships funct ion very well. The confidant s keep t heir leaders’ best int erest s at heart . They derive t heir grat ificat ion vicariously, t hrough t he help t hey provide rat her t han t hrough any personal gain, and t hey are usually quit e aware t hat a person in t heir posit ion can pot ent ially abuse access t o t he CEO’s innerm ost secret s. Unfort unat ely, alm ost as m any confidant s will end up hurt ing, underm ining, or ot herwise exploit ing CEOs when t he execut ives are at t heir m ost vulnerable. These confidant s rarely m ake t he headlines, but behind t he scenes t hey do enorm ous dam age t o t he CEO and t o t he organizat ion as a whole. What ’s m ore, t he leader is oft en t he last one t o know when or how t he confidant relat ionship becam e t oxic. The aut hor has ident ified t hree t ypes of dest ruct ive confidant s. The reflect or m irrors t he CEO, const ant ly reassuring him t hat he is t he “ fairest CEO of t hem all.” The insulat or buffers t he CEO from t he organizat ion, prevent ing crit ical inform at ion from get t ing in or out . And t he usurper cunningly ingrat iat es him self wit h t he CEO in a desperat e bid for power. This art icle explores how t he CEO–confidant relat ionship plays out wit h each t ype of adviser and suggest s ways CEOs can avoid t hese dest ruct ive relat ionships.

Ge t t in g I T Righ t

Charlie S. Feld and Donna B. St oddard Reprint R0402E; Harvard Business Review OnPoint edit ion 5905; Harvard Business Review OnPoint collect ion 5895 “ Making I T Mat t er”

Modern inform at ion t echnology st art ed four decades ago, yet in m ost m aj or corporat ions, I T rem ains an expensive m ess. This is part ly because t he relat ively young and rapidly evolving pract ice of I T cont inues t o be eit her grossly m isunderst ood or blindly ignored by t op m anagem ent . Senior m anagers know how t o t alk about finances because t hey all speak or underst and t he language of profit and loss and balance sheet s. But when t hey allow t hem selves t o be befuddled by I T discussions or bedazzled by t hreelet t er acronym s, t hey shirk a crit ical responsibilit y. I n t his art icle, t he aut hors say a syst em at ic approach t o underst anding and execut ing I T can and should be im plem ent ed, and it should be organized along t hree int erconnect ed principles: A Long- Term I T Renewal Plan Linked t o Corporat e St rat egy. Such a plan focuses t he ent ire I T group on t he com pany’s overarching goals during a m ult iyear period, m akes appropriat e invest m ent s direct ed t oward cut t ing cost s in t he near t erm , and generat es a det ailed blueprint for long- t erm syst em s rej uvenat ion and value creat ion. A Sim plified, Unifying Corporat e Technology Plat form . I nst ead of relying on vert ically orient ed dat a silos t hat serve individual corporat e unit s ( HR, account ing, and so on) , com panies adopt a clean, horizont ally orient ed archit ect ure designed t o serve t he whole

organizat ion. A Highly Funct ional, Perform ance- Orient ed I T Organizat ion. I nst ead of funct ioning as if it were different from t he rest of t he firm or as a loose confederat ion of t ribes, t he I T depart m ent works as a t eam and operat es according t o corporat e perform ance st andards. Get t ing I T right dem ands t he sam e inspired leadership and superb execut ion t hat ot her part s of t he business require. By st icking t o t he t hree cent ral principles out lined in t his art icle, com panies can t urn I T from a quagm ire int o a powerful weapon.

H ow t o H a ve a n H on e st Con ve r sa t ion Abou t You r Bu sin e ss St r a t e gy

Michael Beer and Russell A. Eisenst at Reprint R0402F; Harvard Business Review OnPoint edit ion 5925; Harvard Business Review OnPoint collect ion 5917 “ Honest y I s t he Best St rat egy”

Too m any organizat ions descend int o underperform ance because t hey can’t confront t he painful gap bet ween t heir st rat egy and t he realit y of t heir capabilit ies, t heir behaviors, and t heir m arket s. That ’s because senior m anagers don’t know how t o engage in t rut hful conversat ions about t he problem s t hat t hreat en t he business—and because lower- level m anagers are afraid t o speak up. These fact ors lie behind m any failures t o im plem ent st rat egy. I ndeed, t he dynam ics in alm ost any organizat ion are such t hat it ’s ext rem ely difficult for senior people t o hear t he unfilt ered t rut h from m anagers lower down. Beer and Eisenst at present t he m et hodology t hey’ve developed for get t ing t he t rut h about an organizat ion’s problem s ( and t he t rut h is always em bedded wit hin t he organizat ion) ont o t he t able in a way t hat allows senior m anagem ent t o do som et hing useful wit h it . By assem bling a t ask force of t he m ost effect ive m anagers t o collect dat a about st rat egic and organizat ional problem s, t he senior t eam sends a clear m essage t hat it is serious about uncovering t he t rut h. Task force m em bers present t heir findings t o t he senior t eam in t he form of a discussion. This conversat ion needs t o m ove back and fort h bet ween advocacy and inquiry; it has t o be about t he issues t hat m at t er m ost ; it has t o be collect ive and public; it has t o allow em ployees t o be honest wit hout risking t heir j obs; and it has t o be st ruct ured. This direct feedback from a handful of t heir best people m oves senior t eam s t o m ake changes t hey ot herwise m ight not have. Senior t eam s t hat have engaged in t his process have m ade dram at ic changes in how t heir businesses are organized and m anaged—and in t heir bot t om - line result s. Success t hat begins wit h honest conversat ions beget s fut ure conversat ions t hat furt her im prove perform ance.

La u n ch in g a W or ld- Cla ss Join t Ve n t u r e

Jam es Bam ford, David Ernst , and David G. Fubini Reprint R0402G

More t han 5,000 j oint vent ures, and m any m ore cont ract ual alliances, have been launched worldwide in t he past five years. Com panies are realizing t hat JVs and alliances can be lucrat ive vehicles for developing new product s, m oving int o new m arket s, and increasing revenues. The problem is, t he success rat e for JVs and alliances is on a par wit h t hat for m ergers and acquisit ions—which is t o say not very good. The aut hors, all McKinsey consult ant s, argue t hat JV success rem ains elusive for m ost com panies because t hey don’t pay enough at t ent ion t o launch planning and execut ion. Most com panies are highly disciplined about int egrat ing t he com panies t hey t arget t hrough M&A, but t hey rarely com m it sufficient resources t o launching sim ilarly sized j oint vent ures or alliances. As a result , t he parent com panies experience st rat egic conflict s, governance gridlock, and m issed operat ional synergies. Oft en, t hey walk away from t he deal. The launch phase begins wit h t he parent com panies’ signing of a m em orandum of underst anding and cont inues t hrough t he first 100 days of t he JV or alliance’s operat ion. During t his period, it ’s crit ical for t he parent s t o convene a t eam dedicat ed t o exposing inherent t ensions early. Specifically, t he launch t eam m ust t ackle four basic challenges. First , build and m aint ain st rat egic alignm ent across t he separat e corporat e ent it ies, each of which has it s own goals, m arket pressures, and shareholders. Second, creat e a shared governance syst em for t he t wo parent com panies. Third, m anage t he econom ic int erdependencies bet ween t he corporat e parent s and t he JV. And fourt h, build a cohesive, high- perform ing organizat ion ( t he JV or alliance) —not a sim ple t ask, since m ost m anagers com e from , will want t o ret urn t o, and m ay even hold sim ult aneous posit ions in t he parent com panies. Using real- world exam ples, t he aut hors offer t heir suggest ions for m eet ing t hese challenges.

M a n a gin g You r se lf Su cce ss Th a t La st s

Laura Nash and Howard St evenson Reprint R0402H

Pursuing success can feel like shoot ing in a landscape of m oving t arget s: Every t im e you hit one, five m ore pop up from anot her direct ion. We are under const ant pressure t o do m ore, get m ore, be m ore. But is t hat really what success is all about ? Laura Nash and Howard St evenson int erviewed and surveyed hundreds of professionals t o st udy t he assum pt ions behind t he idea of success. They t hen built a pract ical fram ework for a new way of t hinking about success—a way t hat leads t o personal and professional fulfillm ent inst ead of feelings of anxiet y and st ress. The aut hors’ research uncovered four irreducible com ponent s of success: happiness ( feelings of pleasure or cont ent m ent about your life) ; achievem ent ( accom plishm ent s t hat com pare favorably against sim ilar goals ot hers have st rived for) ; significance ( t he sense t hat you’ve m ade a posit ive im pact on people you care about ) ; and legacy ( a way t o est ablish your values or accom plishm ent s so as t o help ot hers find fut ure success) . Unless you hit on all four cat egories wit h regularit y, any one win will fail t o sat isfy. People who achieve last ing success, t he aut hors learned, t end t o rely on a kaleidoscope st rat egy t o st ruct ure t heir aspirat ions and act ivit ies. This art icle explains how t o build your own kaleidoscope fram ework. The process can help you det erm ine which t asks you should undert ake t o fulfill t he different com ponent s of success and uncover areas where t here are holes. I t can also help you m ake bet t er choices about what you spend your

t im e on and t he level of energy you put int o each act ivit y. According t o Nash and St evenson, successful people who experience real sat isfact ion achieve it t hrough t he deliberat e im posit ion of lim it s. Cult ivat ing your sense of “ j ust enough” can help you set reachable goals, t ally up m ore t rue wins, and enj oy last ing success.

Be st Pr a ct ice Tu r n in g Ga dflie s in t o Allie s

Michael Yazij i Reprint R0402J

Mult inat ional com panies are t he driving force behind globalizat ion, but t hey are also t he source of m any of it s m ost painful consequences, including currency crises, cross- border pollut ion, and overfishing. These problem s rem ain unsolved because t hey are beyond t he scope of individual governm ent s; t ransnat ional organizat ions have also proved unequal t o t he t ask. Nonprofit , nongovernm ent al organizat ions have leaped int o t he breach. To force policy changes, t hey have seized on all form s of m odern persuasion t o influence public sent im ent t oward global t raders, m anufact urers, and invest ors. By part nering wit h NGOs inst ead of opposing t hem , com panies can avoid cost ly conflict and can use NGOs’ asset s t o gain com pet it ive advant age. So far, however, m ost com panies have proved ill equipped t o deal wit h NGOs. Large com panies know how t o com pet e on t he basis of product at t ribut es and price. But NGO at t acks focus on product ion m et hods and t heir spillover effect s, which are oft en noneconom ic. Sim ilarly, NGOs are able t o convert com panies’ st andard com pet it ive st rengt hs—such as size and wide m arket awareness of t heir brands—int o liabilit ies. That ’s because t he wealt hier and bet t er known a com pany is, t he j uicier t he t arget it m akes. Em boldened by t heir successes, NGOs cont inue t o t ake on new causes. By part nering wit h NGOs inst ead of reflexively opposing t hem , com panies could draw on NGOs’ key st rengt hs—legit im acy, awareness of social forces, dist inct net works, and specialized t echnical expert ise—which m ost com panies could use m ore of. And wit h NGOs as allies and guides, com panies should also be able t o accelerat e innovat ion, foresee shift s in dem and, shape legislat ion affect ing t hem , and, in effect , set t echnical and regulat ory st andards for t heir indust ries.

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View Back Issues | February 2004 > Worse Than Enem ies > Before I t 's Too Lat e

W or se Th a n En e m ie s

Before I t 's Too Lat e Five Signs of a Dangerous Confidant Relationship Because of t he unconscious fact ors t hat det erm ine whom you choose as your confidant , you m ay oft en be t he last one t o know if yours is t oxic. To find out if you are get t ing t rapped in a poisonous relat ionship wit h a t rust ed adviser, look for t hese warning signs: • Pe ople com pla in t h a t you ’r e in a cce ssible . Your own difficult personalit y m ay explain why you need a confidant , but choosing som eone who dist ances you from your organizat ion is a poor solut ion. Address head- on t he issues t hat surround your int erpersonal st yle. • You fe e l t h a t n o on e bu t you r con fida n t u n de r st a n ds you . While it ’s nat ural for a leader t o have a few t rust ed advisers, a CEO who overvalues t he opinions of a part icular individual is in danger of get t ing int o m urky wat ers, m aybe even of court ing disast er. Overreliance on a single person suggest s he has undue influence, which should raise a red flag. Seek out ot her people who “ get ” you. • You r con fida n t discou r a ge s you fr om se e k in g ot h e r cou n se l. When your t rust ed adviser want s t o m ake sure nobody else get s close t o you, he m ay be t rying t o wrest power from you. Such confidant s prey on your dist rust and suspicion and are am ong t he m ost insidious confidant s of all. Show t hem t he door quickly. • You r a dvise r st a r t s t o ca ll t h e sh ot s. Confidant s who t ell you what t o do are behaving like t hey are t he real power, and not necessarily j ust t he power behind t he t hrone. Svengali- like confidant s are dangerous t o you and your reput at ion. Find som eone who can genuinely list en t o you and can offer you const ruct ive crit icism . • You r con fida n t pr a ise s you t o t h e h e a ve n s. I f your confidant lays it on t hick and is afraid t o t ell you t he unvarnished t rut h, you m ay already have t rouble on your hands. Look around for som eone who doesn’t feel com pelled t o inflat e your self- est eem .

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Copyright © 2004 Harvard Business School Publishing. All right s reserved.

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View Back Issues | February 2004 > Get t ing I T Right

> | Pu r ch a se Re pr in t > | Pr in t a ble Ve r sion

Get t ing I T Right

> | E- m a il a Colle a gu e > | Ex e cu t ive Su m m a r y

I t ’s be e n 4 0 ye a r s sin ce t h e a dve n t of m ode r n I T, ye t fe w com pa n ie s do it w e ll. I f you st ick t o t h r e e ce n t r a l pr in ciple s, you ca n t u r n I T fr om a cost ly m e ss in t o a pow e r fu l w e a pon .

by Ch a r lie S. Fe ld a n d D on n a B. St odda r d

Of all t he m em bers of t he execut ive com m it t ee, t he CI O is t he least underst ood—m ost ly because his profession is st ill so young. Over t he cent uries, t he fields of m anufact uring, finance, sales, m arket ing, and engineering have evolved int o a set of com m only underst ood pract ices, wit h est ablished vocabularies and operat ing principles com prehended by every m em ber of t he senior t eam . By cont rast , t he field of inform at ion t echnology—born only 40 years ago wit h t he advent of t he I BM 360 in 1964—is prepubescent . This generat ion gap m eans t hat , in m ost organizat ions, t he corporat e parent —caught in t he linguist ic chasm bet ween t ech- speak and business- speak—has no idea what it s youngest child is up t o. Managem ent t oo oft en shrugs it s shoulders, hands t he kid a fat allowance, and looks t he ot her way. Lat er on, t he com pany finds it ’s paid an out rageous price for t he lat est t echnological fad. I nst ead of addressing t he problem , m any com panies j ust kick t he kid out of t he house. The result in m any m aj or corporat ions is t hat I T is an expensive m ess. Orders are lost . Cust om ers call help desks t hat aren’t helpful. Tracking syst em s don’t t rack. I ndeed, t he average business frit t ers away 20% of it s corporat e I T budget on purchases t hat fail t o achieve t heir obj ect ives, according t o Gart ner Research. This adds up t o approxim at ely $500 billion wast ed worldwide. Such wast e—m ost egregious in indust ries like t ransport at ion, insurance, t elecom m unicat ions, banking, and m anufact uring—is a direct result of t he fact t hat I T has so far operat ed wit hout t he const ruct ive involvem ent of t he senior m anagem ent t eam , despit e t he best int ent ions of CI Os. Over t he years, I T depart m ent s have ent husiast ically fulfilled request s by different corporat e funct ions. I n t he process, com panies have creat ed and populat ed dozens of legacy inform at ion syst em s, each consist ing of m illions of lines of code, t hat do not t alk t o one anot her. As t he dat a from discret e funct ions collect in separat e dat abases, m ore and m ore resources are required m erely t o keep t he syst em s funct ioning properly.

Th e r e is n o lon ge r a n y r e a son w h y n on t e ch n ica l e x e cu t ive s sh ou ld a llow t h e m se lve s t o be be fu ddle d by I T discu ssion s or be da zzle d by t h r e e - le t t e r a cr on ym s. While t he Y2K crisis im pelled m any com panies t o clean up t he worst of t heir legacy syst em s, m ost organizat ions m erely did spring cleaning, ignoring t he fact t hat t heir t echnological houses badly needed st ruct ural repair. Despit e advances in t echnology, m ost com panies cont inue t o st ruggle wit h 35- year- old, cost ly, and rigid inform at ion archeology; a cynical execut ive board; a discouraged I T organizat ion; and t hrongs of increasingly frust rat ed cust om ers. Add t he confusion of m ergers and acquisit ions and a long m arch of poorly im plem ent ed “ solut ions” ( ERP, CRM, dat a warehouses, port als, m obile com put ing, dashboards, and out sourcing) , and you end up wit h chaos. How can t his sit uat ion possibly be set right ? Making I T work has lit t le t o do wit h t echnology it self. Just because a builder can acquire a handsom e set of ham m ers, nails, and planks doesn’t m ean he can erect a qualit y house at reasonable cost . Making I T work dem ands t he sam e t hings t hat ot her part s of t he business do—inspired leadership, superb execut ion, m ot ivat ed people, and t he t hought ful at t ent ion and high expect at ions of senior m anagem ent .

Ch a r lie S. Fe ld ( Ch a r lie . fe ld@fe ldgr ou p.com ) is chairm an of t he Feld Group, an I T operat ions firm in I rving, Texas. D on n a B. St odda r d ( dst odda r d@ba bson . e du ) is an associat e professor who chairs t he I nform at ion Technology Managem ent Division at Babson College in Babson Park, Massachuset t s.

> | H a r va r d Bu sin e ss Re vie w On Poin t Edit ion This art icle is enhanced wit h a sum m ary of key point s t o help you quickly absorb and apply t he concept s and a bibliography t o guide furt her explorat ion.

> | H a r va r d Bu sin e ss Re vie w On Poin t Colle ct ion This art icle is also part of t he specially priced OnPoint collect ion “ Making I T Mat t er” which includes t hree OnPoint art icles wit h an overview com paring different perspect ives on t his t opic.

I T success also requires com m on underst anding. Senior m anagers know how t o t alk about finances, because t hey all speak or underst and t he language and can agree on a com m on set of m et rics ( profit and loss, balance sheet s, ret urn on asset s, and so on) . They can do t he sam e wit h m ost elem ent s of operat ions, cust om er service, and m arket ing. So why not wit h I T? There is no longer any reason why nont echnical execut ives should allow t hem selves t o be befuddled by I T discussions or bedazzled by t hree- let t er acronym s. And t here is no reason t hat t echnologist s cannot learn t o speak t he language of business and becom e perfect ly good leaders. We believe t hat t here are t hree int erdependent , int errelat ed, and universally applicable principles for execut ing I T effect ively and t hat it is t op m anagem ent ’s responsibilit y t o underst and and help apply t hem . The t hree principles are: A Lon g- Te r m I T Re n e w a l Pla n Lin k e d t o Cor por a t e St r a t e gy. Revam ping I T is like renewing a m aj or urban area while people are living t here. The effort requires a plan t hat keeps t he ent ire I T group focused on t he com pany’s overarching goals during a m ult iyear period, m akes appropriat e invest m ent s direct ed t oward near- t erm cost reduct ion, and generat es a det ailed blueprint for long- t erm syst em s rej uvenat ion and value creat ion. A Sim plifie d, Un ifyin g Cor por a t e Te ch n ology Pla t for m . Such a plat form replaces a wide variet y of vert ically orient ed dat a silos t hat serve individual corporat e unit s ( HR, account ing, and so on) wit h a clean, horizont ally orient ed archit ect ure designed t o serve t he com pany as a whole. This is sim ilar t o select ing st andard- sized pipes and connect ors for a cit y plan. A H igh ly Fu n ct ion a l, Pe r for m a n ce - Or ie n t e d I T Or ga n iza t ion . I nst ead of being t reat ed as if it were different from t he rest of t he firm or as a loose confederat ion of t ribes, t he I T depart m ent works as a t eam and operat es according t o corporat e perform ance st andards. Like int erlocking gears, t hese principles work t oget her and m ust be consist ent ly applied. I f t hey m esh well, each reinforces t he ot hers. I f one is disengaged or t urns in t he wrong direct ion, t he whole m achine st art s working against it self or grinds t o a halt . As a CI O, Charlie Feld has successfully applied t hese principles t o rej uvenat e I T at a num ber of Fort une 100 com panies—first at Frit o- Lay, t hen during his career as CI O at corporat ions such as Delt a Air Lines and Burlingt on Nort hern and Sant a Fe Railroads. What follows is a com posit e of his experiences, which illust rat e t he t hree principles in cont ext . Ge a r 1 : A Lon g- Te r m I T Pla n Because t he rat e of t echnological change is so rapid, and t he j ob t enure of CI Os generally brief, m ost people see I T t hrough t he narrow lens of short - t erm , silver- bullet solut ions. Heaven knows, vendors want you t o believe t hat t heir im port ant new t echnologies will blow away what has com e before. You can’t blam e a salesperson for t rying t o sell, or CI Os for having a queasy buy- or- lose feeling, but t his at t it ude is precisely t he opposit e of t he one com panies should be t aking. We would argue t hat because t he winds of change buffet I T m ore t han any ot her area of t he organizat ion, I T benefit s m ost from a long- t erm , disciplined, st rat egic view, and a square focus on achieving t he com pany’s m ost fundam ent al goals. For exam ple, Frit o- Lay’s st rat egic goal has always been t o m ake, m ove, and sell t ast y, fresh snack foods as rapidly and efficient ly as possible. That goal hasn’t changed since t he 1930s, when founder Herm an Lay ran his business from his At lant a kit chen and delivery t ruck. He bought and cooked t he pot at oes. He delivered t he chips t o st ores. He collect ed t he m oney and knew all his cust om ers. He balanced t he books and did his own qualit y assurance. Herm an Lay knew how t o conduct t he perfect “ sense and respond” ebusiness before such a t hing ever exist ed, for he held real- t im e cust om er, account ing, and invent ory inform at ion all in one place—his head. Aft er years of spect acular growt h, t he com pany grew m ore and m ore dist ract ed from t his sim ple business m odel. By t he early 1980s, t he com pany’s sales force had swelled t o 10,000, and inform at ion grew harder and harder t o m anage. The com pany’s old bat chbased dat a processing syst em s were all driven by paper form s t hat t ook 12 weeks t o print and dist ribut e t o t he sales force. All sales t ransact ions were recorded by hand; ream s of disparat e dat a were t ransferred t o t he com pany’s m ainfram e com put ers. Much was lost in t he process of set t ing up a dozen different funct ional organizat ions and a variet y of dat abases, none of which com m unicat ed wit h each ot her.

This m odus operandi m ade it im possible t o change prices quickly or develop new regional prom ot ions, st ream line product ion, or im prove invent ory m anagem ent . I t was as if Herm an Lay’s com pany had suffered a spinal cord inj ury, wit h t he brain and t he body no longer connect ed. At t he sam e t im e, t he com pany was seeing t he rise of st rong regional com pet it ors. The leaders realized t hat if t rends cont inued as t hey were, it s overall revenues would fall significant ly by t he early 1990s. Mike Jordan, who t ook over as CEO of Frit o- Lay in 1983, decided t o t ackle t he problem . He reconst ruct ed t he com pany as a hybrid organizat ion t hat was neit her t ot ally cent ralized nor decent ralized. His goal was t o t each t he com pany t o “ walk and chew gum at t he sam e t im e,” as he put it , by separat ing out t he com pany’s t wo com pet it ive advant ages: t he purchasing, product ion, and dist ribut ion leverages of a nat ional powerhouse, and t he local resources t hat gave t he com pany regional speed and agilit y. All t his led t o an organizat ional design t hat kept purchasing, m anufact uring, dist ribut ion, syst em s, account ing, and R&D as t he cent ralized plat form , leaving t he decent ralized sales and m arket ing organizat ions t o launch t heir st ore- by- st ore and st reet - by- st reet offensives. Having ident ified t he com pany’s st rat egy, Jordan t hen developed a long- t erm I T renewal ( as opposed t o a “ rip and replace” ) plan. An execut ive com m it t ee—com prised of t he CEO, CFO, CI O, and t wo execut ive vice president s—out lined a shift from paper t o a risky, em erging handheld t echnology for t he salespeople on t he st reet , as well as a t ransform at ion from bat ch account ing t o online operat ional syst em s. The goal was t o digit ally reconnect t he com pany’s nervous syst em . Equipped wit h t he cool new handhelds, t he sales force would be able t o m anage price, invent ory, and cust om er changes in real t im e and connect t o t he supply pipeline. The handheld com put ers would also est ablish a t echnological “ beachhead” —one sufficient ly im port ant t o keep t he business’s at t ent ion and achieve fast operat ing result s. Paying for all t his, of course, would not be easy. The j ourney would t ake from 1984 t o 1988, at a huge cost ( at t he t im e) : $40 m illion for t he handhelds and about $100 m illion for t he dat abases and core syst em s. Som e on t he execut ive com m it t ee balked, arguing t hat efficiencies gained by t he t echnology would be lost by salespeople working fewer hours. But t he com pany had no choice but t o revit alize it s regional sales, and t hough t he syst em s overhaul would be cost ly, st aying put would be even cost lier. To fund t he new com put ers, Jordan set up a long- t erm , ongoing funding m echanism designed t o keep I T spending bot h predict able and fairly st able from year t o year. To get t hings rolling, each sales region had t o com m it t o a reduct ion in selling expenses from 22 cent s on t he dollar t o 21 cent s wit hin a year of t he handhelds’ inst allat ion. The savings would be achieved by increasing sales at const ant cost , reducing cost s, or a com binat ion of t he t wo. The schem e worked: Wit h t he new syst em in place, t he com pany saved bet ween 30,000 t o 50,000 hours of paperwork per week. By 1988, savings result ing from bet t er cont rol over sales dat a cam e t o m ore t han $40 m illion per year—savings t hat in t urn funded t he renewal of t he core dat a syst em s. Frit o- Lay was able t o cut t he num ber of it s dist ribut ion cent ers, reduce st ale product by 50% , and increase it s dom est ic revenues from $3 billion in 1986 t o $4.2 billion by 1989. Today, Frit o- Lay cont inues t o be t he dom inant player in t he snack- food indust ry. Frit o- Lay’s t echnology st ory received a lot of press at t he t im e, m ost ly because t he handheld t echnology was sexy. But not ice what t he st ory was really about : I t was about execut ing Herm an Lay’s original, real- t im e business experience—feeling t he m oney j ingling in t he pocket and seeing t he invent ory in t he t ruck. Ge a r 2 : A Un ifyin g Pla t for m Most I T organizat ions are am azingly com plex and have individual init iat ives t hat are like independent count ries, each wit h it s own business applicat ions, t echnologies, cult ure, dat a definit ions, and orient at ion. Proj ect cost s soar because individual t eam s are isolat ed rat her t han harnessed t oget her, and few t eam s reuse each ot her’s com ponent s—a condit ion exacerbat ed by a plet hora of consult ant s and com pet it ive t echnologies. And when a com pany is running hundreds of het erogeneous hardware and soft ware syst em s, cost s run ram pant . Consider t he cost of such com plexit y at Delt a Air Lines. I n 1997, Delt a’s fleet consist ed of 600 airplanes and a rainbow of m odels, ranging from 727s, 737s, 757s, t o 767s, from MD 80s and 90s t o L1011s. ( By cont rast , Sout hwest Airlines operat es only one kind of airplane.) Each plane carried different inst rum ent at ion from different eras; as a result ,

t he com pany needed t o t rain pilot s and crew m em bers t o operat e t he different m odels. Keeping t rack of aircraft , people, part s invent ory, qualified m echanics, handling equipm ent , and cat ering cart s all added t o t he st ruct ural cost of t he airline. Delt a’s new CEO, Leo Mullin, and his execut ive t eam underst ood t hat if t hey reduced t he num ber of plane t ypes t hey operat ed, t hey could lower annual cost s by hundreds of m illions of dollars. What t he execut ives didn’t underst and was t hat t hey had an even worse problem in t heir I T organizat ion. The com pany was running m ore t han 30 m aj or I T plat form s, wit h 60 m illion lines of code, none of which were int egrat ed wit h each ot her. Each plat form required approxim at ely 100 I T support specialist s t o keep t he syst em s up and running. That arrangem ent cost t he com pany about $700 m illion per year in capit al and operat ing expenses. The problem wit hin I T m ade t he air fleet look like a m odel of sim plicit y. Running t he airline was nearly im possible. Gat e changes by t he t ower syst em s were not received in t im e by t he people who needed t hem : t he crews, cat erers, reservat ion agent s, t icket count er agent s, m echanics, baggage handlers, and cust om ers. The gat echange dat a were locked inside individual and oft en conflict ing syst em s. Once it underst ood t he root cause of com plexit y, Delt a’s execut ive t eam agreed t o a long- t erm sim plificat ion proj ect . Delt a launched an effort t o build an I T organizat ion t hat spoke a com m on language, operat ed against a sim ple and well- underst ood set of principles, and creat ed an archit ect ure t hat included a com m on set of dat abases. Everyone in t he I T organizat ion focused on a consist ent set of m et hods, t echnologies, and m anagem ent disciplines. From 1998 t o 2003, Delt a refocused it s form erly decent ralized I T invest m ent s of $200 m illion t o $300 m illion annually on a unified I T archit ect ure called t he Delt a Nervous Syst em , which cut inefficiencies out of virt ually every area of it s operat ion. Like Frit oLay’s syst em , Delt a reconnect ed t he elect ronic brain ( I T) t o t he physical body ( operat ions) by linking t he cust om er, flight , schedule, and em ployee dat abases t hat keep t rack of everyt hing from reservat ions t o t icket ing t o check- in and baggage handling t o crew operat ions. The foundat ion of t he Delt a Nervous Syst em was a com prehensive and aggressive sim plificat ion effort wit hin t he I T archit ect ure t o keep t he num ber of m oving part s t o a m inim um . To rebuild and sim plify it s I T syst em s, Delt a t ook a radically different t ack. Rebuilding t he syst em s from scrat ch would have been ext rem ely cost ly—plus t he com pany had an airline t o run. I nst ead, Delt a built a new set of soft ware, or m iddleware, t hat connect ed a com m on infrast ruct ure wit h every applicat ion. The m iddleware wit hin t he Delt a Nervous Syst em sat on t op of t he old t ransact ion syst em s and carried crit ical operat ional dat a from one applicat ion t o t he ot her. I f a gat e changed, t he m iddleware pushed t he news t o t he ot her syst em s t hat needed t o know about t he change ( cat ering, crew, gat e agent , baggage t racking, and so on) . Wit h t his m iddleware in place, Delt a could t hen go back and upgrade or replace older syst em s where necessary, wit hout disrupt ing t he I T syst em as a whole. ( For a visual of t he Delt a Nervous Syst em , see t he exhibit “ The Silo- Based Organizat ion Versus t he Layered Organizat ion.” )

The m iddleware layer wit hin t he Delt a Nervous Syst em proved essent ial t o leveraging t echnology innovat ion at Delt a. I t allowed t he com pany t o add new t echnology in a sim pler and less risky m anner over t im e. Most com panies go t hrough t he agonizing work of rewrit ing t heir syst em s as t echnology changes. Delt a, however, did t he opposit e. For exam ple, Delt a disconnect ed t he m anual syst em s t hat fed t he operat ions cont rol cent er ( OCC) and reconnect ed t hem t o t he Delt a Nervous Syst em . This effect ively rej uvenat ed t he OCC wit hout resort ing t o radical surgery or replacem ent . The OCC becam e a vibrant , fully funct ioning part icipant in t he Delt a Nervous Syst em at a fract ion of t he cost . The design of Delt a’s nervous syst em also form ed t he road m ap and cont ract bet ween I T t eam s, providing guidance on how dat a would be st ored, where t he dat a would com e from , how m any copies t he com pany would keep, as well as rules for calculat ing and int erpret ing t he dat a. For exam ple, all syst em s ( operat ions cont rol cent er, t ower, gat e, passenger, and crew) could now agree on t he sam e m eaning for a “ flight arrival.” Since Delt a revam ped it s inform at ion archit ect ure, t he com pany has reduced it s I T cost s by 30% . And despit e t he downt urn in t he airline indust ry, Delt a has com m it t ed t o a cost savings and revenue enhancem ent of $2 billion by t he end of 2005, while increasing it s service levels. Just as im port ant , Delt a has learned t hat discipline and sim plicit y in it s approach t o t echnology m anagem ent lead t o bot h speed and efficiency. I n doing t he hot , sweat y work of sim plifying it s syst em s and aligning I T wit h t he com pany’s overarching business goals, Delt a’s senior m anagers also learned t o t rust t heir inst inct s. They learned t hat t he sam e business skills t hat allowed t hem t o see what was wrong wit h t he com pany’s fleet of aircraft could also guide t hem in m anaging Delt a’s arm ada of t echnology plat form s. Ge a r 3 : A H igh - Pe r for m a n ce I T Cu lt u r e There’s no reason why m ost com panies can’t develop a long- t erm I T road m ap t ied t o corporat e goals. There’s also no reason t hat given sufficient discipline and resources, m ost can’t develop a unifying I T plat form . But wit hout a high- perform ance I T organizat ion in place—one t hat looks very different from t hose found in m ost com panies —a m essy I T business will persist . For years, corporat ions have t reat ed I T people different ly—a holdover from “ glass house” dat a processing cult ure of 30 years ago. Treat ing I T as if it were a separat e corporat e

ent it y set s up a vicious cycle. Allowed t o work in t heir own t ribes, I T folks feel less affiliat ion wit h t he com pany t han t hey do wit h t heir own proj ect s. Like t he soldiers building t he bridge on t he River Kwai, t hey grow so isolat ed t hat t hey forget what t he war is about . By cont rast , t he people in a high- perform ance I T organizat ion don’t feel different from ot her corporat e cit izens; in fact , t hey are business- savvy leaders in t heir own right . They operat e according t o t he sam e corporat e values as everyone else and are m easured by t he sam e t ough perform ance st andards. The st ory of t he 1995 m erger of Burlingt on Nort hern and Sant a Fe Railroads offers a case in point . The t wo railroads had t wo very dist inct cult ures, perform ance charact erist ics, and leadership st yles. Burlingt on Nort hern’s cult ure was kind, collaborat ive, and soft on account abilit y. Sant a Fe’s cult ure was t ough and st rict ly hierarchical. Thrown t oget her int o a single, 1,500- person organizat ion, t hese t wo t alent ed but ant agonist ic t eam s were t old by CEO Rob Krebs t hat t hey had 24 m ont hs t o com plet e a seam less m erger of t heir separat e I T syst em s. The goal was t o develop t he largest int egrat ed, real- t im e rail inform at ion syst em in t he world—one t hat would allow t he new com pany t o cont rol t raffic and cargo across 33,500 m iles of t rack t hat covered 28 st at es and t wo Canadian provinces. From a t echnology st andpoint , it was a challenge of im m ense proport ions. But once again, t he issue wasn’t t echnology; it was about est ablishing a new and cohesive cult ure, wit h a clear- cut set of rules and a solid perform ance- m anagem ent and feedback syst em . How, t he leaders asked, would people react t o t he deadline pressure, and how would t he t eam s work t oget her t o accom plish a Herculean m ission? How would t he overhaul of syst em s get done? How would t alent be developed? First on t he agenda was t he est ablishm ent of an account able I T leadership t eam . An I T organizat ion t hat has clear guidance, a shared m ission, and high expect at ions can focus t he developers and engineers around t he work and correct perform ance problem s. To do so, t he I T m anagers m ust be hands- on people who are deeply involved in overseeing proj ect s and t eam s. I n set t ing up a leader- led organizat ion, BNSF est ablished t hree sim ple levels of hierarchy: t he CI O, vice president s, and direct ors. Once t he new leadership st ruct ure was in place, BNSF set t he perform ance and bonus t arget s for expect ed leadership behavior—t he sam e ones t hat applied across t he com pany as a whole. These t arget s had t hree com ponent s: delivering result s, leadership com pet encies, and t he “ new BNSF” cult ural behaviors. A t op- perform ing leader had t o deliver on all t hree of t hese t arget s. None of t he I T st aff m em bers had ever been evaluat ed in such a clear way before, and t hey responded ext rem ely well t o expect at ions and feedback. Part of t he secret of get t ing people out of t he old way and int o t he new is t o est ablish a rhyt hm —t hat is, t o cont rol t he flow, t im ing, and pace of t he work. Set t ing a calendar and adhering t o it is, in m ost cases, t he m ost visible m eans of signaling t he t ransform at ion of t he I T cult ure and new set of processes. At BNSF, quart erly updat es, st aff m eet ings, direct ors’ councils, proj ect reviews, t echnical reviews, and I T board m eet ings all helped give t he new t eam a sense of norm alit y and rout ine—especially im port ant for people who are undergoing a reorganizat ion. The m eet ings helped t ransform t he form erly frust rat ing and m essy I T cult ures. I nst ead of accept ing disorganizat ion and lack of part icipat ion as a given, people showed up on t im e and generally becam e m ore efficient in t heir j obs. The new organizat ion and perform ance syst em was t im e- consum ing t o put in place, of course. Most of t he leaders grum bled about t hese dem ands and t he int ense t im e pressure of t he work. This was especially t rue for t hose who never had t o m anage under a clear set of expect at ions. But over t im e, and especially wit h t he early success of t he proj ect , healt hy work pat t erns began t o em erge, and a new cult ure was born. Wit hin a few m ont hs, BNSF’s newly m erged I T group becam e a high- perform ance organizat ion— so m uch so t hat it beat t he 24- m ont h t arget by t hree m ont hs. The reorganizat ion, com bined wit h t he savings realized from st ream lining processes and facilit ies, allowed BNSF t o achieve roughly $500 m illion wort h of cost savings t hat it had com m it t ed t o t he I nt erst at e Com m erce Com m ission t o obt ain m erger approval. Wit hout t he perform ance gear at high t orque, BNSF could not have at t ained it s corporat e goals. All Syst e m s Go Once t hese t hree gears are aligned and locked t oget her, I T organizat ions and syst em s t end t o deliver result s rapidly—in m any cases wit hin six m ont hs. Yet despit e t he obvious benefit s of t hese gears, som e businesspeople m ay ask t hem selves, “ Do we really have t o do all of t his ourselves? Can’t we sim ply out source t o firm s t hat already know how t o do

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t his st uff? And wouldn’t out sourcing be a cheaper alt ernat ive in t he long run?” The answer t o all t hese quest ions is yes and no. Over t im e, fewer and fewer CI Os will run t heir own net works and dat a cent ers, and m uch developm ent m ay be augm ent ed by part ners. However, t he “ gears” becom e even m ore crit ical when you bring out sourcing and offshoring int o t he pict ure, because m anagem ent com plexit y rises. You can’t abdicat e t he leadership and vision for t hese crit ical funct ions. And when you have a num ber of long- t erm cont ract s wit h various suppliers, t he long- t erm plan m ust be ext rem ely well art iculat ed ( Gear 1) . When you work wit h a num ber of vendors t hat have t heir own t ools and m et hodologies, it ’s crit ical t o orchest rat e an overarching com m on fram ework under which everyone can work product ively ( Gear 2) . I t ’s also m uch easier t o build a high- perform ance cult ure when you own t he hum an resources ( Gear 3) . I n operat ing a m ult i- com pany workforce, it t akes ext raordinary leadership t o creat e t he esprit de corp required for high perform ance.

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• • • Wit hout quest ion, t he next decade will require m uch m ore professional and sophist icat ed I T leadership t han ever before. Fort unat ely, com panies are learning fast . As we progress t hrough t he next decade, I T will m at ure from adolescence t o adult hood, and m uch m ore speedily t han any profession ever has. As t he t echnology m at ures and im proves, so will t he skills, processes, and principles on which effect ive I T is based. And here’s t he bonus: Once organizat ions get I T right , t hey will get m uch m ore for far less. Reprint Num ber R0402E | Harvard Business Review OnPoint edit ion 5905 | Harvard Business Review OnPoint collect ion 5895

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Get t ing I T Right I t ’s be e n 4 0 ye a r s sin ce t h e a dve n t of m ode r n I T, ye t fe w com pa n ie s do it w e ll. I f you st ick t o t h r e e ce n t r a l pr in ciple s, you ca n t u r n I T fr om a cost ly m e ss in t o a pow e r fu l w e a pon .

by Ch a r lie S. Fe ld a n d D on n a B. St odda r d Ch a r lie S. Fe ld ( Ch a r lie .fe ld@fe ldgr ou p.com ) is chairm an of t he Feld Group, an I T operat ions firm in I rving, Texas. D on n a B. St odda r d ( dst odda r d@ba bson .e du ) is an associat e professor who chairs t he I nform at ion Technology Managem ent Division at Babson College in Babson Park, Massachuset t s.

Of all t he m em bers of t he execut ive com m it t ee, t he CI O is t he least underst ood—m ost ly because his profession is st ill so young. Over t he cent uries, t he fields of m anufact uring, finance, sales, m arket ing, and engineering have evolved int o a set of com m only underst ood pract ices, wit h est ablished vocabularies and operat ing principles com prehended by every m em ber of t he senior t eam . By cont rast , t he field of inform at ion t echnology—born only 40 years ago wit h t he advent of t he I BM 360 in 1964—is prepubescent . This generat ion gap m eans t hat , in m ost organizat ions, t he corporat e parent —caught in t he linguist ic chasm bet ween t ech- speak and business- speak—has no idea what it s youngest child is up t o. Managem ent t oo oft en shrugs it s shoulders, hands t he kid a fat allowance, and looks t he ot her way. Lat er on, t he com pany finds it ’s paid an out rageous price for t he lat est t echnological fad. I nst ead of addressing t he problem , m any com panies j ust kick t he kid out of t he house. The result in m any m aj or corporat ions is t hat I T is an expensive m ess. Orders are lost . Cust om ers call help desks t hat aren’t helpful. Tracking syst em s don’t t rack. I ndeed, t he average business frit t ers away 20% of it s corporat e I T budget on purchases t hat fail t o achieve t heir obj ect ives, according t o Gart ner Research. This adds up t o approxim at ely $500 billion wast ed worldwide. Such wast e—m ost egregious in indust ries like t ransport at ion, insurance, t elecom m unicat ions, banking, and m anufact uring—is a direct result of t he fact t hat I T has so far operat ed wit hout t he const ruct ive involvem ent of t he senior m anagem ent t eam , despit e t he best int ent ions of CI Os. Over t he years, I T depart m ent s have ent husiast ically fulfilled request s by different corporat e funct ions. I n t he process, com panies have creat ed and populat ed dozens of legacy inform at ion syst em s, each consist ing of m illions of lines of code, t hat do not t alk t o one anot her. As t he dat a from discret e funct ions collect in separat e dat abases, m ore and m ore resources are required m erely t o keep t he syst em s funct ioning properly.

Th e r e is n o lon ge r a n y r e a son w h y n on t e ch n ica l e x e cu t ive s sh ou ld a llow t h e m se lve s t o be be fu ddle d by I T discu ssion s or be da zzle d by t h r e e - le t t e r a cr on ym s. While t he Y2K crisis im pelled m any com panies t o clean up t he worst of t heir legacy syst em s, m ost organizat ions m erely did spring cleaning, ignoring t he fact t hat t heir t echnological houses badly needed st ruct ural repair. Despit e advances in t echnology, m ost com panies cont inue t o st ruggle wit h 35- year- old, cost ly, and rigid inform at ion archeology; a cynical execut ive board; a discouraged I T organizat ion; and t hrongs of increasingly frust rat ed cust om ers. Add t he confusion of m ergers and acquisit ions and a long m arch of poorly im plem ent ed “ solut ions” ( ERP, CRM, dat a warehouses, port als, m obile com put ing, dashboards, and out sourcing) , and you end up wit h chaos. How can t his sit uat ion possibly be set right ? Making I T work has lit t le t o do wit h t echnology it self. Just because a builder can acquire a handsom e set of ham m ers, nails, and planks doesn’t m ean he can erect a qualit y house at reasonable cost . Making I T work dem ands t he sam e t hings t hat ot her part s of t he business do—inspired leadership, superb execut ion, m ot ivat ed people, and t he t hought ful at t ent ion and high expect at ions of senior m anagem ent . I T success also requires com m on underst anding. Senior m anagers know how t o t alk about finances, because t hey all speak or underst and t he language and can agree on a com m on set of m et rics ( profit and loss, balance sheet s, ret urn on asset s, and so on) . They can do t he sam e wit h m ost elem ent s of operat ions, cust om er service, and m arket ing. So why not wit h I T? There is no longer any reason why nont echnical execut ives should allow t hem selves t o be befuddled by I T discussions or bedazzled by t hree- let t er acronym s. And t here is no reason t hat t echnologist s cannot learn t o speak t he language of business and becom e perfect ly good leaders. We believe t hat t here are t hree int erdependent , int errelat ed, and universally applicable principles for execut ing I T effect ively and t hat it is t op m anagem ent ’s responsibilit y t o underst and and help apply t hem . The t hree principles are: A Lon g- Te r m I T Re n e w a l Pla n Lin k e d t o Cor por a t e St r a t e gy. Revam ping I T is like renewing a m aj or urban area while people are living t here. The effort requires a plan t hat keeps t he ent ire I T group focused on t he com pany’s overarching goals during a m ult iyear period, m akes appropriat e invest m ent s direct ed t oward near- t erm cost reduct ion, and generat es a det ailed blueprint for long- t erm syst em s rej uvenat ion and value creat ion. A Sim plifie d, Un ifyin g Cor por a t e Te ch n ology Pla t for m . Such a plat form replaces a wide variet y of vert ically orient ed dat a silos t hat serve individual corporat e unit s ( HR, account ing, and so on) wit h a clean, horizont ally orient ed archit ect ure designed t o serve t he com pany as a whole. This is sim ilar t o select ing st andard- sized pipes and connect ors for a cit y plan. A H igh ly Fu n ct ion a l, Pe r for m a n ce - Or ie n t e d I T Or ga n iza t ion . I nst ead of being t reat ed as if it were different from t he rest of t he firm or as a loose confederat ion of t ribes, t he I T depart m ent works as a t eam and operat es according t o corporat e perform ance st andards. Like int erlocking gears, t hese principles work t oget her and m ust be consist ent ly applied. I f t hey m esh well, each reinforces t he ot hers. I f one is disengaged or t urns in t he wrong direct ion, t he whole m achine st art s working against it self or grinds t o a halt .

As a CI O, Charlie Feld has successfully applied t hese principles t o rej uvenat e I T at a num ber of Fort une 100 com panies—first at Frit o- Lay, t hen during his career as CI O at corporat ions such as Delt a Air Lines and Burlingt on Nort hern and Sant a Fe Railroads. What follows is a com posit e of his experiences, which illust rat e t he t hree principles in cont ext . Ge a r 1 : A Lon g- Te r m I T Pla n Because t he rat e of t echnological change is so rapid, and t he j ob t enure of CI Os generally brief, m ost people see I T t hrough t he narrow lens of short - t erm , silver- bullet solut ions. Heaven knows, vendors want you t o believe t hat t heir im port ant new t echnologies will blow away what has com e before. You can’t blam e a salesperson for t rying t o sell, or CI Os for having a queasy buy- or- lose feeling, but t his at t it ude is precisely t he opposit e of t he one com panies should be t aking. We would argue t hat because t he winds of change buffet I T m ore t han any ot her area of t he organizat ion, I T benefit s m ost from a long- t erm , disciplined, st rat egic view, and a square focus on achieving t he com pany’s m ost fundam ent al goals. For exam ple, Frit o- Lay’s st rat egic goal has always been t o m ake, m ove, and sell t ast y, fresh snack foods as rapidly and efficient ly as possible. That goal hasn’t changed since t he 1930s, when founder Herm an Lay ran his business from his At lant a kit chen and delivery t ruck. He bought and cooked t he pot at oes. He delivered t he chips t o st ores. He collect ed t he m oney and knew all his cust om ers. He balanced t he books and did his own qualit y assurance. Herm an Lay knew how t o conduct t he perfect “ sense and respond” ebusiness before such a t hing ever exist ed, for he held real- t im e cust om er, account ing, and invent ory inform at ion all in one place—his head. Aft er years of spect acular growt h, t he com pany grew m ore and m ore dist ract ed from t his sim ple business m odel. By t he early 1980s, t he com pany’s sales force had swelled t o 10,000, and inform at ion grew harder and harder t o m anage. The com pany’s old bat chbased dat a processing syst em s were all driven by paper form s t hat t ook 12 weeks t o print and dist ribut e t o t he sales force. All sales t ransact ions were recorded by hand; ream s of disparat e dat a were t ransferred t o t he com pany’s m ainfram e com put ers. Much was lost in t he process of set t ing up a dozen different funct ional organizat ions and a variet y of dat abases, none of which com m unicat ed wit h each ot her. This m odus operandi m ade it im possible t o change prices quickly or develop new regional prom ot ions, st ream line product ion, or im prove invent ory m anagem ent . I t was as if Herm an Lay’s com pany had suffered a spinal cord inj ury, wit h t he brain and t he body no longer connect ed. At t he sam e t im e, t he com pany was seeing t he rise of st rong regional com pet it ors. The leaders realized t hat if t rends cont inued as t hey were, it s overall revenues would fall significant ly by t he early 1990s. Mike Jordan, who t ook over as CEO of Frit o- Lay in 1983, decided t o t ackle t he problem . He reconst ruct ed t he com pany as a hybrid organizat ion t hat was neit her t ot ally cent ralized nor decent ralized. His goal was t o t each t he com pany t o “ walk and chew gum at t he sam e t im e,” as he put it , by separat ing out t he com pany’s t wo com pet it ive advant ages: t he purchasing, product ion, and dist ribut ion leverages of a nat ional powerhouse, and t he local resources t hat gave t he com pany regional speed and agilit y. All t his led t o an organizat ional design t hat kept purchasing, m anufact uring, dist ribut ion, syst em s, account ing, and R&D as t he cent ralized plat form , leaving t he decent ralized sales and m arket ing organizat ions t o launch t heir st ore- by- st ore and st reet - by- st reet offensives. Having ident ified t he com pany’s st rat egy, Jordan t hen developed a long- t erm I T renewal ( as opposed t o a “ rip and replace” ) plan. An execut ive com m it t ee—com prised of t he

CEO, CFO, CI O, and t wo execut ive vice president s—out lined a shift from paper t o a risky, em erging handheld t echnology for t he salespeople on t he st reet , as well as a t ransform at ion from bat ch account ing t o online operat ional syst em s. The goal was t o digit ally reconnect t he com pany’s nervous syst em . Equipped wit h t he cool new handhelds, t he sales force would be able t o m anage price, invent ory, and cust om er changes in real t im e and connect t o t he supply pipeline. The handheld com put ers would also est ablish a t echnological “ beachhead” —one sufficient ly im port ant t o keep t he business’s at t ent ion and achieve fast operat ing result s. Paying for all t his, of course, would not be easy. The j ourney would t ake from 1984 t o 1988, at a huge cost ( at t he t im e) : $40 m illion for t he handhelds and about $100 m illion for t he dat abases and core syst em s. Som e on t he execut ive com m it t ee balked, arguing t hat efficiencies gained by t he t echnology would be lost by salespeople working fewer hours. But t he com pany had no choice but t o revit alize it s regional sales, and t hough t he syst em s overhaul would be cost ly, st aying put would be even cost lier. To fund t he new com put ers, Jordan set up a long- t erm , ongoing funding m echanism designed t o keep I T spending bot h predict able and fairly st able from year t o year. To get t hings rolling, each sales region had t o com m it t o a reduct ion in selling expenses from 22 cent s on t he dollar t o 21 cent s wit hin a year of t he handhelds’ inst allat ion. The savings would be achieved by increasing sales at const ant cost , reducing cost s, or a com binat ion of t he t wo. The schem e worked: Wit h t he new syst em in place, t he com pany saved bet ween 30,000 t o 50,000 hours of paperwork per week. By 1988, savings result ing from bet t er cont rol over sales dat a cam e t o m ore t han $40 m illion per year—savings t hat in t urn funded t he renewal of t he core dat a syst em s. Frit o- Lay was able t o cut t he num ber of it s dist ribut ion cent ers, reduce st ale product by 50% , and increase it s dom est ic revenues from $3 billion in 1986 t o $4.2 billion by 1989. Today, Frit o- Lay cont inues t o be t he dom inant player in t he snack- food indust ry. Frit o- Lay’s t echnology st ory received a lot of press at t he t im e, m ost ly because t he handheld t echnology was sexy. But not ice what t he st ory was really about : I t was about execut ing Herm an Lay’s original, real- t im e business experience—feeling t he m oney j ingling in t he pocket and seeing t he invent ory in t he t ruck. Ge a r 2 : A Un ifyin g Pla t for m Most I T organizat ions are am azingly com plex and have individual init iat ives t hat are like independent count ries, each wit h it s own business applicat ions, t echnologies, cult ure, dat a definit ions, and orient at ion. Proj ect cost s soar because individual t eam s are isolat ed rat her t han harnessed t oget her, and few t eam s reuse each ot her’s com ponent s—a condit ion exacerbat ed by a plet hora of consult ant s and com pet it ive t echnologies. And when a com pany is running hundreds of het erogeneous hardware and soft ware syst em s, cost s run ram pant . Consider t he cost of such com plexit y at Delt a Air Lines. I n 1997, Delt a’s fleet consist ed of 600 airplanes and a rainbow of m odels, ranging from 727s, 737s, 757s, t o 767s, from MD 80s and 90s t o L1011s. ( By cont rast , Sout hwest Airlines operat es only one kind of airplane.) Each plane carried different inst rum ent at ion from different eras; as a result , t he com pany needed t o t rain pilot s and crew m em bers t o operat e t he different m odels. Keeping t rack of aircraft , people, part s invent ory, qualified m echanics, handling equipm ent , and cat ering cart s all added t o t he st ruct ural cost of t he airline. Delt a’s new CEO, Leo Mullin, and his execut ive t eam underst ood t hat if t hey reduced t he num ber of plane t ypes t hey operat ed, t hey could lower annual cost s by hundreds of m illions of

dollars. What t he execut ives didn’t underst and was t hat t hey had an even worse problem in t heir I T organizat ion. The com pany was running m ore t han 30 m aj or I T plat form s, wit h 60 m illion lines of code, none of which were int egrat ed wit h each ot her. Each plat form required approxim at ely 100 I T support specialist s t o keep t he syst em s up and running. That arrangem ent cost t he com pany about $700 m illion per year in capit al and operat ing expenses. The problem wit hin I T m ade t he air fleet look like a m odel of sim plicit y. Running t he airline was nearly im possible. Gat e changes by t he t ower syst em s were not received in t im e by t he people who needed t hem : t he crews, cat erers, reservat ion agent s, t icket count er agent s, m echanics, baggage handlers, and cust om ers. The gat echange dat a were locked inside individual and oft en conflict ing syst em s. Once it underst ood t he root cause of com plexit y, Delt a’s execut ive t eam agreed t o a long- t erm sim plificat ion proj ect . Delt a launched an effort t o build an I T organizat ion t hat spoke a com m on language, operat ed against a sim ple and well- underst ood set of principles, and creat ed an archit ect ure t hat included a com m on set of dat abases. Everyone in t he I T organizat ion focused on a consist ent set of m et hods, t echnologies, and m anagem ent disciplines. From 1998 t o 2003, Delt a refocused it s form erly decent ralized I T invest m ent s of $200 m illion t o $300 m illion annually on a unified I T archit ect ure called t he Delt a Nervous Syst em , which cut inefficiencies out of virt ually every area of it s operat ion. Like Frit oLay’s syst em , Delt a reconnect ed t he elect ronic brain ( I T) t o t he physical body ( operat ions) by linking t he cust om er, flight , schedule, and em ployee dat abases t hat keep t rack of everyt hing from reservat ions t o t icket ing t o check- in and baggage handling t o crew operat ions. The foundat ion of t he Delt a Nervous Syst em was a com prehensive and aggressive sim plificat ion effort wit hin t he I T archit ect ure t o keep t he num ber of m oving part s t o a m inim um . To rebuild and sim plify it s I T syst em s, Delt a t ook a radically different t ack. Rebuilding t he syst em s from scrat ch would have been ext rem ely cost ly—plus t he com pany had an airline t o run. I nst ead, Delt a built a new set of soft ware, or m iddleware, t hat connect ed a com m on infrast ruct ure wit h every applicat ion. The m iddleware wit hin t he Delt a Nervous Syst em sat on t op of t he old t ransact ion syst em s and carried crit ical operat ional dat a from one applicat ion t o t he ot her. I f a gat e changed, t he m iddleware pushed t he news t o t he ot her syst em s t hat needed t o know about t he change ( cat ering, crew, gat e agent , baggage t racking, and so on) . Wit h t his m iddleware in place, Delt a could t hen go back and upgrade or replace older syst em s where necessary, wit hout disrupt ing t he I T syst em as a whole. ( For a visual of t he Delt a Nervous Syst em , see t he exhibit “ The Silo- Based Organizat ion Versus t he Layered Organizat ion.” )

The m iddleware layer wit hin t he Delt a Nervous Syst em proved essent ial t o leveraging t echnology innovat ion at Delt a. I t allowed t he com pany t o add new t echnology in a sim pler and less risky m anner over t im e. Most com panies go t hrough t he agonizing work of rewrit ing t heir syst em s as t echnology changes. Delt a, however, did t he opposit e. For exam ple, Delt a disconnect ed t he m anual syst em s t hat fed t he operat ions cont rol cent er ( OCC) and reconnect ed t hem t o t he Delt a Nervous Syst em . This effect ively rej uvenat ed t he OCC wit hout resort ing t o radical surgery or replacem ent . The OCC becam e a vibrant , fully funct ioning part icipant in t he Delt a Nervous Syst em at a fract ion of t he cost . The design of Delt a’s nervous syst em also form ed t he road m ap and cont ract bet ween I T t eam s, providing guidance on how dat a would be st ored, where t he dat a would com e from , how m any copies t he com pany would keep, as well as rules for calculat ing and int erpret ing t he dat a. For exam ple, all syst em s ( operat ions cont rol cent er, t ower, gat e, passenger, and crew) could now agree on t he sam e m eaning for a “ flight arrival.” Since Delt a revam ped it s inform at ion archit ect ure, t he com pany has reduced it s I T cost s by 30% . And despit e t he downt urn in t he airline indust ry, Delt a has com m it t ed t o a cost savings and revenue enhancem ent of $2 billion by t he end of 2005, while increasing it s service levels. Just as im port ant , Delt a has learned t hat discipline and sim plicit y in it s approach t o t echnology m anagem ent lead t o bot h speed and efficiency. I n doing t he hot , sweat y work of sim plifying it s syst em s and aligning I T wit h t he

com pany’s overarching business goals, Delt a’s senior m anagers also learned t o t rust t heir inst inct s. They learned t hat t he sam e business skills t hat allowed t hem t o see what was wrong wit h t he com pany’s fleet of aircraft could also guide t hem in m anaging Delt a’s arm ada of t echnology plat form s. Ge a r 3 : A H igh - Pe r for m a n ce I T Cu lt u r e There’s no reason why m ost com panies can’t develop a long- t erm I T road m ap t ied t o corporat e goals. There’s also no reason t hat given sufficient discipline and resources, m ost can’t develop a unifying I T plat form . But wit hout a high- perform ance I T organizat ion in place—one t hat looks very different from t hose found in m ost com panies —a m essy I T business will persist . For years, corporat ions have t reat ed I T people different ly—a holdover from “ glass house” dat a processing cult ure of 30 years ago. Treat ing I T as if it were a separat e corporat e ent it y set s up a vicious cycle. Allowed t o work in t heir own t ribes, I T folks feel less affiliat ion wit h t he com pany t han t hey do wit h t heir own proj ect s. Like t he soldiers building t he bridge on t he River Kwai, t hey grow so isolat ed t hat t hey forget what t he war is about . By cont rast , t he people in a high- perform ance I T organizat ion don’t feel different from ot her corporat e cit izens; in fact , t hey are business- savvy leaders in t heir own right . They operat e according t o t he sam e corporat e values as everyone else and are m easured by t he sam e t ough perform ance st andards. The st ory of t he 1995 m erger of Burlingt on Nort hern and Sant a Fe Railroads offers a case in point . The t wo railroads had t wo very dist inct cult ures, perform ance charact erist ics, and leadership st yles. Burlingt on Nort hern’s cult ure was kind, collaborat ive, and soft on account abilit y. Sant a Fe’s cult ure was t ough and st rict ly hierarchical. Thrown t oget her int o a single, 1,500- person organizat ion, t hese t wo t alent ed but ant agonist ic t eam s were t old by CEO Rob Krebs t hat t hey had 24 m ont hs t o com plet e a seam less m erger of t heir separat e I T syst em s. The goal was t o develop t he largest int egrat ed, real- t im e rail inform at ion syst em in t he world—one t hat would allow t he new com pany t o cont rol t raffic and cargo across 33,500 m iles of t rack t hat covered 28 st at es and t wo Canadian provinces. From a t echnology st andpoint , it was a challenge of im m ense proport ions. But once again, t he issue wasn’t t echnology; it was about est ablishing a new and cohesive cult ure, wit h a clear- cut set of rules and a solid perform ance- m anagem ent and feedback syst em . How, t he leaders asked, would people react t o t he deadline pressure, and how would t he t eam s work t oget her t o accom plish a Herculean m ission? How would t he overhaul of syst em s get done? How would t alent be developed? First on t he agenda was t he est ablishm ent of an account able I T leadership t eam . An I T organizat ion t hat has clear guidance, a shared m ission, and high expect at ions can focus t he developers and engineers around t he work and correct perform ance problem s. To do so, t he I T m anagers m ust be hands- on people who are deeply involved in overseeing proj ect s and t eam s. I n set t ing up a leader- led organizat ion, BNSF est ablished t hree sim ple levels of hierarchy: t he CI O, vice president s, and direct ors. Once t he new leadership st ruct ure was in place, BNSF set t he perform ance and bonus t arget s for expect ed leadership behavior—t he sam e ones t hat applied across t he com pany as a whole. These t arget s had t hree com ponent s: delivering result s, leadership com pet encies, and t he “ new BNSF” cult ural behaviors. A t op- perform ing leader had t o deliver on all t hree of t hese t arget s. None of t he I T st aff m em bers had ever been evaluat ed in such a clear way before, and t hey responded ext rem ely well t o expect at ions

and feedback. Part of t he secret of get t ing people out of t he old way and int o t he new is t o est ablish a rhyt hm —t hat is, t o cont rol t he flow, t im ing, and pace of t he work. Set t ing a calendar and adhering t o it is, in m ost cases, t he m ost visible m eans of signaling t he t ransform at ion of t he I T cult ure and new set of processes. At BNSF, quart erly updat es, st aff m eet ings, direct ors’ councils, proj ect reviews, t echnical reviews, and I T board m eet ings all helped give t he new t eam a sense of norm alit y and rout ine—especially im port ant for people who are undergoing a reorganizat ion. The m eet ings helped t ransform t he form erly frust rat ing and m essy I T cult ures. I nst ead of accept ing disorganizat ion and lack of part icipat ion as a given, people showed up on t im e and generally becam e m ore efficient in t heir j obs. The new organizat ion and perform ance syst em was t im e- consum ing t o put in place, of course. Most of t he leaders grum bled about t hese dem ands and t he int ense t im e pressure of t he work. This was especially t rue for t hose who never had t o m anage under a clear set of expect at ions. But over t im e, and especially wit h t he early success of t he proj ect , healt hy work pat t erns began t o em erge, and a new cult ure was born. Wit hin a few m ont hs, BNSF’s newly m erged I T group becam e a high- perform ance organizat ion— so m uch so t hat it beat t he 24- m ont h t arget by t hree m ont hs. The reorganizat ion, com bined wit h t he savings realized from st ream lining processes and facilit ies, allowed BNSF t o achieve roughly $500 m illion wort h of cost savings t hat it had com m it t ed t o t he I nt erst at e Com m erce Com m ission t o obt ain m erger approval. Wit hout t he perform ance gear at high t orque, BNSF could not have at t ained it s corporat e goals. All Syst e m s Go Once t hese t hree gears are aligned and locked t oget her, I T organizat ions and syst em s t end t o deliver result s rapidly—in m any cases wit hin six m ont hs. Yet despit e t he obvious benefit s of t hese gears, som e businesspeople m ay ask t hem selves, “ Do we really have t o do all of t his ourselves? Can’t we sim ply out source t o firm s t hat already know how t o do t his st uff? And wouldn’t out sourcing be a cheaper alt ernat ive in t he long run?” The answer t o all t hese quest ions is yes and no. Over t im e, fewer and fewer CI Os will run t heir own net works and dat a cent ers, and m uch developm ent m ay be augm ent ed by part ners. However, t he “ gears” becom e even m ore crit ical when you bring out sourcing and offshoring int o t he pict ure, because m anagem ent com plexit y rises. You can’t abdicat e t he leadership and vision for t hese crit ical funct ions. And when you have a num ber of long- t erm cont ract s wit h various suppliers, t he long- t erm plan m ust be ext rem ely well art iculat ed ( Gear 1) . When you work wit h a num ber of vendors t hat have t heir own t ools and m et hodologies, it ’s crit ical t o orchest rat e an overarching com m on fram ework under which everyone can work product ively ( Gear 2) . I t ’s also m uch easier t o build a high- perform ance cult ure when you own t he hum an resources ( Gear 3) . I n operat ing a m ult i- com pany workforce, it t akes ext raordinary leadership t o creat e t he esprit de corp required for high perform ance.

• • • Wit hout quest ion, t he next decade will require m uch m ore professional and sophist icat ed I T leadership t han ever before. Fort unat ely, com panies are learning fast . As we progress t hrough t he next decade, I T will m at ure from adolescence t o adult hood, and m uch m ore speedily t han any profession ever has. As t he t echnology m at ures and im proves, so will t he skills, processes, and principles on which effect ive I T is based. And here’s t he bonus: Once organizat ions get I T right , t hey will get m uch m ore for far less.

Reprint Num ber R0402E | HBR OnPoint edit ion 5905 | HBR OnPoint collect ion 5895 Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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How t o Have an Honest Conversat ion About Your Business St rat egy Eve r y or ga n iza t ion fa ce s ch a lle n ge s in e x e cu t in g it s st r a t e gy. Gr e a t com pa n ie s k n ow h ow t o w or k t h r ou gh t h e m .

by M ich a e l Be e r a n d Ru sse ll A. Eise n st a t

Despit e widespread rhet oric about t he need for organizat ional agilit y, an ast onishing num ber of businesses st ay st uck in neut ral when t hey need t o im plem ent a new st rat egy. Consider t he sit uat ion t hat Lynne Cam p faced in July 2000. Cam p, t he vice president and general m anager of Agilent Technologies’ Syst em s Generat ion and Delivery Unit ( SGDU) , was charged wit h creat ing a single global com pany from a set of fragm ent ed businesses in Asia, Europe, and t he Unit ed St at es. To gain cont rol over product decisions being m ade by t he regional t eam s she had inherit ed, Cam p and her senior t eam had originally adopt ed a funct ional organizat ion st ruct ure. This enabled t hem t o exit m any m arginal, local businesses and focus on t he opport unit ies t hat were m ost prom ising from a global perspect ive. I t also allowed t hem t o int roduce m ore efficient shared processes. Despit e t hese st rengt hs of t he new st ruct ure, problem s began t o em erge. The funct ional depart m ent s didn’t give t he new businesses t he at t ent ion t hey needed. The st affs of t he regional field organizat ions were in a funk; t hey t hought t heir cust om er perspect ive was being overlooked. Conflict bet ween t he funct ions, t he businesses, and t he field organizat ions was growing. The senior t eam was slow t o m ake decisions, and no one t ook responsibilit y for t he perform ance of t he developing businesses. Cam p surveyed t he problem s and concluded t hat t he best way t o increase account abilit y and speed up decision m aking—and t hus t o support t he st rat egy of focusing on a few prom ising businesses—was t o swit ch t o a m at rix st ruct ure. Mem bers of t he senior t eam st rongly disagreed. A m at rix would not work, t hey t hought , and besides, t hey were t oo overloaded t o undert ake anot her m aj or reorganizat ion. Cam p could have im posed her solut ion unilat erally, but she knew t hat if she did, she’d underm ine t he senior t eam ’s com m it m ent , which was crit ical t o m aking t his com plex global st ruct ure work. She needed t o find a different way out of t he im passe. As Cam p searched for an approach t hat would j um p- st art change at SGDU, she began t o suspect ( correct ly) t hat people t hroughout t he unit were t alking about it s st rat egy—and she furt her suspect ed t hat plent y of m anagers a couple of layers down had insight s t hat she needed t o hear. But t hese conversat ions t ook place behind closed doors, for t he m ost part . And privat e conversat ions, by t heir nat ure, can’t m obilize an organizat ion t o address t he gaps bet ween it s business st rat egy and t he st ruct ure, capabilit ies, and m arket realit ies it faces. I n our experience, t he challenge Lynne Cam p faced—SGDU’s collect ive inabilit y t o t alk openly about it s problem s—is com m on. This lack of openness lies behind m any failures t o im plem ent st rat egy. We’ve becom e convinced t hat t he m ost powerful way for leaders t o realign t heir organizat ion is t o publicly confront t he unvarnished t rut h about t he barriers blocking st rat egy im plem ent at ion. Typically, t his involves looking closely at t he roles and decision right s of various part s of t he business, as well as changing t he behavior of people at all levels. Public, organizat ionwide conversat ions about such fundam ent al issues are difficult and likely t o be painful. But pain cont ribut es t o a species’ survival by t riggering learning and adapt at ion; it can have t he sam e effect on organizat ions. Businesses and t he people inside t hem don’t learn t o change unless t hey have t he courage t o confront difficult t rut hs. Because m ost init iat ives fail t o uncover t he t rut h, t hey lead t o only superficial change.

> | E- m a il a Colle a gu e > | Ex e cu t ive Su m m a r y

M ich a e l Be e r is t he Cahners- Rabb Professor of Business Adm inist rat ion Em erit us at Harvard Business School and t he chairm an of t he Cent er for Organizat ional Fit ness in Bost on. Ru sse ll A. Eise n st a t is t he president of t he Cent er for Organizat ional Fit ness.

> | H a r va r d Bu sin e ss Re vie w On Poin t Edit ion This art icle is enhanced wit h a sum m ary of key point s t o help you quickly absorb and apply t he concept s and a bibliography t o guide furt her explorat ion.

> | H a r va r d Bu sin e ss Re vie w On Poin t Colle ct ion This art icle is also part of t he specially priced OnPoint collect ion “ Honest y I s t he Best St rat egy” which includes t hree OnPoint art icles wit h an overview com paring different perspect ives on t his t opic.

Em ployee surveys, 360- degree feedback, int erviews by ext ernal consult ant s, and even relat ively honest one- t o- one conversat ions bet ween a key m anager and t he CEO ( rem em ber t he courageous discussion Sherron Wat kins had wit h Kennet h Lay at Enron) t ypically do not m ove t he organizat ion forward. They do not convince em ployees t hat m anagem ent want s t o know t he t rut h and is ready t o act . Quit e t he reverse—all t oo oft en, t hese m et hods lead t o cynicism , and cynicism is t he enem y of com m it m ent t o change. I n one highly regarded com pany we st udied, a t ask force of respect ed m anagers rebelled when asked by senior m anagem ent t o conduct and analyze a worldwide em ployee survey. They refused t o get involved in yet anot her hopeless exercise. Meanwhile, senior m anagers fully believed t hat t hey had act ed on past feedback. We believe t hat organizat ionwide conversat ions are essent ial, so about 15 years ago we launched a research program t o develop a process t hat leaders could use t o engage t heir people in an honest conversat ion. The “ st rat egic fit ness process” was designed in part nership wit h senior execut ives t o enhance t heir capacit y t o im plem ent st rat egy quickly and effect ively. I t does so by fit t ing t he organizat ion t o t he st rat egy and increasing fit ness, t he capacit y of t he organizat ion t o learn and change. Since t hen, t his process has been used in m ore t han 150 businesses in t he ret ail, hospit alit y, high t echnology, banking, and pharm aceut ical indust ries. Cr a ft in g a Con ve r sa t ion t h a t M a t t e r s Aft er m ore t han a decade of im plem ent ing t he process and researching it s consequences, we have ident ified several overriding lessons t hat we believe are relevant in any organizat ionwide conversat ion, whet her or not leaders use our part icular process. To wit : A con ve r sa t ion a bou t st r a t e gy n e e ds t o m ove ba ck a n d for t h be t w e e n a dvoca cy a n d in qu ir y. Most failures in organizat ions st art when t op m anagem ent advocat es a new direct ion and begins t o develop program s for change wit hout finding out what influent ial people in ot her part s of t he organizat ion t hink of t he new focus. They t hereby set t hem selves up t o be blindsided by concerns t hat em erge m uch lat er. A sm aller num ber of well- int ent ioned t op m anagers m ake t he opposit e m ist ake. They do not advocat e at all. I nst ead, in t he nam e of part icipat ion and involvem ent , t hey depend ent irely on inquiry—assem bling a large group of m anagers and asking t hem t o define a direct ion. The result is oft en widespread frust rat ion. Managers and em ployees look t o leaders t o art iculat e a point of view about where t he business is going, a point of view t o which t hey can respond. Leaders need t o advocat e, t hen inquire, and repeat as needed. Th e con ve r sa t ion h a s t o be a bou t t h e issu e s t h a t m a t t e r m ost . To energize t he organizat ion, t he conversat ion m ust be focused on t he m ost im port ant issues facing t he organizat ion—t he com pany’s st rengt hs and t he obst acles t o perform ance. I t ’s all t oo easy for senior m anagers t o becom e swam ped in t he operat ional det ails of m anaging a business. What get s crowded out are t ough and honest conversat ions about t he fundam ent al issues t hat will det erm ine long- t erm success. Do we have a dist inct ive business st rat egy t hat key m anagers believe in? Do we have t he capabilit ies t o execut e t hat st rat egy? I s our leadership effect ive? Th e con ve r sa t ion h a s t o be colle ct ive a n d pu blic. Successfully realigning an organizat ion wit h a new st rat egic direct ion alm ost always requires sim ult aneously changing t he worldview and t he behaviors of a whole set of int erdependent players—t he CEO, t he senior leadership t eam , and m anagers down t he line. This won’t happen wit hout a collect ive, public conversat ion. By “ collect ive” we m ean t hat several levels of m anagem ent across im port ant funct ions and value- chain act ivit ies have t o be engaged. By “ public” we m ean t hat senior m anagers need t o keep everyone t hree t o four levels below t hem inform ed about what has been learned, as well as what changes are planned. Th e con ve r sa t ion h a s t o a llow e m ploye e s t o be h on e st w it h ou t r isk in g t h e ir j obs. I n m ost of t he com panies we’ve st udied, m anagers t alked about st rat egic problem s wit h one or t wo people t hey t rust ed but pulled t heir punches in m ore public set t ings. I n Agilent ’s SGDU division, for exam ple, everyone knew about t he t ensions bet ween t he regional ent it ies and t he funct ional depart m ent s. Everyone was aware t hat t he senior t eam wasn’t m anaging effect ively, and m any m anagers doubt ed Cam p’s abilit y t o lead t he organizat ion out of t he m orass. But none of t hese issues was discussed publicly, for t wo reasons. First , m anagers feared t hat being honest would hurt t heir careers or even endanger t heir j obs. Second, t hey were afraid t hat Cam p and her senior t eam would feel so hurt and defensive t hat t he conversat ion would not lead t o change and m ight even set back t he organizat ion.

Th e con ve r sa t ion h a s t o be st r u ct u r e d. When people hear “ honest ,” t hey t end t o t hink “ spont aneous.” But public conversat ions in organizat ions are rarely spont aneous, as Lou Gerst ner found out when he t ook charge at I BM in 1993, because t he st akes are so high. Gerst ner describes a st rat egic m eet ing at which m anagers sat at a large conference t able wit h scores of assist ant s behind t hem , all list ening t o a PowerPoint present at ion and engaging in lit t le or no discussion. He was so frust rat ed by t he lack of real dialogue t hat he t urned off t he overhead proj ect or, wit h what he calls “ t he click heard around t he world.” Gerst ner learned, as we have in our work, t hat t he “ free- for- all of problem solving” so essent ial for high perform ance “ does not work so easily in a large, hierarchically based organizat ion.” Paradoxically, t o achieve honest y and full engagem ent in t hese organizat ions, you need t o st ruct ure t he conversat ion carefully. 1

W h e n pe ople h e a r “h on e st ,” t h e y t e n d t o t h in k “spon t a n e ou s.” Bu t pu blic con ve r sa t ion s in or ga n iza t ion s a r e r a r e ly spon t a n e ou s. D r ivin g Ch a n ge , On e St e p a t a Tim e I n t he pages t hat follow, we’ll out line t he process we’ve developed t o support product ive, organizat ionwide conversat ions about barriers t o perform ance ( sum m arized in t he exhibit “ The St rat egic Fit ness Process” ) . We’ll focus on im port ant point s t o rem em ber as t his conversat ion unfolds. These point s—and t he principles underlying t hem —hold t rue in any set t ing where t op m anagem ent t ruly want s st rat egic change.

St a r t t h e con ve r sa t ion w it h t h e le a de r sh ip t e a m . Businesses are designed wit h a built - in direct ional gyroscope—t he senior t eam . These individuals oversee t he part s of t he organizat ion t hat need t o work t oget her t o im plem ent business st rat egy. Yet our consist ent finding in m any com panies is t hat t hese built - in gyroscopes are broken. The senior m anagem ent t eam s are not doing t he fundam ent al work t hat t heir organizat ions

expect of t hem —set t ing direct ion, resolving conflict ing views about priorit ies, and creat ing t he cont ext and cult ure t hat will enable t he firm t o deliver result s. I n an ext raordinary num ber of com panies, unclear st rat egy and conflict ing priorit ies obst ruct perform ance. The cause, as perceived by people at lower levels as well as by m em bers of t he senior t eam , is an ineffect ive senior t eam . When t hese t eam s m eet t hey t end t o review result s, focus on specific problem s, or discuss adm inist rat ive m at t ers. They do not dig int o or resolve fundam ent al st rat egic issues. All of t his was t rue at SGDU. During senior t eam m eet ings people t ended t o int errupt one anot her, ignore one anot her’s com m ent s, and engage in a lot of side conversat ions. As a result , t he group had difficult y achieving consensus and m aking t im ely decisions, part icularly about t he polit ically charged issues of st rat egy and organizat ion design. The responsibilit y for building an aligned organizat ion cannot be delegat ed. The senior m anagers m ust work t oget her t o define t he business st rat egy as well as t he capabilit ies and values essent ial for long- t erm success. We st art t he st rat egic fit ness process wit h a one- day m eet ing. The senior m anagem ent t eam develops t he st rat egy and draft s a st at em ent about organizat ional direct ion t hat will lat er be used as t he basis of t he inquiry int o t he organizat ion’s st rat egic alignm ent . To prom ot e an honest dialogue t hat uncovers differences am ong m em bers of t he senior m anagem ent t eam , we ask each m em ber t o prepare individual answers t o six sim ple but profoundly im port ant quest ions: • What are t he com pany’s obj ect ives and aspirat ions? • What are t he m arket t hreat s and opport unit ies? • What is t he value proposit ion you are delivering? • What are t he m ost crit ical t hings t he business m ust do t o deliver on t he value proposit ion and creat e or sust ain com pet it ive advant age? • Which organizat ional capabilit ies are needed t o im plem ent t he st rat egy? • Which values should guide t he organizat ion? At SGDU, t he senior t eam ’s answers t o t hese quest ions and t heir effort s t o creat e a direct ion st at em ent revealed t o t hem t hat t hey were t rying t o st raddle t wo very different st rat egies. The first was a react ive st rat egy—grow sales quickly by responding t o im m ediat e cust om er needs using exist ing t echnology. The second was a proact ive, R&Ddriven st rat egy of building dist inct ive, t echnology- based solut ions plat form s t hat com pet it ors could not easily replicat e. I n creat ing t he st at em ent of direct ion, t he senior t eam for t he first t im e clearly com m it t ed it self t o a t echnology- based plat form st rat egy. D r a ft you r be st m a n a ge r s t o colle ct da t a a n d e n ga ge t h e or ga n iza t ion in a con ve r sa t ion . The t wo convent ional approaches t o collect ing dat a about st rat egic and organizat ional problem s are t o survey t housands of em ployees anonym ously or t o ask out siders ( consult ant s or HR specialist s) t o conduct int erviews. The assum pt ion is t hat only anonym ous surveys and out siders can elicit obj ect ive, t rut hful inform at ion. The problem is t hat out of a desire for obj ect ive dat a, t he senior t eam is dist ancing it self from t he people who have seen and experienced problem s. That dist ance m akes it possible for execut ives t o underest im at e or even deny problem s and t o delay act ion. I n m any com panies we have st udied, t he senior t eam had m assive am ount s of survey dat a but had t aken lit t le act ion as a result of anyt hing it had learned. When a senior t eam appoint s a t ask force of up t o eight of it s best m anagers t o int erview pivot al people in all part s of t he organizat ion, t he t eam sends a clear m essage t hat it is serious about uncovering t he t rut h and m aking changes. To ensure t hat t he t ask force is seen as represent ing t he int erest s of t he ent ire organizat ion, t he senior t eam collect ively select s it s m em bers. I f anyone on t he senior t eam expresses a concern about a proposed individual, t hat individual’s nam e is st ricken from t he list . Lynne Cam p and her senior t eam , like m any ot her senior t eam s, hesit at ed t o appoint t heir best m anagers because t hese were also t he busiest m anagers. We have learned t he hard way, however, t hat if you do not appoint your m ost effect ive m anagers, t he t ask force’s feedback will have less credibilit y wit h t he senior t eam and wit h t he larger organizat ion. I t becom es all t oo easy for t he senior t eam t o discount or explain away painful t rut hs. Even if a credible t ask force is appoint ed, skept icism in t he larger organizat ion is likely t o linger. Managers are apt t o rem em ber previous inform at ion- collect ing effort s t hat yielded

few t angible result s. The firm can allay t his skept icism by having t he t ask force, rat her t han t he senior t eam , select t he 100 or so people who are t o be int erviewed. This helps t o assure t he organizat ion t hat t he t ask force m em bers—not senior m anagem ent — cont rol t his piece of t he process. The int erviewees should be a represent at ive sam ple of people, including m anagers, from t he areas m ost responsible for im plem ent ing t he st rat egy. The num ber of int erviews can alm ost always be kept t o 100 or less, regardless of whet her t he st rat egy being assessed is for a worldwide Fort une 50 corporat ion or a sm all st art - up. Dat a collect ion focuses on com pany st rengt hs and barriers t o t he im plem ent at ion of st rat egy, not em ployee sat isfact ion and m orale. Thus, t he int erviews can be lim it ed t o t hose in pivot al roles along t he value chain. Readers m ay wonder whet her a t ask force handpicked by t op m anagem ent will confront t he senior t eam wit h t he t rut h. The answer, em phat ically, is yes. Provided t hat cert ain safeguards are in place ( we will describe t hese in a m om ent ) and t hat t ask force m em bers believe t he leadership t eam is prepared t o m ake changes, t he t ask force quickly becom es a cohesive group, even when it is m ade up of people from warring fact ions of t he organizat ion. Moreover, t ask force m em bers com e t o feel a deep obligat ion t o t hose t hey have int erviewed. Many see t he assignm ent as a once- in- alifet im e opport unit y t o m ake t hings bet t er—and t hey don’t shy away from confront ing t he brut al fact s. As one t ask force m em ber at SGDU put it , “ People had spilled t heir gut s t o m e in t he int erviews, and I owed it t o t hem t o really see t his t hrough.” To u n cove r t h e t r u t h , pr ot e ct t h e pe ople in t h e con ve r sa t ion . I n m ost organizat ions, lower- level m anagers are afraid t o t alk openly about problem s t hat m ay be blocking effect iveness and perform ance. We’ve found t hat several approaches help t o m it igat e t hat fear. First , and m ost im port ant , t he confident ialit y of int erviews m ust be safeguarded. Task force m em bers report back general t hem es t hat com e up in m ult iple conversat ions, not com m ent s t hat can be at t ribut ed t o any one individual. I n addit ion, t ask force m em bers int erview people out side t heir own part s of t he organizat ion, m aking it less likely t hat t hey have an ax t o grind or t hat t he int erviewees will feel int im idat ed. The t ask force m em bers have t heir own fears t o deal wit h, of course. I n going out t o t he organizat ion on behalf of t he senior m anagem ent t eam , t hey risk t heir own reput at ions. As one t ask force m em ber at SGDU point ed out , “ We’re going t o put our careers on t he line assum ing t he t op t eam is going t o follow t hrough. I f we do t he int erviews and not hing happens, t hen we’ll look st upid.” I n addit ion, t hey are fully aware of t he polit ical cost s of speaking uncom fort able t rut hs. Many t ask forces, especially in organizat ions t hat have a hist ory of t op- down m anagem ent , are anxious about t hese risks ( alt hough our research shows t hat a disproport ionat e num ber of t ask force m em bers are lat er prom ot ed) . I n one inst ance, it t ook t hree hours t o assure an anxious t ask force t hat it s m em bers had not been given a career- lim it ing opport unit y. More t han one t ask force has begun it s report wit h a plea not t o “ shoot t he m essenger” ; one creat ed but t ons saying t his, and m em bers wore t hem int o t he m eet ing wit h t he senior t eam . The t op m anager m ust clarify his or her expect at ions for openness if t hese fears are t o be addressed. Cam p t old t he t ask force at t he launch m eet ing, “ I want t he t rut h; not hing should be sugarcoat ed.… We have confidence in you, and we are count ing on you t o help us ident ify and address t he real issues.” I n addit ion, what m akes it possible for t he t ask force m em bers t o speak t he t rut h is t hat t hey are act ing as represent at ives of t he 100 people t hey have int erviewed. We’ve also found t hat it helps if t ask force m em bers can t hink of t hem selves as researchers wit h a j ob t o do. They rem ind m anagem ent of t his report er role by cit ing t he num ber of people t hey int erviewed and t he general area in t he com pany where t hey collect ed inform at ion ( wit hout , of course, revealing individual sources) . D ist ill t h e con ve r sa t ion t o t h e issu e s t h a t m a t t e r . The conversat ion bet ween t ask force m em bers and t he people t hey int erview is kept focused but open- ended. I nt erviewees are asked sim ply, “ What are t he st rengt hs t o build on and t he barriers t o address in im plem ent ing t his st rat egy?” Task force m em bers find t hat respondent s are eager t o discuss st rat egic issues because t his is, in m any cases, t heir first chance t o t alk t o m anagem ent honest ly about t he overall healt h and direct ion of t he com pany. Task force m em bers report long, em ot ional int erviews. Em ployees who are not scheduled t o be int erviewed som et im es line up out side conference room doors, hoping for t he chance t o speak. The t ask force’s j ob is t o ext ract from it s hundreds of hours of rich and em ot ionally charged discussions t he crit ical issues t hat m at t er m ost . This is done t hrough a series of screens. At t he end of each int erview, t he subj ect is asked t o sum m arize t he t wo or

t hree m ost business- crit ical issues t o be shared wit h senior m anagem ent . Each t ask force m em ber t hen reviews all of his or her int erview not es and select s t he t hree or four m ost com m only m ent ioned barriers t o im plem ent ing business st rat egy, as well as t he m aj or organizat ional st rengt hs t hat need t o be preserved. When t he t ask force m em bers com e t oget her, t hey collat e t hese t hem es. The m ost im port ant ones form t he basis for t he present at ion t o t he senior m anagem ent t eam . The t ask force is careful t o illust rat e t he t hem es wit h descript ions of specific event s or proj ect s; t hese rich st ories provide t he t op t eam wit h an in- dept h view of how t he organizat ion really funct ions. The st ories resem ble well- researched case st udies. We have found t hat t hese descript ions are vit al t o convincing senior m anagem ent t hat t he dat a are real and valid. Senior m anagers also respond powerfully t o quot es from ( unnam ed) int erviewees, which t end t o bring hom e t he em ployees’ deep com m it m ent as well as t heir frust rat ion. En a ble t r u t h t o spe a k t o pow e r . The t ask force’s present at ion t o senior m anagem ent is always a charged m eet ing. This st age, perhaps m ore t han any ot her, needs t o be carefully m anaged. When we first developed t his process, t he t ask force would use slides. But we quickly learned t hat t he t ask force had great difficult y agreeing on a few words t hat would convey t heir rich findings. We also found t hat —for all t he safeguards we t hought were in place—t ask force m em bers were apprehensive about t heir individual part s of t he present at ion. They felt exposed and vulnerable because t hey could be individually ident ified wit h som e port ion of t he bad news. We now suggest t hat t ask force m em bers present t heir findings in t he form of a discussion. Task force m em bers sit around a t able in t he m iddle of a room —in what we call a fishbowl—while t he m em bers of t he senior t eam sit at t ables around t he out side of t he fishbowl, observing and t aking not es. For each of t he m aj or t hem es, t he t ask force m em bers discuss t he range of perspect ives t hat em erged from t heir int erviews and t he quest ions t hat t he t hem es raise. They do not recom m end solut ions, and t hey don’t deliver a writ t en report of any kind; t he dept h of t he senior t eam ’s underst anding and insight is far great er when t he execut ives act ively list en and t ake not es.

Cert ain ground rules are set at t he beginning of t hese m eet ings t o enable senior m anagers t o hear what ’s being said and t o prot ect t he t ask force m em bers. Senior m anagers are not allowed t o int errupt or challenge t he t ask force; inst ead, at t he end of each t hem e discussion, t hey are allowed t o ask quest ions for clarificat ion. They’re also encouraged, as t hey list en, t o recognize t hat “ percept ions are fact s” in shaping behavior and det erm ining effect iveness of st rat egy im plem ent at ion. I n every process we’ve observed, t he t ask force was able t o speak t he t rut h wit h a level of openness and richness t hat went well beyond t he init ial expect at ions of t he m anagers involved. One senior m anager described t he t ask force as “ operat ing m uch like a professional consult ing firm , except unlike consult ant s, t hey were a part of t he organizat ion and knew it inside and out . I t hink t hey worked so well t oget her because t hey believed in what t hey were doing.” This is not t o say t hat t he t ask force feedback sessions are easy or painless. Aft er all, senior m anagem ent m em bers are learning about t he business consequences of t heir own act ions. At SGDU, Lynne Cam p learned t hat she was perceived as an aut hent ic leader whom people liked and t rust ed, but t hat she was let t ing down t he organizat ion by not m oving m ore quickly t o resolve t he four m aj or organizat ional problem s facing t he business: • Slow decision m aking: “ Our funct ional organizat ion is killing speed.” • Lack of business focus: “ Lynne and her st aff don’t know t he business well enough t o ask t he right quest ions.” • Lack of account abilit y: “ Everyone report s t o a funct ion; no one is account able.” • Leadership ineffect iveness: “ Managem ent has no t rack record in t aking act ion. This is t he last chance for Lynne and her st aff t o get it right .” The power of direct feedback from eight of t heir best people m oves senior t eam s t o effect changes t hey have ot herwise been reluct ant t o m ake. This happened at SGDU. As Cam p explained t o t he t ask force: “ You lit a fire under us. Thank you for t he unvarnished t rut h.… I t ake your feedback very seriously; it is m y perform ance appraisal.… I f t he organizat ion is going t o change, I m ust change.” Cam p pledged t o do what ever it t ook t o address t he issues raised; she even offered t o resign if it t urned out t hat she was not t he right person t o lead SGDU, as did t he rest of t he senior t eam . This act of leadership courage was not especially unusual. A collect ive and t rut hful conversat ion, our experience shows, enhances everyone’s willingness t o put t he organizat ion and it s obj ect ives ahead of self- int erest . This is it s power. D ia gn ose t h e or ga n iza t ion a n d de ve lop a pla n for ch a n ge . None of us would feel com fort able agreeing t o a recom m endat ion for surgery before a full diagnosis had been m ade. Yet upon hearing about problem s in t heir organizat ion, m anagers oft en m ove t oo quickly t o inst it ut e m aj or changes wit hout undert aking a rigorous diagnosis of root causes. Why? Tim e pressures prevent reflect ion and in- dept h diagnosis. Managers also lack an analyt ical fram ework for diagnosing t he sit uat ion. One senior t eam creat ed a 49it em act ion list , one for each problem it had perceived. This enabled t he general m anager t o avoid confront ing t he underlying issues, which included his own focus on short - t erm product ivit y im provem ent s at t he expense of longer- t erm invest m ent s, an ineffect ive senior m anagem ent t eam unable t o bridge funct ional silos, and his own t opdown st yle. To overcom e such problem s, we have concluded t hat t he senior t eam should convene for a full t hree- day m eet ing at which feedback, diagnosis, and act ion planning occur. Such a m eet ing creat es t he discipline t hat a senior t eam needs t o go beyond sym pt om s t o root causes. On t he first day, t he t ask force gives it s feedback, and t he senior t eam get s an overnight assignm ent : t o ident ify t he organizat ion’s core st rengt hs and weaknesses as t hey relat e t o it s st rat egic obj ect ives. The t ask force is done for now, but t he senior t eam cont inues t o m eet for t wo m ore days. Using it s overnight assignm ent , t he t eam diagnoses t he organizat ion, deciding as a group what t he com pany’s st rengt hs and weaknesses are, which weaknesses will m at erially underm ine achievem ent of st rat egic goals, and which organizat ional levers—for exam ple, organizat ion st ruct ure, corporat e cult ure, m anagem ent processes, hum an resource policies, t he leadership t eam —are causing t he weaknesses. On t he final day, t he senior t eam m akes decisions about organizat ional

changes and ot her priorit y act ions. At SGDU, Cam p and her t eam wrest led wit h t he fundam ent al but polit ically sensit ive quest ion of whet her t he funct ional depart m ent s, geographic ent it ies, or businesses were going t o drive t he com pany. The t eam collect ively agreed t o m ove t o a product - based rat her t han a geography- based business unit st ruct ure in which t he geographic t eam s and funct ional depart m ent s played a support ing rat her t han a driving role. The businesses t hem selves would be responsible for R&D, product planning, m arket ing, and delivery. According t o Cam p, “ We agreed t o have t he whole organizat ion in place in six weeks. There was a real passion t o dem onst rat e result s [ because of] t he candid feedback and because we hadn’t hist orically done t hat .” Alt hough Cam p had favored a m at rix organizat ion, she was persuaded by her t eam ’s fact - based discussion of t he t ask force’s candid report t hat an organizat ion built around several account able product based business unit s would be t he best approach. The senior t eam had converged quickly on t he new organizat ional design even t hough m any of it s m em bers were funct ional m anagers who would lose power in t he new st ruct ure. St r e ss t e st t h e pla n . Once t he senior t eam has developed it s plan, it m eet s again wit h t he t ask force t o present what it has heard, it s diagnosis, and it s act ion plan. This is a crit ical st ep in reinforcing t he senior t eam ’s account abilit y t o t he organizat ion. To ensure t hat it ’s able t o provide honest and t hought ful feedback, t he t ask force t akes t im e t o deliberat e alone before responding t o t he proposed plan. As a result of t his review, t he final m eet ing bet ween t he t wo groups is som et im es m ore cont ent ious t han it ot herwise would have been—and it ’s m ore product ive as well. One t ask force ( not SGDU’s) inform ed t he CEO and his senior t eam t hat t hey had not fully addressed t he need t o st ream line an overlayered divisional st ruct ure; a change in t he st ruct ure would reduce t he aut horit y of a part icularly influent ial m em ber of t he senior t eam . When t he t ask force put t his issue on t he t able, t he CEO and t he t op t eam changed t he plan. The revised plan had m uch great er credibilit y wit hin t he organizat ion, and t he t ask force was able t o m ove beyond it s init ial role as a group of obj ect ive “ report ers” and becom e a com m it t ed part ner in t he im plem ent at ion of t he plan. At SGDU, t he t ask force gave useful feedback t o t he senior t eam about how t o best com m unicat e and im plem ent t he senior t eam ’s plans; in general, t hey were posit ive about what t he senior t eam had proposed.

M or e t h a n on e t a sk for ce h a s be gu n it s r e por t w it h a ple a n ot t o “sh oot t h e m e sse n ge r .” Th e Bot t om Lin e : Be t t e r Bu sin e ss Pe r for m a n ce Senior t eam s t hat have engaged in t his process have been able t o m ake dram at ic changes in how t heir businesses were organized and m anaged—and in t heir firm s’ bot t om - line perform ance. One Hewlet t - Packard division im proved profit abilit y ninefold over a seven- year period; m anagers and em ployees engaged in a conversat ion each year using t he st rat egic fit ness process. Senior corporat e execut ives report ed t hat t he division’s senior t eam had t ransform ed t he division from t he worst t o one of t he best in t he sect or. Ten count ry organizat ions in Merck’s Lat in Am erican region were t ransform ed when senior vice president Grey Warner, who headed t he region, int roduced t his process at t he count ry level. I n j ust t hree years, t hese t op- down organizat ions had developed cust om er- focused, m ore part icipat ive cult ures in which em ployees at lower levels felt em powered t o cont ribut e. Subst ant ial im provem ent s in financial perform ance accom panied t hese changes. At Mat t el Canada, t he process uncovered conflict s bet ween sales and operat ions and helped t he com pany m ove from last t o first in profit abilit y am ong Mat t el’s int ernat ional subsidiaries. Six weeks aft er Lynne Cam p and her t eam t est ed t heir plan wit h t he t ask force, SGDU was operat ing as a decent ralized, business- focused, account able organizat ion. The speed of SGDU’s t ransform at ion is not uncom m on; rapid t ransform at ions of t his sort are possible because senior m anagem ent t eam s are m ade t o feel account able t o t he organizat ion. Just as im port ant , success t hat begins wit h honest conversat ions beget s fut ure conversat ions t hat furt her im prove perform ance. The first t im e is, of course, t he hardest . Once everyone has had a chance t o see t hat real change does em erge out of init ially painful t rut h t elling, t he organizat ion get s bet t er at having an honest collect ive conversat ion. The m anagers whose leadership act ions were quest ioned t he first t im e are t ypically seen as leading m ore effect ively if t hey em braced t he process and responded t o feedback. Lynne Cam p’s st ock went up dram at ically because she courageously acknowledged her role in t he organizat ion’s problem s and responded by changing t he

organizat ion and how she m anaged. By enabling a com plicat ed organizat ional t rut h t o em erge, senior m anagers reduce cynicism , increase t rust , and develop selfless com m it m ent . As a result , t hey creat e a m andat e for change t hat even t he m ost ent renched and resist ant power cent ers cannot resist . Surprisingly few corporat e leaders m ake a serious at t em pt t o engage t heir organizat ions in honest conversat ions about t he st rat egic and organizat ional issues t hey face. As a consequence, t hey forfeit t he benefit s of t ransparency achieved by t he leaders of t he organizat ions discussed in t his art icle. We believe t hat in t he t went y- first cent ury, organizat ions will have t o inst it ut ionalize a m eans for having honest conversat ions if t hey want t o endure. Adopt ing t he principles we have out lined here is a crit ical first st ep in creat ing t he kind of frank public dialogue needed t o build t he collect ive com m it m ent t hat drives rapid change, im proved perform ance, and organizat ional vit alit y. 1. Louis V. Gerst ner, Jr., Who Said Elephant s Can’t Dance? I nside I BM’s Hist oric Turnaround ( HarperBusiness, 2002) .

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How t o Have an Honest Conversat ion About Your Business St rat egy Eve r y or ga n iza t ion fa ce s ch a lle n ge s in e x e cu t in g it s st r a t e gy. Gr e a t com pa n ie s k n ow h ow t o w or k t h r ou gh t h e m .

by M ich a e l Be e r a n d Ru sse ll A. Eise n st a t M ich a e l Be e r is t he Cahners- Rabb Professor of Business Adm inist rat ion Em erit us at Harvard Business School and t he chairm an of t he Cent er for Organizat ional Fit ness in Bost on. Ru sse ll A. Eise n st a t is t he president of t he Cent er for Organizat ional Fit ness.

Despit e widespread rhet oric about t he need for organizat ional agilit y, an ast onishing num ber of businesses st ay st uck in neut ral when t hey need t o im plem ent a new st rat egy. Consider t he sit uat ion t hat Lynne Cam p faced in July 2000. Cam p, t he vice president and general m anager of Agilent Technologies’ Syst em s Generat ion and Delivery Unit ( SGDU) , was charged wit h creat ing a single global com pany from a set of fragm ent ed businesses in Asia, Europe, and t he Unit ed St at es. To gain cont rol over product decisions being m ade by t he regional t eam s she had inherit ed, Cam p and her senior t eam had originally adopt ed a funct ional organizat ion st ruct ure. This enabled t hem t o exit m any m arginal, local businesses and focus on t he opport unit ies t hat were m ost prom ising from a global perspect ive. I t also allowed t hem t o int roduce m ore efficient shared processes. Despit e t hese st rengt hs of t he new st ruct ure, problem s began t o em erge. The funct ional depart m ent s didn’t give t he new businesses t he at t ent ion t hey needed. The st affs of t he regional field organizat ions were in a funk; t hey t hought t heir cust om er perspect ive was being overlooked. Conflict bet ween t he funct ions, t he businesses, and t he field organizat ions was growing. The senior t eam was slow t o m ake decisions, and no one t ook responsibilit y for t he perform ance of t he developing businesses. Cam p surveyed t he problem s and concluded t hat t he best way t o increase account abilit y and speed up decision m aking—and t hus t o support t he st rat egy of focusing on a few prom ising businesses—was t o swit ch t o a m at rix st ruct ure. Mem bers of t he senior t eam st rongly disagreed. A m at rix would not work, t hey t hought , and besides, t hey were t oo overloaded t o undert ake anot her m aj or reorganizat ion. Cam p could have im posed her solut ion unilat erally, but she knew t hat if she did, she’d underm ine t he senior t eam ’s com m it m ent , which was crit ical t o m aking t his com plex global st ruct ure work. She needed t o find a different way out of t he im passe. As Cam p searched for an approach t hat would j um p- st art change at SGDU, she began t o suspect ( correct ly) t hat people t hroughout t he unit were t alking about it s st rat egy—and she furt her suspect ed t hat plent y of m anagers a couple of layers down had insight s t hat she needed t o hear. But t hese conversat ions t ook place behind closed doors, for t he

m ost part . And privat e conversat ions, by t heir nat ure, can’t m obilize an organizat ion t o address t he gaps bet ween it s business st rat egy and t he st ruct ure, capabilit ies, and m arket realit ies it faces. I n our experience, t he challenge Lynne Cam p faced—SGDU’s collect ive inabilit y t o t alk openly about it s problem s—is com m on. This lack of openness lies behind m any failures t o im plem ent st rat egy. We’ve becom e convinced t hat t he m ost powerful way for leaders t o realign t heir organizat ion is t o publicly confront t he unvarnished t rut h about t he barriers blocking st rat egy im plem ent at ion. Typically, t his involves looking closely at t he roles and decision right s of various part s of t he business, as well as changing t he behavior of people at all levels. Public, organizat ionwide conversat ions about such fundam ent al issues are difficult and likely t o be painful. But pain cont ribut es t o a species’ survival by t riggering learning and adapt at ion; it can have t he sam e effect on organizat ions. Businesses and t he people inside t hem don’t learn t o change unless t hey have t he courage t o confront difficult t rut hs. Because m ost init iat ives fail t o uncover t he t rut h, t hey lead t o only superficial change. Em ployee surveys, 360- degree feedback, int erviews by ext ernal consult ant s, and even relat ively honest one- t o- one conversat ions bet ween a key m anager and t he CEO ( rem em ber t he courageous discussion Sherron Wat kins had wit h Kennet h Lay at Enron) t ypically do not m ove t he organizat ion forward. They do not convince em ployees t hat m anagem ent want s t o know t he t rut h and is ready t o act . Quit e t he reverse—all t oo oft en, t hese m et hods lead t o cynicism , and cynicism is t he enem y of com m it m ent t o change. I n one highly regarded com pany we st udied, a t ask force of respect ed m anagers rebelled when asked by senior m anagem ent t o conduct and analyze a worldwide em ployee survey. They refused t o get involved in yet anot her hopeless exercise. Meanwhile, senior m anagers fully believed t hat t hey had act ed on past feedback. We believe t hat organizat ionwide conversat ions are essent ial, so about 15 years ago we launched a research program t o develop a process t hat leaders could use t o engage t heir people in an honest conversat ion. The “ st rat egic fit ness process” was designed in part nership wit h senior execut ives t o enhance t heir capacit y t o im plem ent st rat egy quickly and effect ively. I t does so by fit t ing t he organizat ion t o t he st rat egy and increasing fit ness, t he capacit y of t he organizat ion t o learn and change. Since t hen, t his process has been used in m ore t han 150 businesses in t he ret ail, hospit alit y, high t echnology, banking, and pharm aceut ical indust ries. Cr a ft in g a Con ve r sa t ion t h a t M a t t e r s Aft er m ore t han a decade of im plem ent ing t he process and researching it s consequences, we have ident ified several overriding lessons t hat we believe are relevant in any organizat ionwide conversat ion, whet her or not leaders use our part icular process. To wit : A con ve r sa t ion a bou t st r a t e gy n e e ds t o m ove ba ck a n d for t h be t w e e n a dvoca cy a n d in qu ir y. Most failures in organizat ions st art when t op m anagem ent advocat es a new direct ion and begins t o develop program s for change wit hout finding out what influent ial people in ot her part s of t he organizat ion t hink of t he new focus. They t hereby set t hem selves up t o be blindsided by concerns t hat em erge m uch lat er. A sm aller num ber of well- int ent ioned t op m anagers m ake t he opposit e m ist ake. They do not advocat e at all. I nst ead, in t he nam e of part icipat ion and involvem ent , t hey depend ent irely on inquiry—assem bling a large group of m anagers and asking t hem t o define a direct ion. The result is oft en widespread frust rat ion. Managers and em ployees look t o leaders t o art iculat e a point of view about where t he business is going, a point of view t o which t hey can respond. Leaders need t o advocat e, t hen inquire, and repeat as needed.

Th e con ve r sa t ion h a s t o be a bou t t h e issu e s t h a t m a t t e r m ost . To energize t he organizat ion, t he conversat ion m ust be focused on t he m ost im port ant issues facing t he organizat ion—t he com pany’s st rengt hs and t he obst acles t o perform ance. I t ’s all t oo easy for senior m anagers t o becom e swam ped in t he operat ional det ails of m anaging a business. What get s crowded out are t ough and honest conversat ions about t he fundam ent al issues t hat will det erm ine long- t erm success. Do we have a dist inct ive business st rat egy t hat key m anagers believe in? Do we have t he capabilit ies t o execut e t hat st rat egy? I s our leadership effect ive? Th e con ve r sa t ion h a s t o be colle ct ive a n d pu blic. Successfully realigning an organizat ion wit h a new st rat egic direct ion alm ost always requires sim ult aneously changing t he worldview and t he behaviors of a whole set of int erdependent players—t he CEO, t he senior leadership t eam , and m anagers down t he line. This won’t happen wit hout a collect ive, public conversat ion. By “ collect ive” we m ean t hat several levels of m anagem ent across im port ant funct ions and value- chain act ivit ies have t o be engaged. By “ public” we m ean t hat senior m anagers need t o keep everyone t hree t o four levels below t hem inform ed about what has been learned, as well as what changes are planned. Th e con ve r sa t ion h a s t o a llow e m ploye e s t o be h on e st w it h ou t r isk in g t h e ir j obs. I n m ost of t he com panies we’ve st udied, m anagers t alked about st rat egic problem s wit h one or t wo people t hey t rust ed but pulled t heir punches in m ore public set t ings. I n Agilent ’s SGDU division, for exam ple, everyone knew about t he t ensions bet ween t he regional ent it ies and t he funct ional depart m ent s. Everyone was aware t hat t he senior t eam wasn’t m anaging effect ively, and m any m anagers doubt ed Cam p’s abilit y t o lead t he organizat ion out of t he m orass. But none of t hese issues was discussed publicly, for t wo reasons. First , m anagers feared t hat being honest would hurt t heir careers or even endanger t heir j obs. Second, t hey were afraid t hat Cam p and her senior t eam would feel so hurt and defensive t hat t he conversat ion would not lead t o change and m ight even set back t he organizat ion. Th e con ve r sa t ion h a s t o be st r u ct u r e d. When people hear “ honest ,” t hey t end t o t hink “ spont aneous.” But public conversat ions in organizat ions are rarely spont aneous, as Lou Gerst ner found out when he t ook charge at I BM in 1993, because t he st akes are so high. Gerst ner describes a st rat egic m eet ing at which m anagers sat at a large conference t able wit h scores of assist ant s behind t hem , all list ening t o a PowerPoint present at ion and engaging in lit t le or no discussion. He was so frust rat ed by t he lack of real dialogue t hat he t urned off t he overhead proj ect or, wit h what he calls “ t he click heard around t he world.” Gerst ner learned, as we have in our work, t hat t he “ free- for- all of problem solving” so essent ial for high perform ance “ does not work so easily in a large, hierarchically based organizat ion.” Paradoxically, t o achieve honest y and full engagem ent in t hese organizat ions, you need t o st ruct ure t he conversat ion carefully. 1

W h e n pe ople h e a r “h on e st ,” t h e y t e n d t o t h in k “spon t a n e ou s.” Bu t pu blic con ve r sa t ion s in or ga n iza t ion s a r e r a r e ly spon t a n e ou s. D r ivin g Ch a n ge , On e St e p a t a Tim e I n t he pages t hat follow, we’ll out line t he process we’ve developed t o support product ive, organizat ionwide conversat ions about barriers t o perform ance ( sum m arized in t he exhibit “ The St rat egic Fit ness Process” ) . We’ll focus on im port ant point s t o rem em ber as t his conversat ion unfolds. These point s—and t he principles underlying t hem —hold t rue in any set t ing where t op m anagem ent t ruly want s st rat egic change.

St a r t t h e con ve r sa t ion w it h t h e le a de r sh ip t e a m . Businesses are designed wit h a built - in direct ional gyroscope—t he senior t eam . These individuals oversee t he part s of t he organizat ion t hat need t o work t oget her t o im plem ent business st rat egy. Yet our consist ent finding in m any com panies is t hat t hese built - in gyroscopes are broken. The senior m anagem ent t eam s are not doing t he fundam ent al work t hat t heir organizat ions expect of t hem —set t ing direct ion, resolving conflict ing views about priorit ies, and creat ing t he cont ext and cult ure t hat will enable t he firm t o deliver result s. I n an ext raordinary num ber of com panies, unclear st rat egy and conflict ing priorit ies obst ruct perform ance. The cause, as perceived by people at lower levels as well as by m em bers of t he senior t eam , is an ineffect ive senior t eam . When t hese t eam s m eet t hey t end t o review result s, focus on specific problem s, or discuss adm inist rat ive m at t ers. They do not dig int o or resolve fundam ent al st rat egic issues. All of t his was t rue at SGDU. During senior t eam m eet ings people t ended t o int errupt one anot her, ignore one anot her’s com m ent s, and engage in a lot of side conversat ions. As a result , t he group had difficult y

achieving consensus and m aking t im ely decisions, part icularly about t he polit ically charged issues of st rat egy and organizat ion design. The responsibilit y for building an aligned organizat ion cannot be delegat ed. The senior m anagers m ust work t oget her t o define t he business st rat egy as well as t he capabilit ies and values essent ial for long- t erm success. We st art t he st rat egic fit ness process wit h a one- day m eet ing. The senior m anagem ent t eam develops t he st rat egy and draft s a st at em ent about organizat ional direct ion t hat will lat er be used as t he basis of t he inquiry int o t he organizat ion’s st rat egic alignm ent . To prom ot e an honest dialogue t hat uncovers differences am ong m em bers of t he senior m anagem ent t eam , we ask each m em ber t o prepare individual answers t o six sim ple but profoundly im port ant quest ions: • What are t he com pany’s obj ect ives and aspirat ions? • What are t he m arket t hreat s and opport unit ies? • What is t he value proposit ion you are delivering? • What are t he m ost crit ical t hings t he business m ust do t o deliver on t he value proposit ion and creat e or sust ain com pet it ive advant age? • Which organizat ional capabilit ies are needed t o im plem ent t he st rat egy? • Which values should guide t he organizat ion? At SGDU, t he senior t eam ’s answers t o t hese quest ions and t heir effort s t o creat e a direct ion st at em ent revealed t o t hem t hat t hey were t rying t o st raddle t wo very different st rat egies. The first was a react ive st rat egy—grow sales quickly by responding t o im m ediat e cust om er needs using exist ing t echnology. The second was a proact ive, R&Ddriven st rat egy of building dist inct ive, t echnology- based solut ions plat form s t hat com pet it ors could not easily replicat e. I n creat ing t he st at em ent of direct ion, t he senior t eam for t he first t im e clearly com m it t ed it self t o a t echnology- based plat form st rat egy. D r a ft you r be st m a n a ge r s t o colle ct da t a a n d e n ga ge t h e or ga n iza t ion in a con ve r sa t ion . The t wo convent ional approaches t o collect ing dat a about st rat egic and organizat ional problem s are t o survey t housands of em ployees anonym ously or t o ask out siders ( consult ant s or HR specialist s) t o conduct int erviews. The assum pt ion is t hat only anonym ous surveys and out siders can elicit obj ect ive, t rut hful inform at ion. The problem is t hat out of a desire for obj ect ive dat a, t he senior t eam is dist ancing it self from t he people who have seen and experienced problem s. That dist ance m akes it possible for execut ives t o underest im at e or even deny problem s and t o delay act ion. I n m any com panies we have st udied, t he senior t eam had m assive am ount s of survey dat a but had t aken lit t le act ion as a result of anyt hing it had learned. When a senior t eam appoint s a t ask force of up t o eight of it s best m anagers t o int erview pivot al people in all part s of t he organizat ion, t he t eam sends a clear m essage t hat it is serious about uncovering t he t rut h and m aking changes. To ensure t hat t he t ask force is seen as represent ing t he int erest s of t he ent ire organizat ion, t he senior t eam collect ively select s it s m em bers. I f anyone on t he senior t eam expresses a concern about a proposed individual, t hat individual’s nam e is st ricken from t he list . Lynne Cam p and her senior t eam , like m any ot her senior t eam s, hesit at ed t o appoint t heir best m anagers because t hese were also t he busiest m anagers. We have learned t he hard way, however, t hat if you do not appoint your m ost effect ive m anagers, t he

t ask force’s feedback will have less credibilit y wit h t he senior t eam and wit h t he larger organizat ion. I t becom es all t oo easy for t he senior t eam t o discount or explain away painful t rut hs. Even if a credible t ask force is appoint ed, skept icism in t he larger organizat ion is likely t o linger. Managers are apt t o rem em ber previous inform at ion- collect ing effort s t hat yielded few t angible result s. The firm can allay t his skept icism by having t he t ask force, rat her t han t he senior t eam , select t he 100 or so people who are t o be int erviewed. This helps t o assure t he organizat ion t hat t he t ask force m em bers—not senior m anagem ent — cont rol t his piece of t he process. The int erviewees should be a represent at ive sam ple of people, including m anagers, from t he areas m ost responsible for im plem ent ing t he st rat egy. The num ber of int erviews can alm ost always be kept t o 100 or less, regardless of whet her t he st rat egy being assessed is for a worldwide Fort une 50 corporat ion or a sm all st art - up. Dat a collect ion focuses on com pany st rengt hs and barriers t o t he im plem ent at ion of st rat egy, not em ployee sat isfact ion and m orale. Thus, t he int erviews can be lim it ed t o t hose in pivot al roles along t he value chain. Readers m ay wonder whet her a t ask force handpicked by t op m anagem ent will confront t he senior t eam wit h t he t rut h. The answer, em phat ically, is yes. Provided t hat cert ain safeguards are in place ( we will describe t hese in a m om ent ) and t hat t ask force m em bers believe t he leadership t eam is prepared t o m ake changes, t he t ask force quickly becom es a cohesive group, even when it is m ade up of people from warring fact ions of t he organizat ion. Moreover, t ask force m em bers com e t o feel a deep obligat ion t o t hose t hey have int erviewed. Many see t he assignm ent as a once- in- alifet im e opport unit y t o m ake t hings bet t er—and t hey don’t shy away from confront ing t he brut al fact s. As one t ask force m em ber at SGDU put it , “ People had spilled t heir gut s t o m e in t he int erviews, and I owed it t o t hem t o really see t his t hrough.” To u n cove r t h e t r u t h , pr ot e ct t h e pe ople in t h e con ve r sa t ion . I n m ost organizat ions, lower- level m anagers are afraid t o t alk openly about problem s t hat m ay be blocking effect iveness and perform ance. We’ve found t hat several approaches help t o m it igat e t hat fear. First , and m ost im port ant , t he confident ialit y of int erviews m ust be safeguarded. Task force m em bers report back general t hem es t hat com e up in m ult iple conversat ions, not com m ent s t hat can be at t ribut ed t o any one individual. I n addit ion, t ask force m em bers int erview people out side t heir own part s of t he organizat ion, m aking it less likely t hat t hey have an ax t o grind or t hat t he int erviewees will feel int im idat ed. The t ask force m em bers have t heir own fears t o deal wit h, of course. I n going out t o t he organizat ion on behalf of t he senior m anagem ent t eam , t hey risk t heir own reput at ions. As one t ask force m em ber at SGDU point ed out , “ We’re going t o put our careers on t he line assum ing t he t op t eam is going t o follow t hrough. I f we do t he int erviews and not hing happens, t hen we’ll look st upid.” I n addit ion, t hey are fully aware of t he polit ical cost s of speaking uncom fort able t rut hs. Many t ask forces, especially in organizat ions t hat have a hist ory of t op- down m anagem ent , are anxious about t hese risks ( alt hough our research shows t hat a disproport ionat e num ber of t ask force m em bers are lat er prom ot ed) . I n one inst ance, it t ook t hree hours t o assure an anxious t ask force t hat it s m em bers had not been given a career- lim it ing opport unit y. More t han one t ask force has begun it s report wit h a plea not t o “ shoot t he m essenger” ; one creat ed but t ons saying t his, and m em bers wore t hem int o t he m eet ing wit h t he senior t eam . The t op m anager m ust clarify his or her expect at ions for openness if t hese fears are t o be addressed. Cam p t old t he t ask force at t he launch m eet ing, “ I want t he t rut h; not hing should be sugarcoat ed.… We have confidence in you, and we are count ing on you t o help

us ident ify and address t he real issues.” I n addit ion, what m akes it possible for t he t ask force m em bers t o speak t he t rut h is t hat t hey are act ing as represent at ives of t he 100 people t hey have int erviewed. We’ve also found t hat it helps if t ask force m em bers can t hink of t hem selves as researchers wit h a j ob t o do. They rem ind m anagem ent of t his report er role by cit ing t he num ber of people t hey int erviewed and t he general area in t he com pany where t hey collect ed inform at ion ( wit hout , of course, revealing individual sources) . D ist ill t h e con ve r sa t ion t o t h e issu e s t h a t m a t t e r . The conversat ion bet ween t ask force m em bers and t he people t hey int erview is kept focused but open- ended. I nt erviewees are asked sim ply, “ What are t he st rengt hs t o build on and t he barriers t o address in im plem ent ing t his st rat egy?” Task force m em bers find t hat respondent s are eager t o discuss st rat egic issues because t his is, in m any cases, t heir first chance t o t alk t o m anagem ent honest ly about t he overall healt h and direct ion of t he com pany. Task force m em bers report long, em ot ional int erviews. Em ployees who are not scheduled t o be int erviewed som et im es line up out side conference room doors, hoping for t he chance t o speak. The t ask force’s j ob is t o ext ract from it s hundreds of hours of rich and em ot ionally charged discussions t he crit ical issues t hat m at t er m ost . This is done t hrough a series of screens. At t he end of each int erview, t he subj ect is asked t o sum m arize t he t wo or t hree m ost business- crit ical issues t o be shared wit h senior m anagem ent . Each t ask force m em ber t hen reviews all of his or her int erview not es and select s t he t hree or four m ost com m only m ent ioned barriers t o im plem ent ing business st rat egy, as well as t he m aj or organizat ional st rengt hs t hat need t o be preserved. When t he t ask force m em bers com e t oget her, t hey collat e t hese t hem es. The m ost im port ant ones form t he basis for t he present at ion t o t he senior m anagem ent t eam . The t ask force is careful t o illust rat e t he t hem es wit h descript ions of specific event s or proj ect s; t hese rich st ories provide t he t op t eam wit h an in- dept h view of how t he organizat ion really funct ions. The st ories resem ble well- researched case st udies. We have found t hat t hese descript ions are vit al t o convincing senior m anagem ent t hat t he dat a are real and valid. Senior m anagers also respond powerfully t o quot es from ( unnam ed) int erviewees, which t end t o bring hom e t he em ployees’ deep com m it m ent as well as t heir frust rat ion. En a ble t r u t h t o spe a k t o pow e r . The t ask force’s present at ion t o senior m anagem ent is always a charged m eet ing. This st age, perhaps m ore t han any ot her, needs t o be carefully m anaged. When we first developed t his process, t he t ask force would use slides. But we quickly learned t hat t he t ask force had great difficult y agreeing on a few words t hat would convey t heir rich findings. We also found t hat —for all t he safeguards we t hought were in place—t ask force m em bers were apprehensive about t heir individual part s of t he present at ion. They felt exposed and vulnerable because t hey could be individually ident ified wit h som e port ion of t he bad news. We now suggest t hat t ask force m em bers present t heir findings in t he form of a discussion. Task force m em bers sit around a t able in t he m iddle of a room —in what we call a fishbowl—while t he m em bers of t he senior t eam sit at t ables around t he out side of t he fishbowl, observing and t aking not es. For each of t he m aj or t hem es, t he t ask force m em bers discuss t he range of perspect ives t hat em erged from t heir int erviews and t he quest ions t hat t he t hem es raise. They do not recom m end solut ions, and t hey don’t deliver a writ t en report of any kind; t he dept h of t he senior t eam ’s underst anding and insight is far great er when t he execut ives act ively list en and t ake not es.

Cert ain ground rules are set at t he beginning of t hese m eet ings t o enable senior m anagers t o hear what ’s being said and t o prot ect t he t ask force m em bers. Senior m anagers are not allowed t o int errupt or challenge t he t ask force; inst ead, at t he end of each t hem e discussion, t hey are allowed t o ask quest ions for clarificat ion. They’re also encouraged, as t hey list en, t o recognize t hat “ percept ions are fact s” in shaping behavior and det erm ining effect iveness of st rat egy im plem ent at ion. I n every process we’ve observed, t he t ask force was able t o speak t he t rut h wit h a level of openness and richness t hat went well beyond t he init ial expect at ions of t he m anagers involved. One senior m anager described t he t ask force as “ operat ing m uch like a professional consult ing firm , except unlike consult ant s, t hey were a part of t he organizat ion and knew it inside and out . I t hink t hey worked so well t oget her because t hey believed in what t hey were doing.” This is not t o say t hat t he t ask force feedback sessions are easy or painless. Aft er all, senior m anagem ent m em bers are learning about t he business consequences of t heir own

act ions. At SGDU, Lynne Cam p learned t hat she was perceived as an aut hent ic leader whom people liked and t rust ed, but t hat she was let t ing down t he organizat ion by not m oving m ore quickly t o resolve t he four m aj or organizat ional problem s facing t he business: • Slow decision m aking: “ Our funct ional organizat ion is killing speed.” • Lack of business focus: “ Lynne and her st aff don’t know t he business well enough t o ask t he right quest ions.” • Lack of account abilit y: “ Everyone report s t o a funct ion; no one is account able.” • Leadership ineffect iveness: “ Managem ent has no t rack record in t aking act ion. This is t he last chance for Lynne and her st aff t o get it right .” The power of direct feedback from eight of t heir best people m oves senior t eam s t o effect changes t hey have ot herwise been reluct ant t o m ake. This happened at SGDU. As Cam p explained t o t he t ask force: “ You lit a fire under us. Thank you for t he unvarnished t rut h.… I t ake your feedback very seriously; it is m y perform ance appraisal.… I f t he organizat ion is going t o change, I m ust change.” Cam p pledged t o do what ever it t ook t o address t he issues raised; she even offered t o resign if it t urned out t hat she was not t he right person t o lead SGDU, as did t he rest of t he senior t eam . This act of leadership courage was not especially unusual. A collect ive and t rut hful conversat ion, our experience shows, enhances everyone’s willingness t o put t he organizat ion and it s obj ect ives ahead of self- int erest . This is it s power. D ia gn ose t h e or ga n iza t ion a n d de ve lop a pla n for ch a n ge . None of us would feel com fort able agreeing t o a recom m endat ion for surgery before a full diagnosis had been m ade. Yet upon hearing about problem s in t heir organizat ion, m anagers oft en m ove t oo quickly t o inst it ut e m aj or changes wit hout undert aking a rigorous diagnosis of root causes. Why? Tim e pressures prevent reflect ion and in- dept h diagnosis. Managers also lack an analyt ical fram ework for diagnosing t he sit uat ion. One senior t eam creat ed a 49it em act ion list , one for each problem it had perceived. This enabled t he general m anager t o avoid confront ing t he underlying issues, which included his own focus on short - t erm product ivit y im provem ent s at t he expense of longer- t erm invest m ent s, an ineffect ive senior m anagem ent t eam unable t o bridge funct ional silos, and his own t opdown st yle. To overcom e such problem s, we have concluded t hat t he senior t eam should convene for a full t hree- day m eet ing at which feedback, diagnosis, and act ion planning occur. Such a m eet ing creat es t he discipline t hat a senior t eam needs t o go beyond sym pt om s t o root causes. On t he first day, t he t ask force gives it s feedback, and t he senior t eam get s an overnight assignm ent : t o ident ify t he organizat ion’s core st rengt hs and weaknesses as t hey relat e t o it s st rat egic obj ect ives. The t ask force is done for now, but t he senior t eam cont inues t o m eet for t wo m ore days. Using it s overnight assignm ent , t he t eam diagnoses t he organizat ion, deciding as a group what t he com pany’s st rengt hs and weaknesses are, which weaknesses will m at erially underm ine achievem ent of st rat egic goals, and which organizat ional levers—for exam ple, organizat ion st ruct ure, corporat e cult ure, m anagem ent processes, hum an resource policies, t he leadership t eam —are causing t he weaknesses. On t he final day, t he senior t eam m akes decisions about organizat ional changes and ot her priorit y act ions. At SGDU, Cam p and her t eam wrest led wit h t he fundam ent al but polit ically sensit ive

quest ion of whet her t he funct ional depart m ent s, geographic ent it ies, or businesses were going t o drive t he com pany. The t eam collect ively agreed t o m ove t o a product - based rat her t han a geography- based business unit st ruct ure in which t he geographic t eam s and funct ional depart m ent s played a support ing rat her t han a driving role. The businesses t hem selves would be responsible for R&D, product planning, m arket ing, and delivery. According t o Cam p, “ We agreed t o have t he whole organizat ion in place in six weeks. There was a real passion t o dem onst rat e result s [ because of] t he candid feedback and because we hadn’t hist orically done t hat .” Alt hough Cam p had favored a m at rix organizat ion, she was persuaded by her t eam ’s fact - based discussion of t he t ask force’s candid report t hat an organizat ion built around several account able product based business unit s would be t he best approach. The senior t eam had converged quickly on t he new organizat ional design even t hough m any of it s m em bers were funct ional m anagers who would lose power in t he new st ruct ure. St r e ss t e st t h e pla n . Once t he senior t eam has developed it s plan, it m eet s again wit h t he t ask force t o present what it has heard, it s diagnosis, and it s act ion plan. This is a crit ical st ep in reinforcing t he senior t eam ’s account abilit y t o t he organizat ion. To ensure t hat it ’s able t o provide honest and t hought ful feedback, t he t ask force t akes t im e t o deliberat e alone before responding t o t he proposed plan. As a result of t his review, t he final m eet ing bet ween t he t wo groups is som et im es m ore cont ent ious t han it ot herwise would have been—and it ’s m ore product ive as well. One t ask force ( not SGDU’s) inform ed t he CEO and his senior t eam t hat t hey had not fully addressed t he need t o st ream line an overlayered divisional st ruct ure; a change in t he st ruct ure would reduce t he aut horit y of a part icularly influent ial m em ber of t he senior t eam . When t he t ask force put t his issue on t he t able, t he CEO and t he t op t eam changed t he plan. The revised plan had m uch great er credibilit y wit hin t he organizat ion, and t he t ask force was able t o m ove beyond it s init ial role as a group of obj ect ive “ report ers” and becom e a com m it t ed part ner in t he im plem ent at ion of t he plan. At SGDU, t he t ask force gave useful feedback t o t he senior t eam about how t o best com m unicat e and im plem ent t he senior t eam ’s plans; in general, t hey were posit ive about what t he senior t eam had proposed.

M or e t h a n on e t a sk for ce h a s be gu n it s r e por t w it h a ple a n ot t o “sh oot t h e m e sse n ge r .” Th e Bot t om Lin e : Be t t e r Bu sin e ss Pe r for m a n ce Senior t eam s t hat have engaged in t his process have been able t o m ake dram at ic changes in how t heir businesses were organized and m anaged—and in t heir firm s’ bot t om - line perform ance. One Hewlet t - Packard division im proved profit abilit y ninefold over a seven- year period; m anagers and em ployees engaged in a conversat ion each year using t he st rat egic fit ness process. Senior corporat e execut ives report ed t hat t he division’s senior t eam had t ransform ed t he division from t he worst t o one of t he best in t he sect or. Ten count ry organizat ions in Merck’s Lat in Am erican region were t ransform ed when senior vice president Grey Warner, who headed t he region, int roduced t his process at t he count ry level. I n j ust t hree years, t hese t op- down organizat ions had developed cust om er- focused, m ore part icipat ive cult ures in which em ployees at lower levels felt em powered t o cont ribut e. Subst ant ial im provem ent s in financial perform ance accom panied t hese changes. At Mat t el Canada, t he process uncovered conflict s bet ween sales and operat ions and helped t he com pany m ove from last t o first in profit abilit y am ong Mat t el’s int ernat ional subsidiaries. Six weeks aft er Lynne Cam p and her t eam t est ed t heir plan wit h t he t ask force, SGDU was operat ing as a decent ralized, business- focused, account able organizat ion. The speed

of SGDU’s t ransform at ion is not uncom m on; rapid t ransform at ions of t his sort are possible because senior m anagem ent t eam s are m ade t o feel account able t o t he organizat ion. Just as im port ant , success t hat begins wit h honest conversat ions beget s fut ure conversat ions t hat furt her im prove perform ance. The first t im e is, of course, t he hardest . Once everyone has had a chance t o see t hat real change does em erge out of init ially painful t rut h t elling, t he organizat ion get s bet t er at having an honest collect ive conversat ion. The m anagers whose leadership act ions were quest ioned t he first t im e are t ypically seen as leading m ore effect ively if t hey em braced t he process and responded t o feedback. Lynne Cam p’s st ock went up dram at ically because she courageously acknowledged her role in t he organizat ion’s problem s and responded by changing t he organizat ion and how she m anaged. By enabling a com plicat ed organizat ional t rut h t o em erge, senior m anagers reduce cynicism , increase t rust , and develop selfless com m it m ent . As a result , t hey creat e a m andat e for change t hat even t he m ost ent renched and resist ant power cent ers cannot resist . Surprisingly few corporat e leaders m ake a serious at t em pt t o engage t heir organizat ions in honest conversat ions about t he st rat egic and organizat ional issues t hey face. As a consequence, t hey forfeit t he benefit s of t ransparency achieved by t he leaders of t he organizat ions discussed in t his art icle. We believe t hat in t he t went y- first cent ury, organizat ions will have t o inst it ut ionalize a m eans for having honest conversat ions if t hey want t o endure. Adopt ing t he principles we have out lined here is a crit ical first st ep in creat ing t he kind of frank public dialogue needed t o build t he collect ive com m it m ent t hat drives rapid change, im proved perform ance, and organizat ional vit alit y.

1. Louis V. Gerst ner, Jr., Who Said Elephant s Can’t Dance? I nside I BM’s Hist oric Turnaround ( HarperBusiness, 2002) . Reprint Num ber R0402F | HBR OnPoint edit ion 5925 | HBR OnPoint collect ion 5917 Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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by Ja m e s Ba m for d, D a vid Er n st , a n d D a vid G. Fu bin i

W h e n I s a JV W or t h t h e Tr ou ble ? Abou t t h e Re se a r ch

More t han 5,000 j oint vent ures, and m any m ore cont ract ual alliances, have been launched worldwide in t he past five years. The largest 100 JVs current ly represent m ore t han $350 billion in com bined annual revenues. So it ’s becom e clear t o m any com panies t hat alliances—bot h equit y JVs ( where t he part ners cont ribut e resources t o creat e a new com pany) and cont ract ual alliances ( where t he part ners collaborat e wit hout creat ing a new com pany) —can be ideal for m anaging risk in uncert ain m arket s, sharing t he cost of large- scale capit al invest m ent s, and inj ect ing newfound ent repreneurial spirit int o m at uring businesses. What ’s less clear t o t hese com panies is how t o overcom e t he m any challenges inherent in im plem ent ing j oint vent ures and alliances. I n 1991, we assessed t he perform ance of 49 j oint vent ures and alliances and found t hat only 51% were “ successful” —t hat is, each part ner had achieved ret urns great er t han t he cost of capit al. A decade lat er, in 2001, we assessed t he out com es of m ore t han 2,000 alliance announcem ent s—and t he success rat e st ill hovered at j ust 53% , despit e st udies t hat have highlight ed t he well- known reasons for JV failure: wrong st rat egies, incom pat ible part ners, inequit able or unrealist ic deals, and weak m anagem ent . Our m ost recent research, on which t his art icle is based, confirm s t hat t he challenge cont inues. Why is JV success so elusive? We believe it ’s because m any com panies overlook a crit ical piece of any alliance or JV effort —t he launch planning and execut ion. Alt hough m ost com panies are highly disciplined about int egrat ing acquisit ions, t hey rarely com m it sufficient resources t o launching sim ilarly sized j oint vent ures or alliances. Mist akes m ade during t he launch phase oft en erode up t o half t he pot ent ial value creat ion of a vent ure. The launch phase—beginning wit h t he signing of a m em orandum of underst anding and cont inuing t hrough t he first 100 days of operat ion—is usually not m anaged closely enough. This lack of at t ent ion can result in st rat egic conflict s bet ween t he allied com panies, governance gridlock, and m issed operat ional synergies. As one execut ive t old us, “ I f we could im prove our skills in one area, it would not be in deal m aking or ongoing m anagem ent but in t he launch phase. That ’s where t he rubber m eet s t he road.”

W e a k con t r ols ca n cost t h e pa r e n t com pa n ie s m on e y a n d ca n e x pose t h e m t o u n e x pe ct e d r isk s. JV Ch a lle n ge s When an organizat ion brings an acquired com pany int o t he fold, only one corporat ion exist s aft er t he deal, allowing for unilat eral decision m aking. By cont rast , aft er t wo com panies agree t o an alliance, t here are st ill m ult iple part ies ( t wo parent com panies, and, in m any cases, a new com pany) dealing wit h disparat e int erest s. This creat es a unique set of challenges. ( For an overview of t he challenges com panies face in launching JVs and alliances, see t he exhibit “ Clearing t he Hurdles.” )

Ja m e s Ba m for d is a consult ant in McKinsey & Com pany’s Washingt on, DC, office and a coaut hor of Mast ering Alliance St rat egy ( Wiley, 2003) . D a vid Er n st is a part ner in McKinsey’s Washingt on office and a leader of it s corporat e finance and st rat egy pract ice. He is a coaut hor of Collaborat ing t o Com pet e ( Wiley, 1993) . D a vid G. Fu bin i is a senior part ner in McKinsey’s Bost on office and leads it s global organizat ion and post m erger m anagem ent pract ices.

The first challenge is building and m aint aining st rat egic alignm ent across t he separat e corporat e ent it ies, each of which has it s own goals, m arket pressures, and shareholders. I f t hese individual int erest s are not addressed during t he launch phase, conflict s will develop in crucial st rat egic areas. For inst ance, should t he JV’s product s or services t arget high- end or m ass- m arket consum ers? Should t he vent ure’s reinvest m ent goals em phasize revenue growt h or cash flow? Such conflict s can delay t he vent ure’s developm ent and can set t he st age for cost ly com prom ises down t he road. JV and alliance part ners t ry t o ant icipat e areas of pot ent ial m isalignm ent during t he negot iat ion phase—but m any conflict s of int erest surface only when t he part ners dig deep int o operat ional det ails and st art t o run t he business. The second challenge is t o creat e a governance syst em t hat prom ot es shared decisionm aking and oversight bet ween t he t wo parent com panies. Even t hough a j oint vent ure isn’t necessarily a m arriage for life, governance problem s can quickly t rigger t erm inat ion of t he deal. Weak cont rols can cost t he parent com panies m oney and can expose t hem t o unexpect ed risks. The secret t o effect ive governance is balance: providing enough oversight t o prot ect im port ant asset s wit hout st ifling ent repreneurship. The t hird challenge t hat m ost j oint vent ures—and virt ually all nonequit y alliances—face is m anaging t he econom ic int erdependencies bet ween t he corporat e parent s and t he JV. To avoid duplicat ing cost s, m ost alliances are st ruct ured so t hat t he parent s cont inually provide financial capit al, hum an skills, m at erial resources, and m arket ing and ot her services. The parent com panies generally do out line t he broad ext ent of t he econom ic int erdependencies during t he negot iat ion phase—but t hey oft en don’t quant ify t he specific resources and finances t hat should be flowing t o and from each part ner unt il t he launch phase. Consider what St arbucks and PepsiCo did. I n 1994, t he com panies form ed t heir successful Nort h Am erican Coffee Part nership, a JV wit h m ore t han 90% of t he U.S. ready- t o- drink coffee business. The vent ure was set up wit h fewer t han a dozen full- t im e professionals, who have capit alized on t he parent com panies’ capabilit ies. St arbucks cont ribut es services such as coffee purchasing and roast ing, creat ion of beverage concent rat es, and qualit y assurance. PepsiCo provides dist ribut ion of t he JV product s t o grocery, convenience, and m ass- m arket st ores. The t wo com panies j oint ly m anage m arket ing and product developm ent . And t hey agreed during t he launch phase on specific ground rules for com pensat ing each parent fairly for it s cont ribut ions. The fourt h challenge is building t he organizat ion—a cohesive, high- perform ing JV or alliance—when m ost m anagers com e from , will want t o ret urn t o, and m ay even hold sim ult aneous posit ions in t he parent com panies. Many vent ure CEOs lam ent t hat alliances are t reat ed as dum ping grounds for underperform ing execut ives, rat her t han as m agnet s for high- pot ent ial m anagers. Most com panies t hat com plet e a m erger dedicat e a full- t im e t eam of t heir best leaders t o int egrat e t he t arget com pany. By cont rast , m any JV launch t eam s com prise a handful of part - t im e m anagers who are learning as t hey go. According t o a board m em ber of one successful m ult ibillion- dollar JV, “ We agreed t o

virt ually every decision—picking t he I T syst em s, select ing st aff at every level—prior t o closing t he deal.” I f organizat ions underinvest in launch proj ect m anagem ent , t hey can j eopardize t he long- t erm healt h of t heir vent ures. Som e guidelines for launch planning and execut ion apply t o all JVs and alliances. The parent s should appoint a launch leader ( som et im es, but not always, t he JV CEO) and ident ify deal cham pions. The lat t er are t ypically senior execut ives from each parent com pany who are known and respect ed across t he organizat ion and have a st rong int erest in t he success of t he j oint vent ure. The parent s should also assem ble a dedicat ed and experienced t ransit ion t eam im m ediat ely upon signing t he m em orandum of underst anding. This t eam is responsible for get t ing t he business up and running. I t s t asks include developing a det ailed business plan, creat ing t he 100- day road m ap t hat orchest rat es t he act ivit ies of all work groups, and int ervening when t he launch process veers off t rack. Ot her requirem ent s of launch planning vary based on t he nat ure of t he vent ure. There are basically four t ypes of j oint vent ures: I n t he consolidat ion JV, t he value of t he alliance com es from a deep com binat ion of exist ing businesses. I n t he skills- t ransfer JV, t he value com es from t he t ransfer of som e crit ical skills from one part ner t o t he j oint vent ure—and som et im es t o t he ot her part ner. I n t he coordinat ion JV, t he value com es from leveraging t he com plem ent ary capabilit ies of bot h part ners. And in t he newbusiness JV, t he value com es from com bining exist ing capabilit ies, not businesses, t o creat e new growt h. The t ransit ion t eam should focus on m axim izing operat ional synergies in t he first t wo cases, and it should focus on underst anding new or expanded m arket opport unit ies in t he lat t er t wo. Once t he right launch t eam is in place and a t im e line has been set , t he real work begins. Successful JVs t ackle each of t he challenges out lined previously. They preem pt failure by exposing inherent t ensions early in t he process. They m ove quickly from general road m aps t o det ailed, pract ical planning. They clarify st rat egy and governance, and t hey put in place t he right incent ives and processes t o secure t op t alent and crit ical resources from t he parent s. W h e n I s a JV W or t h t h e Tr ou ble ? Re solvin g St r a t e gic Con flict s Up Fr on t I t is com m on for com panies t o assum e t hat t he JV’s st rat egy has already been defined during deal m aking and t hat t he launch phase, t herefore, is sim ply t he t im e t o im plem ent a shared st rat egic vision. I n our experience, it is virt ually im possible t o get int o enough det ail during t he deal- m aking phase t o surface and resolve all t he st rat egic differences bet ween t he corporat e parent s. Consider t he following exam ples. Two large pharm aceut ical com panies form ed a vent ure t o expand t he m arket for a specific class of drugs. Each part ner cont ribut ed com plem ent ary pat ent - prot ect ed m edicines wit hin t he drug class and regional m arket ing st rengt hs t o t he JV. Yet once t he JV was up and running, one parent want ed t o prom ot e it s higher- m argin, lower- volum e product s, while t he ot her parent want ed t o expand it s m arket share for it s product s t hrough aggressive pricing. The com panies had failed t o address t his fundam ent al m isalignm ent early in t he process, and t he vent ure st ruggled t hrough t wo years of frict ion and weak sales before one part ner ult im at ely bought t he ot her out . I n anot her consolidat ion JV bet ween t wo global chem ical com panies, it was clear early on t hat one part ner was m ore willing t o invest in t he vent ure t han t he ot her one was. The com panies had different t arget s for ret urn on capit al and different percept ions of t he long- t erm st rat egic benefit s associat ed wit h t he vent ure. The CEO of t his j oint vent ure was caught in t he cross fire, lacking agreem ent from t he parent com panies about how and where t he JV would com pet e and what level of invest m ent was appropriat e. I n bot h cases, t he com panies had failed t o discover st rat egic conflict s early enough in t he launch process, when t he part ners m ight have been m ore am enable t o negot iat ion. To root out t hese conflict s, com panies should do t he following: D e ve lop a VC- qu a lit y bu sin e ss pla n . Prior t o closing t he deal, t he launch t eam , working wit h fut ure m anagem ent , needs t o develop a det ailed business plan. I t should m eet t he sam e st andards of rigor, det ail, and logic t hat a vent ure capit alist would dem and. To st art wit h, t he m anagem ent t eam ( t he CEO, CFO, and COO) should m eet offsit e for t wo or t hree days wit h m em bers of t he JV board and t he deal cham pions from bot h parent com panies. The group should define exact ly how and where t he JV will com pet e, proj ect how t he JV m ight expand beyond it s init ial scope, set financial t arget s, plan capit al expendit ures, and creat e a blueprint for t he organizat ion. This work is t hen t ranslat ed int o a det ailed business plan. I t all sounds st raight forward, but t hese

m eet ings are oft en cont ent ious precisely because t hey reveal gaps in st rat egic alignm ent . The launch t eam , working wit h t he JV board, also needs t o draw up perform ance cont ract s t hat m ake key JV m anagers account able for t he success of t he vent ure. The part ners should clarify t he resources, personnel, and behaviors required for t he JV’s success so confusion about t hese m at t ers won’t ham st ring t he people charged wit h running t he vent ure day t o day. Consider t he following exam ple: Four elect ric power com panies int erviewed for a CEO t o run t heir proposed j oint vent ure. One candidat e was offered t he posit ion but t ook his t im e in deciding whet her t o accept . Before com m it t ing t o t he vent ure, he int erviewed each board m em ber t o underst and t he parent s’ obj ect ives, revised t he JV business plan, and proposed six specific obj ect ives for t he first nine m ont hs of his t enure as CEO. He t hen insist ed on t he collect ive endorsem ent of t he JV board as a precondit ion t o accept ing t he j ob, and he negot iat ed a com pensat ion agreem ent t hat linked his bonus t o t hese obj ect ives. He also negot iat ed an em ploym ent cont ract t hat em powered him t o m ake key operat ing decisions and choose execut ives. As he lat er explained, “ I n j oint vent ures, especially wit h m any part ners, t here is a t endency for t he part ners t o each m ake back- channel request s of t he CEO and t o t ry t o influence t he alliance t hrough people t hey put int o t he JV. I was not going t o put up wit h t hat . I needed all t he part ners t o agree on t he vent ure’s overall priorit ies and hold m e responsible for execut ing against t hem .”

Su cce ssfu l a llia n ce s pa y a lot of a t t e n t ion t o com m u n ica t ion —n ot j u st du r in g t h e la u n ch ph a se , bu t t h r ou gh ou t t h e life of t h e ve n t u r e . Act qu ick ly t o m a n a ge in e vit a ble se t ba ck s. A det ailed business plan and support ing perform ance cont ract s are im port ant , but t hey can’t prevent unpleasant surprises once t he vent ure is launched. For inst ance, St arbucks and PepsiCo were forced t o ret hink t he direct ion of t heir j oint vent ure aft er t he first product it int roduced, a carbonat ed coffee drink, received m ixed result s in early t est s wit h cust om ers. “ We had a great part ner, a leveraged organizat ional m odel, but no product ,” one St arbucks execut ive recalled. The part ners ult im at ely redefined t he JV’s product , drawing on t he lessons t hey learned from t hose init ial m arket t est s. Successful alliances pay a lot of at t ent ion t o com m unicat ion—not j ust during t he launch phase, but t hroughout t he life of t he vent ure. For inst ance, senior m anagem ent at TRW Koyo St eering Syst em s, a JV m anufact urer of aut om ot ive com ponent s, followed a policy of “ equal com m unicat ions” wit h each of t he parent com panies ( TRW Aut om ot ive and Koyo Seiko) . When Arvind Korde, CEO of t he JV, needed t o com m unicat e fact s or issues t o one parent , he always copied t he ot her parent , t hereby prom ot ing openness and t rust . And Korde and his t eam were quick t o react t o problem s. One year int o t he vent ure, t he JV was on t he verge of securing it s first cust om er, which exposed t he parent com panies’ difference of opinion around pricing. TRW, which was focused on profit abilit y m ore t han growt h, argued for higher m argins and prices. Koyo Seiko sought t o build m arket share and m axim ize t he scale of it s global relat ionship wit h key Asian cust om ers. “ This was a real t urning point for t he JV,” Korde recalls. “ Despit e our early success, I wasn’t sure we would m ake it out of t here alive.” Korde called an off- sit e m eet ing of his m anagem ent t eam in which t hey experienced what he calls a “ com ing t o Jesus” m om ent . I n t hat session, t he m anagem ent t eam craft ed a new vision for t he JV and a const ruct ive approach for resolving t he conflict . Ach ie vin g Loose - Tigh t Gove r n a n ce Besides m anaging t he parent s’ goals and expect at ions, t he launch t eam needs t o focus on building an effect ive governance syst em for t he JV or alliance. An appropriat e st ruct ure should allow t he JV m anagem ent t eam t o m ake t im ely decisions while providing t he parent s wit h sufficient oversight t o prot ect t heir asset s. During t he deal phase, m ost com panies focus on t he com posit ion of t he board, t he parent com panies’ vet o right s, and t he condit ions for t erm inat ion of t he vent ure. But effect ive ongoing governance requires m ore t han cont ract ual agreem ent s. Wit hout t he right launch planning, t he t ypical JV cont ract is a recipe for disast er because every m aj or decision is subj ect t o board approval, which requires t he agreem ent of bot h part ners. The default process for resolving disput es is oft en, “ Talk som e m ore.” This usually result s in st rat egic deadlock bet ween t he parent com panies, followed by erosion of t he synergy creat ed by t he deal and, oft en, t erm inat ion of t he vent ure. The launch phase is t he t im e t o go beyond t he lines and boxes and address how decisions will be m ade and disput es resolved. To find t he right balance bet ween giving t he JV enough aut onom y and

grant ing t he parent s enough cont rol, com panies should do t he following: Apply r igor ou s r isk m a n a ge m e n t a n d pe r for m a n ce t r a ck in g. Som e com panies grant t he vent ure m anagem ent t eam so m uch aut onom y t hat it borders on negligence. This was t he case in a billion- dollar indust rial JV t hat com bined sim ilar business unit s t o increase scale and reduce operat ing cost s. During t he launch phase, t he part ners failed t o creat e adequat e oversight m echanism s. Three years int o t he alliance, t he U.S. part ner was dism ayed t o discover t hat t he JV had incurred a $400 m illion debt wit hout ever having gone t hrough eit her parent ’s capit al- budget ing process. I n a second JV at t he sam e com pany, one parent found t hat t he vent ure was delivering an annual 3% ret urn on invest ed capit al, a figure well below it s t arget ed rat e of 14% . The JV was not part of t he st andard corporat e- planning and st rat egy review forum s and was never subj ect t o t he sam e level of scrut iny as t he wholly owned businesses. I n t he wake of Sarbanes- Oxley, com panies have increased t heir at t ent ion t o t ransparency, risk m anagem ent , disclosure, and perform ance m anagem ent in t heir wholly owned businesses. But our research shows t hat com panies don’t evaluat e t he perform ance of t heir JVs as diligent ly as t hey do t heir wholly owned businesses wit h equivalent asset s. That ’s a m ist ake; parent s need t o t reat t heir vent ures and t heir wholly owned unit s sim ilarly. This m eans, for large j oint vent ures, put t ing in place an audit process like t he ones used at t he best public com panies, including an act ive audit com m it t ee and ext ernal audit ors focused solely on t he vent ure’s econom ics. I t m eans building a st rong finance organizat ion inside t he JV t o m ake sure t hat t he board and vent ure m anagem ent have t he crit ical inform at ion t hey need t o do t heir j obs. And som et im es it m eans including t he JV in at least one parent ’s annual or sem iannual corporat e review, t hereby ensuring t ransparency. St r e a m lin e de cision m a k in g. Of course, som e corporat e parent s go t oo far and im plem ent governance syst em s t hat st ifle ent repreneurship and creat e dysfunct ional bureaucracy. During t he launch of a $4 billion nat ural resource JV, t he parent com panies creat ed a large board wit h subcom m it t ees int ended t o be heavily involved in—but not account able for—t he day- t o- day operat ions of t he vent ure. All m aj or decisions required m ult iple subcom m it t ee and board m eet ings, int erspersed wit h addit ional fact - finding effort s by t he JV m anagem ent t eam . Since each subcom m it t ee m et only four t im es per year, t he t im e it t ook for t he JV t o m ake a decision becam e a dist inct com pet it ive disadvant age. As a result , profit abilit y declined, frict ions am ong t he parent com panies and t he vent ure’s m anagem ent escalat ed, and t he parent s had t o com plet ely rest ruct ure t he JV’s governance approach. Com panies can avoid t his governance t rap by im plem ent ing a loose- t ight governance m odel. ( See t he exhibit “ The Loose- Tight Approach.” ) I n t his approach, t he part ners ident ify t he vent ure’s m ost im port ant governance processes ( for inst ance, set t ing st rat egy, allocat ing resources, or det erm ining pricing) and t hen designat e t he appropriat e degree of parent al involvem ent for each. As a general rule, parent com panies operat ing t hrough a JV board should play an act ive role in t he t hree governance areas crit ical t o driving financial perform ance and prot ect ing shareholder int erest : capit al allocat ion, risk m anagem ent , and perform ance m anagem ent . The parent s should generally lim it t heir int ervent ions in m ore operat ional processes—such as st affing, pricing, and product developm ent —where t he JV needs independence t o ensure com pet it iveness and m arket responsiveness.

Once a high- level governance road m ap is in place, t he launch t eam needs t o t ranslat e it int o pract ical decision- m aking processes t hat are consist ent wit h t he parent com panies’ form al and inform al governance and influence st ruct ures. There are m any ways t o do t his, but one effect ive approach is t o m ap out each governance process, showing how inform at ion and decisions flow t hrough t he JV and parent com panies. For exam ple, a request for capit al could originat e wit hin t he JV’s m anufact uring organizat ion and be form ally subm it t ed t o t he board for approval. But t he way t he process m ight work in pract ice is for board m em bers t o survey t he CFOs at each parent com pany t o m ake cert ain t hat t he proposal m eet s t heir individual capit al- expendit ure requirem ent s and t hen convene an inform al discussion wit h one or bot h parent CEOs t o m ake sure t hey’re aligned. By m apping out bot h form al and inform al decision- m aking processes, you can reduce t he t im e and effort it will t ake t o approve m aj or init iat ives.

Th e la u n ch t e a m n e e ds t o ch a lle n ge —a n d lim it w h e r e ve r possible —t h e in t e r de pe n de n cie s be t w e e n t h e pa r e n t s a n d t h e JV. M a n a gin g t h e I n t e r de pe n de n cie s For pract ical reasons, m ost JVs depend on t heir parent s t o provide ongoing access t o capit al, people, int ellect ual propert y, raw m at erials, and cust om ers. Bot h t angible and int angible cont ribut ions from t he parent s det erm ine t heir act ual ret urn on invest m ent . But m uch dam age can be done if t he det ails of t hose cont ribut ions aren’t worked out during launch. For inst ance, if t ransfer prices ( t he int ernal fees t hat one group charges anot her for a resource or a service) are not set appropriat ely, Parent A, who provides a resource t o t he j oint vent ure, has an opport unit y t o supplem ent it s ret urns “ off t he books” of t he JV. When Part ner B sees t his happening, it uses t he inform at ion t o j ust ify holding back it s com m it t ed cont ribut ions, creat ing a loop of part ner suspicion and dist rust . Winning JVs st art t o address econom ic int erdependencies as soon as an agreem ent looks likely in order t o avoid launch delays and t he loss of m illions of dollars in pot ent ial synergies. They m ake sure t hat t he launch t eam cont ains appropriat e expert ise and aut horit y t o resolve im port ant econom ic issues. Specifically, successful vent ures do t he following: D e dica t e r e sou r ce s t o r e solve in t e r de pe n de n cie s u p fr on t . The process of sort ing out who will provide what t o t he j oint vent ure is t im e- consum ing for everyone involved. I n one high- t ech consolidat ion JV, t he part ners spent 10,000 m an- hours over four

m ont hs det erm ining precisely which services and resources each parent would provide t he JV and const ruct ing service- level agreem ent s t hat specified t ransfer pricing, access right s, and ot her crit ical t erm s of t he deal. The work can’t be post poned j ust because it is cont ent ious and resource int ensive. According t o one JV execut ive we spoke wit h, “ Shared services are oft en a crit ical part of det erm ining t ot al vent ure econom ics and how t he value is dist ribut ed bet ween t he part ners.” I n t he high- t ech consolidat ion JV, t he part ners form ed a sm all t ransit ion services t eam t hat ident ified t he econom ic int erdependencies across t he 20 launch t eam s. This group est ablished crit eria for det erm ining which services t he JV would purchase from t he parent s. I t t hen docum ent ed t he shared resources and services and collaborat ed wit h t he purchasing and finance t eam s t o price each shared service. Ch a lle n ge a n d lim it in t e r de pe n de n cie s. One of t he m ost valuable t asks of t he launch t eam is t o challenge—and lim it wherever possible—t he num ber of int erdependencies bet ween t he parent s and t he JV. Working t eam s in t he high- t ech consolidat ion JV init ially generat ed a list of m ore t han 1,000 dependencies upon one parent —t hat parent was slat ed t o provide adm inist rat ive services, com ponent purchases, and shared research facilit ies, am ong a slew of ot her resources. Recognizing t hat a heavy load could creat e unm anageable com plexit y down t he road for t he parent com pany, t he launch leaders challenged virt ually every line it em on t he list . Event ually, t hey whit t led it down t o j ust 300 services t hat t he parent would provide t he vent ure in t he first year and less t han t en services in t he second year and beyond. Once a list of shared services is finalized, t he launch t eam m ust develop t ransparent and honest m et hodologies for calculat ing t ransfer pricing. This is crit ical for m aint aining t rust down t he road. A 50- 50 t elecom j oint vent ure depended on one parent for 90 different shared services. Two years int o t he JV, a st rat egic review revealed t hat t his part ner was allocat ing it s corporat e overhead and ot her nonshared cost s t o t he JV, t hereby creat ing significant profit s for it self while ham pering t he vent ure’s abilit y t o set com pet it ive prices and m ake a profit . The part ners did renegot iat e t ransfer pricing, but t he dist rust t hat was creat ed cont inues t o plague t he vent ure.

Pa r e n t com pa n ie s n e e d t o m ove ou t side t h e ir com for t zon e s w h e n de visin g a n or ga n iza t ion a l st r u ct u r e for t h e ir JVs. To avoid t his sit uat ion, t he launch t eam should agree at t he out set on t he m et hods for allocat ing cost s, specifying which operat ing cost s should be included ( for inst ance, cust om er billing or m aint enance) and t he basis upon which t o allocat e each shared cost ( for inst ance, per subscriber, per region, per dollar of revenue) . The launch t eam should also est ablish a way t o benchm ark t he parent s’ int ernal pricing and qualit y of service against t hose of out side vendors and suppliers. And t he launch t eam should specify a pat h for resolving cont ent ious econom ic issues. Finally, t he JV should be linked t o t he corporat e review and planning cycle of at least one of t he parent s, reducing t he odds t hat im port ant econom ic issues will fall bet ween t he cracks and require 11t h- hour int ervent ion. Bu ildin g t h e Or ga n iza t ion Parent com panies m ay need t o m ove out side t heir com fort zones when devising an organizat ional st ruct ure for t heir JVs, adopt ing a st affing m odel, and designing incent ive plans. There is a t endency in m any JVs t hat com bine exist ing organizat ions t o select a fam iliar organizat ional m odel—eit her a regional one, if t he parent s are cont ribut ing asset s from different regions, or a product - division st ruct ure, if each parent is cont ribut ing different product s. This sim ple approach allows each parent t o prot ect it s t urf and m inim ize organizat ional disrupt ion—but it also dilut es t he pot ent ial effect iveness of t he new organizat ion. I f t he parent s t ry t o preserve t he st at us quo, t hey risk reducing t he synergies bet ween t hem . And let ’s not forget t hat com panies are oft en at t ract ed t o t he JV st ruct ure precisely because of t heir need for a new m odel and m ind- set t o com pet e in a new business. The creat ion of a j oint vent ure is an opport unit y t o unfreeze t he organizat ion. Beyond t he issue of form al st ruct ure, a successful JV launch requires t aking t he following approaches t o st affing and incent ives. Ch oose you r or ga n iza t ion a l m ode l ca r e fu lly. There are t hree basic organizat ional m odels for j oint vent ures: independent , dependent , and int erdependent . The independent m odel, pursued by com panies such as Carlson Wagonlit Travel and Marat hon Ashland Pet roleum , let s com panies creat e new and oft en m ore ent repreneurial cult ures. The independent JV t ypically has an ent irely separat e report ing st ruct ure from t he parent s, it s own facilit ies, and t he freedom t o source from ext ernal as well as

int ernal suppliers. This m odel allows vent ure m anagem ent t o have great er focus and unit y of purpose, but it also requires t he vent ure t o est ablish and m aint ain separat e HR syst em s. This can m ake it harder t o recruit pot ent ial m anagers who would prefer t he wider career opport unit ies offered by t he parent com panies. Som e com panies go t o t he opposit e ext rem e and creat e dependent JVs. This t ype of JV operat es as a business unit of one parent and uses t hat parent com pany’s incent ive syst em s and HR policies. BP and Mobil used t his approach when creat ing t wo JVs in t heir downst ream European oil businesses: The refining vent ure operat ed as a BP business, while t he lubricant s vent ure operat ed as a Mobil business. The advant ages here are opposit e t hose of t he independent JV. There is no need t o creat e a separat e HR syst em for t he vent ure, and t he m anaging parent ensures t hat t he vent ure’s high perform ers get equal access t o prom ot ion opport unit ies wit hin t he wholly owned businesses. But t he dependent m odel lim it s t he JV’s abilit y t o share people and skills wit h t he nonoperat ing part ner and gives t hat part ner less influence in t he JV. The t hird m odel, t he int erdependent JV, is t ough t o execut e but is by far t he m ost com m only im plem ent ed st ruct ure. Mem bers of t he m anagem ent t eam m aint ain links t o t heir original corporat e parent . They rem ain on t he sam e com pensat ion plans, ant icipat e fut ure career m oves back t o t he parent , and som et im es have dot t ed- line- report ing relat ionships t o an execut ive in t heir parent organizat ion. The int erdependent m odel prot ect s career pat hs and offers m axim um flexibilit y, but it can be com plex t o m anage and can perpet uat e divided loyalt ies. I n one billion- dollar global m edia JV, t he m anagem ent t eam rem ained cult urally divided int o U.S. and Germ an cam ps t wo years aft er t he vent ure’s form at ion. This int erdependent JV was operat ing in a m at ure sect or, and t he part ners had agreed t o rot at e t he senior posit ions bet ween t hem every t hree years—which creat ed a quest ionable career pat h for t hose deciding t o st ay at t he JV. To m ake m at t ers worse, t he vent ure was funct ioning at a significant t alent disadvant age. Those m anagers who perform ed well were repat riat ed back t o t he parent s, while t hose wit h m ediocre perform ance rem ained at t he vent ure. This JV was furt her bedeviled by unclear report ing relat ionships. For exam ple, a senior- ranking Germ an m anager in t he JV rout inely com m unicat ed privat ely wit h a senior board m em ber from t he Germ an parent ( who was his form er boss) . As a result , t he JV CEO had t o t reat his second in com m and as a board liaison rat her t han a direct report , m aking it difficult t o hold his feet t o t he fire on perform ance issues. Unfort unat ely, t his is not an isolat ed case. Many JVs are held back because t hey offer t he wrong incent ives and are unclear about account abilit y. And t he problem s are not lim it ed t o t he senior m anagem ent t eam ; t hey spread t hroughout t he vent ure, even back t o t he support st affers who rem ain wit h t he parent organizat ions. The disadvant ages of t he int erdependent m odel can be m it igat ed if t he JV CEO is em powered t o writ e perform ance reviews and t o m ake all hiring and firing decisions; if all part ies agree up front on perform ance crit eria; if a m inim um t our of dut y is est ablished wit hin t he vent ure, t ypically t hree years; and if t he parent s aren’t allowed t o poach from t he vent ure unt il t hat t our of dut y is up. M a k e pe ople w a n t t o j oin t h e t e a m . Regardless of t he organizat ional m odel, t he launch t eam m ust creat e a com pelling value proposit ion t hat m akes good people want t o j oin t he t eam . For st art - ups, t he excit em ent of building som et hing from t he ground up is oft en sufficient t o at t ract m ot ivat ed players. I n difficult t urnaround sit uat ions, t he com pensat ion upside m ight be essent ial ( lower base pay but higher bonus or st ock opt ions t han in t he parent com panies) . Personal considerat ions cannot be underest im at ed. Everyone want s t o work for a m ot ivat ional leader, and select ing a CEO who inspires loyalt y is t he best way t o build a st rong new business. This is especially im port ant in int erdependent JVs, where personal loyalt y t o t he JV CEO can help unit e t he m anagem ent t eam and overcom e t he em ployees’ nat ural affiliat ions t o one parent or t he ot her. The physical proxim it y of key m em bers of t he JV m anagem ent t eam is also im port ant for accelerat ing t eam building. The value in creat ing a st rong m anagem ent t eam and a m ot ivat ed st aff is obvious. I t ’s equally im port ant t o get t he st aff inside t he parent com panies on your side. Two groups are wort h special at t ent ion. The first is t he handful of parent com pany m anagers who possess dist inct ive skills t hat need t o be t ransferred t o t he j oint vent ure, such as R&D, product m arket ing, or m anufact uring process design. The second is t he broader set of em ployees perform ing day- t o- day work for t he JV, who cont inue t o reside in a parent com pany.

Obt a in com m it m e n t s fr om pa r e n t com pa n y st a ff. Top- perform ing com panies recognize t hat skills are t ransferred by people, not by processes or cont ract s. Failure t o acknowledge t his can be cost ly. For inst ance, a global consum er goods com pany held a 50% st ake in a part ner in a developing count ry; t he result ing JV was looking t o t he global part ner t o t ransfer som e of it s operat ing and m arket ing expert ise int o t he developing- count ry part ner’s underperform ing beverage business. The JV request ed from t he global part ner t wo or t hree people highly skilled in em erging- m arket branding and m arket ing. The parent offered very lim it ed support from it s developing- count ry gurus; inst ead, it sent a m arket ing execut ive who had spent m ost of his career in Nort h Am erica. Lacking access t o crucial skills, t he JV couldn’t prop up t he declining brand and failed t o capt ure half of t he expect ed synergies, or around $450 m illion. Get t ing sufficient t im e and at t ent ion from a few t opflight people is oft en crit ical t o a JV’s success. Managers at t he parent com panies oft en assum e t hat t hese individuals will cont ribut e t heir m agic t o t he vent ure regardless of form al allocat ions or incent ives. To be cert ain t hat t hese valuable players do inj ect t heir crucial know- how, t he JV launch t eam needs t o ident ify t hem right away and creat e m echanism s t o involve t hem heavily in t he first six t o 18 m ont hs of operat ions. For exam ple, t he CEO of a successful U.S.–Japanese JV spent t wo weeks during t he first m ont h of t he vent ure in Japan finding local m anagers who t ruly underst ood what it would t ake t o build a world- class m anufact uring line in t he Unit ed St at es. He t hen persuaded t he m anagers t o com e t o t he St at es for up t o a year, where t hey could have a direct , im m ediat e im pact on t he layout and operat ions of t he new plant . Once t he skill holders are ident ified, successful com panies creat e form al cont ract s for t hem t hat define t heir levels of com m it m ent t o t he JV ( usually 50% or m ore of t heir t im e t o ensure focus and account abilit y) and t he m et rics by which t heir perform ance will be evaluat ed and rewarded. The launch t eam also needs t o creat e incent ives for parent com pany em ployees who spend less t han half t heir t im e on t he JV—for inst ance, sales reps, adm inist rat ive st aff, and ot hers—so t hat t hey are m ot ivat ed t o provide st rong support .

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For exam ple, t wo soft ware com panies recent ly creat ed a JV t o com bine t he field sales capabilit ies of bot h parent com panies. The JV’s product s would be sold t hrough t he vent ure it self, as well as t hrough bot h parent s. To rally disparat e salespeople around t his goal, t he sales and m arket ing launch t eam s focused on developing rules of engagem ent for all t hree sales groups ( product pricing and posit ioning, and t he m anagem ent of j oint account s) ; defining incent ives for all t he salespeople; and developing m echanism s for building and t ransferring product knowledge am ong t he sales forces—a crit ical issue, since t he JV would be developing and m anufact uring t he product s.

• • • Launching a world- class j oint vent ure is com plex and dem anding. Research shows t hat it can, in fact , be m ore resource int ensive t han post m erger int egrat ion or int ernal business st art - ups. Best - in- class com panies m anage t o do it well, som et im es over and over again. They execut e t he classic launch t asks ( organizat ion building and proj ect m anagem ent ) well. They also m aint ain an int ense focus on issues like st rat egy, deal econom ics, and governance t hat m ost com panies assum e have been discussed and resolved up front . When execut ives underst and t he unique dem ands of j oint vent ures, and invest in early planning, t he rewards can be enorm ous. As one m anager sum m ed it up: “ I f you get launch right , t he rest alm ost t akes care of it self.” Abou t t h e Re se a r ch Reprint Num ber R0402G

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Launching a World- Class Joint Vent ure JVs a n d a llia n ce s ca n de live r m or e sh a r e h olde r va lu e t h a n M & As ca n , bu t ge t t in g t h e m off t h e gr ou n d ca n t r ip you u p in u n pr e dict a ble w a ys.

by Ja m e s Ba m for d, D a vid Er n st , a n d D a vid G. Fu bin i Ja m e s Ba m for d is a consult ant in McKinsey & Com pany’s Washingt on, DC, office and a coaut hor of Mast ering Alliance St rat egy ( Wiley, 2003) . D a vid Er n st is a part ner in McKinsey’s Washingt on office and a leader of it s corporat e finance and st rat egy pract ice. He is a coaut hor of Collaborat ing t o Com pet e ( Wiley, 1993) . D a vid G. Fu bin i is a senior part ner in McKinsey’s Bost on office and leads it s global organizat ion and post m erger m anagem ent pract ices.

More t han 5,000 j oint vent ures, and m any m ore cont ract ual alliances, have been launched worldwide in t he past five years. The largest 100 JVs current ly represent m ore t han $350 billion in com bined annual revenues. So it ’s becom e clear t o m any com panies t hat alliances—bot h equit y JVs ( where t he part ners cont ribut e resources t o creat e a new com pany) and cont ract ual alliances ( where t he part ners collaborat e wit hout creat ing a new com pany) —can be ideal for m anaging risk in uncert ain m arket s, sharing t he cost of large- scale capit al invest m ent s, and inj ect ing newfound ent repreneurial spirit int o m at uring businesses. What ’s less clear t o t hese com panies is how t o overcom e t he m any challenges inherent in im plem ent ing j oint vent ures and alliances. I n 1991, we assessed t he perform ance of 49 j oint vent ures and alliances and found t hat only 51% were “ successful” —t hat is, each part ner had achieved ret urns great er t han t he cost of capit al. A decade lat er, in 2001, we assessed t he out com es of m ore t han 2,000 alliance announcem ent s—and t he success rat e st ill hovered at j ust 53% , despit e st udies t hat have highlight ed t he well- known reasons for JV failure: wrong st rat egies, incom pat ible part ners, inequit able or unrealist ic deals, and weak m anagem ent . Our m ost recent research, on which t his art icle is based, confirm s t hat t he challenge cont inues. Why is JV success so elusive? We believe it ’s because m any com panies overlook a crit ical piece of any alliance or JV effort —t he launch planning and execut ion. Alt hough m ost com panies are highly disciplined about int egrat ing acquisit ions, t hey rarely com m it sufficient resources t o launching sim ilarly sized j oint vent ures or alliances. Mist akes m ade during t he launch phase oft en erode up t o half t he pot ent ial value creat ion of a vent ure. The launch phase—beginning wit h t he signing of a m em orandum of underst anding and cont inuing t hrough t he first 100 days of operat ion—is usually not m anaged closely enough. This lack of at t ent ion can result in st rat egic conflict s bet ween t he allied com panies, governance gridlock, and m issed operat ional synergies. As one execut ive t old us, “ I f we could im prove our skills in one area, it would not be in deal m aking or ongoing m anagem ent but in t he launch phase. That ’s where t he rubber m eet s t he road.”

W e a k con t r ols ca n cost t h e pa r e n t com pa n ie s m on e y a n d ca n e x pose t h e m t o u n e x pe ct e d r isk s. JV Ch a lle n ge s When an organizat ion brings an acquired com pany int o t he fold, only one corporat ion exist s aft er t he deal, allowing for unilat eral decision m aking. By cont rast , aft er t wo com panies agree t o an alliance, t here are st ill m ult iple part ies ( t wo parent com panies, and, in m any cases, a new com pany) dealing wit h disparat e int erest s. This creat es a unique set of challenges. ( For an overview of t he challenges com panies face in launching JVs and alliances, see t he exhibit “ Clearing t he Hurdles.” )

The first challenge is building and m aint aining st rat egic alignm ent across t he separat e corporat e ent it ies, each of which has it s own goals, m arket pressures, and shareholders. I f t hese individual int erest s are not addressed during t he launch phase, conflict s will develop in crucial st rat egic areas. For inst ance, should t he JV’s product s or services t arget high- end or m ass- m arket consum ers? Should t he vent ure’s reinvest m ent goals em phasize revenue growt h or cash flow? Such conflict s can delay t he vent ure’s developm ent and can set t he st age for cost ly com prom ises down t he road. JV and alliance part ners t ry t o ant icipat e areas of pot ent ial m isalignm ent during t he negot iat ion phase—but m any conflict s of int erest surface only when t he part ners dig deep int o operat ional det ails and st art t o run t he business. The second challenge is t o creat e a governance syst em t hat prom ot es shared decisionm aking and oversight bet ween t he t wo parent com panies. Even t hough a j oint vent ure isn’t necessarily a m arriage for life, governance problem s can quickly t rigger t erm inat ion of t he deal. Weak cont rols can cost t he parent com panies m oney and can expose t hem t o unexpect ed risks. The secret t o effect ive governance is balance: providing enough

oversight t o prot ect im port ant asset s wit hout st ifling ent repreneurship. The t hird challenge t hat m ost j oint vent ures—and virt ually all nonequit y alliances—face is m anaging t he econom ic int erdependencies bet ween t he corporat e parent s and t he JV. To avoid duplicat ing cost s, m ost alliances are st ruct ured so t hat t he parent s cont inually provide financial capit al, hum an skills, m at erial resources, and m arket ing and ot her services. The parent com panies generally do out line t he broad ext ent of t he econom ic int erdependencies during t he negot iat ion phase—but t hey oft en don’t quant ify t he specific resources and finances t hat should be flowing t o and from each part ner unt il t he launch phase. Consider what St arbucks and PepsiCo did. I n 1994, t he com panies form ed t heir successful Nort h Am erican Coffee Part nership, a JV wit h m ore t han 90% of t he U.S. ready- t o- drink coffee business. The vent ure was set up wit h fewer t han a dozen full- t im e professionals, who have capit alized on t he parent com panies’ capabilit ies. St arbucks cont ribut es services such as coffee purchasing and roast ing, creat ion of beverage concent rat es, and qualit y assurance. PepsiCo provides dist ribut ion of t he JV product s t o grocery, convenience, and m ass- m arket st ores. The t wo com panies j oint ly m anage m arket ing and product developm ent . And t hey agreed during t he launch phase on specific ground rules for com pensat ing each parent fairly for it s cont ribut ions. The fourt h challenge is building t he organizat ion—a cohesive, high- perform ing JV or alliance—when m ost m anagers com e from , will want t o ret urn t o, and m ay even hold sim ult aneous posit ions in t he parent com panies. Many vent ure CEOs lam ent t hat alliances are t reat ed as dum ping grounds for underperform ing execut ives, rat her t han as m agnet s for high- pot ent ial m anagers. Most com panies t hat com plet e a m erger dedicat e a full- t im e t eam of t heir best leaders t o int egrat e t he t arget com pany. By cont rast , m any JV launch t eam s com prise a handful of part - t im e m anagers who are learning as t hey go. According t o a board m em ber of one successful m ult ibillion- dollar JV, “ We agreed t o virt ually every decision—picking t he I T syst em s, select ing st aff at every level—prior t o closing t he deal.” I f organizat ions underinvest in launch proj ect m anagem ent , t hey can j eopardize t he long- t erm healt h of t heir vent ures. Som e guidelines for launch planning and execut ion apply t o all JVs and alliances. The parent s should appoint a launch leader ( som et im es, but not always, t he JV CEO) and ident ify deal cham pions. The lat t er are t ypically senior execut ives from each parent com pany who are known and respect ed across t he organizat ion and have a st rong int erest in t he success of t he j oint vent ure. The parent s should also assem ble a dedicat ed and experienced t ransit ion t eam im m ediat ely upon signing t he m em orandum of underst anding. This t eam is responsible for get t ing t he business up and running. I t s t asks include developing a det ailed business plan, creat ing t he 100- day road m ap t hat orchest rat es t he act ivit ies of all work groups, and int ervening when t he launch process veers off t rack. Ot her requirem ent s of launch planning vary based on t he nat ure of t he vent ure. There are basically four t ypes of j oint vent ures: I n t he consolidat ion JV, t he value of t he alliance com es from a deep com binat ion of exist ing businesses. I n t he skills- t ransfer JV, t he value com es from t he t ransfer of som e crit ical skills from one part ner t o t he j oint vent ure—and som et im es t o t he ot her part ner. I n t he coordinat ion JV, t he value com es from leveraging t he com plem ent ary capabilit ies of bot h part ners. And in t he newbusiness JV, t he value com es from com bining exist ing capabilit ies, not businesses, t o creat e new growt h. The t ransit ion t eam should focus on m axim izing operat ional synergies in t he first t wo cases, and it should focus on underst anding new or expanded m arket opport unit ies in t he lat t er t wo. Once t he right launch t eam is in place and a t im e line has been set , t he real work begins. Successful JVs t ackle each of t he challenges out lined previously. They preem pt

failure by exposing inherent t ensions early in t he process. They m ove quickly from general road m aps t o det ailed, pract ical planning. They clarify st rat egy and governance, and t hey put in place t he right incent ives and processes t o secure t op t alent and crit ical resources from t he parent s. W h e n I s a JV W or t h t h e Tr ou ble ? Sidebar R0 4 0 2 G_ A (Locat ed at t he end of t his art icle)

Re solvin g St r a t e gic Con flict s Up Fr on t I t is com m on for com panies t o assum e t hat t he JV’s st rat egy has already been defined during deal m aking and t hat t he launch phase, t herefore, is sim ply t he t im e t o im plem ent a shared st rat egic vision. I n our experience, it is virt ually im possible t o get int o enough det ail during t he deal- m aking phase t o surface and resolve all t he st rat egic differences bet ween t he corporat e parent s. Consider t he following exam ples. Two large pharm aceut ical com panies form ed a vent ure t o expand t he m arket for a specific class of drugs. Each part ner cont ribut ed com plem ent ary pat ent - prot ect ed m edicines wit hin t he drug class and regional m arket ing st rengt hs t o t he JV. Yet once t he JV was up and running, one parent want ed t o prom ot e it s higher- m argin, lower- volum e product s, while t he ot her parent want ed t o expand it s m arket share for it s product s t hrough aggressive pricing. The com panies had failed t o address t his fundam ent al m isalignm ent early in t he process, and t he vent ure st ruggled t hrough t wo years of frict ion and weak sales before one part ner ult im at ely bought t he ot her out . I n anot her consolidat ion JV bet ween t wo global chem ical com panies, it was clear early on t hat one part ner was m ore willing t o invest in t he vent ure t han t he ot her one was. The com panies had different t arget s for ret urn on capit al and different percept ions of t he long- t erm st rat egic benefit s associat ed wit h t he vent ure. The CEO of t his j oint vent ure was caught in t he cross fire, lacking agreem ent from t he parent com panies about how and where t he JV would com pet e and what level of invest m ent was appropriat e. I n bot h cases, t he com panies had failed t o discover st rat egic conflict s early enough in t he launch process, when t he part ners m ight have been m ore am enable t o negot iat ion. To root out t hese conflict s, com panies should do t he following: D e ve lop a VC- qu a lit y bu sin e ss pla n . Prior t o closing t he deal, t he launch t eam , working wit h fut ure m anagem ent , needs t o develop a det ailed business plan. I t should m eet t he sam e st andards of rigor, det ail, and logic t hat a vent ure capit alist would dem and. To st art wit h, t he m anagem ent t eam ( t he CEO, CFO, and COO) should m eet offsit e for t wo or t hree days wit h m em bers of t he JV board and t he deal cham pions from bot h parent com panies. The group should define exact ly how and where t he JV will com pet e, proj ect how t he JV m ight expand beyond it s init ial scope, set financial t arget s, plan capit al expendit ures, and creat e a blueprint for t he organizat ion. This work is t hen t ranslat ed int o a det ailed business plan. I t all sounds st raight forward, but t hese m eet ings are oft en cont ent ious precisely because t hey reveal gaps in st rat egic alignm ent . The launch t eam , working wit h t he JV board, also needs t o draw up perform ance cont ract s t hat m ake key JV m anagers account able for t he success of t he vent ure. The part ners should clarify t he resources, personnel, and behaviors required for t he JV’s success so confusion about t hese m at t ers won’t ham st ring t he people charged wit h running t he vent ure day t o day. Consider t he following exam ple: Four elect ric power com panies int erviewed for a CEO t o run t heir proposed j oint vent ure. One candidat e was offered t he posit ion but t ook his t im e in deciding whet her t o accept . Before com m it t ing t o t he vent ure, he int erviewed each board m em ber t o underst and t he parent s’

obj ect ives, revised t he JV business plan, and proposed six specific obj ect ives for t he first nine m ont hs of his t enure as CEO. He t hen insist ed on t he collect ive endorsem ent of t he JV board as a precondit ion t o accept ing t he j ob, and he negot iat ed a com pensat ion agreem ent t hat linked his bonus t o t hese obj ect ives. He also negot iat ed an em ploym ent cont ract t hat em powered him t o m ake key operat ing decisions and choose execut ives. As he lat er explained, “ I n j oint vent ures, especially wit h m any part ners, t here is a t endency for t he part ners t o each m ake back- channel request s of t he CEO and t o t ry t o influence t he alliance t hrough people t hey put int o t he JV. I was not going t o put up wit h t hat . I needed all t he part ners t o agree on t he vent ure’s overall priorit ies and hold m e responsible for execut ing against t hem .”

Su cce ssfu l a llia n ce s pa y a lot of a t t e n t ion t o com m u n ica t ion —n ot j u st du r in g t h e la u n ch ph a se , bu t t h r ou gh ou t t h e life of t h e ve n t u r e . Act qu ick ly t o m a n a ge in e vit a ble se t ba ck s. A det ailed business plan and support ing perform ance cont ract s are im port ant , but t hey can’t prevent unpleasant surprises once t he vent ure is launched. For inst ance, St arbucks and PepsiCo were forced t o ret hink t he direct ion of t heir j oint vent ure aft er t he first product it int roduced, a carbonat ed coffee drink, received m ixed result s in early t est s wit h cust om ers. “ We had a great part ner, a leveraged organizat ional m odel, but no product ,” one St arbucks execut ive recalled. The part ners ult im at ely redefined t he JV’s product , drawing on t he lessons t hey learned from t hose init ial m arket t est s. Successful alliances pay a lot of at t ent ion t o com m unicat ion—not j ust during t he launch phase, but t hroughout t he life of t he vent ure. For inst ance, senior m anagem ent at TRW Koyo St eering Syst em s, a JV m anufact urer of aut om ot ive com ponent s, followed a policy of “ equal com m unicat ions” wit h each of t he parent com panies ( TRW Aut om ot ive and Koyo Seiko) . When Arvind Korde, CEO of t he JV, needed t o com m unicat e fact s or issues t o one parent , he always copied t he ot her parent , t hereby prom ot ing openness and t rust . And Korde and his t eam were quick t o react t o problem s. One year int o t he vent ure, t he JV was on t he verge of securing it s first cust om er, which exposed t he parent com panies’ difference of opinion around pricing. TRW, which was focused on profit abilit y m ore t han growt h, argued for higher m argins and prices. Koyo Seiko sought t o build m arket share and m axim ize t he scale of it s global relat ionship wit h key Asian cust om ers. “ This was a real t urning point for t he JV,” Korde recalls. “ Despit e our early success, I wasn’t sure we would m ake it out of t here alive.” Korde called an off- sit e m eet ing of his m anagem ent t eam in which t hey experienced what he calls a “ com ing t o Jesus” m om ent . I n t hat session, t he m anagem ent t eam craft ed a new vision for t he JV and a const ruct ive approach for resolving t he conflict . Ach ie vin g Loose - Tigh t Gove r n a n ce Besides m anaging t he parent s’ goals and expect at ions, t he launch t eam needs t o focus on building an effect ive governance syst em for t he JV or alliance. An appropriat e st ruct ure should allow t he JV m anagem ent t eam t o m ake t im ely decisions while providing t he parent s wit h sufficient oversight t o prot ect t heir asset s. During t he deal phase, m ost com panies focus on t he com posit ion of t he board, t he parent com panies’ vet o right s, and t he condit ions for t erm inat ion of t he vent ure. But effect ive ongoing governance requires m ore t han cont ract ual agreem ent s. Wit hout t he right launch planning, t he t ypical JV cont ract is a recipe for disast er because every m aj or decision is subj ect t o board approval, which requires t he agreem ent of bot h part ners. The default process for resolving disput es is oft en, “ Talk som e m ore.” This usually result s in st rat egic deadlock bet ween t he parent com panies, followed by erosion of t he

synergy creat ed by t he deal and, oft en, t erm inat ion of t he vent ure. The launch phase is t he t im e t o go beyond t he lines and boxes and address how decisions will be m ade and disput es resolved. To find t he right balance bet ween giving t he JV enough aut onom y and grant ing t he parent s enough cont rol, com panies should do t he following: Apply r igor ou s r isk m a n a ge m e n t a n d pe r for m a n ce t r a ck in g. Som e com panies grant t he vent ure m anagem ent t eam so m uch aut onom y t hat it borders on negligence. This was t he case in a billion- dollar indust rial JV t hat com bined sim ilar business unit s t o increase scale and reduce operat ing cost s. During t he launch phase, t he part ners failed t o creat e adequat e oversight m echanism s. Three years int o t he alliance, t he U.S. part ner was dism ayed t o discover t hat t he JV had incurred a $400 m illion debt wit hout ever having gone t hrough eit her parent ’s capit al- budget ing process. I n a second JV at t he sam e com pany, one parent found t hat t he vent ure was delivering an annual 3% ret urn on invest ed capit al, a figure well below it s t arget ed rat e of 14% . The JV was not part of t he st andard corporat e- planning and st rat egy review forum s and was never subj ect t o t he sam e level of scrut iny as t he wholly owned businesses. I n t he wake of Sarbanes- Oxley, com panies have increased t heir at t ent ion t o t ransparency, risk m anagem ent , disclosure, and perform ance m anagem ent in t heir wholly owned businesses. But our research shows t hat com panies don’t evaluat e t he perform ance of t heir JVs as diligent ly as t hey do t heir wholly owned businesses wit h equivalent asset s. That ’s a m ist ake; parent s need t o t reat t heir vent ures and t heir wholly owned unit s sim ilarly. This m eans, for large j oint vent ures, put t ing in place an audit process like t he ones used at t he best public com panies, including an act ive audit com m it t ee and ext ernal audit ors focused solely on t he vent ure’s econom ics. I t m eans building a st rong finance organizat ion inside t he JV t o m ake sure t hat t he board and vent ure m anagem ent have t he crit ical inform at ion t hey need t o do t heir j obs. And som et im es it m eans including t he JV in at least one parent ’s annual or sem iannual corporat e review, t hereby ensuring t ransparency. St r e a m lin e de cision m a k in g. Of course, som e corporat e parent s go t oo far and im plem ent governance syst em s t hat st ifle ent repreneurship and creat e dysfunct ional bureaucracy. During t he launch of a $4 billion nat ural resource JV, t he parent com panies creat ed a large board wit h subcom m it t ees int ended t o be heavily involved in—but not account able for—t he day- t o- day operat ions of t he vent ure. All m aj or decisions required m ult iple subcom m it t ee and board m eet ings, int erspersed wit h addit ional fact - finding effort s by t he JV m anagem ent t eam . Since each subcom m it t ee m et only four t im es per year, t he t im e it t ook for t he JV t o m ake a decision becam e a dist inct com pet it ive disadvant age. As a result , profit abilit y declined, frict ions am ong t he parent com panies and t he vent ure’s m anagem ent escalat ed, and t he parent s had t o com plet ely rest ruct ure t he JV’s governance approach. Com panies can avoid t his governance t rap by im plem ent ing a loose- t ight governance m odel. ( See t he exhibit “ The Loose- Tight Approach.” ) I n t his approach, t he part ners ident ify t he vent ure’s m ost im port ant governance processes ( for inst ance, set t ing st rat egy, allocat ing resources, or det erm ining pricing) and t hen designat e t he appropriat e degree of parent al involvem ent for each. As a general rule, parent com panies operat ing t hrough a JV board should play an act ive role in t he t hree governance areas crit ical t o driving financial perform ance and prot ect ing shareholder int erest : capit al allocat ion, risk m anagem ent , and perform ance m anagem ent . The parent s should generally lim it t heir int ervent ions in m ore operat ional processes—such as st affing, pricing, and product developm ent —where t he JV needs independence t o ensure com pet it iveness and m arket responsiveness.

Once a high- level governance road m ap is in place, t he launch t eam needs t o t ranslat e it int o pract ical decision- m aking processes t hat are consist ent wit h t he parent com panies’ form al and inform al governance and influence st ruct ures. There are m any ways t o do t his, but one effect ive approach is t o m ap out each governance process, showing how inform at ion and decisions flow t hrough t he JV and parent com panies. For exam ple, a request for capit al could originat e wit hin t he JV’s m anufact uring organizat ion and be form ally subm it t ed t o t he board for approval. But t he way t he process m ight work in pract ice is for board m em bers t o survey t he CFOs at each parent com pany t o m ake cert ain t hat t he proposal m eet s t heir individual capit al- expendit ure requirem ent s and t hen convene an inform al discussion wit h one or bot h parent CEOs t o m ake sure t hey’re aligned. By m apping out bot h form al and inform al decision- m aking processes, you can reduce t he t im e and effort it will t ake t o approve m aj or init iat ives.

Th e la u n ch t e a m n e e ds t o ch a lle n ge —a n d lim it w h e r e ve r possible —t h e in t e r de pe n de n cie s be t w e e n t h e pa r e n t s a n d t h e JV. M a n a gin g t h e I n t e r de pe n de n cie s For pract ical reasons, m ost JVs depend on t heir parent s t o provide ongoing access t o capit al, people, int ellect ual propert y, raw m at erials, and cust om ers. Bot h t angible and int angible cont ribut ions from t he parent s det erm ine t heir act ual ret urn on invest m ent . But m uch dam age can be done if t he det ails of t hose cont ribut ions aren’t worked out during launch. For inst ance, if t ransfer prices ( t he int ernal fees t hat one group charges

anot her for a resource or a service) are not set appropriat ely, Parent A, who provides a resource t o t he j oint vent ure, has an opport unit y t o supplem ent it s ret urns “ off t he books” of t he JV. When Part ner B sees t his happening, it uses t he inform at ion t o j ust ify holding back it s com m it t ed cont ribut ions, creat ing a loop of part ner suspicion and dist rust . Winning JVs st art t o address econom ic int erdependencies as soon as an agreem ent looks likely in order t o avoid launch delays and t he loss of m illions of dollars in pot ent ial synergies. They m ake sure t hat t he launch t eam cont ains appropriat e expert ise and aut horit y t o resolve im port ant econom ic issues. Specifically, successful vent ures do t he following: D e dica t e r e sou r ce s t o r e solve in t e r de pe n de n cie s u p fr on t . The process of sort ing out who will provide what t o t he j oint vent ure is t im e- consum ing for everyone involved. I n one high- t ech consolidat ion JV, t he part ners spent 10,000 m an- hours over four m ont hs det erm ining precisely which services and resources each parent would provide t he JV and const ruct ing service- level agreem ent s t hat specified t ransfer pricing, access right s, and ot her crit ical t erm s of t he deal. The work can’t be post poned j ust because it is cont ent ious and resource int ensive. According t o one JV execut ive we spoke wit h, “ Shared services are oft en a crit ical part of det erm ining t ot al vent ure econom ics and how t he value is dist ribut ed bet ween t he part ners.” I n t he high- t ech consolidat ion JV, t he part ners form ed a sm all t ransit ion services t eam t hat ident ified t he econom ic int erdependencies across t he 20 launch t eam s. This group est ablished crit eria for det erm ining which services t he JV would purchase from t he parent s. I t t hen docum ent ed t he shared resources and services and collaborat ed wit h t he purchasing and finance t eam s t o price each shared service. Ch a lle n ge a n d lim it in t e r de pe n de n cie s. One of t he m ost valuable t asks of t he launch t eam is t o challenge—and lim it wherever possible—t he num ber of int erdependencies bet ween t he parent s and t he JV. Working t eam s in t he high- t ech consolidat ion JV init ially generat ed a list of m ore t han 1,000 dependencies upon one parent —t hat parent was slat ed t o provide adm inist rat ive services, com ponent purchases, and shared research facilit ies, am ong a slew of ot her resources. Recognizing t hat a heavy load could creat e unm anageable com plexit y down t he road for t he parent com pany, t he launch leaders challenged virt ually every line it em on t he list . Event ually, t hey whit t led it down t o j ust 300 services t hat t he parent would provide t he vent ure in t he first year and less t han t en services in t he second year and beyond. Once a list of shared services is finalized, t he launch t eam m ust develop t ransparent and honest m et hodologies for calculat ing t ransfer pricing. This is crit ical for m aint aining t rust down t he road. A 50- 50 t elecom j oint vent ure depended on one parent for 90 different shared services. Two years int o t he JV, a st rat egic review revealed t hat t his part ner was allocat ing it s corporat e overhead and ot her nonshared cost s t o t he JV, t hereby creat ing significant profit s for it self while ham pering t he vent ure’s abilit y t o set com pet it ive prices and m ake a profit . The part ners did renegot iat e t ransfer pricing, but t he dist rust t hat was creat ed cont inues t o plague t he vent ure.

Pa r e n t com pa n ie s n e e d t o m ove ou t side t h e ir com for t zon e s w h e n de visin g a n or ga n iza t ion a l st r u ct u r e for t h e ir JVs. To avoid t his sit uat ion, t he launch t eam should agree at t he out set on t he m et hods for allocat ing cost s, specifying which operat ing cost s should be included ( for inst ance, cust om er billing or m aint enance) and t he basis upon which t o allocat e each shared cost ( for inst ance, per subscriber, per region, per dollar of revenue) . The launch t eam should

also est ablish a way t o benchm ark t he parent s’ int ernal pricing and qualit y of service against t hose of out side vendors and suppliers. And t he launch t eam should specify a pat h for resolving cont ent ious econom ic issues. Finally, t he JV should be linked t o t he corporat e review and planning cycle of at least one of t he parent s, reducing t he odds t hat im port ant econom ic issues will fall bet ween t he cracks and require 11t h- hour int ervent ion. Bu ildin g t h e Or ga n iza t ion Parent com panies m ay need t o m ove out side t heir com fort zones when devising an organizat ional st ruct ure for t heir JVs, adopt ing a st affing m odel, and designing incent ive plans. There is a t endency in m any JVs t hat com bine exist ing organizat ions t o select a fam iliar organizat ional m odel—eit her a regional one, if t he parent s are cont ribut ing asset s from different regions, or a product - division st ruct ure, if each parent is cont ribut ing different product s. This sim ple approach allows each parent t o prot ect it s t urf and m inim ize organizat ional disrupt ion—but it also dilut es t he pot ent ial effect iveness of t he new organizat ion. I f t he parent s t ry t o preserve t he st at us quo, t hey risk reducing t he synergies bet ween t hem . And let ’s not forget t hat com panies are oft en at t ract ed t o t he JV st ruct ure precisely because of t heir need for a new m odel and m ind- set t o com pet e in a new business. The creat ion of a j oint vent ure is an opport unit y t o unfreeze t he organizat ion. Beyond t he issue of form al st ruct ure, a successful JV launch requires t aking t he following approaches t o st affing and incent ives. Ch oose you r or ga n iza t ion a l m ode l ca r e fu lly. There are t hree basic organizat ional m odels for j oint vent ures: independent , dependent , and int erdependent . The independent m odel, pursued by com panies such as Carlson Wagonlit Travel and Marat hon Ashland Pet roleum , let s com panies creat e new and oft en m ore ent repreneurial cult ures. The independent JV t ypically has an ent irely separat e report ing st ruct ure from t he parent s, it s own facilit ies, and t he freedom t o source from ext ernal as well as int ernal suppliers. This m odel allows vent ure m anagem ent t o have great er focus and unit y of purpose, but it also requires t he vent ure t o est ablish and m aint ain separat e HR syst em s. This can m ake it harder t o recruit pot ent ial m anagers who would prefer t he wider career opport unit ies offered by t he parent com panies. Som e com panies go t o t he opposit e ext rem e and creat e dependent JVs. This t ype of JV operat es as a business unit of one parent and uses t hat parent com pany’s incent ive syst em s and HR policies. BP and Mobil used t his approach when creat ing t wo JVs in t heir downst ream European oil businesses: The refining vent ure operat ed as a BP business, while t he lubricant s vent ure operat ed as a Mobil business. The advant ages here are opposit e t hose of t he independent JV. There is no need t o creat e a separat e HR syst em for t he vent ure, and t he m anaging parent ensures t hat t he vent ure’s high perform ers get equal access t o prom ot ion opport unit ies wit hin t he wholly owned businesses. But t he dependent m odel lim it s t he JV’s abilit y t o share people and skills wit h t he nonoperat ing part ner and gives t hat part ner less influence in t he JV. The t hird m odel, t he int erdependent JV, is t ough t o execut e but is by far t he m ost com m only im plem ent ed st ruct ure. Mem bers of t he m anagem ent t eam m aint ain links t o t heir original corporat e parent . They rem ain on t he sam e com pensat ion plans, ant icipat e fut ure career m oves back t o t he parent , and som et im es have dot t ed- line- report ing relat ionships t o an execut ive in t heir parent organizat ion. The int erdependent m odel prot ect s career pat hs and offers m axim um flexibilit y, but it can be com plex t o m anage and can perpet uat e divided loyalt ies. I n one billion- dollar global m edia JV, t he m anagem ent t eam rem ained cult urally divided

int o U.S. and Germ an cam ps t wo years aft er t he vent ure’s form at ion. This int erdependent JV was operat ing in a m at ure sect or, and t he part ners had agreed t o rot at e t he senior posit ions bet ween t hem every t hree years—which creat ed a quest ionable career pat h for t hose deciding t o st ay at t he JV. To m ake m at t ers worse, t he vent ure was funct ioning at a significant t alent disadvant age. Those m anagers who perform ed well were repat riat ed back t o t he parent s, while t hose wit h m ediocre perform ance rem ained at t he vent ure. This JV was furt her bedeviled by unclear report ing relat ionships. For exam ple, a senior- ranking Germ an m anager in t he JV rout inely com m unicat ed privat ely wit h a senior board m em ber from t he Germ an parent ( who was his form er boss) . As a result , t he JV CEO had t o t reat his second in com m and as a board liaison rat her t han a direct report , m aking it difficult t o hold his feet t o t he fire on perform ance issues. Unfort unat ely, t his is not an isolat ed case. Many JVs are held back because t hey offer t he wrong incent ives and are unclear about account abilit y. And t he problem s are not lim it ed t o t he senior m anagem ent t eam ; t hey spread t hroughout t he vent ure, even back t o t he support st affers who rem ain wit h t he parent organizat ions. The disadvant ages of t he int erdependent m odel can be m it igat ed if t he JV CEO is em powered t o writ e perform ance reviews and t o m ake all hiring and firing decisions; if all part ies agree up front on perform ance crit eria; if a m inim um t our of dut y is est ablished wit hin t he vent ure, t ypically t hree years; and if t he parent s aren’t allowed t o poach from t he vent ure unt il t hat t our of dut y is up. M a k e pe ople w a n t t o j oin t h e t e a m . Regardless of t he organizat ional m odel, t he launch t eam m ust creat e a com pelling value proposit ion t hat m akes good people want t o j oin t he t eam . For st art - ups, t he excit em ent of building som et hing from t he ground up is oft en sufficient t o at t ract m ot ivat ed players. I n difficult t urnaround sit uat ions, t he com pensat ion upside m ight be essent ial ( lower base pay but higher bonus or st ock opt ions t han in t he parent com panies) . Personal considerat ions cannot be underest im at ed. Everyone want s t o work for a m ot ivat ional leader, and select ing a CEO who inspires loyalt y is t he best way t o build a st rong new business. This is especially im port ant in int erdependent JVs, where personal loyalt y t o t he JV CEO can help unit e t he m anagem ent t eam and overcom e t he em ployees’ nat ural affiliat ions t o one parent or t he ot her. The physical proxim it y of key m em bers of t he JV m anagem ent t eam is also im port ant for accelerat ing t eam building. The value in creat ing a st rong m anagem ent t eam and a m ot ivat ed st aff is obvious. I t ’s equally im port ant t o get t he st aff inside t he parent com panies on your side. Two groups are wort h special at t ent ion. The first is t he handful of parent com pany m anagers who possess dist inct ive skills t hat need t o be t ransferred t o t he j oint vent ure, such as R&D, product m arket ing, or m anufact uring process design. The second is t he broader set of em ployees perform ing day- t o- day work for t he JV, who cont inue t o reside in a parent com pany. Obt a in com m it m e n t s fr om pa r e n t com pa n y st a ff. Top- perform ing com panies recognize t hat skills are t ransferred by people, not by processes or cont ract s. Failure t o acknowledge t his can be cost ly. For inst ance, a global consum er goods com pany held a 50% st ake in a part ner in a developing count ry; t he result ing JV was looking t o t he global part ner t o t ransfer som e of it s operat ing and m arket ing expert ise int o t he developing- count ry part ner’s underperform ing beverage business. The JV request ed from t he global part ner t wo or t hree people highly skilled in em erging- m arket branding and m arket ing. The parent offered very lim it ed support from it s developing- count ry gurus; inst ead, it sent a m arket ing execut ive who had spent m ost of his career in Nort h

Am erica. Lacking access t o crucial skills, t he JV couldn’t prop up t he declining brand and failed t o capt ure half of t he expect ed synergies, or around $450 m illion. Get t ing sufficient t im e and at t ent ion from a few t opflight people is oft en crit ical t o a JV’s success. Managers at t he parent com panies oft en assum e t hat t hese individuals will cont ribut e t heir m agic t o t he vent ure regardless of form al allocat ions or incent ives. To be cert ain t hat t hese valuable players do inj ect t heir crucial know- how, t he JV launch t eam needs t o ident ify t hem right away and creat e m echanism s t o involve t hem heavily in t he first six t o 18 m ont hs of operat ions. For exam ple, t he CEO of a successful U.S.–Japanese JV spent t wo weeks during t he first m ont h of t he vent ure in Japan finding local m anagers who t ruly underst ood what it would t ake t o build a world- class m anufact uring line in t he Unit ed St at es. He t hen persuaded t he m anagers t o com e t o t he St at es for up t o a year, where t hey could have a direct , im m ediat e im pact on t he layout and operat ions of t he new plant . Once t he skill holders are ident ified, successful com panies creat e form al cont ract s for t hem t hat define t heir levels of com m it m ent t o t he JV ( usually 50% or m ore of t heir t im e t o ensure focus and account abilit y) and t he m et rics by which t heir perform ance will be evaluat ed and rewarded. The launch t eam also needs t o creat e incent ives for parent com pany em ployees who spend less t han half t heir t im e on t he JV—for inst ance, sales reps, adm inist rat ive st aff, and ot hers—so t hat t hey are m ot ivat ed t o provide st rong support . For exam ple, t wo soft ware com panies recent ly creat ed a JV t o com bine t he field sales capabilit ies of bot h parent com panies. The JV’s product s would be sold t hrough t he vent ure it self, as well as t hrough bot h parent s. To rally disparat e salespeople around t his goal, t he sales and m arket ing launch t eam s focused on developing rules of engagem ent for all t hree sales groups ( product pricing and posit ioning, and t he m anagem ent of j oint account s) ; defining incent ives for all t he salespeople; and developing m echanism s for building and t ransferring product knowledge am ong t he sales forces—a crit ical issue, since t he JV would be developing and m anufact uring t he product s.

• • • Launching a world- class j oint vent ure is com plex and dem anding. Research shows t hat it can, in fact , be m ore resource int ensive t han post m erger int egrat ion or int ernal business st art - ups. Best - in- class com panies m anage t o do it well, som et im es over and over again. They execut e t he classic launch t asks ( organizat ion building and proj ect m anagem ent ) well. They also m aint ain an int ense focus on issues like st rat egy, deal econom ics, and governance t hat m ost com panies assum e have been discussed and resolved up front . When execut ives underst and t he unique dem ands of j oint vent ures, and invest in early planning, t he rewards can be enorm ous. As one m anager sum m ed it up: “ I f you get launch right , t he rest alm ost t akes care of it self.” Abou t t h e Re se a r ch Sidebar R0 4 0 2 G_ B (Locat ed at t he end of t his art icle)

Reprint Num ber R0402G

W h e n I s a JV W or t h t h e Tr ou ble ?

Sidebar R0 4 0 2 G_ A

Som e m anagers avoid or overlook t he JV opt ion because t hey aren’t sure at what point t he advant ages out weigh t he com plexit ies. Yet som e com panies have developed a core com pet ency in alliances and pursue JVs over and over again wit h good result s. Judicious use of JVs st art s wit h a careful evaluat ion of t he business opport unit y at hand. First , consider your dedicat ed int ernal resources. I f you don’t have t he required skills and experience in house—and t here is not enough t im e t o develop t hese capabilit ies from scrat ch—an ext ernal vehicle ( a JV, a cont ract ual alliance, or m ergers and acquisit ions) m ight be a good opt ion. I n general, t he furt her rem oved a new business opport unit y is from a com pany’s core com pet encies and exist ing businesses, t he m ore likely t he com pany is t o consider an alliance inst ead of an acquisit ion or organic growt h. Alliances t end t o have higher success rat es t han M&As when t he obj ect ive is t o ent er a new region, product area, or cust om er segm ent or t o develop ent irely new capabilit ies. Alliances have lower success rat es when cont rol is im port ant —for inst ance, when t he goal is consolidat ion of operat ions or im proved perform ance. Many com panies assum e t he fast est way t o gain scale wit h new product s or capabilit ies is t o buy or m erge wit h anot her com pany. But anyone who’s gone down t he M&A evaluat ion pat h knows t he barriers and risks. Mergers and acquisit ions oft en require t hat t he buyer pay a prem ium of 20% t o 50% over t he current st ock price of t he t arget ed com pany. But experience and research show t hat m ost acquirers never recover t hat prem ium . By cont rast , a j oint vent ure t ypically involves no prem ium . An unwilling M&A t arget or part ner can also be a barrier. I f t wo com panies are com parable in size, and one part y is unwilling ( or unable, perhaps by local law) t o part icipat e in a m erger, a j oint vent ure m ay be an at t ract ive alt ernat ive for capt uring specific capabilit ies from anot her com pany. And let ’s not forget t hat int egrat ing an acquired com pany t akes lot s of t im e and resources. I t can t ie up m anagers for years while t he core business goes unat t ended. The process is part icularly risky when a com pany has no experience—or a poor t rack record—wit h int egrat ing acquisit ions. Again, a j oint vent ure or cont ract ual alliance, which can allow a m ore t ailored deal, m ay be a safer alt ernat ive. Equit y JVs m ake t he m ost sense when value will be gained by int egrat ing asset s or capabilit ies, or when t he size of t he prize warrant s t he effort of set t ing up a separat e com pany wit h it s own cult ure and P&L. Cont ract ual alliances can be a good alt ernat ive when t he relevant asset s or capabilit ies cannot be carved out of t he parent com panies ( for inst ance, a sales force or a brand) and when value creat ion is driven by im proved coordinat ion and learning, not resource int egrat ion.

Abou t t h e Re se a r ch

Sidebar R0 4 0 2 G_ B

To bet t er underst and t he challenges of JV launch, we and our colleagues in McKinsey’s post m erger m anagem ent and alliances pract ices int erviewed 50 execut ives who were direct ly involved in t he launch of 25 j oint vent ures across t he globe. ( The int erviews t ook place in 2002 and 2003.) The vent ures represent ed asset s or revenues in excess of $300 m illion, involved som e degree of operat ional int egrat ion, and covered a range of indust ries: aut om ot ive, consum er product s, elect ronics, energy, financial services, pharm aceut icals, and t elecom m unicat ions, am ong ot hers. The com panies were based in t he Unit ed St at es, Europe, Asia, and em erging m arket s. Most of t hese JVs were t wo t o five years of age—old enough t o have a t rack record of perform ance but young enough for execut ives t o rem em ber launch det ails. Over t he past decade, we’ve int erviewed m ore t han 500 execut ives about t heir alliances and have advised m ore t han 1,000 com panies on alliance st rat egy, st ruct uring, launch planning, and rest ruct uring. We also have conduct ed several st udies ( in 1991 and 2001) of alliance success rat es and t he fact ors associat ed wit h success and failure. Our definit ion of an alliance covers a broad range of collaborat ions involving shared risk, rewards, and cont rol. These include equit y j oint vent ures where a separat e com pany is creat ed; cont ract ual alliances ( wit h or wit hout equit y st akes) , such as exclusive m arket ing or dist ribut ion arrangem ent s; and j oint m arket ing agreem ent s. While t his art icle focuses prim arily on j oint vent ures, m any of t he findings apply equally t o deep cont ract ual alliances.

Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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View Back Issues | February 2004 > Launching a World- Class Joint Vent ure > When I s a JV Wort h t he Trouble?

La u n ch in g a W or ld- Cla ss Join t Ve n t u r e

When I s a JV Wort h t he Trouble? Som e m anagers avoid or overlook t he JV opt ion because t hey aren’t sure at what point t he advant ages out weigh t he com plexit ies. Yet som e com panies have developed a core com pet ency in alliances and pursue JVs over and over again wit h good result s. Judicious use of JVs st art s wit h a careful evaluat ion of t he business opport unit y at hand. First , consider your dedicat ed int ernal resources. I f you don’t have t he required skills and experience in house—and t here is not enough t im e t o develop t hese capabilit ies from scrat ch—an ext ernal vehicle ( a JV, a cont ract ual alliance, or m ergers and acquisit ions) m ight be a good opt ion. I n general, t he furt her rem oved a new business opport unit y is from a com pany’s core com pet encies and exist ing businesses, t he m ore likely t he com pany is t o consider an alliance inst ead of an acquisit ion or organic growt h. Alliances t end t o have higher success rat es t han M&As when t he obj ect ive is t o ent er a new region, product area, or cust om er segm ent or t o develop ent irely new capabilit ies. Alliances have lower success rat es when cont rol is im port ant —for inst ance, when t he goal is consolidat ion of operat ions or im proved perform ance. Many com panies assum e t he fast est way t o gain scale wit h new product s or capabilit ies is t o buy or m erge wit h anot her com pany. But anyone who’s gone down t he M&A evaluat ion pat h knows t he barriers and risks. Mergers and acquisit ions oft en require t hat t he buyer pay a prem ium of 20% t o 50% over t he current st ock price of t he t arget ed com pany. But experience and research show t hat m ost acquirers never recover t hat prem ium . By cont rast , a j oint vent ure t ypically involves no prem ium . An unwilling M&A t arget or part ner can also be a barrier. I f t wo com panies are com parable in size, and one part y is unwilling ( or unable, perhaps by local law) t o part icipat e in a m erger, a j oint vent ure m ay be an at t ract ive alt ernat ive for capt uring specific capabilit ies from anot her com pany. And let ’s not forget t hat int egrat ing an acquired com pany t akes lot s of t im e and resources. I t can t ie up m anagers for years while t he core business goes unat t ended. The process is part icularly risky when a com pany has no experience—or a poor t rack record—wit h int egrat ing acquisit ions. Again, a j oint vent ure or cont ract ual alliance, which can allow a m ore t ailored deal, m ay be a safer alt ernat ive. Equit y JVs m ake t he m ost sense when value will be gained by int egrat ing asset s or capabilit ies, or when t he size of t he prize warrant s t he effort of set t ing up a separat e com pany wit h it s own cult ure and P&L. Cont ract ual alliances can be a good alt ernat ive when t he relevant asset s or capabilit ies cannot be carved out of t he parent com panies ( for inst ance, a sales force or a brand) and when value creat ion is driven by im proved coordinat ion and learning, not resource int egrat ion.

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La u n ch in g a W or ld- Cla ss Join t Ve n t u r e

About t he Research To bet t er underst and t he challenges of JV launch, we and our colleagues in McKinsey’s post m erger m anagem ent and alliances pract ices int erviewed 50 execut ives who were direct ly involved in t he launch of 25 j oint vent ures across t he globe. ( The int erviews t ook place in 2002 and 2003.) The vent ures represent ed asset s or revenues in excess of $300 m illion, involved som e degree of operat ional int egrat ion, and covered a range of indust ries: aut om ot ive, consum er product s, elect ronics, energy, financial services, pharm aceut icals, and t elecom m unicat ions, am ong ot hers. The com panies were based in t he Unit ed St at es, Europe, Asia, and em erging m arket s. Most of t hese JVs were t wo t o five years of age—old enough t o have a t rack record of perform ance but young enough for execut ives t o rem em ber launch det ails. Over t he past decade, we’ve int erviewed m ore t han 500 execut ives about t heir alliances and have advised m ore t han 1,000 com panies on alliance st rat egy, st ruct uring, launch planning, and rest ruct uring. We also have conduct ed several st udies ( in 1991 and 2001) of alliance success rat es and t he fact ors associat ed wit h success and failure. Our definit ion of an alliance covers a broad range of collaborat ions involving shared risk, rewards, and cont rol. These include equit y j oint vent ures where a separat e com pany is creat ed; cont ract ual alliances ( wit h or wit hout equit y st akes) , such as exclusive m arket ing or dist ribut ion arrangem ent s; and j oint m arket ing agreem ent s. While t his art icle focuses prim arily on j oint vent ures, m any of t he findings apply equally t o deep cont ract ual alliances.

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View Back Issues | February 2004 > Success That Last s

> | Pu r ch a se Re pr in t > | Pr in t a ble Ve r sion

Success That Last s

> | E- m a il a Colle a gu e > | Ex e cu t ive Su m m a r y

Sin gle - m in de d a m bit ion is a gr e a t w a y t o a ch ie ve som e goa ls—bu t is t h a t r e a lly su cce ss? N e w r e se a r ch r e ve a ls su r pr isin gly pr a ct ica l w a ys t o fin d pr ofe ssion a l a n d pe r son a l fu lfillm e n t .

Th e Ka le idoscope St r a t e gy for Bu sin e sse s

by La u r a N a sh a n d H ow a r d St e ve n son

A 5 5 - ye a r - old, h igh ly su cce ssfu l ve n t u r e ca pit a list is t hinking about his next invest m ent . He’s not cert ain he has t he energy t o st art anot her seven- year round of int ense financing and consult ing act ivit y. “ I j ust can’t im agine enj oying t hat pace again, and frankly, it ’s t im e I paid at t ent ion t o m y fam ily. But I ’d really feel a loser if I didn’t play t he gam e as hard as everyone else. I guess I should ret ire.” Th e pr e side n t of a $ 1 billion division of a consum er product s com pany discovers t hat m anufact uring and dist ribut ion bugs will delay t he scheduled rollout of a new product line. Ret ailers are eager for t he product , pressures on share price are int ense, and t he president ’s bonus is t ied t o t he rollout ’s success. I f he goes ahead, t he product is sure t o be on t op—but only t em porarily. The cost s down t he road from disappoint ed consum ers and t im e invest ed in having t o fix m ist akes will clearly hurt t he bot t om line. What is success under t hese circum st ances? A fa st - t r a ck 3 2 - ye a r - old soft w a r e e n gin e e r wit h a second degree in sacred m usic feels t hat som et hing is m issing in her career st rat egy. She want s t he lifest yle of a wellpaid m anager, but soft ware doesn’t feel as socially significant as playing t he organ for a congregat ion. And she som eday want s a house and a fam ily. “ Why can’t I find t he career pat h t hat will get m e all of t hese t hings?” she wonders. “ Are t hey really so unreasonable?”

La u r a N a sh ( ln a sh @j u st e n ou gh su cce ss.com ) is a senior research fellow and H ow a r d St e ve n son ( h st e ve n son @j u st e n ou gh su cce ss. com ) is t he Sarofim - Rock Professor of Business Adm inist rat ion at Harvard Business School in Bost on. They are t he aut hors of Just Enough: Tools for Creat ing Success in Your Work and Life ( John Wiley & Sons, 2004) , from which t his art icle is adapt ed.

Different as t hese exam ples m ay be, t hese individuals have a sim ilar problem : They all need a com prehensive fram ework for t hinking about success. And t hey’re far from alone. Survey aft er survey shows a high degree of j ob dissat isfact ion and burnout am ong t he general working populat ion, even am ong t hose wit h plent y of opt ions. I n t he collect ive soul- searching prom pt ed by Sept em ber 11, 2001, m any high achievers revisit ed t heir not ion of success. The wave of corporat e scandals t hat followed soon aft er only m ade t he quest ions m ore acut e. Even t he m ost dedicat ed em ployees wondered aloud whet her t hey would ever recom m end t heir own careers and com panies t o t heir children. Pursuing success is like shoot ing at a series of m oving t arget s. Every t im e you hit one, five m ore pop up from anot her direct ion. Just when we’ve achieved one goal, we feel pressure t o work harder t o earn m ore m oney, exert m ore effort , possess m ore t oys. St andards and exam ples of “ m aking it ” const ant ly shift , while a fast - paced world of t echnological and social change const ant ly poses new obst acles t o overcom e. During t he past decade, t radit ional career pat hs suddenly becam e point less. Professionals found t hem selves overworked and undersat isfied in t he boom , t hen overworked and com pet it ively vulnerable in t he bust . And far t oo m any businesses discovered t hey were using t he wrong m easures t o gauge success, winning big in t he 1990s only t o lose big for t heir shareholders and em ployees at t he t urn of t he m illennium . The clim b t o success can feel like an Escher drawing of a st aircase t hat goes nowhere. I n t he face of such inst abilit y, m any people assum e success requires a winner- t akes- all approach. They believe t hat success depends on put t ing all your energy int o achieving one goal, be it a single- m inded focus on your j ob or a com m it m ent t o being t he best soccer m om in your com m unit y. But no m at t er how noble, one goal can’t sat isfy all of a person’s com plex needs and desires, as t he exam ples at t he beginning of t he art icle dem onst rat e. The sam e holds t rue for t he goals of a business. Fort unat ely, success doesn’t have t o be seen as a one- dim ensional t ug- of- war bet ween achievem ent and happiness. I f developed in t he right way, your ideals of t he good life for yourself and societ y can becom e powerful—and m anageable—fact ors of success. We st udied hundreds of high achievers who realize last ing success, m ake a posit ive difference, and enj oy t he process. And we learned t hat som e of t he m ost successful people have got t en where t hey are precisely because t hey have a great er underst anding of what success is really about and t he versat ilit y t o m ake good on t heir ideals. I n t his art icle, we’ll int roduce a pract ical fram ework t hat will help you see success in t hese sam e

t erm s. But first , a closer exam inat ion of how we arrived at t his m odel. W h a t I s En du r in g Su cce ss? Our research t ook a fresh look at t he assum pt ions behind success. We were int erest ed in real, enduring success—where get t ing what you want has rewards t hat are sust ainable for you and t hose you care about . This t ype of at t ainm ent delivers a sense of legit im acy and im port ance; it s sat isfact ions endure far beyond t he m om ent ary rewards of a bonus or a new posit ion. Last ing success is em ot ionally renewing, not anxiet y provoking. Unlike an equat ion for a successful m arket st rat egy, no one person or com pany can fully em body last ing success for ot hers. Everyone ( and every business) has a unique vision of real success, and t hat not ion changes over t im e. A fam ily- orient ed person would hardly call t he absent ee life of a t op execut ive a success but m ight find t ravel and advent ure j ust t he t icket aft er t he kids grow up. A born invest m ent banker would hardly regard m ixing cem ent as a successful career, whereas a const ruct ion worker who j ust com plet ed an ext raordinary bridge m ight point t o t he st ruct ure wit h pride for t he rest of his or her life. No one, however, has unreserved success, not even t he m ost obvious winner. Recognizing how im port ant it is for each person t o underst and and develop his or her unique definit ion of success over t im e, we chose not t o report on one or t wo wellknown exam ples of success as t he perfect m odel t o follow. Nonet heless, for t he purposes of research, we posit ed five com m on charact erist ics of individuals who by m ost st andards had achieved enduring success: high achievem ent , m ult iple goals, t he abilit y t o experience pleasure, t he abilit y t o creat e posit ive relat ionships, and a value on accom plishm ent s t hat endure. We held m ore t han 60 int erviews wit h successful professionals, surveyed 90 t op execut ives at t ending Harvard Business School m anagem ent program s, and inform ally observed high achievers wit h whom we live and work. We conduct ed m ore t han a dozen m odel- t est ing sessions wit h bet ween 50 and 110 execut ives in each. Most of t hese groups were drawn from HBS graduat es or current m em bers of t he Young President s’ Organizat ion. We also reviewed t he problem s t hat t he general populat ion has report ed about success, using sources t hat ranged from m edia report s t o conversat ions wit h friends, st udent s, and colleagues. We t alked t o people from all different walks of life, at every level of t he econom y, bot h in and out of business careers. Som e of t hem were st ay- at - hom e parent s who had once worked full t im e; ot hers were at t he pinnacle of t heir careers. Th e Com ple x it y of Su cce ss

Success involves m ore t han a heart - pounding race t o t he finish line. Our research uncovered four irreducible com ponent s of enduring success: happiness ( feelings of pleasure or cont ent m ent about your life) ; achievem ent ( accom plishm ent s t hat com pare favorably against sim ilar goals ot hers have st rived for) ; significance ( t he sense t hat you’ve m ade a posit ive im pact on people you care about ) ; and legacy ( a way t o est ablish your values or accom plishm ent s so as t o help ot hers find fut ure success) . These four cat egories form t he basic st ruct ure of what people t ry t o gain t hrough t he pursuit and enj oym ent of success. Take away any one com ponent , and it no longer feels like “ real” success. I f you were wildly wealt hy because you had m ast ered a cert ain business problem but couldn’t experience pleasure, for inst ance, would you consider yourself successful? I f building your power base kept you from being t here for ot hers, would your success feel m orally right ? I f you left your career t o be a full- t im e parent , would you have enough of an out let for your t alent s? Just as a st eady diet of t he sam e four foods would hardly be sat isfying over t he long t erm , t he four com ponent s of success cannot be sat isfied by t he presence of a single flavor in each cat egory. That is why you cannot neat ly cat egorize t he realm s of your life, assigning happiness t o self, achievem ent t o work, significance t o fam ily, legacy t o com m unit y. Unless you hit on all four cat egories wit h regularit y, any one win will fail t o sat isfy. You’ll experience what we call t he “ wince fact or” : You know you’re doing what is right , but it st ill feels like a loss. You’re preoccupied wit h t hought s of t he ot her t hings you could be doing or get t ing. Your achievem ent s and pleasures fade alm ost as soon as t hey occur. By cont rast , success t hat encom passes all four kinds of accom plishm ent is enriching; it endures. You can creat e t his synergy wit hin a single event , but you can also creat e it t hrough a j uxt aposit ion of act ivit ies. Taking t im e out in t he m iddle of a high- st ress period or st opping t o give back t o t he com m unit y while in t he m idst of pursuing your m ost self- advancing goals are good exam ples of t his. I f you t hink about what const it ut es a m om ent of last ing sat isfact ion in your own life— m aybe it ’s your daily pract ice of a m usical inst rum ent —it m ay be surprisingly t rivial in com parison wit h your m aj or com m it m ent s at work or at hom e. The act ivit y draws force from accom plishing som et hing dist inct ive in each of t he four cat egories over t im e. The m usical inst rum ent provides release and pleasure ( happiness) , it is a challenge t o m ast er and build on ( achievem ent ) , and it becom es even m ore fulfilling when you j oin a band t hat com pet es wit h ot her bands or play concert s at hospit als ( significance) . Those who also t urn t hese “ lesser” vocat ions int o legacies t hat build t he sam e opport unit y for t he next generat ion—say, t hrough get t ing involved in recruit ing and t raining younger m usicians—will find an even deeper sense of success from so- called hobbies.

Anyone who t akes t he four elem ent s of success seriously soon realizes how com plicat ed it can be t o t ouch on all four wit h regularit y. As you scale up your goals, t he four- part m ix becom es m ore difficult t o achieve. Each fact or has a different set of charact erist ics. Sat isfying different needs, t hey draw on dist inct ive em ot ional drives and priorit ize self and ot hers in different ways. That ’s why people who t ell you t hat happiness, achievem ent , and significance will com e aut om at ically if you sim ply do t he work you love are m isguided. Regardless of how m uch you care about your j ob, you will st ill feel conflict ing desires—bet ween work and hom e, bet ween working forever on a problem and t aking a break from it , bet ween going for m ore m arket share t oday and invest ing in t he com pany’s needs for t om orrow. The skills you use t o com pet e are t ot ally different from t hose you em ploy in m om ent s of enj oym ent . You can be t here for a friend, and you can care about a cust om er, but t hese act s ( in t he significance cat egory) can’t be subst it ut ed for t he kind of t hinking and priorit izat ion t hat is necessary t o st ruct ure favorable financial t erm s for your own firm ( in t he achievem ent cat egory) .

Pe ople w h o t e ll you t h a t h a ppin e ss, a ch ie ve m e n t , a n d sign ifica n ce w ill com e a u t om a t ica lly if you sim ply do t h e w or k you love a r e m isgu ide d. Underst anding t he dist inct ive feat ures of t he four areas of success can help you art iculat e what you are seeking in a cert ain act ivit y. You can t hen creat e a diagnost ic for det erm ining how t o achieve t he m ost appropriat e goal. You m ay be expect ing t oo m any cat egories t o be fulfilled wit hout incorporat ing t he right resources and perspect ives, or you m ay be falling prey t o a m ism at ch. Mat ching your expect at ions t o t he right cat egory is a crit ical skill for achieving sust ainable success. I f you expect happiness t o com e prim arily from com pet it ion ( an achievem ent skill) , you’ll probably t urn int o som eone neit her you nor t hose around you can t olerat e—and wonder why success has m ade you so lonely. People who report having t rouble defining t he right goals for t hem selves or for t heir com panies are oft en caught in such m ism at ches. For inst ance, a self- described fam ily- friendly com pany m ight hold crit ical st aff m eet ings over lat e dinners or during ext ended weekend ret reat s. The act of cat egorizing in and of it self can help you t ake m ore decisive act ion and channel t he right em ot ions and perspect ives t o t he t ask at hand. You can st op m easuring a j ob only by how happy it m akes you or calculat ing a business success only in t erm s of your abilit y t o achieve m ast ery over som et hing. I nst ead, you’ll see how one t ask fit s int o a larger cont ext . By t he sam e t oken, you’ll be able t o ant icipat e what kind

of em ot ional capit al you’ll need t o bring t o a t ask. I f you t ry t o bring feelings of happiness or cont ent m ent t o your achievem ent goals, you’ll st unt your perform ance from t he st art . I f you don’t put achievem ent in it s place, however, you’ll t rap yourself in a workaholic rest lessness. Those in our research who achieved sat isfying, enduring, m ult idim ensional success consciously went aft er vict ories in all four cat egories wit hout losing t ouch wit h t heir values and special t alent s. They seem ed t o underst and int uit ively t he paradox we uncovered at t he heart of enduring success: To get t o m ore wins on t he various im port ant m easures t hat m ake up your not ion of t he good life, success has t o rest on a paradigm of lim it at ion in any one act ivit y for t he sake of t he whole. Or, as we call it , “ on t he reasoned pursuit of j ust enough.” This principle flies in t he face of t he popular opinion t hat success is all about breaking t hrough lim it at ions, t hat it ’s about having m ore, being m ore, doing m ore. Our research shows t hat t he high- powered people who experienced real sat isfact ion achieved it t hrough t he deliberat e im posit ion of lim it s. They all shared a versat ile t alent t hat we call “ swit ching and linking” : They were able t o focus int ensely on one t ask unt il it gave t hem a part icular sense of sat isfact ion, t hen put it down and j um p t o t he next cat egory wit h a feeling of accom plishm ent and renewed energy. This versat ile refocusing could occur wit hin t he sam e act ivit y ( say, when you base your product st rat egy on accom plishing your profit goal and on caring for t he cust om er) , or it can involve swit ching at t ent ion bet ween t wo realm s ( t aking a break from work t o j oke wit h a friend) . The people in our research who were part icularly skilled at sift ing t hrough t he m oving t arget s and going aft er only t hose t hat would produce last ing rewards shared t wo charact erist ics. First , t hey viewed success as a broad and dynam ic experience of accom plishm ent , one t hat fact ored in all four cat egories. They didn’t at t ribut e t heir success t o one single event or even one single realm of life. Second, t heir concret e exam ples of what count ed as “ real” success included accom plishm ent s of wildly varying m agnit ude. They weren’t set t ing m axim um goals for t hem selves in each cat egory; rat her, t hey set som e at a sm all scale and som e at a scale t hat dem anded sust ained effort . The baseline for t hese individuals wasn’t t he am ount of act ivit y or num ber of rewards in any one cat egory, but t he securing of a proport ionat e m ix of all four. Anyone can learn t o do t his; you j ust need t o have a larger fram ework in which t o underst and t he dynam ics of t he four cat egories. Th e Ka le idoscope St r a t e gy We com pare an effect ive success st rat egy t o a kaleidoscope—t hat sim ple m echanical

device wit h a lens, m irror, and a long t ube housing separat e cham bers. Each cham ber holds pieces of glass t hat const ant ly shift as t he t ube is m oved. Alt hough t he cham bers are separat e, t he eye sees one unique pict ure m ade up of t he various cham bers. Mirrors reflect t he ent ire set of glass chips and enhance t he com plexit y of t he pat t ern. The beaut y of t hat pat t ern com es from t he variet y and sym m et ry of t he design. Alt hough t he pat t erns in a kaleidoscope are inherent ly unst able, changed by your own m ovem ent s or by out side forces, t he pieces provide ongoing sat isfact ion as t hey t ake t heir places wit hin new pat t erns. Now im agine a slight ly different kind of kaleidoscope, one t hat is your own vision of a successful life. This kaleidoscope also has four cham bers—happiness, achievem ent , significance, and legacy—and you can add brilliant glass pieces ( goals sought and fulfilled) over a lifet im e, m aking your unique pat t ern richer and richer. I n t his m et aphor, success is about choice, m ovem ent , pat t ern, and a st ruct ure t hat holds all t he separat e act ivit ies t oget her. And, j ust like a kaleidoscope, you have t o hold t his pat t ern up t o t he light . By regularly assessing t he pict ure you are creat ing in all four cham bers, you can quickly spot “ holes” —places you feel require m ore at t ent ion—in your act ivit ies and be assured t hat you are j ust ified in int errupt ing ot her work t o at t end t o t hem . The rest of t he chips will be enough for t he m om ent , but not enough for t he rest of your life. Through our research, we discovered t hat t he people who achieve enduring success rely on a kaleidoscope st rat egy t o st ruct ure t heir aspirat ions. Not only do t hey cont inually creat e new chips in each of t he four cat egories, but t hey also choose t heir act ions so t hat t he whole pict ure will display a pleasing proport ionalit y. Feeling deep sat isfact ion in each cat egory st rengt hens t hese achievers’ abilit y t o t urn away from one cat egory when anot her needs at t ent ion. I t allows t hem t o say, “ I don’t need t o work away at t his part icular t hing unt il I ’m sat iat ed and hat e t he very sight of it . This is j ust enough.” They recognize t he im port ance of set t ing t heir own st andards for “ enough” and not falling prey t o t he lure of t he infinit e “ m ore.” This is exact ly t he kind of t hinking you see in good leaders: They ant icipat e what will be needed in all four dim ensions of success despit e pressures t o deliver t o t he m axim um in one. This is what t he subj ect s in t he t hree exam ples at t he beginning of t his art icle were lacking. They had no fram ework in which t o ident ify and sort m ult iple desires so t hat t hey could go aft er t heir conflict ing goals sequent ially in a proport ionat e m ix. The burned- out vent ure capit alist needs t o underst and t hat scaling back his achievem ent goals is part of a larger pict ure of expansion in t he ot her cat egories, rat her t han a paralyzing prospect of loss and “ doing not hing.” This kaleidoscope view will allow him space t o cult ivat e t he em ot ional relat ionships he craves wit h his fam ily. That doesn’t

m ean he should give up all form s of achievem ent ; he sim ply needs t o readj ust t he level of energy he put s int o t hat cat egory. Doing so will require m ore creat ive t hought and versat ilit y t han he’s exhibit ing now. The execut ive overseeing t he problem at ic product rollout was fram ing his dilem m a in t erm s of short - t erm versus long- t erm achievem ent . He would do bet t er t o refram e his challenge in t erm s of legacy: What kind of plat form would he be creat ing for t he success of t his product and t hat of fut ure m anagers in t he com pany if he decided t o release incom plet e product s? Thinking about t he problem from t his perspect ive helped him clarify his priorit ies. I nst ead of feeling t hat he had t o m ake a t rade- off in a negat ive sense, he could t ake a posit ive view of what needed t he m ost at t ent ion and what was wort h sacrificing for. I n t he end, he delayed rolling out t he new product line—and not only were t he ret ailers delight ed wit h t he final result s, but t he product division, in craft ing t he solut ion, discovered a new way t o coordinat e and leverage it s t echnological capabilit ies across t hree count ries. The soft ware engineer t orn bet ween com put ers and church m usic needed t o shrink or redirect her goals in som e act ivit ies and develop t hem in ot hers. When she t ried t he kaleidoscope st rat egy, she quickly saw t hat church m usic regist ered high in her significance cat egory but would always be a lim it ed out let for achievem ent . She had neit her t he skill nor t he opport unit y t o becom e a st ar m usician. Soft ware had m ore pot ent ial for significance t han she had previously t hought . She needed t o learn how t o change her j ob in ways t hat em phasized t he social value she was creat ing in t he product s she worked on and t he help she provided t o ot hers. She began t o see benefit s in fram ing church m usic prim arily as an exercise in significance rat her t han in achievem ent , wit h all it s com pet it ive and financial associat ions. But t o fill bot h cham bers, she’d need t o rest ruct ure her j ob com m it m ent s in order t o m inim ize t ravel and com m it t o choir pract ice. When she looked at t he whole pict ure of goals she could sat isfy t hrough t he sum of t hese act ivit ies, scaling back suddenly seem ed m ore posit ive. The pieces were enough. And, she recognized, t aking t his pat h would require cont inued growt h on her part —som et hing she had forgot t en she valued and which she now had t he confidence t o pursue st rat egically. Enduring success required enduring com m it m ent . Bu ildin g You r Ow n Ka le idoscope To creat e your own kaleidoscope, st art by sket ching out your fram ework. Take a piece of paper and draw four int ersect ing circles. Label t hem happiness, achievem ent , significance, and legacy. I n each circle, list self, fam ily, work, and com m unit y. This will enable you t o do a full invent ory of t he m ix and det erm ine how each piece falls in t he cont ext of each m aj or dom ain of your life. ( See t he exhibit “ My Personal Kaleidoscope.” )

Su cce ss is a bou t ch oice , m ove m e n t , pa t t e r n , a n d a st r u ct u r e t h a t h olds a ll t h e se pa r a t e a ct ivit ie s t oge t h e r .

Next , quickly j ot down exam ples of your successes or great sat isfact ions. You don’t have t o com e up wit h one for every it em in every circle—t his is j ust a quick sket ch of your beliefs about yourself, not t he full pict ure. Don’t spend t im e worrying about whet her you should put a part icular t arget next t o a part icular it em . Just work wit h your first im pulses. Take your college degree as an exam ple. You m ay feel t hat graduat ing from college was a m aj or achievem ent , a benchm ark in your overall career plans and som et hing you will value for your whole life. Your degree represent s a m ast ery of skills. You had t o com pet e successfully t o get t here and get t he grades. You felt sat isfact ion when you were successful. So you would writ e “ college” in your achievem ent cham ber, next t o t he word “ work.” But what if college represent ed ot her t hings for you? Significance in your fam ily life, for exam ple, because your parent s or spouse really valued what you were doing? I n t hat case, you m ight also put college in your significance cham ber, next t o “ fam ily.” The point is not t o com pulsively divide your life int o lit t le circles and list s. Rat her, it is t o help you assess t he various t ypes of sat isfact ions you have already experienced and see what t hey add up t o. The answer is oft en m ore surprising or richer t han you m ay have suspect ed. Depending on your age, you m ight even want t o fill out fram ework profiles for several periods in your life. Did you want t he sam e t hings at 40 as you did at 20? Will you want t he sam e t hings at 60? At 85? Could you ever fully abandon one of t he cat egories and st ill feel t hat you were a success? ( This is t he t rap t hat m any ret irees and t hose who downscale t heir careers t o becom e full- t im e parent s fall int o.) Now, m et aphorically speaking, you can hold your kaleidoscope up t o t he light . Look at it obj ect ively, and ask yourself: 1. How int egrat ed is your profile? Are som e of t he dom ains em pt y? Are ot hers t oo full? I s each realm of your ident it y—self, fam ily, work, com m unit y—a deposit ory of only one sat isfact ion, or is t here a broader basis for success in each of t hese areas? 2. How varied is your profile? Where are m ost of your great est successes and sat isfact ions so far? Where are t he holes? The obsessions? Are t he cham bers and realm s evolving or repeat ing t he sam e t hings over and over?

3. What have you learned about what you act ually do? Where is your t im e going? How does it speak t o what you really want from success? Research int o success has shown t hat one of t he biggest causes of failure is an overreliance on one’s great est st rengt hs. Are you favoring what you do best and neglect ing your need for fulfillm ent in all four cat egories? Here’s how t he kaleidoscope st rat egy helped John, t he owner of a large real est at e com pany, find enduring success. John was having t rouble deciding what t o do wit h his business. Aft er a blowout wit h his t eenage child and a series of relent less, debilit at ing headaches, he decided he had t o cut back on his work. He had already bought a plane— against his fam ily’s wishes—and he had increased his t im e for him self, but he was st ill suffering. “ I know I should sell part of t his business for t he sake of m y happiness,” he said, “ but I j ust can’t do it .” We suggest ed he t ry put t ing t his sale in anot her cat egory, one t hat seem ed rat her em pt y. Why not t hink about t he sale as an act ive engagem ent in legacy rat her t han as a plat form for happiness? The pieces fit . Legacy is about building on your achievem ent s and values t o help ot hers succeed aft er you’re gone. John rem em bered a young m anager who had left t he firm , som eone who knew John’s values and was quit e accom plished in his own right . This person would probably welcom e t he chance t o head t he new spin- off, and he’d be likely t o ext end t he kind of business John had spent his life building. The buyers would need such a person, and John would be com fort able doing business wit h t hem . Aft er seeing t he sit uat ion from a different perspect ive, John was m ore decisive about t he sale and had a richer plat form of concret e goals around which t o st ruct ure t he t ransact ion: t he t erm s in which legacy would be fulfilled, t he new t im e fram e for his own enj oym ent of life, a revit alizing and m ore realist ic set of achievem ent goals, and a sense of providing t he space t o be t here for his daught er and wife wit hout giving up all t he challenges of t he real est at e business. I dent ifying where his act ivit ies were locat ed in t he kaleidoscope gave John im m ediat e insight int o what he was seeking and get t ing from his effort s—as well as what was lacking. I n channeling your effort s effect ively t oward what you really seek from success, it ’s crit ical t o t est your profile against your idealized view of yourself. What do you want your profile of accom plishm ent s in each of t he four cat egories t o look like t om orrow? Next m ont h? Over your lifet im e? Th e Ka le idoscope St r a t e gy for Bu sin e sse s

Ge t t in g t o “Ju st En ou gh ” I f you pay at t ent ion t o t he four cat egories and t heir relat ion t o one anot her, you can enrich t he pot ent ial for any act ivit y t o sat isfy you on num erous dim ensions, whet her at work, in your leisure t im e, or in som e ot her aspect of your life. The high achievers in our st udy were able t o accom plish great t hings for t hem selves and ot hers by recognizing t hey had m ult iple goals t hat were crit ical t o t heir idea of real success and by being fully com m it t ed t o what ever act ivit y t hey were engaged in. By swit ching and linking, t hey lim it ed t heir at t ent ion t o one t ask, and when ot her needs pressed, t hey were able t o m ake light ning fast changes of focus and em ot ional energy. I nst ead of feeling cheat ed because t hey couldn’t get it all, t hey were renewed by following t he cycle of at t ent ion t o each cat egory.

“Ju st e n ou gh ” is t h e a n t idot e t o socie t y’s a ddict ion t o t h e in fin it e “m or e .” How do you know when it ’s t im e t o st op your work in one cat egory and swit ch your at t ent ion t o anot her? That ’s where t he concept of “ j ust enough” becom es crit ical. Convent ional int erpret at ions of “ enough” don’t capt ure it s full pot ent ial. People t end t o use t he t erm t o express dissat isfact ion, as in, “ That ’s it ! I ’ve had enough! ” or as a code for m ediocrit y or passivit y, as in, “ I f I ’m j ust happy every day, t hat ’s enough.” We m ean som et hing else by enough, closer t o it s root definit ion: occurring in sufficient quant it y or qualit y t o sat isfy dem ands or needs. I f you have a firm idea of t he big pict ure in your kaleidoscope of success, it becom es easier t o det erm ine and appreciat e “ enough” in any one act ivit y. Wit hout losing your energy for high aspirat ions, you set reachable goals. “ Just enough” is t he ant idot e t o societ y’s addict ion t o t he infinit e “ m ore.” Seen in t hat light , it becom es a vehicle for act ively m aking choices t hat allow you t o do and get m ore, not less, t hrough achieving sat isfact ion in m ore areas of your life.

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Success That Last s Sin gle - m in de d a m bit ion is a gr e a t w a y t o a ch ie ve som e goa ls—bu t is t h a t r e a lly su cce ss? N e w r e se a r ch r e ve a ls su r pr isin gly pr a ct ica l w a ys t o fin d pr ofe ssion a l a n d pe r son a l fu lfillm e n t .

by La u r a N a sh a n d H ow a r d St e ve n son La u r a N a sh ( ln a sh @j u st e n ou gh su cce ss.com ) is a senior research fellow and H ow a r d St e ve n son ( h st e ve n son @j u st e n ou gh su cce ss.com ) is t he Sarofim - Rock Professor of Business Adm inist rat ion at Harvard Business School in Bost on. They are t he aut hors of Just Enough: Tools for Creat ing Success in Your Work and Life ( John Wiley & Sons, 2004) , from which t his art icle is adapt ed.

A 5 5 - ye a r - old, h igh ly su cce ssfu l ve n t u r e ca pit a list is t hinking about his next invest m ent . He’s not cert ain he has t he energy t o st art anot her seven- year round of int ense financing and consult ing act ivit y. “ I j ust can’t im agine enj oying t hat pace again, and frankly, it ’s t im e I paid at t ent ion t o m y fam ily. But I ’d really feel a loser if I didn’t play t he gam e as hard as everyone else. I guess I should ret ire.” Th e pr e side n t of a $ 1 billion division of a consum er product s com pany discovers t hat m anufact uring and dist ribut ion bugs will delay t he scheduled rollout of a new product line. Ret ailers are eager for t he product , pressures on share price are int ense, and t he president ’s bonus is t ied t o t he rollout ’s success. I f he goes ahead, t he product is sure t o be on t op—but only t em porarily. The cost s down t he road from disappoint ed consum ers and t im e invest ed in having t o fix m ist akes will clearly hurt t he bot t om line. What is success under t hese circum st ances? A fa st - t r a ck 3 2 - ye a r - old soft w a r e e n gin e e r wit h a second degree in sacred m usic feels t hat som et hing is m issing in her career st rat egy. She want s t he lifest yle of a wellpaid m anager, but soft ware doesn’t feel as socially significant as playing t he organ for a congregat ion. And she som eday want s a house and a fam ily. “ Why can’t I find t he career pat h t hat will get m e all of t hese t hings?” she wonders. “ Are t hey really so unreasonable?” Different as t hese exam ples m ay be, t hese individuals have a sim ilar problem : They all need a com prehensive fram ework for t hinking about success. And t hey’re far from alone. Survey aft er survey shows a high degree of j ob dissat isfact ion and burnout am ong t he general working populat ion, even am ong t hose wit h plent y of opt ions. I n t he collect ive soul- searching prom pt ed by Sept em ber 11, 2001, m any high achievers revisit ed t heir not ion of success. The wave of corporat e scandals t hat followed soon aft er only m ade t he quest ions m ore acut e. Even t he m ost dedicat ed em ployees wondered aloud whet her t hey would ever recom m end t heir own careers and com panies t o t heir children. Pursuing success is like shoot ing at a series of m oving t arget s. Every t im e you hit one, five m ore pop up from anot her direct ion. Just when we’ve achieved one goal, we feel

pressure t o work harder t o earn m ore m oney, exert m ore effort , possess m ore t oys. St andards and exam ples of “ m aking it ” const ant ly shift , while a fast - paced world of t echnological and social change const ant ly poses new obst acles t o overcom e. During t he past decade, t radit ional career pat hs suddenly becam e point less. Professionals found t hem selves overworked and undersat isfied in t he boom , t hen overworked and com pet it ively vulnerable in t he bust . And far t oo m any businesses discovered t hey were using t he wrong m easures t o gauge success, winning big in t he 1990s only t o lose big for t heir shareholders and em ployees at t he t urn of t he m illennium . The clim b t o success can feel like an Escher drawing of a st aircase t hat goes nowhere. I n t he face of such inst abilit y, m any people assum e success requires a winner- t akes- all approach. They believe t hat success depends on put t ing all your energy int o achieving one goal, be it a single- m inded focus on your j ob or a com m it m ent t o being t he best soccer m om in your com m unit y. But no m at t er how noble, one goal can’t sat isfy all of a person’s com plex needs and desires, as t he exam ples at t he beginning of t he art icle dem onst rat e. The sam e holds t rue for t he goals of a business. Fort unat ely, success doesn’t have t o be seen as a one- dim ensional t ug- of- war bet ween achievem ent and happiness. I f developed in t he right way, your ideals of t he good life for yourself and societ y can becom e powerful—and m anageable—fact ors of success. We st udied hundreds of high achievers who realize last ing success, m ake a posit ive difference, and enj oy t he process. And we learned t hat som e of t he m ost successful people have got t en where t hey are precisely because t hey have a great er underst anding of what success is really about and t he versat ilit y t o m ake good on t heir ideals. I n t his art icle, we’ll int roduce a pract ical fram ework t hat will help you see success in t hese sam e t erm s. But first , a closer exam inat ion of how we arrived at t his m odel. W h a t I s En du r in g Su cce ss? Our research t ook a fresh look at t he assum pt ions behind success. We were int erest ed in real, enduring success—where get t ing what you want has rewards t hat are sust ainable for you and t hose you care about . This t ype of at t ainm ent delivers a sense of legit im acy and im port ance; it s sat isfact ions endure far beyond t he m om ent ary rewards of a bonus or a new posit ion. Last ing success is em ot ionally renewing, not anxiet y provoking. Unlike an equat ion for a successful m arket st rat egy, no one person or com pany can fully em body last ing success for ot hers. Everyone ( and every business) has a unique vision of real success, and t hat not ion changes over t im e. A fam ily- orient ed person would hardly call t he absent ee life of a t op execut ive a success but m ight find t ravel and advent ure j ust t he t icket aft er t he kids grow up. A born invest m ent banker would hardly regard m ixing cem ent as a successful career, whereas a const ruct ion worker who j ust com plet ed an ext raordinary bridge m ight point t o t he st ruct ure wit h pride for t he rest of his or her life. No one, however, has unreserved success, not even t he m ost obvious winner. Recognizing how im port ant it is for each person t o underst and and develop his or her unique definit ion of success over t im e, we chose not t o report on one or t wo wellknown exam ples of success as t he perfect m odel t o follow. Nonet heless, for t he purposes of research, we posit ed five com m on charact erist ics of individuals who by m ost st andards had achieved enduring success: high achievem ent , m ult iple goals, t he abilit y t o experience pleasure, t he abilit y t o creat e posit ive relat ionships, and a value on accom plishm ent s t hat endure. We held m ore t han 60 int erviews wit h successful professionals, surveyed 90 t op execut ives at t ending Harvard Business School m anagem ent program s, and inform ally

observed high achievers wit h whom we live and work. We conduct ed m ore t han a dozen m odel- t est ing sessions wit h bet ween 50 and 110 execut ives in each. Most of t hese groups were drawn from HBS graduat es or current m em bers of t he Young President s’ Organizat ion. We also reviewed t he problem s t hat t he general populat ion has report ed about success, using sources t hat ranged from m edia report s t o conversat ions wit h friends, st udent s, and colleagues. We t alked t o people from all different walks of life, at every level of t he econom y, bot h in and out of business careers. Som e of t hem were st ay- at - hom e parent s who had once worked full t im e; ot hers were at t he pinnacle of t heir careers. Th e Com ple x it y of Su cce ss Success involves m ore t han a heart - pounding race t o t he finish line. Our research uncovered four irreducible com ponent s of enduring success: happiness ( feelings of pleasure or cont ent m ent about your life) ; achievem ent ( accom plishm ent s t hat com pare favorably against sim ilar goals ot hers have st rived for) ; significance ( t he sense t hat you’ve m ade a posit ive im pact on people you care about ) ; and legacy ( a way t o est ablish your values or accom plishm ent s so as t o help ot hers find fut ure success) . These four cat egories form t he basic st ruct ure of what people t ry t o gain t hrough t he pursuit and enj oym ent of success. Take away any one com ponent , and it no longer feels like “ real” success. I f you were wildly wealt hy because you had m ast ered a cert ain business problem but couldn’t experience pleasure, for inst ance, would you consider yourself successful? I f building your power base kept you from being t here for ot hers, would your success feel m orally right ? I f you left your career t o be a full- t im e parent , would you have enough of an out let for your t alent s? Just as a st eady diet of t he sam e four foods would hardly be sat isfying over t he long t erm , t he four com ponent s of success cannot be sat isfied by t he presence of a single flavor in each cat egory. That is why you cannot neat ly cat egorize t he realm s of your life, assigning happiness t o self, achievem ent t o work, significance t o fam ily, legacy t o com m unit y. Unless you hit on all four cat egories wit h regularit y, any one win will fail t o sat isfy. You’ll experience what we call t he “ wince fact or” : You know you’re doing what is right , but it st ill feels like a loss. You’re preoccupied wit h t hought s of t he ot her t hings you could be doing or get t ing. Your achievem ent s and pleasures fade alm ost as soon as t hey occur. By cont rast , success t hat encom passes all four kinds of accom plishm ent is enriching; it endures. You can creat e t his synergy wit hin a single event , but you can also creat e it t hrough a j uxt aposit ion of act ivit ies. Taking t im e out in t he m iddle of a high- st ress period or st opping t o give back t o t he com m unit y while in t he m idst of pursuing your m ost self- advancing goals are good exam ples of t his. I f you t hink about what const it ut es a m om ent of last ing sat isfact ion in your own life— m aybe it ’s your daily pract ice of a m usical inst rum ent —it m ay be surprisingly t rivial in com parison wit h your m aj or com m it m ent s at work or at hom e. The act ivit y draws force from accom plishing som et hing dist inct ive in each of t he four cat egories over t im e. The m usical inst rum ent provides release and pleasure ( happiness) , it is a challenge t o m ast er and build on ( achievem ent ) , and it becom es even m ore fulfilling when you j oin a band t hat com pet es wit h ot her bands or play concert s at hospit als ( significance) . Those who also t urn t hese “ lesser” vocat ions int o legacies t hat build t he sam e opport unit y for t he next generat ion—say, t hrough get t ing involved in recruit ing and t raining younger m usicians—will find an even deeper sense of success from so- called hobbies. Anyone who t akes t he four elem ent s of success seriously soon realizes how com plicat ed it can be t o t ouch on all four wit h regularit y. As you scale up your goals, t he four- part m ix becom es m ore difficult t o achieve. Each fact or has a different set of charact erist ics.

Sat isfying different needs, t hey draw on dist inct ive em ot ional drives and priorit ize self and ot hers in different ways. That ’s why people who t ell you t hat happiness, achievem ent , and significance will com e aut om at ically if you sim ply do t he work you love are m isguided. Regardless of how m uch you care about your j ob, you will st ill feel conflict ing desires—bet ween work and hom e, bet ween working forever on a problem and t aking a break from it , bet ween going for m ore m arket share t oday and invest ing in t he com pany’s needs for t om orrow. The skills you use t o com pet e are t ot ally different from t hose you em ploy in m om ent s of enj oym ent . You can be t here for a friend, and you can care about a cust om er, but t hese act s ( in t he significance cat egory) can’t be subst it ut ed for t he kind of t hinking and priorit izat ion t hat is necessary t o st ruct ure favorable financial t erm s for your own firm ( in t he achievem ent cat egory) .

Pe ople w h o t e ll you t h a t h a ppin e ss, a ch ie ve m e n t , a n d sign ifica n ce w ill com e a u t om a t ica lly if you sim ply do t h e w or k you love a r e m isgu ide d. Underst anding t he dist inct ive feat ures of t he four areas of success can help you art iculat e what you are seeking in a cert ain act ivit y. You can t hen creat e a diagnost ic for det erm ining how t o achieve t he m ost appropriat e goal. You m ay be expect ing t oo m any cat egories t o be fulfilled wit hout incorporat ing t he right resources and perspect ives, or you m ay be falling prey t o a m ism at ch. Mat ching your expect at ions t o t he right cat egory is a crit ical skill for achieving sust ainable success. I f you expect happiness t o com e prim arily from com pet it ion ( an achievem ent skill) , you’ll probably t urn int o som eone neit her you nor t hose around you can t olerat e—and wonder why success has m ade you so lonely. People who report having t rouble defining t he right goals for t hem selves or for t heir com panies are oft en caught in such m ism at ches. For inst ance, a self- described fam ily- friendly com pany m ight hold crit ical st aff m eet ings over lat e dinners or during ext ended weekend ret reat s. The act of cat egorizing in and of it self can help you t ake m ore decisive act ion and channel t he right em ot ions and perspect ives t o t he t ask at hand. You can st op m easuring a j ob only by how happy it m akes you or calculat ing a business success only in t erm s of your abilit y t o achieve m ast ery over som et hing. I nst ead, you’ll see how one t ask fit s int o a larger cont ext . By t he sam e t oken, you’ll be able t o ant icipat e what kind of em ot ional capit al you’ll need t o bring t o a t ask. I f you t ry t o bring feelings of happiness or cont ent m ent t o your achievem ent goals, you’ll st unt your perform ance from t he st art . I f you don’t put achievem ent in it s place, however, you’ll t rap yourself in a workaholic rest lessness. Those in our research who achieved sat isfying, enduring, m ult idim ensional success consciously went aft er vict ories in all four cat egories wit hout losing t ouch wit h t heir values and special t alent s. They seem ed t o underst and int uit ively t he paradox we uncovered at t he heart of enduring success: To get t o m ore wins on t he various im port ant m easures t hat m ake up your not ion of t he good life, success has t o rest on a paradigm of lim it at ion in any one act ivit y for t he sake of t he whole. Or, as we call it , “ on t he reasoned pursuit of j ust enough.” This principle flies in t he face of t he popular opinion t hat success is all about breaking t hrough lim it at ions, t hat it ’s about having m ore, being m ore, doing m ore. Our research shows t hat t he high- powered people who experienced real sat isfact ion achieved it t hrough t he deliberat e im posit ion of lim it s. They all shared a versat ile t alent t hat we call “ swit ching and linking” : They were able t o focus int ensely on one t ask unt il it gave t hem a part icular sense of sat isfact ion, t hen put it down and j um p t o t he next cat egory wit h a feeling of accom plishm ent and renewed energy. This versat ile refocusing could occur

wit hin t he sam e act ivit y ( say, when you base your product st rat egy on accom plishing your profit goal and on caring for t he cust om er) , or it can involve swit ching at t ent ion bet ween t wo realm s ( t aking a break from work t o j oke wit h a friend) . The people in our research who were part icularly skilled at sift ing t hrough t he m oving t arget s and going aft er only t hose t hat would produce last ing rewards shared t wo charact erist ics. First , t hey viewed success as a broad and dynam ic experience of accom plishm ent , one t hat fact ored in all four cat egories. They didn’t at t ribut e t heir success t o one single event or even one single realm of life. Second, t heir concret e exam ples of what count ed as “ real” success included accom plishm ent s of wildly varying m agnit ude. They weren’t set t ing m axim um goals for t hem selves in each cat egory; rat her, t hey set som e at a sm all scale and som e at a scale t hat dem anded sust ained effort . The baseline for t hese individuals wasn’t t he am ount of act ivit y or num ber of rewards in any one cat egory, but t he securing of a proport ionat e m ix of all four. Anyone can learn t o do t his; you j ust need t o have a larger fram ework in which t o underst and t he dynam ics of t he four cat egories. Th e Ka le idoscope St r a t e gy We com pare an effect ive success st rat egy t o a kaleidoscope—t hat sim ple m echanical device wit h a lens, m irror, and a long t ube housing separat e cham bers. Each cham ber holds pieces of glass t hat const ant ly shift as t he t ube is m oved. Alt hough t he cham bers are separat e, t he eye sees one unique pict ure m ade up of t he various cham bers. Mirrors reflect t he ent ire set of glass chips and enhance t he com plexit y of t he pat t ern. The beaut y of t hat pat t ern com es from t he variet y and sym m et ry of t he design. Alt hough t he pat t erns in a kaleidoscope are inherent ly unst able, changed by your own m ovem ent s or by out side forces, t he pieces provide ongoing sat isfact ion as t hey t ake t heir places wit hin new pat t erns. Now im agine a slight ly different kind of kaleidoscope, one t hat is your own vision of a successful life. This kaleidoscope also has four cham bers—happiness, achievem ent , significance, and legacy—and you can add brilliant glass pieces ( goals sought and fulfilled) over a lifet im e, m aking your unique pat t ern richer and richer. I n t his m et aphor, success is about choice, m ovem ent , pat t ern, and a st ruct ure t hat holds all t he separat e act ivit ies t oget her. And, j ust like a kaleidoscope, you have t o hold t his pat t ern up t o t he light . By regularly assessing t he pict ure you are creat ing in all four cham bers, you can quickly spot “ holes” —places you feel require m ore at t ent ion—in your act ivit ies and be assured t hat you are j ust ified in int errupt ing ot her work t o at t end t o t hem . The rest of t he chips will be enough for t he m om ent , but not enough for t he rest of your life. Through our research, we discovered t hat t he people who achieve enduring success rely on a kaleidoscope st rat egy t o st ruct ure t heir aspirat ions. Not only do t hey cont inually creat e new chips in each of t he four cat egories, but t hey also choose t heir act ions so t hat t he whole pict ure will display a pleasing proport ionalit y. Feeling deep sat isfact ion in each cat egory st rengt hens t hese achievers’ abilit y t o t urn away from one cat egory when anot her needs at t ent ion. I t allows t hem t o say, “ I don’t need t o work away at t his part icular t hing unt il I ’m sat iat ed and hat e t he very sight of it . This is j ust enough.” They recognize t he im port ance of set t ing t heir own st andards for “ enough” and not falling prey t o t he lure of t he infinit e “ m ore.” This is exact ly t he kind of t hinking you see in good leaders: They ant icipat e what will be needed in all four dim ensions of success despit e pressures t o deliver t o t he m axim um in one. This is what t he subj ect s in t he t hree exam ples at t he beginning of t his art icle were lacking. They had no fram ework in which t o ident ify and sort m ult iple desires so t hat t hey could go aft er t heir conflict ing goals sequent ially in a proport ionat e m ix.

The burned- out vent ure capit alist needs t o underst and t hat scaling back his achievem ent goals is part of a larger pict ure of expansion in t he ot her cat egories, rat her t han a paralyzing prospect of loss and “ doing not hing.” This kaleidoscope view will allow him space t o cult ivat e t he em ot ional relat ionships he craves wit h his fam ily. That doesn’t m ean he should give up all form s of achievem ent ; he sim ply needs t o readj ust t he level of energy he put s int o t hat cat egory. Doing so will require m ore creat ive t hought and versat ilit y t han he’s exhibit ing now. The execut ive overseeing t he problem at ic product rollout was fram ing his dilem m a in t erm s of short - t erm versus long- t erm achievem ent . He would do bet t er t o refram e his challenge in t erm s of legacy: What kind of plat form would he be creat ing for t he success of t his product and t hat of fut ure m anagers in t he com pany if he decided t o release incom plet e product s? Thinking about t he problem from t his perspect ive helped him clarify his priorit ies. I nst ead of feeling t hat he had t o m ake a t rade- off in a negat ive sense, he could t ake a posit ive view of what needed t he m ost at t ent ion and what was wort h sacrificing for. I n t he end, he delayed rolling out t he new product line—and not only were t he ret ailers delight ed wit h t he final result s, but t he product division, in craft ing t he solut ion, discovered a new way t o coordinat e and leverage it s t echnological capabilit ies across t hree count ries. The soft ware engineer t orn bet ween com put ers and church m usic needed t o shrink or redirect her goals in som e act ivit ies and develop t hem in ot hers. When she t ried t he kaleidoscope st rat egy, she quickly saw t hat church m usic regist ered high in her significance cat egory but would always be a lim it ed out let for achievem ent . She had neit her t he skill nor t he opport unit y t o becom e a st ar m usician. Soft ware had m ore pot ent ial for significance t han she had previously t hought . She needed t o learn how t o change her j ob in ways t hat em phasized t he social value she was creat ing in t he product s she worked on and t he help she provided t o ot hers. She began t o see benefit s in fram ing church m usic prim arily as an exercise in significance rat her t han in achievem ent , wit h all it s com pet it ive and financial associat ions. But t o fill bot h cham bers, she’d need t o rest ruct ure her j ob com m it m ent s in order t o m inim ize t ravel and com m it t o choir pract ice. When she looked at t he whole pict ure of goals she could sat isfy t hrough t he sum of t hese act ivit ies, scaling back suddenly seem ed m ore posit ive. The pieces were enough. And, she recognized, t aking t his pat h would require cont inued growt h on her part —som et hing she had forgot t en she valued and which she now had t he confidence t o pursue st rat egically. Enduring success required enduring com m it m ent . Bu ildin g You r Ow n Ka le idoscope To creat e your own kaleidoscope, st art by sket ching out your fram ework. Take a piece of paper and draw four int ersect ing circles. Label t hem happiness, achievem ent , significance, and legacy. I n each circle, list self, fam ily, work, and com m unit y. This will enable you t o do a full invent ory of t he m ix and det erm ine how each piece falls in t he cont ext of each m aj or dom ain of your life. ( See t he exhibit “ My Personal Kaleidoscope.” )

Su cce ss is a bou t ch oice , m ove m e n t , pa t t e r n , a n d a st r u ct u r e t h a t h olds a ll t h e se pa r a t e a ct ivit ie s t oge t h e r .

Next , quickly j ot down exam ples of your successes or great sat isfact ions. You don’t have t o com e up wit h one for every it em in every circle—t his is j ust a quick sket ch of your beliefs about yourself, not t he full pict ure. Don’t spend t im e worrying about whet her you should put a part icular t arget next t o a part icular it em . Just work wit h your first im pulses. Take your college degree as an exam ple. You m ay feel t hat graduat ing from college was a m aj or achievem ent , a benchm ark in your overall career plans and som et hing you will value for your whole life. Your degree represent s a m ast ery of skills. You had t o com pet e successfully t o get t here and get t he grades. You felt sat isfact ion when you were successful. So you would writ e “ college” in your achievem ent cham ber, next t o t he word “ work.” But what if college represent ed ot her t hings for you? Significance in your fam ily life, for

exam ple, because your parent s or spouse really valued what you were doing? I n t hat case, you m ight also put college in your significance cham ber, next t o “ fam ily.” The point is not t o com pulsively divide your life int o lit t le circles and list s. Rat her, it is t o help you assess t he various t ypes of sat isfact ions you have already experienced and see what t hey add up t o. The answer is oft en m ore surprising or richer t han you m ay have suspect ed. Depending on your age, you m ight even want t o fill out fram ework profiles for several periods in your life. Did you want t he sam e t hings at 40 as you did at 20? Will you want t he sam e t hings at 60? At 85? Could you ever fully abandon one of t he cat egories and st ill feel t hat you were a success? ( This is t he t rap t hat m any ret irees and t hose who downscale t heir careers t o becom e full- t im e parent s fall int o.) Now, m et aphorically speaking, you can hold your kaleidoscope up t o t he light . Look at it obj ect ively, and ask yourself: 1. How int egrat ed is your profile? Are som e of t he dom ains em pt y? Are ot hers t oo full? I s each realm of your ident it y—self, fam ily, work, com m unit y—a deposit ory of only one sat isfact ion, or is t here a broader basis for success in each of t hese areas? 2. How varied is your profile? Where are m ost of your great est successes and sat isfact ions so far? Where are t he holes? The obsessions? Are t he cham bers and realm s evolving or repeat ing t he sam e t hings over and over? 3. What have you learned about what you act ually do? Where is your t im e going? How does it speak t o what you really want from success? Research int o success has shown t hat one of t he biggest causes of failure is an overreliance on one’s great est st rengt hs. Are you favoring what you do best and neglect ing your need for fulfillm ent in all four cat egories? Here’s how t he kaleidoscope st rat egy helped John, t he owner of a large real est at e com pany, find enduring success. John was having t rouble deciding what t o do wit h his business. Aft er a blowout wit h his t eenage child and a series of relent less, debilit at ing headaches, he decided he had t o cut back on his work. He had already bought a plane— against his fam ily’s wishes—and he had increased his t im e for him self, but he was st ill suffering. “ I know I should sell part of t his business for t he sake of m y happiness,” he said, “ but I j ust can’t do it .” We suggest ed he t ry put t ing t his sale in anot her cat egory, one t hat seem ed rat her em pt y. Why not t hink about t he sale as an act ive engagem ent in legacy rat her t han as a plat form for happiness? The pieces fit . Legacy is about building on your achievem ent s and values t o help ot hers succeed aft er you’re gone. John rem em bered a young m anager who had left t he firm , som eone who knew John’s values and was quit e accom plished in his own right . This person would probably welcom e t he chance t o head t he new spin- off, and he’d be likely t o ext end t he kind of business John had spent his life building. The buyers would need such a person, and John would be com fort able doing business wit h t hem . Aft er seeing t he sit uat ion from a different perspect ive, John was m ore decisive about t he sale and had a richer plat form of concret e goals around which t o st ruct ure t he t ransact ion: t he t erm s in which legacy would be fulfilled, t he new t im e fram e for his own enj oym ent of life, a revit alizing and m ore realist ic set of achievem ent goals, and a sense of providing t he space t o be t here for his daught er and wife wit hout giving up all t he challenges of t he real est at e business.

I dent ifying where his act ivit ies were locat ed in t he kaleidoscope gave John im m ediat e insight int o what he was seeking and get t ing from his effort s—as well as what was lacking. I n channeling your effort s effect ively t oward what you really seek from success, it ’s crit ical t o t est your profile against your idealized view of yourself. What do you want your profile of accom plishm ent s in each of t he four cat egories t o look like t om orrow? Next m ont h? Over your lifet im e? Th e Ka le idoscope St r a t e gy for Bu sin e sse s Sidebar R0 4 0 2 H _ A (Locat ed at t he end of t his art icle)

Ge t t in g t o “Ju st En ou gh ” I f you pay at t ent ion t o t he four cat egories and t heir relat ion t o one anot her, you can enrich t he pot ent ial for any act ivit y t o sat isfy you on num erous dim ensions, whet her at work, in your leisure t im e, or in som e ot her aspect of your life. The high achievers in our st udy were able t o accom plish great t hings for t hem selves and ot hers by recognizing t hey had m ult iple goals t hat were crit ical t o t heir idea of real success and by being fully com m it t ed t o what ever act ivit y t hey were engaged in. By swit ching and linking, t hey lim it ed t heir at t ent ion t o one t ask, and when ot her needs pressed, t hey were able t o m ake light ning fast changes of focus and em ot ional energy. I nst ead of feeling cheat ed because t hey couldn’t get it all, t hey were renewed by following t he cycle of at t ent ion t o each cat egory.

“Ju st e n ou gh ” is t h e a n t idot e t o socie t y’s a ddict ion t o t h e in fin it e “m or e .” How do you know when it ’s t im e t o st op your work in one cat egory and swit ch your at t ent ion t o anot her? That ’s where t he concept of “ j ust enough” becom es crit ical. Convent ional int erpret at ions of “ enough” don’t capt ure it s full pot ent ial. People t end t o use t he t erm t o express dissat isfact ion, as in, “ That ’s it ! I ’ve had enough! ” or as a code for m ediocrit y or passivit y, as in, “ I f I ’m j ust happy every day, t hat ’s enough.” We m ean som et hing else by enough, closer t o it s root definit ion: occurring in sufficient quant it y or qualit y t o sat isfy dem ands or needs. I f you have a firm idea of t he big pict ure in your kaleidoscope of success, it becom es easier t o det erm ine and appreciat e “ enough” in any one act ivit y. Wit hout losing your energy for high aspirat ions, you set reachable goals. “ Just enough” is t he ant idot e t o societ y’s addict ion t o t he infinit e “ m ore.” Seen in t hat light , it becom es a vehicle for act ively m aking choices t hat allow you t o do and get m ore, not less, t hrough achieving sat isfact ion in m ore areas of your life.

Reprint Num ber R0402H

Th e Ka le idoscope St r a t e gy for Bu sin e sse s

Sidebar R0 4 0 2 H _ A

What m akes for t he enduring success of a com pany? I n our view, businesses prosper when t hey enable individuals and societ y t o achieve all four cat egories of enduring success: happiness, achievem ent , significance, and legacy. Aft er all, could any com pany survive if everyone were m iserable in t heir j ob? Happiness in an organizat ion is essent ial, and it grows in cult ures of t rust and respect . And what com pany succeeds wit hout solving problem s and execut ing bet t er t han it s com pet it ors? I nnovat ion and result s are classic form s of business achievem ent . What great business doesn’t add value for it s cust om ers, it s shareholders, and it s com m unit y? Providing such useful services is clearly significant . Of course, no business could t hrive for long wit hout act ive at t ent ion t o it s legacy. I n fact , classic exam ples of enduring success—Johnson & Johnson’s careful handling of t he Tylenol- t am pering episode or t he developm ent of an open- access st andardized dom ain assignm ent syst em for t he I nt ernet by Jon Post el and ot hers— illust rat e wins in all four cat egories of t he kaleidoscope. Many of t oday’s weak business et hics and perform ance problem s can be t raced t o a failure t o adopt t he skills of enduring success. The favored candidat e for “ running t hings” is oft en t he achievem ent - driven m axim izer, but t oo oft en, t hat approach runs t he business ( and t he leader) int o t he ground. This neglect creat es cost ly success pat hologies such as greed, lack of loyalt y or com m it m ent , burnout , insensit ivit y, and t he dem oralizat ion of knowing t hat your work isn’t m aking a posit ive cont ribut ion t o societ y. To creat e a plat form for enduring success in your organizat ion, it ’s im port ant t o discuss t he feat ures of all four segm ent s of success in a collect ive kaleidoscope exercise. Com panies t hat t ake responsibilit y for t eaching t heir em ployees t o pursue t he four cat egories of success and t o develop t heir “ swit ching and linking” skills—t heir abilit y t o shift focus quickly from one t ask t o anot her—will creat e t he condit ions for com m it m ent , happiness, sat isfact ion, and cont inuit y in t heir organizat ions. To det erm ine how well your business is perform ing in t he four cat egories of success, consider t he following t est s: H a ppin e ss. Does your corporat e cult ure allow em ployees t o let down t heir guard and enj oy t he m om ent —bot h individually and collect ively? Ach ie ve m e n t . Are your financial vict ories t he reward for genuine m ast ery of im port ant new problem s or a num bers gam e wit h no real result s? Sign ifica n ce . Does your product or service creat e real value for ot hers? Le ga cy. Are you preparing t he organizat ion for t he next generat ion of success by invest ing in people, innovat ion, cust om er needs, and syst em s?

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Su cce ss Th a t La st s

The Kaleidoscope St rat egy for Businesses What m akes for t he enduring success of a com pany? I n our view, businesses prosper when t hey enable individuals and societ y t o achieve all four cat egories of enduring success: happiness, achievem ent , significance, and legacy. Aft er all, could any com pany survive if everyone were m iserable in t heir j ob? Happiness in an organizat ion is essent ial, and it grows in cult ures of t rust and respect . And what com pany succeeds wit hout solving problem s and execut ing bet t er t han it s com pet it ors? I nnovat ion and result s are classic form s of business achievem ent . What great business doesn’t add value for it s cust om ers, it s shareholders, and it s com m unit y? Providing such useful services is clearly significant . Of course, no business could t hrive for long wit hout act ive at t ent ion t o it s legacy. I n fact , classic exam ples of enduring success—Johnson & Johnson’s careful handling of t he Tylenol- t am pering episode or t he developm ent of an open- access st andardized dom ain assignm ent syst em for t he I nt ernet by Jon Post el and ot hers— illust rat e wins in all four cat egories of t he kaleidoscope. Many of t oday’s weak business et hics and perform ance problem s can be t raced t o a failure t o adopt t he skills of enduring success. The favored candidat e for “ running t hings” is oft en t he achievem ent - driven m axim izer, but t oo oft en, t hat approach runs t he business ( and t he leader) int o t he ground. This neglect creat es cost ly success pat hologies such as greed, lack of loyalt y or com m it m ent , burnout , insensit ivit y, and t he dem oralizat ion of knowing t hat your work isn’t m aking a posit ive cont ribut ion t o societ y. To creat e a plat form for enduring success in your organizat ion, it ’s im port ant t o discuss t he feat ures of all four segm ent s of success in a collect ive kaleidoscope exercise. Com panies t hat t ake responsibilit y for t eaching t heir em ployees t o pursue t he four cat egories of success and t o develop t heir “ swit ching and linking” skills—t heir abilit y t o shift focus quickly from one t ask t o anot her—will creat e t he condit ions for com m it m ent , happiness, sat isfact ion, and cont inuit y in t heir organizat ions. To det erm ine how well your business is perform ing in t he four cat egories of success, consider t he following t est s: H a ppin e ss. Does your corporat e cult ure allow em ployees t o let down t heir guard and enj oy t he m om ent —bot h individually and collect ively? Ach ie ve m e n t . Are your financial vict ories t he reward for genuine m ast ery of im port ant new problem s or a num bers gam e wit h no real result s? Sign ifica n ce . Does your product or service creat e real value for ot hers? Le ga cy. Are you preparing t he organizat ion for t he next generat ion of success by invest ing in people, innovat ion, cust om er needs, and syst em s?

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Turning Gadflies int o Allies

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Com pa n ie s vie w n on gove r n m e n t a l or ga n iza t ion s a s pe st s, or w or se . Bu t j oin in g t h e m ca n be m or e pr odu ct ive t h a n sw a t t in g t h e m , a n d j u st m igh t give you r com pa n y a n e dge .

You r bu sin e ss is a t r isk if...

by M ich a e l Ya zij i

Mult inat ional com panies are t he driving force behind globalizat ion, but t hey are also t he source of m any of it s m ost painful consequences, including currency crises, cross- border pollut ion, and overfishing. These rem ain unsolved due t o t wo kinds of failures. For one, such issues are, by t heir nat ure, beyond t he scope of individual governm ent s t o avoid or resolve. For t he ot her, t ransnat ional organizat ions, such as t he World Bank, t he I nt ernat ional Monet ary Fund, and t he World Trade Organizat ion, have proved unequal t o t he t ask. I nt o t he breach have leaped not - for- profit , nongovernm ent al organizat ions ( NGOs) of concerned cit izens. Realizing t hat news of cross- border problem s can also cross borders, NGOs have sponsored angry prot est s in Seat t le, Davos, Göt eborg, and Genoa. While t hese are perhaps t he best - publicized dem onst rat ions of nongovernm ent al organizat ions’ act ivism , t hey are hardly t he only ones. NGOs have seized on all form s of m odern persuasion—from advert ising t o boycot t s and even sabot age—in order t o influence public sent im ent t oward global t raders, m anufact urers, and invest ors. The NGOs hope t hat t hey can effect policy changes in t his way. I n m any NGOs’ view, com panies t hat incorporat e offshore t o avoid t axes or t hat send j obs overseas dem onst rat e a lack of allegiance t o t heir count ry of origin. At t he sam e t im e, by failing t o bring wit h t hem t he labor and hum an right s st andards prevailing in t he developed world, t hese com panies appear unconcerned wit h t he welfare of t he count ries where t hey do business. Yet t heir econom ic power frust rat es official effort s t o cont rol t heir act ivit ies. Such views can harden int o a purely opposit ional st ance. Guy Taylor, a spokesperson for London- based Globalize Resist ance, says his organizat ion has as it s aim a world free of corporat ions and t hat it would welcom e t heir dest ruct ion. Yet while an ant icorporat e backlash cont inues t o grow, m any influent ial NGOs are increasingly com posed of seriousm inded, educat ed professionals who pursue a m ore m oderat e agenda. While NGOs m ay not forswear t ough public cam paigns against com panies t hey t hink are act ing selfishly or short sight edly, lat ely t hey have becom e m ore willing t o ent er int o negot iat ions wit h t hem . NGOs like t hese have t he skills, resources, insight s, and dept hs of popular support t hat m ake it unwise for com panies t o confront t hem head- on. For exam ple, in 2001, NGOs obliged Avent is t o spend m ore t han $500 m illion on buying back genet ically m odified St arlink corn from growers, ult im at ely leading it t o spin off it s agricult ural business. NGOs have also virt ually closed t he EU m arket t o t he agricult ural biot ech indust ry. And in t he face of a public relat ions disast er t hat nongovernm ent al organizat ions such as Doct ors Wit hout Borders and Oxfam I nt ernat ional incit ed, GlaxoSm it hKline, Merck, Brist ol- Myers Squibb, Roche, and ot her pharm aceut ical com panies wit hdrew a lawsuit challenging a Sout h African law t hat undercut pat ent enforcem ent of t heir AI DS drugs. Those com panies m ight have avoided such out com es by part nering wit h NGOs inst ead of flat ly opposing t hem . Doing so would have offered t he com panies t he chance not only t o avoid cost ly conflict but also t o use NGOs’ asset s t o gain com pet it ive advant age. I ’ve found evidence of NGOs’ recept iveness t o such an approach in case st udies, archival dat a, and in- dept h int erviews wit h execut ives from Greenpeace, t he World Wildlife Fund, t he Marine St ewardship Council, and ot her NGOs. I ’ve also spoken wit h front line m anagers and t he CEOs of com panies such as Shell, ExxonMobil, and Monsant o, who

M ich a e l Ya zij i is a PhD candidat e at I nsead, in Font ainebleau, France, and is t he founder of it s Business and Societ y Forum . He is a form er lect urer in philosophy and et hics at t he Universit y of California, Sant a Barbara.

at t est ed bot h t o t he cost s of being at t acked by NGOs and t o t he challenges and benefit s of part nering wit h t hem . So far, however, m ost com panies have proved ill equipped t o deal wit h NGOs. One reason is t hat NGO at t acks pose very different challenges from t hose m ount ed by business com pet it ors. Large com panies know how t o com pet e on t he basis of product at t ribut es and price. But NGO at t acks focus on product ion m et hods and t heir spillover, oft en noneconom ic effect s. Sim ilarly, NGOs are able t o convert int o liabilit ies com panies’ st andard com pet it ive st rengt hs such as size and wide m arket awareness of t heir brands. That ’s because t he wealt hier and bet t er known a com pany is, t he j uicier t he t arget it m akes. ( See t he box t hat lays out businesses at risk.) You r bu sin e ss is a t r isk if... NGOs have developed special, oft en I nt ernet - enabled, capabilit ies for t urning t he t ables in t hese ways. For one t hing, NGOs are ferocious net workers. I t is not out of t he ordinary for an NGO in, say, Bangalore t o share inform at ion and coordinat e st rat egies wit h count erpart s in Bost on and Budapest . One favorit e NGO st rat egy is “ swarm ing” —an at t ack on a single corporat ion by a host of sm all, m odest ly funded advocacy groups. Corporat ions like t o t hink of t hem selves as operat ing on “ I nt ernet t im e,” but NGOs are m uch nim bler. I ssue- cent ered global coalit ions of hundreds of NGOs can m at erialize and m obilize wit hin days. Em boldened by t heir successes, NGOs cont inue t o t ake on, or form around, new causes. The num ber of NGOs wit h global concerns has quadrupled t his past decade, a fact part ly reflect ed in t he t went yfold increase over t he last t en years in m ent ions of NGOs generally in t he Wall St reet Journal and t he Financial Tim es. To such advocacy groups and independent wat chdog organizat ions, sim ple com pliance wit h all applicable laws is not t he end of a corporat ion’s responsibilit ies—if t he laws t hem selves are insufficient ly prot ect ive. To NGOs’ way of t hinking, t hey have a perm anent m andat e t o fill t he regulat ory vacuum . I n t he face of such num bers and expect at ions, com panies would be well advised t o look for com m on ground. St r e n gt h s W or t h Cove t in g Nongovernm ent al organizat ions have four st rengt hs t hat corporat ions would be well served t o heed. They are legit im acy, awareness of social forces, dist inct net works, and specialized t echnical expert ise. The public best ows t he first , and t he second is a funct ion of t he NGOs’ m ission. The lat t er t wo refer t o com pet ences t hat NGOs have developed by vent uring where corporat ions usually don’t go.

Le git im a cy. According t o a poll conduct ed by t he Edelm an public relat ions firm , bot h Am ericans and Europeans said t hey found NGO spokespeople m ore credible t han eit her a com pany’s CEO or PR represent at ive. Som e fract ion of t he public, especially in Europe,

sees NGOs as dedicat ed first and forem ost t o serving an aspect of t he general social welfare. While m any com panies produce direct benefit s t o societ y—t hose in t he pharm aceut ical and food indust ries being obvious exam ples—t he public int erpret s t hose benefit s as by- product s of t he com panies’ profit m ot ive rat her t han as t he direct result of t heir desire t o feed or care for t heir fellow hum an beings. Suspicion of com panies’ m ot ives can becom e so ent renched t hat t he soundest solut ions aren’t given a fair hearing. The fat e of Shell Oil’s Brent Spar st orage and t anker offloading syst em is one such exam ple. Aft er conduct ing a t horough analysis of what t o do wit h t he plat form , Shell concluded t hat t owing it int o t he deep wat er of t he Nort h At lant ic and t hen sinking it was t he best alt ernat ive from an environm ent al st andpoint . ( I t would also be £40 m illion cheaper t han dism ant ling t he plat form on land.) Out raged by t he plan, Greenpeace organized a boycot t of Shell product s in t he UK and sent prot est ers t o occupy t he facilit y. Ult im at ely, Shell succum bed t o public pressure and hauled t he rig ashore for dism ant ling. Greenpeace subsequent ly adm it t ed t hat it had overst at ed t he am ount of oil residues in t he t ank and t hus t he harm ful environm ent al effect s of scut t ling. Aw a r e n e ss of Socia l For ce s. Com panies live and die by t he m arket s t hey com pet e in; NGOs, by t he ebb and flow of people’s concerns about t he safet y and fairness of condit ions worldwide. Alt hough t he gulf bet ween t he t wo arenas is large, businesses can learn m uch from NGOs’ at t unem ent t o and influence on shift s in com m on beliefs and m ores t hat in t urn shape consum er dem and. For exam ple, in t he early 1970s, years before organizat ions such as People for t he Et hical Treat m ent of Anim als were organizing boycot t s of fur apparel, and guerrillas from t he Anim al Liberat ion Front were infilt rat ing m ink farm s t o free t he anim als caged t here, groups such as Anim al Right s I nt ernat ional had highlight ed indust rial condit ions afflict ing anim als generally. I f fur, cosm et ics, poult ry, and fast - food com panies had not ed t he public’s first st irrings of hum ane concern, t hey could have m odified t heir pract ices and avoided t he ensuing bad publicit y and econom ic harm . D ist in ct N e t w or k s. Most com panies’ net works prim arily consist of organizat ions t hat would belong am ong Michael Port er’s five forces m odel of buyers, suppliers, rival firm s, new ent rant s, and subst it ut e producers. NGOs’ net works, by cont rast , m ost ly consist of ot her NGOs, as well as donors, regulat ors, legislat ors, and public- int erest lobbyist s. These net works are oft en quit e ext ensive and dense, since m any NGOs are sm all, lack resources, and m ust form coalit ions t o be effect ive. Part nering wit h NGOs is an excellent way t o gain access t o t he inform at ion circulat ing wit hin t heir net works. Spe cia lize d Te ch n ica l Ex pe r t ise . NGO m em bers are oft en t hought of as young, unsophist icat ed m alcont ent s. I n realit y, t he m ore est ablished NGOs are filled wit h lawyers, policy analyst s, and scient ist s. Half t he em ployees of t he largest , m ost influent ial environm ent al NGOs have m ast er’s or law degrees, and 10% t o 20% have doct orat es. Many of t hem possess knowledge t hat t he com panies being t arget ed lack. The NGOs m ay know about a new t echnology t hat is superior only in it s environm ent al im pact and t herefore escaped businesses’ at t ent ion. Or t hey m ay have not iced a j udicial ruling in an out - of- t he- way j urisdict ion t hat m ay one day set a st andard of conduct nat ionwide. Out of fear t hat t heir own research int o ways of m it igat ing harm m ight est ablish liabilit y, com panies are som et im es willfully ignorant of developm ent s t hat NGOs are aggressively pursuing. N o M or e N o- Go There are five prim ary benefit s t o part nering wit h NGOs: H e a d off t r ou ble . Alt hough NGOs are known for engineering confront at ions, t he m ore est ablished of t hese increasingly recognize t hat negot iat ing direct ly wit h com panies is m ore efficient t han put t ing on a negat ive cam paign in hopes t hat t he public will t hen pressure governm ent officials or t he com panies t hem selves t o correct t he sit uat ion t hey’ve creat ed. From t he com panies’ st andpoint as well, t he involvem ent of m ot ivat ed expert s in place of com m it t ed adversaries m akes negot iat ion a m ore prom ising alt ernat ive. As soon as t he first signs of disagreem ent wit h a proj ect proposal are in evidence— whet her it be a let t er t o t he edit or, a pet it ion, or a picket line—t he com pany under scrut iny should invit e t he crit ics in for a discussion. Even bet t er, com panies should learn t he concerns of t he NGOs t hat follow t heir indust ry and sound t hem out while a pot ent ially cont roversial proj ect is st ill on t he drawing board. Such is t he m et hod current ly em ployed by Shell, which regularly brings t oget her int erest ed groups such as t he World Wildlife Fund, Am nest y I nt ernat ional, and local

NGOs at t he init ial st ages of proj ect planning and evaluat ion. As one senior Shell execut ive st at ed, “ [ Brent Spar] led us t o a new approach in which we t ry t o prevent crises t hrough open dialogue. The discussions aren’t always easy, but t here is a reasonable am ount of m ut ual t rust and underst anding bet ween us now.” An added benefit , according t o t he execut ive, is t hat t he com pany now has an open channel of com m unicat ion wit h t he NGOs t hat at t acked it in earlier cont roversies. I f consult at ions occur regularly inst ead of during t im es of crisis, confront at ion is less likely. Consult at ions should include all int erest ed part ies, all gat hered around t he sam e t able. That way, t he part y urging an NGO t o soft en it s dem ands m ay not be t he com pany it self but a fellow NGO. Aft er all, different NGOs represent different int erest s. Som e groups focus on hum an right s, som e on t he prot ect ion of endangered species, som e on com m unit y concerns. When a large- scale proj ect produces diverse result s, cert ain NGOs can end up favoring it and ot hers opposing it . For inst ance, a fact ory being planned m ight bring j obs t o t he local populat ion but acid rain t o t he adj oining st at e. Two NGOs could assess t he hazards and benefit s different ly, even t hough t heir net works overlap. Privat e negot iat ion is preferable t o public dem onst rat ions, especially when it concerns proj ect s t hat have not yet been m ade public. The t wo have t rouble coexist ing, since public post uring by eit her part y can erode t he t rust and candor t hat are essent ial for progress t o occur in privat e. I f a com pany’s reput at ion t urns out t o be bad enough, m ost NGOs will refuse t o negot iat e wit h it for fear t hey will lose t heir bona fides. Som e m ay be willing but will keep quiet about it . One environm ent al NGO I know well has a part nership wit h a global fast - food corporat ion. The NGO provides it wit h t echnical guidance on reducing wast e. Many environm ent alist s t hink it s st andard pract ices place it beyond t he pale, so t he NGO does not t alk about t he part nership. As a senior execut ive of t he NGO t ells it , “ We t hink t his part nership is a good t hing. I t accords wit h our m ission. But not all of our support ers would be t hrilled at t he associat ion. We don’t lie about it , but it j ust isn’t an act ivit y t hat we advert ise.” Com panies wit h decent records t hat acquire a reput at ion for approachabilit y will raise t heir st anding am ong responsible NGOs generally. And such com panies will obt ain valuable exposure t o NGOs’ concerns and ways of t hinking. Acce le r a t e in n ova t ion . I n t he absence of a dire com pet it ive t hreat , m ost com panies are cont ent t o m ake increm ent al im provem ent s t o t heir processes or product s. By focusing on t he wider effect s of com panies’ pract ices rat her t han on t heir cost s or profit abilit y, NGOs are able t o dem and m ore of an ent erprise t han it som et im es dem ands of it self. The result can be radical solut ions t hat im prove som e aspect of societ y or t he environm ent while also increasing com pet it iveness. The creat ion of a m arket for liquefied pet roleum gas ( LPG) refrigerat ors occurred in j ust t his way. I n response t o t he Mont real Prot ocol’s call for elim inat ing ozone- dest roying chlorofluorocarbons by 1996, t he chem ical indust ry encouraged appliance m akers t o replace t hem wit h hydrochlorofluorocarbons ( HCFCs) , greenhouse gases wit h less ozonedest roying pot ent ial. DuPont and I CI , t he specialt y product and paint developer, invest ed m ore t han $500 m illion in research int o HCFCs and facilit ies for m anufact uring t hem . But in 1991, Greenpeace convinced DKK Scharfenst ein, an appliance m anufact urer in east ern Germ any, t o develop a refrigerat or based on LPG. ( I t didn’t hurt t he com pany’s recept iveness t hat it was on t he verge of bankrupt cy and t hat LPG is far less expensive t han st andard refrigerant s.) The environm ent ally conscious Germ an consum er m arket em braced DKK Scharfenst ein’s refrigerat ors cont aining t he new t echnology. By 1994, Bosch and Liebherr, t wo of Germ any’s largest appliance m akers, had m oved alm ost exclusively t o LPG- based refrigerat ors. Today, refrigerat ors wit h LPG t echnology dom inat e t he m arket s in m any European count ries. For e se e sh ift s in de m a n d. NGOs oft en lead social m ovem ent s. They det ect lat ent but burgeoning concern about an issue, which t hey t hen am plify. New norm s and values em erge t hat will, event ually, influence consum ers’ t ast es. Ult im at ely, t hey can endanger ent ire indust ries. For exam ple, t he nuclear energy and genet ically m odified food indust ries have becom e em bat t led and shrunken at least in part because of NGOsponsored cam paigns highlight ing t he dangers t hey pose. Such m ovem ent s can also direct consum ers t o subst it ut es t hat becom e t he basis of new growt h indust ries. Take t he $10 billion organic foods business, which has been enj oying annual growt h rat es of 20% t o 30% for t he past decade. By t he t im e Monsant o and ot her com panies began int roducing genet ically m odified foods t o t he European m arket in hopes of

launching t heir own kind of growt h indust ry, a public already t raum at ized by m ad cow disease had becom e acut ely conscious of t he safet y and purit y of t he food it at e. Then NGOs such as Friends of t he Eart h and Greenpeace publicized t he dangers of crosspollinat ion and t he t hreat t o but t erflies and ot her insect s. Flush wit h t heir success in t he Unit ed St at es ( where, for exam ple, half t he soybean crop is genet ically m odified) , t he com panies producing genet ically m odified foods failed t o t ake t he t rue m easure of Europeans’ resist ance. Wit hin j ust a few years, governm ent regulat ion and public dist ast e had driven genet ically m odified foods off Europe’s st ore shelves. By consult ing wit h NGOs, producers of t hese foods could have avoided invest ing in a m arket t hat was sim ply not int erest ed and saved t hem selves billions of dollars. NGOs are good at sensing shift s in t ast e and values. They should be, since t hey are usually born during one of t hose shift s and depend for t heir survival on keeping up wit h t hem . ( The rise and fall of an NGO’s funding t ends t o reflect t he ext ent of t he public’s alarm about t he sort s of issues t hat an NGO addresses.) But NGOs don’t sim ply respond t o t hose shift s. I n a posit ive feedback loop, t hey help redirect and cont rol t hem . By st aying close t o groups t hat are expert at following and shaping public opinion, com panies get a leg up, eit her in t heir product developm ent or t heir m arket ing. Sh a pe le gisla t ion . Through it s t ax policies, regulat ion of com pet it ion, grant s of pat ent prot ect ion, and prom ulgat ion of labor and environm ent al st andards, t o nam e j ust som e of it s powers, governm ent is perhaps t he great est nonm arket force shaping indust ry. NGOs have access t o like- m inded legislat ors and regulat ors t hat even t he best connect ed corporat e lobbyist s m ay not know well. Oft en, NGOs hear of behind- t hescenes m aneuvering or legislat ive init iat ives brewing long before t hey reach t he com m it t ee level. And t hey are som et im es willing t o report t hese t o com panies t hey t rust . The result is usually bet t er- inform ed legislat ion. Som e NGOs are form idable lobbying organizat ions in t heir own right . As a World Wildlife Fund execut ive in Brussels explained t o m e, “ When I speak wit h EU lawm akers, I can reasonably claim t o be speaking on behalf of 5 m illion fee- paying m em bers. Polit icians list en.” Thus, by working wit h NGOs, com panies can have a great er im pact on fut ure legislat ion t han t hey would if t hey were speaking st rict ly on behalf of t heir own econom ic int erest s and in opposit ion t o what m ay be societ y’s well- being. An appreciat ion of t he ot her side’s perspect ive perm it s t he brokering of int erest s t hat oft en precedes t he writ ing of new law. Bot h com panies and NGOs know t hat t hey can gain far great er influence by bringing an opponent int o t heir coalit ion t han by adding yet one m ore indust ry m em ber or support er. Se t in du st r y st a n da r ds. Cooperat ing wit h NGOs gives com panies a chance not only t o avoid various kinds of t rouble but also t o reshape t heir indust ry, som et im es for t heir own benefit . They can do t his by est ablishing new t echnology st andards, as DKK Scharfenst ein happened t o do when it developed it s new kind of refrigerat or. These t echnology st andards t hen becom e t he basis of new labor or environm ent al st andards, which are enforced eit her by governm ent m andat e or m arket preference. Unilever pursued t his st rat egy in it s groundbreaking part nership wit h t he World Wildlife Fund. The t wo organizat ions j oined forces t o deal wit h a serious decline in fisheries around t he world. Bot h knew t hat volunt ary rest raint on t he part of som e fleet s would have no effect on t he num ber of fish caught , since t he ot her fleet s would increase t heir cat ches accordingly—a classic problem of t he com m ons. Yet all of t hem would suffer econom ically as t he size of t heir cat ches shrank or t heir voyages ranged fart her and last ed longer. The t wo organizat ions got t oget her in 1996 t o develop precise st andards for responsible and sust ainable fishing pract ices. Since it s founding in 1999, t he Marine St ewardship Council has accredit ed m ore t han 100 com panies, in 20 count ries, t hat adhere t o it s st andards. Accredit at ion gives t hose com panies t he right t o put t he MSC logo on t heir product s. I n collaborat ion wit h NGOs, indust ries ranging from coffee product ion t o clot hing m anufact uring t o forest ry have est ablished sim ilar cert ificat ion program s. Aside from prot ect ing t he nat ural resources on which part icipat ing businesses depend, t he program s have in effect creat ed cat egories of sought - aft er product s defined by t he label t hey carry. Environm ent ally m inded consum ers, for inst ance, will prefer a can of t una labeled “ dolphin free” over one sim ply labeled “ light t una.’’ A reput at ion for advancing t he com m on good is not t he only benefit t hat accrues t o first m overs. By set t ing dem anding st andards, t hey present t heir com pet it ors wit h a dilem m a: Eit her invest large am ount s of capit al in m eet ing t hose st andards or face condem nat ion for refusing t o do so. And for would- be at t ackers out side t he m arket in

quest ion, st andards can serve as barriers t o ent ry. I f you dom inat e your m arket , you m ight want t o set a t echnical st andard t hat your less well- capit alized com pet it ors would have t o st ruggle t o afford, or t hat applies t o an area in which t hey would prefer not t o com pet e. I f you don’t dom inat e your m arket but deploy a t echnology t hat is safer or cleaner t han your rivals’, you m ay want t o work at get t ing t hat t echnology adopt ed as t he new regulat ory st andard. NGOs should be willing t o assist you in t his. Being a first m over allows you t o generat e st andards t hat are rat ional, pract icable, and uniform . When m arket s fall int o line behind such st andards, t hey reduce t he danger t hat m ore t han one j urisdict ion or regulat ory body, each wit h it s own idiosyncrat ic not ions, will st ep in. I n t he Unit ed St at es in part icular, where t he 50 st at es as well as t he federal governm ent oft en exercise regulat ory oversight , com pliance can be difficult and expensive when a single indust ry st andard does not prevail. A caveat is in order. Credible NGOs will oft en insist on higher st andards of behavior t han a firm left t o it s own devices would choose. I n short , an NGO endorsem ent m ay not com e cheaply.

• • • I t ’s good business t o m ake social and environm ent al concerns a key part of decision m aking. But it ’s not always possible. Bill Ford, CEO of Ford Mot or, once said, “ Transparency, st akeholder engagem ent , and account abilit y…will be t he regulat ory t ools of t he t went y- first cent ury.’’ He lat er had t o concede t hat his com pany’s com m it m ent t o helping cut greenhouse gases “ will be t em pered by our near- t erm business realit ies.’’ Even when part nerships wit h NGOs are possible, t hey carry t heir own risks. First , if your com pany int eract s wit h NGOs, it is likely providing t hem ( and, by ext ension, your com pet it ors and regulat ors) wit h sensit ive inform at ion. Knowledge of R&D proj ect s, st rat egic plans, and int ernal audit s m ay help NGOs be bet t er part ners, but it m ight also m ake t hem dangerous ones. Just as com panies have disclosure policies for j oint vent ures, t hey should have st rict guidelines for part nerships wit h NGOs. Second, part nering wit h NGOs, and advert ising it , can draw st rict er scrut iny from t he public, t he press, regulat ors, and so on t han your com pany form erly received. A lapse t hat earlier would not have been not ewort hy will suddenly call int o quest ion your com pany’s sincerit y, m aking furt her cooperat ion wit h NGOs difficult . Worse, cynics are likely t o accuse your com pany of being int erest ed exclusively in im age building. CorpWat ch, a corporat e wat chdog, gives out so- called Greenwash Awards t o corporat ions t hat “ put m ore m oney, t im e, and energy int o slick PR cam paigns aim ed at prom ot ing t heir eco- friendly im ages t han t hey do in act ually prot ect ing t he environm ent .” I n short , an overriding int erest in good public relat ions can have t he perverse result of act ually dam aging your com pany’s reput at ion. Part nering wit h an NGO requires not hing less t han a change in m ent alit y. I n m y experience, ot herwise highly com pet ent execut ives find t hem selves at sea when t hey vent ure int o t he sociopolit ical realm , which operat es according t o it s own set of rules. Ask an execut ive his ult im at e responsibilit y, and he will probably say, “ Maxim ize shareholder ret urn.” NGOs—wit h fundam ent ally different assum pt ions about t he free m arket and t he role of corporat ions in societ y—will see t hat answer as t he problem . And t hey will act accordingly.

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Just as m ost progressive NGOs t ake int o considerat ion com panies’ econom ic realit ies when t hey work t o form ulat e t heir goals, com panies m ust incorporat e an underst anding of NGOs’ values and concerns int o t heir ordinary cost - benefit calculat ions. I f t hey do, t hey will be bet t er prepared when NGOs, invit ed or not , arrive on t heir doorst ep.

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Turning Gadflies int o Allies Com pa n ie s vie w n on gove r n m e n t a l or ga n iza t ion s a s pe st s, or w or se . Bu t j oin in g t h e m ca n be m or e pr odu ct ive t h a n sw a t t in g t h e m , a n d j u st m igh t give you r com pa n y a n e dge .

by M ich a e l Ya zij i M ich a e l Ya zij i is a PhD candidat e at I nsead, in Font ainebleau, France, and is t he founder of it s Business and Societ y Forum . He is a form er lect urer in philosophy and et hics at t he Universit y of California, Sant a Barbara.

Mult inat ional com panies are t he driving force behind globalizat ion, but t hey are also t he source of m any of it s m ost painful consequences, including currency crises, cross- border pollut ion, and overfishing. These rem ain unsolved due t o t wo kinds of failures. For one, such issues are, by t heir nat ure, beyond t he scope of individual governm ent s t o avoid or resolve. For t he ot her, t ransnat ional organizat ions, such as t he World Bank, t he I nt ernat ional Monet ary Fund, and t he World Trade Organizat ion, have proved unequal t o t he t ask. I nt o t he breach have leaped not - for- profit , nongovernm ent al organizat ions ( NGOs) of concerned cit izens. Realizing t hat news of cross- border problem s can also cross borders, NGOs have sponsored angry prot est s in Seat t le, Davos, Göt eborg, and Genoa. While t hese are perhaps t he best - publicized dem onst rat ions of nongovernm ent al organizat ions’ act ivism , t hey are hardly t he only ones. NGOs have seized on all form s of m odern persuasion—from advert ising t o boycot t s and even sabot age—in order t o influence public sent im ent t oward global t raders, m anufact urers, and invest ors. The NGOs hope t hat t hey can effect policy changes in t his way. I n m any NGOs’ view, com panies t hat incorporat e offshore t o avoid t axes or t hat send j obs overseas dem onst rat e a lack of allegiance t o t heir count ry of origin. At t he sam e t im e, by failing t o bring wit h t hem t he labor and hum an right s st andards prevailing in t he developed world, t hese com panies appear unconcerned wit h t he welfare of t he count ries where t hey do business. Yet t heir econom ic power frust rat es official effort s t o cont rol t heir act ivit ies. Such views can harden int o a purely opposit ional st ance. Guy Taylor, a spokesperson for London- based Globalize Resist ance, says his organizat ion has as it s aim a world free of corporat ions and t hat it would welcom e t heir dest ruct ion. Yet while an ant icorporat e backlash cont inues t o grow, m any influent ial NGOs are increasingly com posed of seriousm inded, educat ed professionals who pursue a m ore m oderat e agenda. While NGOs m ay not forswear t ough public cam paigns against com panies t hey t hink are act ing selfishly or short sight edly, lat ely t hey have becom e m ore willing t o ent er int o negot iat ions wit h t hem .

NGOs like t hese have t he skills, resources, insight s, and dept hs of popular support t hat m ake it unwise for com panies t o confront t hem head- on. For exam ple, in 2001, NGOs obliged Avent is t o spend m ore t han $500 m illion on buying back genet ically m odified St arlink corn from growers, ult im at ely leading it t o spin off it s agricult ural business. NGOs have also virt ually closed t he EU m arket t o t he agricult ural biot ech indust ry. And in t he face of a public relat ions disast er t hat nongovernm ent al organizat ions such as Doct ors Wit hout Borders and Oxfam I nt ernat ional incit ed, GlaxoSm it hKline, Merck, Brist ol- Myers Squibb, Roche, and ot her pharm aceut ical com panies wit hdrew a lawsuit challenging a Sout h African law t hat undercut pat ent enforcem ent of t heir AI DS drugs. Those com panies m ight have avoided such out com es by part nering wit h NGOs inst ead of flat ly opposing t hem . Doing so would have offered t he com panies t he chance not only t o avoid cost ly conflict but also t o use NGOs’ asset s t o gain com pet it ive advant age. I ’ve found evidence of NGOs’ recept iveness t o such an approach in case st udies, archival dat a, and in- dept h int erviews wit h execut ives from Greenpeace, t he World Wildlife Fund, t he Marine St ewardship Council, and ot her NGOs. I ’ve also spoken wit h front line m anagers and t he CEOs of com panies such as Shell, ExxonMobil, and Monsant o, who at t est ed bot h t o t he cost s of being at t acked by NGOs and t o t he challenges and benefit s of part nering wit h t hem . So far, however, m ost com panies have proved ill equipped t o deal wit h NGOs. One reason is t hat NGO at t acks pose very different challenges from t hose m ount ed by business com pet it ors. Large com panies know how t o com pet e on t he basis of product at t ribut es and price. But NGO at t acks focus on product ion m et hods and t heir spillover, oft en noneconom ic effect s. Sim ilarly, NGOs are able t o convert int o liabilit ies com panies’ st andard com pet it ive st rengt hs such as size and wide m arket awareness of t heir brands. That ’s because t he wealt hier and bet t er known a com pany is, t he j uicier t he t arget it m akes. ( See t he box t hat lays out businesses at risk.) You r bu sin e ss is a t r isk if... Sidebar R0 4 0 2 J_ A (Locat ed at t he end of t his art icle)

NGOs have developed special, oft en I nt ernet - enabled, capabilit ies for t urning t he t ables in t hese ways. For one t hing, NGOs are ferocious net workers. I t is not out of t he ordinary for an NGO in, say, Bangalore t o share inform at ion and coordinat e st rat egies wit h count erpart s in Bost on and Budapest . One favorit e NGO st rat egy is “ swarm ing” —an at t ack on a single corporat ion by a host of sm all, m odest ly funded advocacy groups. Corporat ions like t o t hink of t hem selves as operat ing on “ I nt ernet t im e,” but NGOs are m uch nim bler. I ssue- cent ered global coalit ions of hundreds of NGOs can m at erialize and m obilize wit hin days. Em boldened by t heir successes, NGOs cont inue t o t ake on, or form around, new causes. The num ber of NGOs wit h global concerns has quadrupled t his past decade, a fact part ly reflect ed in t he t went yfold increase over t he last t en years in m ent ions of NGOs generally in t he Wall St reet Journal and t he Financial Tim es. To such advocacy groups and independent wat chdog organizat ions, sim ple com pliance wit h all applicable laws is not t he end of a corporat ion’s responsibilit ies—if t he laws t hem selves are insufficient ly prot ect ive. To NGOs’ way of t hinking, t hey have a perm anent m andat e t o fill t he regulat ory vacuum . I n t he face of such num bers and expect at ions, com panies would be well advised t o look for com m on ground. St r e n gt h s W or t h Cove t in g Nongovernm ent al organizat ions have four st rengt hs t hat corporat ions would be well

served t o heed. They are legit im acy, awareness of social forces, dist inct net works, and specialized t echnical expert ise. The public best ows t he first , and t he second is a funct ion of t he NGOs’ m ission. The lat t er t wo refer t o com pet ences t hat NGOs have developed by vent uring where corporat ions usually don’t go.

Le git im a cy. According t o a poll conduct ed by t he Edelm an public relat ions firm , bot h Am ericans and Europeans said t hey found NGO spokespeople m ore credible t han eit her a com pany’s CEO or PR represent at ive. Som e fract ion of t he public, especially in Europe, sees NGOs as dedicat ed first and forem ost t o serving an aspect of t he general social welfare. While m any com panies produce direct benefit s t o societ y—t hose in t he pharm aceut ical and food indust ries being obvious exam ples—t he public int erpret s t hose benefit s as by- product s of t he com panies’ profit m ot ive rat her t han as t he direct result of t heir desire t o feed or care for t heir fellow hum an beings. Suspicion of com panies’ m ot ives can becom e so ent renched t hat t he soundest solut ions aren’t given a fair hearing. The fat e of Shell Oil’s Brent Spar st orage and t anker offloading syst em is one such exam ple. Aft er conduct ing a t horough analysis of what t o do wit h t he plat form , Shell concluded t hat t owing it int o t he deep wat er of t he Nort h At lant ic and t hen sinking it was t he best alt ernat ive from an environm ent al st andpoint . ( I t would also be £40 m illion cheaper t han dism ant ling t he plat form on land.) Out raged by t he plan, Greenpeace organized a boycot t of Shell product s in t he UK and sent prot est ers t o occupy t he facilit y. Ult im at ely, Shell succum bed t o public pressure and hauled t he rig ashore for dism ant ling. Greenpeace subsequent ly adm it t ed t hat it had overst at ed t he am ount of oil residues in t he t ank and t hus t he harm ful environm ent al effect s of scut t ling. Aw a r e n e ss of Socia l For ce s. Com panies live and die by t he m arket s t hey com pet e in; NGOs, by t he ebb and flow of people’s concerns about t he safet y and fairness of condit ions worldwide. Alt hough t he gulf bet ween t he t wo arenas is large, businesses can

learn m uch from NGOs’ at t unem ent t o and influence on shift s in com m on beliefs and m ores t hat in t urn shape consum er dem and. For exam ple, in t he early 1970s, years before organizat ions such as People for t he Et hical Treat m ent of Anim als were organizing boycot t s of fur apparel, and guerrillas from t he Anim al Liberat ion Front were infilt rat ing m ink farm s t o free t he anim als caged t here, groups such as Anim al Right s I nt ernat ional had highlight ed indust rial condit ions afflict ing anim als generally. I f fur, cosm et ics, poult ry, and fast - food com panies had not ed t he public’s first st irrings of hum ane concern, t hey could have m odified t heir pract ices and avoided t he ensuing bad publicit y and econom ic harm . D ist in ct N e t w or k s. Most com panies’ net works prim arily consist of organizat ions t hat would belong am ong Michael Port er’s five forces m odel of buyers, suppliers, rival firm s, new ent rant s, and subst it ut e producers. NGOs’ net works, by cont rast , m ost ly consist of ot her NGOs, as well as donors, regulat ors, legislat ors, and public- int erest lobbyist s. These net works are oft en quit e ext ensive and dense, since m any NGOs are sm all, lack resources, and m ust form coalit ions t o be effect ive. Part nering wit h NGOs is an excellent way t o gain access t o t he inform at ion circulat ing wit hin t heir net works. Spe cia lize d Te ch n ica l Ex pe r t ise . NGO m em bers are oft en t hought of as young, unsophist icat ed m alcont ent s. I n realit y, t he m ore est ablished NGOs are filled wit h lawyers, policy analyst s, and scient ist s. Half t he em ployees of t he largest , m ost influent ial environm ent al NGOs have m ast er’s or law degrees, and 10% t o 20% have doct orat es. Many of t hem possess knowledge t hat t he com panies being t arget ed lack. The NGOs m ay know about a new t echnology t hat is superior only in it s environm ent al im pact and t herefore escaped businesses’ at t ent ion. Or t hey m ay have not iced a j udicial ruling in an out - of- t he- way j urisdict ion t hat m ay one day set a st andard of conduct nat ionwide. Out of fear t hat t heir own research int o ways of m it igat ing harm m ight est ablish liabilit y, com panies are som et im es willfully ignorant of developm ent s t hat NGOs are aggressively pursuing. N o M or e N o- Go There are five prim ary benefit s t o part nering wit h NGOs: H e a d off t r ou ble . Alt hough NGOs are known for engineering confront at ions, t he m ore est ablished of t hese increasingly recognize t hat negot iat ing direct ly wit h com panies is m ore efficient t han put t ing on a negat ive cam paign in hopes t hat t he public will t hen pressure governm ent officials or t he com panies t hem selves t o correct t he sit uat ion t hey’ve creat ed. From t he com panies’ st andpoint as well, t he involvem ent of m ot ivat ed expert s in place of com m it t ed adversaries m akes negot iat ion a m ore prom ising alt ernat ive. As soon as t he first signs of disagreem ent wit h a proj ect proposal are in evidence— whet her it be a let t er t o t he edit or, a pet it ion, or a picket line—t he com pany under scrut iny should invit e t he crit ics in for a discussion. Even bet t er, com panies should learn t he concerns of t he NGOs t hat follow t heir indust ry and sound t hem out while a pot ent ially cont roversial proj ect is st ill on t he drawing board. Such is t he m et hod current ly em ployed by Shell, which regularly brings t oget her int erest ed groups such as t he World Wildlife Fund, Am nest y I nt ernat ional, and local NGOs at t he init ial st ages of proj ect planning and evaluat ion. As one senior Shell execut ive st at ed, “ [ Brent Spar] led us t o a new approach in which we t ry t o prevent crises t hrough open dialogue. The discussions aren’t always easy, but t here is a reasonable am ount of m ut ual t rust and underst anding bet ween us now.” An added benefit , according t o t he execut ive, is t hat t he com pany now has an open channel of com m unicat ion wit h t he NGOs t hat at t acked it in earlier cont roversies. I f consult at ions

occur regularly inst ead of during t im es of crisis, confront at ion is less likely. Consult at ions should include all int erest ed part ies, all gat hered around t he sam e t able. That way, t he part y urging an NGO t o soft en it s dem ands m ay not be t he com pany it self but a fellow NGO. Aft er all, different NGOs represent different int erest s. Som e groups focus on hum an right s, som e on t he prot ect ion of endangered species, som e on com m unit y concerns. When a large- scale proj ect produces diverse result s, cert ain NGOs can end up favoring it and ot hers opposing it . For inst ance, a fact ory being planned m ight bring j obs t o t he local populat ion but acid rain t o t he adj oining st at e. Two NGOs could assess t he hazards and benefit s different ly, even t hough t heir net works overlap. Privat e negot iat ion is preferable t o public dem onst rat ions, especially when it concerns proj ect s t hat have not yet been m ade public. The t wo have t rouble coexist ing, since public post uring by eit her part y can erode t he t rust and candor t hat are essent ial for progress t o occur in privat e. I f a com pany’s reput at ion t urns out t o be bad enough, m ost NGOs will refuse t o negot iat e wit h it for fear t hey will lose t heir bona fides. Som e m ay be willing but will keep quiet about it . One environm ent al NGO I know well has a part nership wit h a global fast - food corporat ion. The NGO provides it wit h t echnical guidance on reducing wast e. Many environm ent alist s t hink it s st andard pract ices place it beyond t he pale, so t he NGO does not t alk about t he part nership. As a senior execut ive of t he NGO t ells it , “ We t hink t his part nership is a good t hing. I t accords wit h our m ission. But not all of our support ers would be t hrilled at t he associat ion. We don’t lie about it , but it j ust isn’t an act ivit y t hat we advert ise.” Com panies wit h decent records t hat acquire a reput at ion for approachabilit y will raise t heir st anding am ong responsible NGOs generally. And such com panies will obt ain valuable exposure t o NGOs’ concerns and ways of t hinking. Acce le r a t e in n ova t ion . I n t he absence of a dire com pet it ive t hreat , m ost com panies are cont ent t o m ake increm ent al im provem ent s t o t heir processes or product s. By focusing on t he wider effect s of com panies’ pract ices rat her t han on t heir cost s or profit abilit y, NGOs are able t o dem and m ore of an ent erprise t han it som et im es dem ands of it self. The result can be radical solut ions t hat im prove som e aspect of societ y or t he environm ent while also increasing com pet it iveness. The creat ion of a m arket for liquefied pet roleum gas ( LPG) refrigerat ors occurred in j ust t his way. I n response t o t he Mont real Prot ocol’s call for elim inat ing ozone- dest roying chlorofluorocarbons by 1996, t he chem ical indust ry encouraged appliance m akers t o replace t hem wit h hydrochlorofluorocarbons ( HCFCs) , greenhouse gases wit h less ozonedest roying pot ent ial. DuPont and I CI , t he specialt y product and paint developer, invest ed m ore t han $500 m illion in research int o HCFCs and facilit ies for m anufact uring t hem . But in 1991, Greenpeace convinced DKK Scharfenst ein, an appliance m anufact urer in east ern Germ any, t o develop a refrigerat or based on LPG. ( I t didn’t hurt t he com pany’s recept iveness t hat it was on t he verge of bankrupt cy and t hat LPG is far less expensive t han st andard refrigerant s.) The environm ent ally conscious Germ an consum er m arket em braced DKK Scharfenst ein’s refrigerat ors cont aining t he new t echnology. By 1994, Bosch and Liebherr, t wo of Germ any’s largest appliance m akers, had m oved alm ost exclusively t o LPG- based refrigerat ors. Today, refrigerat ors wit h LPG t echnology dom inat e t he m arket s in m any European count ries. For e se e sh ift s in de m a n d. NGOs oft en lead social m ovem ent s. They det ect lat ent but burgeoning concern about an issue, which t hey t hen am plify. New norm s and values em erge t hat will, event ually, influence consum ers’ t ast es. Ult im at ely, t hey can endanger

ent ire indust ries. For exam ple, t he nuclear energy and genet ically m odified food indust ries have becom e em bat t led and shrunken at least in part because of NGOsponsored cam paigns highlight ing t he dangers t hey pose. Such m ovem ent s can also direct consum ers t o subst it ut es t hat becom e t he basis of new growt h indust ries. Take t he $10 billion organic foods business, which has been enj oying annual growt h rat es of 20% t o 30% for t he past decade. By t he t im e Monsant o and ot her com panies began int roducing genet ically m odified foods t o t he European m arket in hopes of launching t heir own kind of growt h indust ry, a public already t raum at ized by m ad cow disease had becom e acut ely conscious of t he safet y and purit y of t he food it at e. Then NGOs such as Friends of t he Eart h and Greenpeace publicized t he dangers of crosspollinat ion and t he t hreat t o but t erflies and ot her insect s. Flush wit h t heir success in t he Unit ed St at es ( where, for exam ple, half t he soybean crop is genet ically m odified) , t he com panies producing genet ically m odified foods failed t o t ake t he t rue m easure of Europeans’ resist ance. Wit hin j ust a few years, governm ent regulat ion and public dist ast e had driven genet ically m odified foods off Europe’s st ore shelves. By consult ing wit h NGOs, producers of t hese foods could have avoided invest ing in a m arket t hat was sim ply not int erest ed and saved t hem selves billions of dollars. NGOs are good at sensing shift s in t ast e and values. They should be, since t hey are usually born during one of t hose shift s and depend for t heir survival on keeping up wit h t hem . ( The rise and fall of an NGO’s funding t ends t o reflect t he ext ent of t he public’s alarm about t he sort s of issues t hat an NGO addresses.) But NGOs don’t sim ply respond t o t hose shift s. I n a posit ive feedback loop, t hey help redirect and cont rol t hem . By st aying close t o groups t hat are expert at following and shaping public opinion, com panies get a leg up, eit her in t heir product developm ent or t heir m arket ing. Sh a pe le gisla t ion . Through it s t ax policies, regulat ion of com pet it ion, grant s of pat ent prot ect ion, and prom ulgat ion of labor and environm ent al st andards, t o nam e j ust som e of it s powers, governm ent is perhaps t he great est nonm arket force shaping indust ry. NGOs have access t o like- m inded legislat ors and regulat ors t hat even t he best connect ed corporat e lobbyist s m ay not know well. Oft en, NGOs hear of behind- t hescenes m aneuvering or legislat ive init iat ives brewing long before t hey reach t he com m it t ee level. And t hey are som et im es willing t o report t hese t o com panies t hey t rust . The result is usually bet t er- inform ed legislat ion. Som e NGOs are form idable lobbying organizat ions in t heir own right . As a World Wildlife Fund execut ive in Brussels explained t o m e, “ When I speak wit h EU lawm akers, I can reasonably claim t o be speaking on behalf of 5 m illion fee- paying m em bers. Polit icians list en.” Thus, by working wit h NGOs, com panies can have a great er im pact on fut ure legislat ion t han t hey would if t hey were speaking st rict ly on behalf of t heir own econom ic int erest s and in opposit ion t o what m ay be societ y’s well- being. An appreciat ion of t he ot her side’s perspect ive perm it s t he brokering of int erest s t hat oft en precedes t he writ ing of new law. Bot h com panies and NGOs know t hat t hey can gain far great er influence by bringing an opponent int o t heir coalit ion t han by adding yet one m ore indust ry m em ber or support er. Se t in du st r y st a n da r ds. Cooperat ing wit h NGOs gives com panies a chance not only t o avoid various kinds of t rouble but also t o reshape t heir indust ry, som et im es for t heir own benefit . They can do t his by est ablishing new t echnology st andards, as DKK Scharfenst ein happened t o do when it developed it s new kind of refrigerat or. These t echnology st andards t hen becom e t he basis of new labor or environm ent al st andards, which are enforced eit her by governm ent m andat e or m arket preference.

Unilever pursued t his st rat egy in it s groundbreaking part nership wit h t he World Wildlife Fund. The t wo organizat ions j oined forces t o deal wit h a serious decline in fisheries around t he world. Bot h knew t hat volunt ary rest raint on t he part of som e fleet s would have no effect on t he num ber of fish caught , since t he ot her fleet s would increase t heir cat ches accordingly—a classic problem of t he com m ons. Yet all of t hem would suffer econom ically as t he size of t heir cat ches shrank or t heir voyages ranged fart her and last ed longer. The t wo organizat ions got t oget her in 1996 t o develop precise st andards for responsible and sust ainable fishing pract ices. Since it s founding in 1999, t he Marine St ewardship Council has accredit ed m ore t han 100 com panies, in 20 count ries, t hat adhere t o it s st andards. Accredit at ion gives t hose com panies t he right t o put t he MSC logo on t heir product s. I n collaborat ion wit h NGOs, indust ries ranging from coffee product ion t o clot hing m anufact uring t o forest ry have est ablished sim ilar cert ificat ion program s. Aside from prot ect ing t he nat ural resources on which part icipat ing businesses depend, t he program s have in effect creat ed cat egories of sought - aft er product s defined by t he label t hey carry. Environm ent ally m inded consum ers, for inst ance, will prefer a can of t una labeled “ dolphin free” over one sim ply labeled “ light t una.’’ A reput at ion for advancing t he com m on good is not t he only benefit t hat accrues t o first m overs. By set t ing dem anding st andards, t hey present t heir com pet it ors wit h a dilem m a: Eit her invest large am ount s of capit al in m eet ing t hose st andards or face condem nat ion for refusing t o do so. And for would- be at t ackers out side t he m arket in quest ion, st andards can serve as barriers t o ent ry. I f you dom inat e your m arket , you m ight want t o set a t echnical st andard t hat your less well- capit alized com pet it ors would have t o st ruggle t o afford, or t hat applies t o an area in which t hey would prefer not t o com pet e. I f you don’t dom inat e your m arket but deploy a t echnology t hat is safer or cleaner t han your rivals’, you m ay want t o work at get t ing t hat t echnology adopt ed as t he new regulat ory st andard. NGOs should be willing t o assist you in t his. Being a first m over allows you t o generat e st andards t hat are rat ional, pract icable, and uniform . When m arket s fall int o line behind such st andards, t hey reduce t he danger t hat m ore t han one j urisdict ion or regulat ory body, each wit h it s own idiosyncrat ic not ions, will st ep in. I n t he Unit ed St at es in part icular, where t he 50 st at es as well as t he federal governm ent oft en exercise regulat ory oversight , com pliance can be difficult and expensive when a single indust ry st andard does not prevail. A caveat is in order. Credible NGOs will oft en insist on higher st andards of behavior t han a firm left t o it s own devices would choose. I n short , an NGO endorsem ent m ay not com e cheaply.

• • • I t ’s good business t o m ake social and environm ent al concerns a key part of decision m aking. But it ’s not always possible. Bill Ford, CEO of Ford Mot or, once said, “ Transparency, st akeholder engagem ent , and account abilit y…will be t he regulat ory t ools of t he t went y- first cent ury.’’ He lat er had t o concede t hat his com pany’s com m it m ent t o helping cut greenhouse gases “ will be t em pered by our near- t erm business realit ies.’’ Even when part nerships wit h NGOs are possible, t hey carry t heir own risks. First , if your com pany int eract s wit h NGOs, it is likely providing t hem ( and, by ext ension, your com pet it ors and regulat ors) wit h sensit ive inform at ion. Knowledge of R&D proj ect s, st rat egic plans, and int ernal audit s m ay help NGOs be bet t er part ners, but it m ight also

m ake t hem dangerous ones. Just as com panies have disclosure policies for j oint vent ures, t hey should have st rict guidelines for part nerships wit h NGOs. Second, part nering wit h NGOs, and advert ising it , can draw st rict er scrut iny from t he public, t he press, regulat ors, and so on t han your com pany form erly received. A lapse t hat earlier would not have been not ewort hy will suddenly call int o quest ion your com pany’s sincerit y, m aking furt her cooperat ion wit h NGOs difficult . Worse, cynics are likely t o accuse your com pany of being int erest ed exclusively in im age building. CorpWat ch, a corporat e wat chdog, gives out so- called Greenwash Awards t o corporat ions t hat “ put m ore m oney, t im e, and energy int o slick PR cam paigns aim ed at prom ot ing t heir eco- friendly im ages t han t hey do in act ually prot ect ing t he environm ent .” I n short , an overriding int erest in good public relat ions can have t he perverse result of act ually dam aging your com pany’s reput at ion. Part nering wit h an NGO requires not hing less t han a change in m ent alit y. I n m y experience, ot herwise highly com pet ent execut ives find t hem selves at sea when t hey vent ure int o t he sociopolit ical realm , which operat es according t o it s own set of rules. Ask an execut ive his ult im at e responsibilit y, and he will probably say, “ Maxim ize shareholder ret urn.” NGOs—wit h fundam ent ally different assum pt ions about t he free m arket and t he role of corporat ions in societ y—will see t hat answer as t he problem . And t hey will act accordingly. Just as m ost progressive NGOs t ake int o considerat ion com panies’ econom ic realit ies when t hey work t o form ulat e t heir goals, com panies m ust incorporat e an underst anding of NGOs’ values and concerns int o t heir ordinary cost - benefit calculat ions. I f t hey do, t hey will be bet t er prepared when NGOs, invit ed or not , arrive on t heir doorst ep.

Reprint Num ber R0402J

You r bu sin e ss is a t r isk if...

Sidebar R0 4 0 2 J_ A

offe r s life sa vin g or life - t h r e a t e n in g pr odu ct s ( such as pharm aceut icals, arm s) con fr on t s ch a n gin g socia l m or e s ( such as fashion, alcohol, t obacco) pr odu ce s sign ifica n t spillove r e ffe ct s ( such as m ining, heavy m anufact uring, wast e m anagem ent ) e n j oys h igh br a n d a w a r e n e ss ( such as clot hing, food and beverage, aut om ot ive) is ba se d on n e w t e ch n ologie s ( such as genet ic engineering, personal- dat a collect ion) doe s bu sin e ss in diffe r e n t r e gion s w it h diffe r in g e t h ica l or socia l n or m s

( such as t ext iles and clot hing, oil and gas, forest ry)

Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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View Back Issues | February 2004 > Turning Gadflies int o Allies > Your business is at risk if...

Tu r n in g Ga dflie s in t o Allie s

Your business is at risk if it : offe r s life sa vin g or life - t h r e a t e n in g pr odu ct s ( such as pharm aceut icals, arm s) con fr on t s ch a n gin g socia l m or e s ( such as fashion, alcohol, t obacco) pr odu ce s sign ifica n t spillove r e ffe ct s ( such as m ining, heavy m anufact uring, wast e m anagem ent ) e n j oys h igh br a n d a w a r e n e ss ( such as clot hing, food and beverage, aut om ot ive) is ba se d on n e w t e ch n ologie s ( such as genet ic engineering, personal- dat a collect ion) doe s bu sin e ss in diffe r e n t r e gion s w it h diffe r in g e t h ica l or socia l n or m s ( such as t ext iles and clot hing, oil and gas, forest ry)

< Back t o Art icle

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View Back Issues | February 2004 > For St rat egy, t he Readiness I s All

> | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

For St rat egy, t he Readiness I s All Th om a s A. St e w a r t

by Th om a s A. St e w a r t

I m et Bob Kaplan in 1990. By t hen, he was already fam iliar t o HBR readers; his first art icle for us, “ Yest erday’s Account ing Underm ines Product ion,” appeared in 1984 and won t he McKinsey Award t hat year. The argum ent in t hat art icle—and in Bob’s 1987 book Relevance Lost : The Rise and Fall of Managem ent Account ing, coaut hored wit h H. Thom as Johnson—was t hat t he num bers com panies collect ed were increasingly irrelevant t o t he needs, st rat egies, and real perform ance of business. At t he t im e, I was invest igat ing t he nat ure and value of int ellect ual capit al, and Bob’s work was profoundly pert inent . I n a subsequent art icle in Fort une, I wrot e, “ I nt ellect ual capit al can be as ephem eral as t he holy grail.” A sim ilar phrase appears in “ Measuring t he St rat egic Readiness of I nt angible Asset s,” t he m aj or new art icle by Kaplan and David Nort on in t his issue of HBR: “ Measuring t he value of…int angible asset s is t he holy grail of account ing.” The aut hors don’t claim t o have found it ; grails aren’t t o be found on t his eart h, except in Wagner and in I ndiana Jones m ovies. But Kaplan and Nort on have done t he next best t hing—or m aybe som et hing even bet t er t han t hat . They argue t hat com panies should not t ry t o put an overall value on asset s like hum an capit al. I nst ead, com panies should first art iculat e t heir st rat egy, t hen rat e t heir int angibles according t o how well t hose asset s are aligned wit h t he st rat egy. A financial services com pany, for exam ple, m ight decide t hat it s st rat egy is t o sell m ore different services t o each cust om er. I f t hat ’s t he goal, t hen t he com pany needs a set of int angibles t o reach it —a cert ain num ber of people skilled in cross- selling, inform at ion syst em s t hat can t alk t o each ot her, an organizat ional design t hat allows people t o work across product lines. So how would t he com pany rat e each of t hese int angibles—hum an, inform at ion, and organizat ion capit al—against t he goal? Those are knowable num bers, if you know enough t o look for t hem . This is, in m y opinion, a breakt hrough art icle. I t ’s cert ainly so for t hose of us who have been wrest ling wit h t he issues creat ed by t he increasing im port ance of int angibles. Kaplan and Nort on’s process result s in dat a rigorous enough for a CFO t o believe and pract ical enough for a m anager t o use. I t ’s also a breakt hrough art icle for people concerned wit h how t o t ake a great st rat egy and m ake it work. The t ool Kaplan and Nort on propose rat es what t hey call “ st rat egic readiness.” I f you know how well your int angible asset s support your st rat egy, you have a good idea of how likely t hat st rat egy is t o succeed. For t hose of us concerned wit h execut ion, t hat ’s som et hing akin t o t he holy grail. “ Measuring t he St rat egic Readiness of I nt angible Asset s” is new fruit from seeds Kaplan and his colleagues plant ed years ago. This m ont h we’re also bringing you a whole orchard of seedlings—ideas t hat will bear fruit for m any years t o com e. I ’m referring t o t he fourt h annual HBR List , t his t im e in a new form at . I n t his art icle, you’ll find a score of t he m ost int erest ing, provocat ive, hot new ideas in business. Am ong t hem : how neurology is changing our ideas about leadership; why com panies should spend less t im e exam ining t heir failures and m ore t im e st udying t heir successes; what m arket ing research can learn from operat ions; and how social net work analysis can revit alize your com pany. The last it em in t his issue appears in HBR for t he first t im e. A few m ont hs ago, a booklet called Boom appeared on m y desk. I t cont ained a shrewd and delight ful business narrat ive t old ent irely in pict ures, wit h a brief t ext ual gloss at t he end. Enclosed wit h t he booklet was a not e from it s creat or, Don Moyer, hoping I ’d like Boom . I loved it . I called Moyer, who works for Agnew Moyer Sm it h, a Pit t sburgh- based ad agency, and invit ed him t o develop a series of wordless st ories for HBR. We t alked for a bit , t hen he began working wit h senior edit or Leigh Buchanan. The result is Panel

Discussion. I n t his issue, and for t he foreseeable fut ure, you’ll find it on t he last page of t he m agazine. As Don said, I hope you like it . Or even love it .

> | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

View Back Issues Copyright © 2004 Harvard Business School Publishing. All right s reserved.

Click here t o visit : > | ht t p: / / www.hbsp.org

For St rat egy, t he Readiness I s All by Th om a s A. St e w a r t Th om a s A. St e w a r t

I m et Bob Kaplan in 1990. By t hen, he was already fam iliar t o HBR readers; his first art icle for us, “ Yest erday’s Account ing Underm ines Product ion,” appeared in 1984 and won t he McKinsey Award t hat year. The argum ent in t hat art icle—and in Bob’s 1987 book Relevance Lost : The Rise and Fall of Managem ent Account ing, coaut hored wit h H. Thom as Johnson—was t hat t he num bers com panies collect ed were increasingly irrelevant t o t he needs, st rat egies, and real perform ance of business. At t he t im e, I was invest igat ing t he nat ure and value of int ellect ual capit al, and Bob’s work was profoundly pert inent . I n a subsequent art icle in Fort une, I wrot e, “ I nt ellect ual capit al can be as ephem eral as t he holy grail.” A sim ilar phrase appears in “ Measuring t he St rat egic Readiness of I nt angible Asset s,” t he m aj or new art icle by Kaplan and David Nort on in t his issue of HBR: “ Measuring t he value of…int angible asset s is t he holy grail of account ing.” The aut hors don’t claim t o have found it ; grails aren’t t o be found on t his eart h, except in Wagner and in I ndiana Jones m ovies. But Kaplan and Nort on have done t he next best t hing—or m aybe som et hing even bet t er t han t hat . They argue t hat com panies should not t ry t o put an overall value on asset s like hum an capit al. I nst ead, com panies should first art iculat e t heir st rat egy, t hen rat e t heir int angibles according t o how well t hose asset s are aligned wit h t he st rat egy. A financial services com pany, for exam ple, m ight decide t hat it s st rat egy is t o sell m ore different services t o each cust om er. I f t hat ’s t he goal, t hen t he com pany needs a set of int angibles t o reach it —a cert ain num ber of people skilled in cross- selling, inform at ion syst em s t hat can t alk t o each ot her, an organizat ional design t hat allows people t o work across product lines. So how would t he com pany rat e each of t hese int angibles—hum an, inform at ion, and organizat ion capit al—against t he goal? Those are knowable num bers, if you know enough t o look for t hem . This is, in m y opinion, a breakt hrough art icle. I t ’s cert ainly so for t hose of us who have been wrest ling wit h t he issues creat ed by t he increasing im port ance of int angibles. Kaplan and Nort on’s process result s in dat a rigorous enough for a CFO t o believe and pract ical enough for a m anager t o use. I t ’s also a breakt hrough art icle for people concerned wit h how t o t ake a great st rat egy and m ake it work. The t ool Kaplan and Nort on propose rat es what t hey call “ st rat egic readiness.” I f you know how well your int angible asset s support your st rat egy, you have a good idea of how likely t hat st rat egy is t o succeed. For t hose of us concerned wit h execut ion, t hat ’s som et hing akin t o t he holy grail. “ Measuring t he St rat egic Readiness of I nt angible Asset s” is new fruit from seeds Kaplan and his colleagues plant ed years ago. This m ont h we’re also bringing you a whole orchard of seedlings—ideas t hat will bear fruit for m any years t o com e. I ’m referring t o

t he fourt h annual HBR List , t his t im e in a new form at . I n t his art icle, you’ll find a score of t he m ost int erest ing, provocat ive, hot new ideas in business. Am ong t hem : how neurology is changing our ideas about leadership; why com panies should spend less t im e exam ining t heir failures and m ore t im e st udying t heir successes; what m arket ing research can learn from operat ions; and how social net work analysis can revit alize your com pany. The last it em in t his issue appears in HBR for t he first t im e. A few m ont hs ago, a booklet called Boom appeared on m y desk. I t cont ained a shrewd and delight ful business narrat ive t old ent irely in pict ures, wit h a brief t ext ual gloss at t he end. Enclosed wit h t he booklet was a not e from it s creat or, Don Moyer, hoping I ’d like Boom . I loved it . I called Moyer, who works for Agnew Moyer Sm it h, a Pit t sburgh- based ad agency, and invit ed him t o develop a series of wordless st ories for HBR. We t alked for a bit , t hen he began working wit h senior edit or Leigh Buchanan. The result is Panel Discussion. I n t his issue, and for t he foreseeable fut ure, you’ll find it on t he last page of t he m agazine. As Don said, I hope you like it . Or even love it .

Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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View Back Issues | February 2004 > Books in Brief

> | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

Books in Brief by Joh n T. La n dr y

H ow t o Ch a n ge t h e W or ld Socia l En t r e pr e n e u r s a n d t h e Pow e r of N e w I de a s David Bornst ein ( Oxford Universit y Press, 2004) Businesspeople oft en dism iss nonprofit organizers as pat ernalist ic dream ers, but t his engaging book shows t hat t he “ cit izen sect or” can be quit e aggressive. Bornst ein, a j ournalist , chronicles t he Ashoka Foundat ion and t he act ivist s it funds in t he developing world. Following t he exam ple set by Gram een Bank, Ashoka seeks social ent repreneurs eager t o devot e t hem selves full t im e t o m aking t heir revolut ionary ideas happen. These ent repreneurs t ake on business challenges t hat seem hopeless, ones t hat bot h governm ent s and com panies have abdicat ed, such as get t ing elect ricit y t o poor farm ers in Brazil. Wit h a com binat ion of ingenious pract ical solut ions, a gift for hearing t he concerns of t he pot ent ial beneficiaries, and hardheaded persist ence, m any of t hese social ent repreneurs have succeeded—in som e cases so well t hat profit - seeking com panies have j um ped in. Bornst ein not es t hat t he cont inuing liberalizat ion of m arket s and polit ics in m any count ries has opened opport unit ies for nonprofit s t hat never exist ed before. While social ent repreneurs m ay have lit t le t o t each business direct ly—t he borrowing generally goes in t he ot her direct ion— t hey can serve as m arket pioneers, creat ing profit able businesses where ot hers t hought none could survive.

D ow n sizin g in Am e r ica Re a lit y, Ca u se s, a n d Con se qu e n ce s William J. Baum ol, Alan S. Blinder, and Edward N. Wolff ( Russell Sage Foundat ion, 2003) I n t his careful exam inat ion of t he Unit ed St at es’ last real wave of downsizing ( bet ween 1988 and 1992) , t hese econom ist s offer execut ives good news and bad news. First t he good news: Most large com panies did so m uch hiring aft er t heir layoffs of t his period t hat t hey ended up at least as big as t hey were before m aking t he cut s. Only in m anufact uring did big com panies generally get sm aller; inst ead of rehiring, t hey j ust cont inued t he j ob cut s t hey had been m aking since t he 1970s. Now t he bad news: The downsizing t hat did occur had no significant effect on product ivit y. I nst ead of t rim m ing fat from t he syst em , t he layoffs sim ply forced t he rem aining workers t o accept lower wages. The aut hors refrain from speculat ing about t he effect s of t he m ost recent layoffs, but t heir look back offers a useful caut ion against drawing quick conclusions about business t rends.

> | Ex e cu t ive Su m m a r y

Em ot ion a l D e sign W h y W e Love ( or H a t e ) Eve r yda y Th in gs Donald A. Norm an ( Basic Books, 2004) Designers have always recognized t he m arket ing value of aest het ics. Now t hey have anot her reason t o m ake product s engaging: Beaut y can act ually boost funct ionalit y, argues Norm an, a com put er scient ist and consult ant . Cognit ive st udies have shown t hat posit ive em ot ions relax t he m ind and m ake people curious and open t o novelt y. That ’s why brainst orm ing sessions oft en begin wit h icebreaking st ories and j okes. By t he sam e t oken, a delight ful design can m ake consum ers willing t o em brace new or problem at ic product s. Look at t he success of BMW’s appealing Mini Cooper, which has won rave reviews despit e several awkward feat ures. Negat ive em ot ions, by cont rast , t end t o concent rat e t he m ind on an im m ediat e t ask, which is why people oft en drive up t heir anxiet y levels wit h selfim posed deadlines near t he end of a proj ect . Sim ilarly, t he negat ive em ot ions st irred up by t he bland, t echnocrat ic design of m ost personal com put ers oft en prevent people from discovering t he PC’s im m ense funct ionalit y. The m aj or challenge t o applying t hese findings, Norm an explains in t his wellillust rat ed survey of t he em ot ional drivers in product design, is t hat cust om ers’ responses vary so great ly. Product designers need t o t ailor t heir work carefully in order t o push t he right but t ons wit h t he right cust om ers.

Pe r fe ct ly Le ga l Th e Cove r t Ca m pa ign t o Rig Ou r Ta x Syst e m t o Be n e fit t h e Su pe r Rich —a n d Ch e a t Eve r ybody Else David Cay Johnst on ( Port folio, 2004) Most Am erican execut ives have cheered t he recent federal policy changes t hat have lowered corporat e and incom e t axes, but as t his eye- opening book explains, t he new t ax policy favors t he wealt hy even m ore t han it appears. The governm ent has sharply and consciously cut back on it s enforcem ent of t ax law t o t he point where it spends alm ost all of it s resources hunt ing down dishonest wage earners rat her t han exposing t he increasingly lucrat ive and creat ive t ax- evasion schem es com panies and wealt hy individuals use. A t ax syst em originally designed t o be progressive—requiring richer people t o pay a great er share of t heir incom es t han poorer people do—now act ually favors anyone who can hire a t ax lawyer t o prepare t he proper docum ent s. Johnst on, a j ournalist , focuses on revealing t he realit y of t ax collect ion rat her t han on analyzing it s consequences. Arguably, t he new t ax policy m ay reflect t he governm ent ’s st rat egy of prom ot ing invest m ent ( at least on paper) over consum pt ion, but t his new arrangem ent m ay be unst able. What happens if upper- m iddle- class earners, who will event ually bear t he brunt of t he exploding federal debt , find ways t o j oin t he part y? > | Ex e cu t ive Su m m a r y > | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

View Back Issues Copyright © 2004 Harvard Business School Publishing. All right s reserved.

Click here t o visit : > | ht t p: / / www.hbsp.org

Books in Brief by Joh n T. La n dr y

H ow t o Ch a n ge t h e W or ld Socia l En t r e pr e n e u r s a n d t h e Pow e r of N e w I de a s David Bornst ein ( Oxford Universit y Press, 2004) Businesspeople oft en dism iss nonprofit organizers as pat ernalist ic dream ers, but t his engaging book shows t hat t he “ cit izen sect or” can be quit e aggressive. Bornst ein, a j ournalist , chronicles t he Ashoka Foundat ion and t he act ivist s it funds in t he developing world. Following t he exam ple set by Gram een Bank, Ashoka seeks social ent repreneurs eager t o devot e t hem selves full t im e t o m aking t heir revolut ionary ideas happen. These ent repreneurs t ake on business challenges t hat seem hopeless, ones t hat bot h governm ent s and com panies have abdicat ed, such as get t ing elect ricit y t o poor farm ers in Brazil. Wit h a com binat ion of ingenious pract ical solut ions, a gift for hearing t he concerns of t he pot ent ial beneficiaries, and hardheaded persist ence, m any of t hese social ent repreneurs have succeeded—in som e cases so well t hat profit - seeking com panies have j um ped in. Bornst ein not es t hat t he cont inuing liberalizat ion of m arket s and polit ics in m any count ries has opened opport unit ies for nonprofit s t hat never exist ed before. While social ent repreneurs m ay have lit t le t o t each business direct ly—t he borrowing generally goes in t he ot her direct ion— t hey can serve as m arket pioneers, creat ing profit able businesses where ot hers t hought none could survive.

D ow n sizin g in Am e r ica Re a lit y, Ca u se s, a n d Con se qu e n ce s William J. Baum ol, Alan S. Blinder, and Edward N. Wolff ( Russell Sage Foundat ion, 2003) I n t his careful exam inat ion of t he Unit ed St at es’ last real wave of downsizing ( bet ween 1988 and 1992) , t hese econom ist s offer execut ives good news and bad news. First t he good news: Most large com panies did so m uch hiring aft er t heir layoffs of t his period t hat t hey ended up at least as big as t hey were before m aking t he cut s. Only in m anufact uring did big com panies generally get sm aller; inst ead of rehiring, t hey j ust cont inued t he j ob cut s t hey had been m aking since t he 1970s. Now t he bad news: The downsizing t hat did occur had no significant effect on product ivit y. I nst ead of t rim m ing fat from t he syst em , t he layoffs sim ply forced t he rem aining workers t o accept lower wages. The aut hors refrain from speculat ing about t he effect s of t he m ost recent layoffs, but t heir look back offers a useful caut ion against drawing quick conclusions about business t rends.

Em ot ion a l D e sign W h y W e Love ( or H a t e ) Eve r yda y Th in gs Donald A. Norm an ( Basic Books, 2004) Designers have always recognized t he m arket ing value of aest het ics. Now t hey have anot her reason t o m ake product s engaging: Beaut y can act ually boost funct ionalit y, argues Norm an, a com put er scient ist and consult ant . Cognit ive st udies have shown t hat posit ive em ot ions relax t he m ind and m ake people curious and open t o novelt y. That ’s why brainst orm ing sessions oft en begin wit h icebreaking st ories and j okes. By t he sam e t oken, a delight ful design can m ake consum ers willing t o em brace new or problem at ic product s. Look at t he success of BMW’s appealing Mini Cooper, which has won rave reviews despit e several awkward feat ures. Negat ive em ot ions, by cont rast , t end t o concent rat e t he m ind on an im m ediat e t ask, which is why people oft en drive up t heir anxiet y levels wit h selfim posed deadlines near t he end of a proj ect . Sim ilarly, t he negat ive em ot ions st irred up by t he bland, t echnocrat ic design of m ost personal com put ers oft en prevent people from discovering t he PC’s im m ense funct ionalit y. The m aj or challenge t o applying t hese findings, Norm an explains in t his wellillust rat ed survey of t he em ot ional drivers in product design, is t hat cust om ers’ responses vary so great ly. Product designers need t o t ailor t heir work carefully in order t o push t he right but t ons wit h t he right cust om ers.

Pe r fe ct ly Le ga l Th e Cove r t Ca m pa ign t o Rig Ou r Ta x Syst e m t o Be n e fit t h e Su pe r Rich —a n d Ch e a t Eve r ybody Else David Cay Johnst on ( Port folio, 2004) Most Am erican execut ives have cheered t he recent federal policy changes t hat have lowered corporat e and incom e t axes, but as t his eye- opening book explains, t he new t ax policy favors t he wealt hy even m ore t han it appears. The governm ent has sharply and consciously cut back on it s enforcem ent of t ax law t o t he point where it spends alm ost all of it s resources hunt ing down dishonest wage earners rat her t han exposing t he increasingly lucrat ive and creat ive t ax- evasion schem es com panies and wealt hy individuals use. A t ax syst em originally designed t o be progressive—requiring richer people t o pay a great er share of t heir incom es t han poorer people do—now act ually favors anyone who can hire a t ax lawyer t o prepare t he proper docum ent s. Johnst on, a j ournalist , focuses on revealing t he realit y of t ax collect ion rat her t han on analyzing it s consequences. Arguably, t he new t ax policy m ay reflect t he governm ent ’s st rat egy of prom ot ing invest m ent ( at least on paper) over consum pt ion, but t his new arrangem ent m ay be unst able. What happens if upper- m iddle- class earners, who will event ually bear t he brunt of t he exploding federal debt , find ways t o j oin t he part y?

Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

Click here t o visit :

View Back Issues | February 2004 > Opt Art ist s

> | Pr in t a ble Ve r sion > | E- m a il a Colle a gu e

Opt Art ist s by D on M oye r

D on M oye r can be reached at don @a m sit e . com

Your cust om ers love choices, but t oo m any can paralyze t hem . Thirt y- plus PDAs. Eight y SUVs. Four t housand m ut ual funds. Overwhelm ed by abundance, t hey m ay leave t he m arket place em pt y- handed. I t ’s easier t o post pone a buying decision t han t o wade t hrough all t hose opt ions. But no one is hankering for t he any- color- as- long- as- it ’s- black Model T. What t hey want is advice. An inform ed opinion. Direct ion from an int erm ediary who relishes t he quest t o find t he best and is generous wit h insight s about superior goods and services. Consum er Report s has played t hat role for 68 years; t oday shopping advice Web sit es proliferat e while Malcolm Gladwell’s m avens adj udicat e on t he best cappuccino in Manhat t an. I n fact , how m any buyers of Gladwell’s best - seller The Tipping Point were influenced by praise from such canny crit ics as George St ephanopoulos and Michael Lewis? I f a product ’s qualit y speaks for it self but no one can hear it , does it m ake a sound? I n a

> | Pr in t a ble Ve r sion

noisy m arket place, t arget t he m out hs t hat m at t er.

> | E- m a il a Colle a gu e

View Back Issues Copyright © 2004 Harvard Business School Publishing. All right s reserved.

Click here t o visit : > | ht t p: / / www.hbsp.org

Opt Art ist s by D on M oye r D on M oye r can be reached at don @a m sit e .com

Your cust om ers love choices, but t oo m any can paralyze t hem . Thirt y- plus PDAs. Eight y

SUVs. Four t housand m ut ual funds. Overwhelm ed by abundance, t hey m ay leave t he m arket place em pt y- handed. I t ’s easier t o post pone a buying decision t han t o wade t hrough all t hose opt ions. But no one is hankering for t he any- color- as- long- as- it ’s- black Model T. What t hey want is advice. An inform ed opinion. Direct ion from an int erm ediary who relishes t he quest t o find t he best and is generous wit h insight s about superior goods and services. Consum er Report s has played t hat role for 68 years; t oday shopping advice Web sit es proliferat e while Malcolm Gladwell’s m avens adj udicat e on t he best cappuccino in Manhat t an. I n fact , how m any buyers of Gladwell’s best - seller The Tipping Point were influenced by praise from such canny crit ics as George St ephanopoulos and Michael Lewis? I f a product ’s qualit y speaks for it self but no one can hear it , does it m ake a sound? I n a noisy m arket place, t arget t he m out hs t hat m at t er.

Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

Click here t o visit :

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Let t ers t o t he Edit or Th e Qu e st for Re silie n ce Dear Edit or: We have deep respect for t he work of Gary Ham el and Liisa Välikangas, but “ The Quest for Resilience” ( Sept em ber 2003) point s your readers in t he wrong direct ion. Com panies need t o build t he “ capacit y t o change before t he case for change becom es desperat ely obvious.” But Ham el and Välikangas propose a ut opian corporat e capacit y t hat adapt s t o st rat egic failure wit hout t raum at ic wake- up calls of lost m arket share, prot ract ed earnings slum ps, and t he need for wrenching t urnarounds. A recipe for pain- free learning could work only if learning were solely about developing valuable new ideas. The st rat egically im port ant innovat ions t hat give com panies resilience do not com e from experim ent s, or from m ult iple bet - hedging experim ent s, or from people whose careers are prot ect ed from t he consequences of failed experim ent s. I nst ead, senior m anagers need t o develop a com m it m ent t o risking t heir careers t o develop new ideas. The value of any new idea only becom es known in t he m idst of failed pilot s, funding losses, and heart breaking rej iggerings. Likewise, corporat e resilience generally does not com e from t raining senior m anagers t o apply resources, like m arket s, t o a hundred different well- hedged fut ures. Com panies learn t o spot difficult ies early, invent opport unit ies in t he m idst of breakdowns, and fundam ent ally change how t hey int eract wit h suppliers and cust om ers by focusing on t he core cust om er concerns t hey serve. Disconnect ion occurs when m anagers begin t o seek m ult iple, hedged, or pain- free solut ions. Resilience requires re- ignit ing m anagers’ passion and com m it m ent t o t aking chances and working t hrough t hem , not pain- free experim ent at ion. Ge r a ld Ada m s Founder Vision Consult ing New York

Ch a u n ce y Be ll Founder and President The Design Com m unit y San Francisco

Com in g Up Sh or t on N on fin a n cia l Pe r for m a n ce M e a su r e m e n t Dear Edit or: I absolut ely agree wit h Christ opher I t t ner and David Larcker’s observat ion in “ Com ing Up Short on Nonfinancial Perform ance Measurem ent ” ( Novem ber 2003) t hat nonfinancial perform ance m easurem ent s are not as rigorous as t hey should be and t herefore do not drive im provem ent . I agree, t oo, t hat t he causes include a lack of account abilit y and a lack of connect ion t o operat ing and financial result s. I do not agree, however, t hat t he solut ion is a 300- quest ion survey. Effect ive nonfinancial m easurem ent s are crit ical t o any organizat ion’s success. Sim plicit y is key t o t hat effect iveness. Organizat ions such as First Tennessee, S.C. Johnson, and Prudent ial have developed processes t hat show t he connect ion bet ween cust om er and em ployee engagem ent and result s and include t hose indicat ors in t heir perform ance m easurem ent s. The Gallup Organizat ion pioneered t he Q12 quest ionnaire, which can m easure em ployee and cust om er influence on corporat e perform ance. Responses t o it s 12 quest ions show a posit ive correlat ion bet ween em ployee engagem ent and product ivit y, profit abilit y, cust om er service, ret ent ion, and safet y.

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Having worked wit h t his survey for a num ber of years in a com pany t hat em ploys m ore t han 100,000 people, I can at t est not only t o t hose correlat ions but also t o t he relat ed behavior changes when survey scores becom e part of t he st andard operat ing m easurem ent s. The power of t he survey lies in it s sim plicit y and flexibilit y, allowing each t eam t o ident ify and correct it s own causes for disengagem ent . PJ Sm oot President The Point of Cont act Mem phis, Tennessee

Christ opher I t t ner and David Larcker respond: PJ Sm oot m akes t wo point s in his let t er. The first is t hat sim plicit y is t he key t o perform ance m easurem ent effect iveness. We agree t hat com panies are bet t er off ident ifying and m easuring t he “ vit al few” drivers of success rat her t han m easuring a m ult it ude of useful but less im port ant m easures. Sim pler m easures are also preferable t o m ore com plex ones if t hey are j ust as inform at ive. However, you should not choose sim plicit y over perform ance cat egories crit ical t o financial result s. ( Em ployee and cust om er fact ors need not be t he only im port ant perform ance drivers.) You also should not adopt sim ple m easures t hat lack st at ist ical reliabilit y and validit y. Even t he Gallup Organizat ion’s survey uses 12 quest ions t o assess em ployee engagem ent , not j ust a single quest ion t hat asks em ployees how engaged or sat isfied t hey are. The second point is t hat a num ber of com panies and consult ing firm s have developed and validat ed nonfinancial m easures t hat are linked t o financial result s ( Gallup’s Q12 survey being one of m any) . Again, we acknowledge and applaud t heir effort s. But adopt ing m easures wit hout conduct ing furt her analysis requires caut ion. The relat ionship bet ween a nonfinancial m easure and financial perform ance can vary due t o different organizat ions’ st rat egies and com pet it ive environm ent s. Measurem ent indicat ors can also vary in t erm s of t heir relat ive im port ance. For exam ple, in som e com panies all t he Gallup survey quest ions m ay be equally im port ant , while in ot hers a subset m ay be m ore predict ive of fut ure perform ance. Com panies m ust ident ify and validat e t he perform ance m easures t hat reflect t heir unique sources of com pet it ive advant age.

H BR Spot ligh t : Ch in a Tom or r ow Th e Gr e a t Tr a n sit ion Th e H idde n D r a gon s Dear Edit or: Kennet h Liebert hal and Geoffrey Liebert hal’s art icle “ The Great Transit ion” and Ming Zeng and Pet er William son’s art icle “ The Hidden Dragons” ( Oct ober 2003) bot h focus at t ent ion on underappreciat ed aspect s of t he China opport unit y. Liebert hal and Liebert hal are right t o point out t hat , aft er China j oins t he World Trade Organizat ion, dom est ic opport unit ies for m ult inat ionals in China will expand. Zeng and William son are right t o rem ind m ult inat ionals t o be wary of dom est ic ent erprises. “ The Great Transit ion,” wit h it s exclusive focus on m ult inat ionals, and “ The Hidden Dragons,” wit h it s concent rat ion on dom est ic ent erprises, undersell China’s chance of succeeding wit h m ult inat ional and dom est ic firm s. The success of m ult inat ionals should not com e at t he expense of dom est ic firm s but should spur privat e- sect or ent repreneurship in China. The Liebert hals are am bit ious in providing a blueprint for m ult inat ional success. But if Chinese m anagem ent t alent is not nurt ured, t he im plicat ion is t hat t he m anagem ent know- how of running a fact ory, m arket ing a product , or running a laborat ory will not spread t hrough t he Chinese econom y quickly. I t will t hen be harder for m ult inat ionals t o cat alyze new vent ures by, for inst ance, allowing em ployees t o leave t o st art t heir own businesses. Mult inat ionals m ay worry t hat t heir int angible asset s, t he source of t heir com pet it ive advant age, will walk out t he door wit h t he em ployees. I ndia’s experience suggest s t hat a happier out com e is possible. Firm s like Cit ibank and Hindust an Lever ( Unilever) have incorporat ed local execut ives at t he m ost senior levels and have served as de fact o t raining inst it ut es for t he rest of corporat e I ndia. These kinds of pract ices have m ade t hem em ployers of choice. Form er Cit ibank and Hindust an Lever em ployees have t aken t he m anagem ent t echniques t hey learned at t hose com panies and st art ed t heir own businesses.

Act ivit y in t he dom est ic privat e sect or and foreign direct invest m ent can be com plem ent ary. However, people who leave m ult inat ionals t o st art businesses m ust have t he access t o infrast ruct ure, especially m anagem ent skills. That is not t he case in China. A great er com m it m ent t o privat e ent erprise will enhance China’s abilit y t o get m ore from t he foreign invest m ent it at t ract s. I t m ay sound sim plist ic t o say t hat m ult inat ionals should develop Chinese m anagers. But Chinese policy m akers, basking in t he adulat ion of m ult inat ionals t he world over— including subst ant ial invest m ent s originat ing from a wealt hy diaspora—have had t he luxury of being able t o defer privat e- ent erprise reform . Their at t ent ion, inst ead, has been direct ed squarely at rolling out t he red carpet for foreign privat e ent erprises and keeping t roubled st at e- owned ent erprises afloat , while dom est ic privat e ent erprises rem ain, at best , neglect ed. Under t hese circum st ances, it is unrealist ic t o assum e t hat dom est ic privat e ent erprise in China will develop wit hout t he help of m ult inat ionals. Turning t o Zeng and William son’s Hidden Dragons, I m arvel at how Chinese ent repreneurs deal wit h t he ubiquit y of governm ent and find ways t o align t he int erest s of local governm ent wit h t hose of t he ent erprise. The net result is t hat you would be hard pressed t o find any purely privat e- sect or ent repreneurial effort in China. Prot ect ionism t o build nat ional cham pions, or t o back t he effort s of a few t arget ed ent repreneurs, is also com m on. Given t he count ry’s success at at t ract ing m ult inat ionals, it is surprising t hat few, if any, of t he com panies highlight ed by Zeng and William son have benefit ed from t he m ult inat ionals in t he Chinese backyard. For t he m ost part , Chinese ent repreneurs have apparent ly been unable t o capit alize on t he m anagem ent know- how brought int o t he count ry by m ult inat ionals. Here’s t he inadvert ent connect ion bet ween t he t wo art icles: I f m ult inat ionals follow a blueprint wit h insufficient at t ent ion paid t o nurt uring Chinese m anagem ent t alent , it will likely result in t oo few privat e com panies capit alizing on t he soft t echnology and skills t hat t he m ult inat ionals inevit ably bring. As MI T Sloan School professor Yasheng Huang and I have argued, I ndia has produced m any m ore privat e- sect or com panies—world- class ones, at t hat —in t he past few decades t han has China. These are m uch bet t er governed ( by int ernat ional corporat e governance st andards) and are spread across m any sect ors of t he I ndian econom y, beyond soft ware. Not t o decry Zeng and William son’s observat ions regarding am azing success st ories in China, but t he I ndian benchm ark suggest s t hat China act ually does not have enough. Many of I ndia’s leading firm s in t he privat e sect or owe t heir st art t o m ult inat ionals operat ing t here. I ndia cont inues t o display incom pet ence in at t ract ing foreign direct invest m ent , but when m ult inat ionals do show up, t hey apparent ly cont ribut e well beyond t he im m ediat e provision of goods and services. General Elect ric, for exam ple, did m uch t o help I ndia’s leading soft ware com pany, Wipro, get t o where it is now. The count ry’s leading biot echnology firm , Biocon, got an early boost t hrough it s affiliat ion wit h Unilever. And I ndia’s leading m anufact urer of specialized aut om ot ive com ponent s, Sundaram Fast eners, has piggybacked on General Mot ors’ global reach and presence. While I ndia should t ake a page out of China’s book and learn not t o scare away m ult inat ionals, China should t ake a page out of I ndia’s book and learn how t o get t he m ost out of t he resources being poured int o it s econom y. I f eit her count ry pulls t his off, I ’d be happy t o break out t he cham pagne! Unt il t hen, t he Liebert hals’ advice and Zeng and William son’s adm onit ion t o m ult inat ionals are all very well and good, but t hey are not win- win perspect ives. Mult inat ionals have m uch m ore t o gain t han t o lose from a dynam ic privat e sect or in China. Ta r u n Kh a n n a Professor, Novart is Fellow Harvard Business School Bost on

Kennet h Liebert hal and Geoffrey Liebert hal respond: Tarun Khanna raises an im port ant point t hat is com plem ent ary t o, rat her t han at crosspurposes wit h, our art icle. Khanna st resses t he long- t erm value t o MNCs of prom ot ing t he developm ent of China’s privat e sect or and t herefore underscores t he int erest MNCs should have in t raining t op Chinese m anagers. We did not address t raining Chinese m anagers because we lacked t he space needed t o t ackle t hat issue. The realit y is t hat MNCs have put a great deal of effort int o developing t op Chinese m anagers, and Chinese nat ionals hold highly responsible m anagem ent posit ions in a large percent age of m ult inat ionals’ Chinese vent ures. MNCs have also worked hard t o upgrade t heir Chinese suppliers’ m anagem ent capabilit ies in such sect ors as aut om ot ive. Anyone addressing a m eet ing convened by t he Am erican Cham ber of Com m erce of eit her Beij ing or Shanghai sees a lot of Chinese faces in t he audience. There is also a subst ant ial body of lit erat ure on Chinese HR issues for MNCs. Many m anagers who have gained experience in MNCs have t hen left t o set up or j oin st rict ly Chinese vent ures. Not ably few of t hese have achieved m aj or success. The reasons for t his poor showing are not com plet ely clear, but it is likely t he Chinese operat ing environm ent we describe in our art icle cont ribut es subst ant ially t o t hese problem s. Chinese ent repreneurs m ay seek t o capt ure t he dynam ic efficiency of t he MNCs in which t hey worked, but polit ical int erference, lim it ed access t o credit , and ot her fact ors seriously reduce t heir chances of succeeding. Nevert heless, som e of t he Chinese vent ures have m ade it . Mot orola, for exam ple, now faces a sit uat ion in which t he com bined sales of handset s produced by Chinese firm s equals sales of Mot orola’s handset s in t he count ry. ( Not surprisingly, form er Mot orola em ployees run m any of t hose Chinese firm s.) We doubt , t hough, t hat Mot orola is pleased t o see t his sit uat ion develop. Moreover, as foreign financial inst it ut ions becom e eligible t o provide a full array of renm inbi banking services, t hey are likely t o increase great ly t he pool of credit available t o prom ising privat e- sect or firm s. Available credit will com bine wit h m anagers t rained in foreign firm s ( and foreign business schools) t o produce, over t im e, larger, m ore sophist icat ed, and m ore dynam ic privat e ent erprises. Great er vibrancy in t he privat e sect or will produce a m ore robust Chinese econom y, and t hat will serve t he int erest s of MNCs involved t here. Ming Zeng and Pet er William son respond: Tarun Khanna m akes a good point t hat com pet it ion bet ween m ult inat ionals and Chinese com panies can spur privat e- sect or ent repreneurship in China. The presence of m ult inat ionals in China has already been a fact or in t he em ergence of t he powerful new breed of privat e and hybrid- ownership Chinese com pet it ors t hat we described in our art icle. Ult im at ely, t he Hidden Dragons’ capacit y for rapid learning is what has allowed t hem t o cat ch up wit h t heir West ern cousins so quickly. And t hey have learned t hrough close cooperat ion wit h m ult inat ional firm s as j oint - vent ure part ners, dist ribut ors, suppliers, and cust om ers, as well as t hrough direct com pet it ion in t he m arket place. The Legend Group, China’s leading m aker of personal com put ers, st art ed as t he dist ribut or for AST, Hewlet t - Packard, and Toshiba. From t hese part nerships, Legend learned a great deal about I T indust ry and channel m anagem ent , as well as general m anagem ent know- how—key ingredient s in it s current success. When Legend int roduced it s own brand back in t he early 1990s, m ost of it s m arket ing and sales m anagers had been t rained by HP, and t he m arket ing m odel was largely borrowed from HP as well. TCL, m eanwhile, got it s st art in t he t elevision, personal com put ers, and m obile- phone indust ries t hrough successive j oint vent ures wit h foreign part ners. More recent ly, senior m anagers have been m igrat ing from m ult inat ionals t o Chinese com panies, nat urally bringing t heir knowledge wit h t hem . Chinese firm s are also growing up as t hey bat t le it out wit h m ult inat ionals. For exam ple, Wanj ia, a local superm arket est ablished cheek by j owl wit h Wal- Mart ’s subsidiary in Shenzhen, was t hought t o be doom ed t o failure. But inst ead, com pet it ion forced Wanj ia t o raise it s gam e and becom e world class t o survive and prosper. Chinese firm s observe t he best pract ice right in front of t hem and t hen figure out how t o im it at e, adapt , and, ult im at ely, m aybe im prove it , t o bet t er fit t he local cont ext . These int eract ions can provide t he kind of win- win out com es t hat have helped develop t he I ndian business sect or, as Khanna correct ly point s out . Com pet it ion and cooperat ion

bet ween m ult inat ionals and local firm s help raise st andards of qualit y, efficiency, and service and increase m arket size by fueling growt h. But t hat doesn’t m ean m ult inat ionals can afford t o be com placent . Despit e t he opport unit ies for m ult inat ionals ident ified by Liebert hal and Liebert hal, China’s own com panies have so far won t he dom inant share of m any of it s m arket s, including TVs, PCs, and hom e appliances. Even in sect ors such as m obile- phone handset s, where Chinese firm s had only a 3% share in 1999, t hey capt ured alm ost 50% of China’s boom ing m arket in 2003! I nside and out side China, t he em erging Chinese dragons could be t he real com pet it ors t o beat .

H BR Spot ligh t : Ch in a Tom or r ow Th e Ch in e se N e got ia t ion Dear Edit or: John Graham and N. Mark Lam ’s art icle “ The Chinese Negot iat ion” ( Oct ober 2003) provides necessary cult ural inform at ion for Am ericans negot iat ing in China. However, Am ericans can run int o danger if t hey t reat t his advice as a list of cult ural how- t os. How t o int eract and com m unicat e given t hat cult ural background is j ust as crit ical as t he inform at ion it self. Ot herwise, t hat background inform at ion is reduced t o fort une- cookie wisdom . Dist inguishing Am erican and Chinese views so st arkly can breed an us- versust hem m ent alit y. Variat ions in em phasis, expression, and degree exist , but individualism and collect ivism are t wo halves of a whole in bot h Am erica and China. At least t wo crosscult ural fundam ent als m ust be in t he m ix t o successfully negot iat e in China. First , a negot iat or has t o t ake int o account t he individuals involved. For exam ple, an Am erican t hat invit es t he Chinese count erpart out t o dinner because t he Am erican believes t hat ’s cult urally correct m ay m iss t he signals t hat t he ot her person want s t o go hom e early t o see his or her child before bedt im e. Bot h are t rying t o accom m odat e each ot her, and yet t hey bot h end up doing som et hing t hey did not want t o do. Group inform at ion should be t reat ed as a t heory t o be t est ed and not as a fact . Many Chinese businesspeople have spent significant t im e in t he Unit ed St at es for educat ion or work, which m eans t hey have already negot iat ed wit h Am ericans on Am erican cult ural t erm s. Learning t he individual’s way of t hinking and preferences is as im perat ive as t he cult ural inform at ion. Second, a negot iat or needs t o look at t he dynam ics and cont ext of t he specific sit uat ion. Knowing t he root s of each ot her’s cult ure is im port ant . But t he ways in which an individual uses t hat inform at ion is as im port ant . Neit her side usually expect s t he ot her t o abandon his own cult ure when ent ering int o a negot iat ion. I t is not assum ed t hat eit her side get s every cult ural nuance right . Bot h sides m ust adj ust t o each ot her and t o unique values and prot ocols t hat exist in various business sect ors. I n a sense, t he negot iat ion is not j ust over t he deal and t he relat ionship; t he part ies m ust negot iat e how t hey negot iat e wit h each ot her. Gr a n de Lu m

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John Graham and N. Mark Lam respond: Thank you for your useful insight s. We agree wit h your com m ent s. Of course, as im port ant as t hey are, cult ural differences do not explain all t he int erest ing variat ions we see in negot iat ions bet ween Am ericans and Chinese. I ndividual and cont ext ual differences such as you describe frequent ly play crucial roles as well. I ndeed, we discuss in det ail such im port ant t opics in our fort hcom ing book, Red China, Green China. View Back Issues Copyright © 2004 Harvard Business School Publishing. All right s reserved.

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Let t ers t o t he Edit or Th e Qu e st for Re silie n ce Dear Edit or: We have deep respect for t he work of Gary Ham el and Liisa Välikangas, but “ The Quest for Resilience” ( Sept em ber 2003) point s your readers in t he wrong direct ion. Com panies need t o build t he “ capacit y t o change before t he case for change becom es desperat ely obvious.” But Ham el and Välikangas propose a ut opian corporat e capacit y t hat adapt s t o st rat egic failure wit hout t raum at ic wake- up calls of lost m arket share, prot ract ed earnings slum ps, and t he need for wrenching t urnarounds. A recipe for pain- free learning could work only if learning were solely about developing valuable new ideas. The st rat egically im port ant innovat ions t hat give com panies resilience do not com e from experim ent s, or from m ult iple bet - hedging experim ent s, or from people whose careers are prot ect ed from t he consequences of failed experim ent s. I nst ead, senior m anagers need t o develop a com m it m ent t o risking t heir careers t o develop new ideas. The value of any new idea only becom es known in t he m idst of failed pilot s, funding losses, and heart breaking rej iggerings. Likewise, corporat e resilience generally does not com e from t raining senior m anagers t o apply resources, like m arket s, t o a hundred different well- hedged fut ures. Com panies learn t o spot difficult ies early, invent opport unit ies in t he m idst of breakdowns, and fundam ent ally change how t hey int eract wit h suppliers and cust om ers by focusing on t he core cust om er concerns t hey serve. Disconnect ion occurs when m anagers begin t o seek m ult iple, hedged, or pain- free solut ions. Resilience requires re- ignit ing m anagers’ passion and com m it m ent t o t aking chances and working t hrough t hem , not pain- free experim ent at ion. Ge r a ld Ada m s Founder Vision Consult ing New York

Ch a u n ce y Be ll Founder and President The Design Com m unit y San Francisco

Com in g Up Sh or t on N on fin a n cia l Pe r for m a n ce M e a su r e m e n t

Dear Edit or: I absolut ely agree wit h Christ opher I t t ner and David Larcker’s observat ion in “ Com ing Up Short on Nonfinancial Perform ance Measurem ent ” ( Novem ber 2003) t hat nonfinancial perform ance m easurem ent s are not as rigorous as t hey should be and t herefore do not drive im provem ent . I agree, t oo, t hat t he causes include a lack of account abilit y and a lack of connect ion t o operat ing and financial result s. I do not agree, however, t hat t he solut ion is a 300- quest ion survey. Effect ive nonfinancial m easurem ent s are crit ical t o any organizat ion’s success. Sim plicit y is key t o t hat effect iveness. Organizat ions such as First Tennessee, S.C. Johnson, and Prudent ial have developed processes t hat show t he connect ion bet ween cust om er and em ployee engagem ent and result s and include t hose indicat ors in t heir perform ance m easurem ent s. The Gallup Organizat ion pioneered t he Q12 quest ionnaire, which can m easure em ployee and cust om er influence on corporat e perform ance. Responses t o it s 12 quest ions show a posit ive correlat ion bet ween em ployee engagem ent and product ivit y, profit abilit y, cust om er service, ret ent ion, and safet y. Having worked wit h t his survey for a num ber of years in a com pany t hat em ploys m ore t han 100,000 people, I can at t est not only t o t hose correlat ions but also t o t he relat ed behavior changes when survey scores becom e part of t he st andard operat ing m easurem ent s. The power of t he survey lies in it s sim plicit y and flexibilit y, allowing each t eam t o ident ify and correct it s own causes for disengagem ent . PJ Sm oot President The Point of Cont act Mem phis, Tennessee

Christ opher I t t ner and David Larcker respond: PJ Sm oot m akes t wo point s in his let t er. The first is t hat sim plicit y is t he key t o perform ance m easurem ent effect iveness. We agree t hat com panies are bet t er off ident ifying and m easuring t he “ vit al few” drivers of success rat her t han m easuring a m ult it ude of useful but less im port ant m easures. Sim pler m easures are also preferable t o m ore com plex ones if t hey are j ust as inform at ive. However, you should not choose sim plicit y over perform ance cat egories crit ical t o financial result s. ( Em ployee and cust om er fact ors need not be t he only im port ant perform ance drivers.) You also should not adopt sim ple m easures t hat lack st at ist ical reliabilit y and validit y. Even t he Gallup Organizat ion’s survey uses 12 quest ions t o assess em ployee engagem ent , not j ust a single quest ion t hat asks em ployees how engaged or sat isfied t hey are. The second point is t hat a num ber of com panies and consult ing firm s have developed and validat ed nonfinancial m easures t hat are linked t o financial result s ( Gallup’s Q12 survey being one of m any) . Again, we acknowledge and applaud t heir effort s. But adopt ing m easures wit hout conduct ing furt her analysis requires caut ion. The relat ionship bet ween a nonfinancial m easure and financial perform ance can vary due t o different organizat ions’ st rat egies and com pet it ive environm ent s. Measurem ent indicat ors can also vary in t erm s of t heir relat ive im port ance. For exam ple, in som e com panies all t he Gallup survey quest ions m ay be equally im port ant , while in ot hers a subset m ay be m ore predict ive of fut ure perform ance. Com panies m ust ident ify and validat e t he perform ance m easures t hat reflect t heir unique sources of com pet it ive advant age.

H BR Spot ligh t : Ch in a Tom or r ow Th e Gr e a t Tr a n sit ion Th e H idde n D r a gon s

Dear Edit or: Kennet h Liebert hal and Geoffrey Liebert hal’s art icle “ The Great Transit ion” and Ming Zeng and Pet er William son’s art icle “ The Hidden Dragons” ( Oct ober 2003) bot h focus at t ent ion on underappreciat ed aspect s of t he China opport unit y. Liebert hal and Liebert hal are right t o point out t hat , aft er China j oins t he World Trade Organizat ion, dom est ic opport unit ies for m ult inat ionals in China will expand. Zeng and William son are right t o rem ind m ult inat ionals t o be wary of dom est ic ent erprises. “ The Great Transit ion,” wit h it s exclusive focus on m ult inat ionals, and “ The Hidden Dragons,” wit h it s concent rat ion on dom est ic ent erprises, undersell China’s chance of succeeding wit h m ult inat ional and dom est ic firm s. The success of m ult inat ionals should not com e at t he expense of dom est ic firm s but should spur privat e- sect or ent repreneurship in China. The Liebert hals are am bit ious in providing a blueprint for m ult inat ional success. But if Chinese m anagem ent t alent is not nurt ured, t he im plicat ion is t hat t he m anagem ent know- how of running a fact ory, m arket ing a product , or running a laborat ory will not spread t hrough t he Chinese econom y quickly. I t will t hen be harder for m ult inat ionals t o cat alyze new vent ures by, for inst ance, allowing em ployees t o leave t o st art t heir own businesses. Mult inat ionals m ay worry t hat t heir int angible asset s, t he source of t heir com pet it ive advant age, will walk out t he door wit h t he em ployees. I ndia’s experience suggest s t hat a happier out com e is possible. Firm s like Cit ibank and Hindust an Lever ( Unilever) have incorporat ed local execut ives at t he m ost senior levels and have served as de fact o t raining inst it ut es for t he rest of corporat e I ndia. These kinds of pract ices have m ade t hem em ployers of choice. Form er Cit ibank and Hindust an Lever em ployees have t aken t he m anagem ent t echniques t hey learned at t hose com panies and st art ed t heir own businesses. Act ivit y in t he dom est ic privat e sect or and foreign direct invest m ent can be com plem ent ary. However, people who leave m ult inat ionals t o st art businesses m ust have t he access t o infrast ruct ure, especially m anagem ent skills. That is not t he case in China. A great er com m it m ent t o privat e ent erprise will enhance China’s abilit y t o get m ore from t he foreign invest m ent it at t ract s. I t m ay sound sim plist ic t o say t hat m ult inat ionals should develop Chinese m anagers. But Chinese policy m akers, basking in t he adulat ion of m ult inat ionals t he world over— including subst ant ial invest m ent s originat ing from a wealt hy diaspora—have had t he luxury of being able t o defer privat e- ent erprise reform . Their at t ent ion, inst ead, has been direct ed squarely at rolling out t he red carpet for foreign privat e ent erprises and keeping t roubled st at e- owned ent erprises afloat , while dom est ic privat e ent erprises rem ain, at best , neglect ed. Under t hese circum st ances, it is unrealist ic t o assum e t hat dom est ic privat e ent erprise in China will develop wit hout t he help of m ult inat ionals. Turning t o Zeng and William son’s Hidden Dragons, I m arvel at how Chinese ent repreneurs deal wit h t he ubiquit y of governm ent and find ways t o align t he int erest s of local governm ent wit h t hose of t he ent erprise. The net result is t hat you would be hard pressed t o find any purely privat e- sect or ent repreneurial effort in China. Prot ect ionism t o build nat ional cham pions, or t o back t he effort s of a few t arget ed ent repreneurs, is also com m on. Given t he count ry’s success at at t ract ing m ult inat ionals, it is surprising t hat few, if any,

of t he com panies highlight ed by Zeng and William son have benefit ed from t he m ult inat ionals in t he Chinese backyard. For t he m ost part , Chinese ent repreneurs have apparent ly been unable t o capit alize on t he m anagem ent know- how brought int o t he count ry by m ult inat ionals. Here’s t he inadvert ent connect ion bet ween t he t wo art icles: I f m ult inat ionals follow a blueprint wit h insufficient at t ent ion paid t o nurt uring Chinese m anagem ent t alent , it will likely result in t oo few privat e com panies capit alizing on t he soft t echnology and skills t hat t he m ult inat ionals inevit ably bring. As MI T Sloan School professor Yasheng Huang and I have argued, I ndia has produced m any m ore privat e- sect or com panies—world- class ones, at t hat —in t he past few decades t han has China. These are m uch bet t er governed ( by int ernat ional corporat e governance st andards) and are spread across m any sect ors of t he I ndian econom y, beyond soft ware. Not t o decry Zeng and William son’s observat ions regarding am azing success st ories in China, but t he I ndian benchm ark suggest s t hat China act ually does not have enough. Many of I ndia’s leading firm s in t he privat e sect or owe t heir st art t o m ult inat ionals operat ing t here. I ndia cont inues t o display incom pet ence in at t ract ing foreign direct invest m ent , but when m ult inat ionals do show up, t hey apparent ly cont ribut e well beyond t he im m ediat e provision of goods and services. General Elect ric, for exam ple, did m uch t o help I ndia’s leading soft ware com pany, Wipro, get t o where it is now. The count ry’s leading biot echnology firm , Biocon, got an early boost t hrough it s affiliat ion wit h Unilever. And I ndia’s leading m anufact urer of specialized aut om ot ive com ponent s, Sundaram Fast eners, has piggybacked on General Mot ors’ global reach and presence. While I ndia should t ake a page out of China’s book and learn not t o scare away m ult inat ionals, China should t ake a page out of I ndia’s book and learn how t o get t he m ost out of t he resources being poured int o it s econom y. I f eit her count ry pulls t his off, I ’d be happy t o break out t he cham pagne! Unt il t hen, t he Liebert hals’ advice and Zeng and William son’s adm onit ion t o m ult inat ionals are all very well and good, but t hey are not win- win perspect ives. Mult inat ionals have m uch m ore t o gain t han t o lose from a dynam ic privat e sect or in China. Ta r u n Kh a n n a Professor, Novart is Fellow Harvard Business School Bost on

Kennet h Liebert hal and Geoffrey Liebert hal respond: Tarun Khanna raises an im port ant point t hat is com plem ent ary t o, rat her t han at crosspurposes wit h, our art icle. Khanna st resses t he long- t erm value t o MNCs of prom ot ing t he developm ent of China’s privat e sect or and t herefore underscores t he int erest MNCs should have in t raining t op Chinese m anagers. We did not address t raining Chinese m anagers because we lacked t he space needed t o t ackle t hat issue. The realit y is t hat MNCs have put a great deal of effort int o developing t op Chinese m anagers, and Chinese nat ionals hold highly responsible m anagem ent posit ions in a large percent age of m ult inat ionals’ Chinese vent ures. MNCs have also worked hard t o upgrade t heir Chinese suppliers’ m anagem ent capabilit ies in such sect ors as aut om ot ive. Anyone addressing a m eet ing convened by t he Am erican Cham ber of Com m erce of eit her Beij ing or Shanghai sees a lot of Chinese faces in t he audience. There is also a subst ant ial body of lit erat ure on Chinese HR issues for MNCs.

Many m anagers who have gained experience in MNCs have t hen left t o set up or j oin st rict ly Chinese vent ures. Not ably few of t hese have achieved m aj or success. The reasons for t his poor showing are not com plet ely clear, but it is likely t he Chinese operat ing environm ent we describe in our art icle cont ribut es subst ant ially t o t hese problem s. Chinese ent repreneurs m ay seek t o capt ure t he dynam ic efficiency of t he MNCs in which t hey worked, but polit ical int erference, lim it ed access t o credit , and ot her fact ors seriously reduce t heir chances of succeeding. Nevert heless, som e of t he Chinese vent ures have m ade it . Mot orola, for exam ple, now faces a sit uat ion in which t he com bined sales of handset s produced by Chinese firm s equals sales of Mot orola’s handset s in t he count ry. ( Not surprisingly, form er Mot orola em ployees run m any of t hose Chinese firm s.) We doubt , t hough, t hat Mot orola is pleased t o see t his sit uat ion develop. Moreover, as foreign financial inst it ut ions becom e eligible t o provide a full array of renm inbi banking services, t hey are likely t o increase great ly t he pool of credit available t o prom ising privat e- sect or firm s. Available credit will com bine wit h m anagers t rained in foreign firm s ( and foreign business schools) t o produce, over t im e, larger, m ore sophist icat ed, and m ore dynam ic privat e ent erprises. Great er vibrancy in t he privat e sect or will produce a m ore robust Chinese econom y, and t hat will serve t he int erest s of MNCs involved t here. Ming Zeng and Pet er William son respond: Tarun Khanna m akes a good point t hat com pet it ion bet ween m ult inat ionals and Chinese com panies can spur privat e- sect or ent repreneurship in China. The presence of m ult inat ionals in China has already been a fact or in t he em ergence of t he powerful new breed of privat e and hybrid- ownership Chinese com pet it ors t hat we described in our art icle. Ult im at ely, t he Hidden Dragons’ capacit y for rapid learning is what has allowed t hem t o cat ch up wit h t heir West ern cousins so quickly. And t hey have learned t hrough close cooperat ion wit h m ult inat ional firm s as j oint - vent ure part ners, dist ribut ors, suppliers, and cust om ers, as well as t hrough direct com pet it ion in t he m arket place. The Legend Group, China’s leading m aker of personal com put ers, st art ed as t he dist ribut or for AST, Hewlet t - Packard, and Toshiba. From t hese part nerships, Legend learned a great deal about I T indust ry and channel m anagem ent , as well as general m anagem ent know- how—key ingredient s in it s current success. When Legend int roduced it s own brand back in t he early 1990s, m ost of it s m arket ing and sales m anagers had been t rained by HP, and t he m arket ing m odel was largely borrowed from HP as well. TCL, m eanwhile, got it s st art in t he t elevision, personal com put ers, and m obile- phone indust ries t hrough successive j oint vent ures wit h foreign part ners. More recent ly, senior m anagers have been m igrat ing from m ult inat ionals t o Chinese com panies, nat urally bringing t heir knowledge wit h t hem . Chinese firm s are also growing up as t hey bat t le it out wit h m ult inat ionals. For exam ple, Wanj ia, a local superm arket est ablished cheek by j owl wit h Wal- Mart ’s subsidiary in Shenzhen, was t hought t o be doom ed t o failure. But inst ead, com pet it ion forced Wanj ia t o raise it s gam e and becom e world class t o survive and prosper. Chinese firm s observe t he best pract ice right in front of t hem and t hen figure out how t o im it at e, adapt , and, ult im at ely, m aybe im prove it , t o bet t er fit t he local cont ext . These int eract ions can provide t he kind of win- win out com es t hat have helped develop t he I ndian business sect or, as Khanna correct ly point s out . Com pet it ion and cooperat ion bet ween m ult inat ionals and local firm s help raise st andards of qualit y, efficiency, and

service and increase m arket size by fueling growt h. But t hat doesn’t m ean m ult inat ionals can afford t o be com placent . Despit e t he opport unit ies for m ult inat ionals ident ified by Liebert hal and Liebert hal, China’s own com panies have so far won t he dom inant share of m any of it s m arket s, including TVs, PCs, and hom e appliances. Even in sect ors such as m obile- phone handset s, where Chinese firm s had only a 3% share in 1999, t hey capt ured alm ost 50% of China’s boom ing m arket in 2003! I nside and out side China, t he em erging Chinese dragons could be t he real com pet it ors t o beat .

H BR Spot ligh t : Ch in a Tom or r ow Th e Ch in e se N e got ia t ion Dear Edit or: John Graham and N. Mark Lam ’s art icle “ The Chinese Negot iat ion” ( Oct ober 2003) provides necessary cult ural inform at ion for Am ericans negot iat ing in China. However, Am ericans can run int o danger if t hey t reat t his advice as a list of cult ural how- t os. How t o int eract and com m unicat e given t hat cult ural background is j ust as crit ical as t he inform at ion it self. Ot herwise, t hat background inform at ion is reduced t o fort une- cookie wisdom . Dist inguishing Am erican and Chinese views so st arkly can breed an us- versust hem m ent alit y. Variat ions in em phasis, expression, and degree exist , but individualism and collect ivism are t wo halves of a whole in bot h Am erica and China. At least t wo crosscult ural fundam ent als m ust be in t he m ix t o successfully negot iat e in China. First , a negot iat or has t o t ake int o account t he individuals involved. For exam ple, an Am erican t hat invit es t he Chinese count erpart out t o dinner because t he Am erican believes t hat ’s cult urally correct m ay m iss t he signals t hat t he ot her person want s t o go hom e early t o see his or her child before bedt im e. Bot h are t rying t o accom m odat e each ot her, and yet t hey bot h end up doing som et hing t hey did not want t o do. Group inform at ion should be t reat ed as a t heory t o be t est ed and not as a fact . Many Chinese businesspeople have spent significant t im e in t he Unit ed St at es for educat ion or work, which m eans t hey have already negot iat ed wit h Am ericans on Am erican cult ural t erm s. Learning t he individual’s way of t hinking and preferences is as im perat ive as t he cult ural inform at ion. Second, a negot iat or needs t o look at t he dynam ics and cont ext of t he specific sit uat ion. Knowing t he root s of each ot her’s cult ure is im port ant . But t he ways in which an individual uses t hat inform at ion is as im port ant . Neit her side usually expect s t he ot her t o abandon his own cult ure when ent ering int o a negot iat ion. I t is not assum ed t hat eit her side get s every cult ural nuance right . Bot h sides m ust adj ust t o each ot her and t o unique values and prot ocols t hat exist in various business sect ors. I n a sense, t he negot iat ion is not j ust over t he deal and t he relat ionship; t he part ies m ust negot iat e how t hey negot iat e wit h each ot her. Gr a n de Lu m Principal Thought Bridge San Francisco

John Graham and N. Mark Lam respond: Thank you for your useful insight s. We agree wit h your com m ent s. Of course, as im port ant as t hey are, cult ural differences do not explain all t he int erest ing variat ions we see in negot iat ions bet ween Am ericans and Chinese. I ndividual and cont ext ual differences such as you describe frequent ly play crucial roles as well. I ndeed, we discuss in det ail such im port ant t opics in our fort hcom ing book, Red China, Green China. Copyright © 2004 Harvard Business School Publishing. This cont ent m ay not be reproduced or t ransm it t ed in any form or by any m eans, elect ronic or m echanical, including phot ocopy, recording, or any inform at ion st orage or ret rieval syst em , wit hout writ t en perm ission. Request s for perm ission should be direct ed t o perm [email protected], 1- 888- 500- 1020, or m ailed t o Perm issions, Harvard Business School Publishing, 60 Harvard Way, Bost on, MA 02163.

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Measuring t he St rat egic Readiness of I nt angible Asset s A r e a l—a n d r e volu t ion a r y—oppor t u n it y lie s in st u dyin g a n d a sse ssin g h ow w e ll pr e pa r e d a com pa n y’s pe ople , syst e m s, a n d cu lt u r e a r e t o ca r r y ou t it s st r a t e gy.

by Robe r t S. Ka pla n a n d D a vid P. N or t on Robe r t S. Ka pla n ( r k a pla n @h bs.e du ) is t he Marvin Bower Professor of Leadership Developm ent at Harvard Business School in Bost on. D a vid P. N or t on ( dn or t on @bscol.com ) is t he founder and president of t he Balanced Scorecard Collaborat ive ( www.bscol.com ) in Lincoln, Massachuset t s. This art icle is based on t heir book St rat egy Maps: Convert ing I nt angible Asset s int o Tangible Out com es ( Harvard Business School Press, 2004) .

How valuable is a com pany cult ure t hat enables em ployees t o underst and and believe in t heir organizat ion’s m ission, vision, and core values? What ’s t he payoff from invest ing in a knowledge m anagem ent syst em or in a new cust om er dat abase? I s it m ore im port ant t o im prove t he skills of all em ployees or focus on t hose in j ust a few key posit ions? Measuring t he value of such int angible asset s is t he holy grail of account ing. Em ployees’ skills, I T syst em s, and organizat ional cult ures are wort h far m ore t o m any com panies t han t heir t angible asset s. Unlike financial and physical ones, int angible asset s are hard for com pet it ors t o im it at e, which m akes t hem a powerful source of sust ainable com pet it ive advant age. I f m anagers could find a way t o est im at e t he value of t heir int angible asset s, t hey could m easure and m anage t heir com pany’s com pet it ive posit ion m uch m ore easily and accurat ely. But t hat ’s sim pler said t han done. Unlike financial and physical asset s, int angible asset s are wort h different t hings t o different people. An oil well, for exam ple, is alm ost as valuable t o a ret ail firm as it is t o an oil explorat ion corporat ion because eit her com pany could sell it swift ly if necessary. But a workforce wit h a st rong sense of cust om er service and sat isfact ion is wort h far m ore t o t he ret ailer t han it would be t o t he oil com pany. Also, unlike t angible asset s, int angible asset s alm ost never creat e value by t hem selves. They need t o be com bined wit h ot her asset s. I nvest m ent s in I T, for exam ple, have lit t le value unless com plem ent ed wit h HR t raining and incent ive program s. And, conversely, m any HR t raining program s have lit t le value unless com plem ent ed wit h m odern t echnology t ools. HR and I T invest m ent s m ust be int egrat ed and aligned wit h corporat e st rat egy if t he organizat ion is t o realize t heir full pot ent ial. I ndeed, when com panies separat e funct ions like HR and I T organizat ionally, t hey usually end up wit h com pet ing silos of t echnical specializat ion. The HR depart m ent argues for increases in em ployee t raining, while t he I T depart m ent lobbies for buying new hardware and soft ware packages.

What ’s m ore, int angible asset s seldom affect financial perform ance direct ly. I nst ead, t hey work indirect ly t hrough com plex chains of cause and effect . Training em ployees in Tot al Qualit y Managem ent and Six Sigm a, for inst ance, should im prove process qualit y. That im provem ent should t hen increase cust om er sat isfact ion and loyalt y—and also creat e som e excess resource capacit y. But only if t he com pany can t ransform t hat loyalt y int o im proved sales and m argins and elim inat e or redeploy t he excess resources will t he invest m ent in t raining pay off. By cont rast , t he im pact of a new t angible asset is im m ediat e: When a ret ailer develops a new sit e, it sees financial benefit s from t he sales in t he newly opened out let right away. Alt hough t hese charact erist ics m ake it im possible t o value int angible asset s on a freest anding basis, t hey also point t he way t o a new approach for quant ifying how int angible asset s add value t o t he com pany. By underst anding t he problem s associat ed wit h valuing int angible asset s, we learn t hat t he m easurem ent of t he value t hey creat e is em bedded in t he cont ext of t he st rat egy t he com pany is pursuing. Com panies such as Dell, Wal- Mart , or McDonald’s t hat are following a low- cost st rat egy derive value from Six Sigm a and TQM t raining because t heir st rat egies are predicat ed on cont inuous process im provem ent . The st rat egy of offering cust om ers int egrat ed solut ions ( rat her t han discret e product s) pursued by Goldm an Sachs, I BM Consult ing, and t he like requires em ployees good at est ablishing and m aint aining long- t erm cust om er relat ionships. An organizat ion cannot possibly assign a m eaningful financial value t o an int angible asset like “ a m ot ivat ed and prepared workforce” in a vacuum because value can be derived only in t he cont ext of t he st rat egy. What t he com pany can m easure, however, is whet her it s workforce is properly t rained and m ot ivat ed t o pursue a part icular goal. Viewed in t his light , it becom es clear t hat m easuring t he value of int angible asset s is really about est im at ing how closely aligned t hose asset s are t o t he com pany’s st rat egy. I f t he com pany has a sound st rat egy and if t he int angible asset s are aligned wit h t hat st rat egy, t hen t he asset s will creat e value for t he organizat ion. I f t he asset s are not aligned wit h t he st rat egy or if t he st rat egy is flawed, t hen int angible asset s will creat e lit t le value, even if large am ount s have been spent on t hem . I n t he following pages, we will draw on t he concept s and t ools of t he Balanced Scorecard t o present a way t o syst em at ically m easure t he alignm ent of t he com pany’s hum an, inform at ion, and organizat ion capit al—what we call it s st rat egic readiness—wit hout which even t he best st rat egy cannot succeed. D e fin in g St r a t e gic Re a din e ss I n developing t he Balanced Scorecard m ore t han a decade ago, we ident ified, in it s Learning and Growt h Perspect ive, t hree cat egories of int angible asset s essent ial for im plem ent ing any st rat egy: • H u m a n Ca pit a l: t he skills, t alent , and knowledge t hat a com pany’s em ployees possess. • I n for m a t ion Ca pit a l: t he com pany’s dat abases, inform at ion syst em s, net works, and t echnology infrast ruct ure. • Or ga n iza t ion Ca pit a l: t he com pany’s cult ure, it s leadership, how aligned it s people are wit h it s st rat egic goals, and em ployees’ abilit y t o share knowledge. To link t hese int angible asset s t o a com pany’s st rat egy and perform ance, we developed a t ool called t he “ st rat egy m ap,” which we first int roduced in our previous art icle for Harvard Business Review, “ Having Trouble wit h Your St rat egy? Then Map

I t ” ( Sept em ber–Oct ober 2000) . As t he exhibit “ The St rat egy Map” shows, int angible asset s influence a com pany’s perform ance by enhancing t he int ernal processes m ost crit ical t o creat ing value for cust om ers and shareholders. Com panies build t heir st rat egy m aps from t he t op down, st art ing wit h t heir long- t erm financial goals and t hen det erm ining t he value proposit ion t hat will deliver t he revenue growt h specified in t hose goals, ident ifying t he processes m ost crit ical t o creat ing and delivering t hat value proposit ion, and, finally, det erm ining t he hum an, inform at ion, and organizat ion capit al t he processes require. Th e St r a t e gy M a p Sidebar R0 4 0 2 C_ A (Locat ed at t he end of t his art icle)

This art icle focuses on t he bot t om —t he foundat ion—of t he m ap and will show how int angible asset s act ually det erm ine t he perform ance of t he crit ical int ernal processes. Once t hat link has been est ablished, it becom es easy t o t race t he st eps back up t he m ap t o see exact ly how int angible asset s relat e t o t he com pany’s st rat egy and perform ance. That , in t urn, m akes it possible t o align t hose asset s wit h t he st rat egy and m easure t heir cont ribut ion t o it . The degree t o which t he current set of asset s does—or does not — cont ribut e t o t he perform ance of t he crit ical int ernal processes det erm ines t he st rat egic readiness of t hose asset s and t hus t heir value t o t he organizat ion. The st rat egic readiness of each t ype of int angible asset can be t hought of as follows: H u m a n Ca pit a l ( H C) : I n t he case of hum an capit al, st rat egic readiness is m easured by whet her em ployees have t he right kind and level of skills t o perform t he crit ical int ernal processes on t he st rat egy m ap. The first st ep in est im at ing HC readiness is t o ident ify t he st rat egic j ob fam ilies—t he posit ions in which em ployees wit h t he right skills, t alent , and knowledge have t he biggest im pact on enhancing t he organizat ion’s crit ical int ernal processes. The next st ep is t o pinpoint t he set of specific com pet encies needed t o perform each of t hose st rat egic j obs. The difference bet ween t he requirem ent s needed t o carry out t hese j obs effect ively and t he com pany’s current capabilit ies represent s a “ com pet ency gap” t hat m easures t he organizat ion’s HC readiness. I n for m a t ion Ca pit a l ( I C) : The st rat egic readiness of inform at ion capit al is a m easure of how well t he com pany’s st rat egic I T port folio of infrast ruct ure and applicat ions support s t he crit ical int ernal processes. I nfrast ruct ure com prises hardware—such as cent ral servers and com m unicat ion net works—and t he m anagerial expert ise—such as st andards, disast er planning, and securit y—required t o effect ively deliver and use applicat ions. Two cat egories of applicat ions, in t urn, are built on t his infrast ruct ure: Transact ion- processing applicat ions, such as an ERP syst em , aut om at e t he basic repet it ive t ransact ions of t he ent erprise. Analyt ic applicat ions prom ot e analysis, int erpret at ion, and sharing of inform at ion and knowledge. Eit her t ype m ay or m ay not be a t ransform at ional applicat ion—one t hat changes t he prevailing business m odel of t he ent erprise. Levi’s uses a t ransform at ional applicat ion t o t ailor j eans t o individual cust om ers. Hom e Shopping Net work uses a t ransform at ional applicat ion t o m easure t he “ profit s per second” being generat ed by current ly offered m erchandise. Transform at ional applicat ions have t he m ost pot ent ial im pact on st rat egic obj ect ives and require t he great est degree of organizat ion change t o deliver t heir benefit s. Or ga n iza t ion Ca pit a l ( OC) : Organizat ion capit al is perhaps t he least underst ood of t he int angible asset s, and t he t ask of m easuring it is correspondingly difficult . But in looking at t he st rat egic priorit ies t hat com panies in our dat abase of Balanced Scorecard im plem ent at ions used for t heir organizat ion capit al obj ect ives, we found a consist ent pict ure. Successful com panies had a cult ure in which people were deeply aware of and int ernalized t he m ission, vision, and core values needed t o execut e t he com pany’s

st rat egy. These com panies st rove for excellent leadership at all levels, leadership t hat could m obilize t he organizat ion t oward it s st rat egy. They st rove for a clear alignm ent bet ween t he organizat ion’s st rat egic obj ect ives and individual, t eam , and depart m ent al goals and incent ives. Finally, t hese com panies prom ot ed t eam work, especially t he sharing of st rat egic knowledge t hroughout t he organizat ion. Det erm ining OC readiness, we concluded, would involve first ident ifying t he changes in organizat ion capit al required by t he new st rat egy—what we call t he “ organizat ion change agenda” —and t hen separat ely ident ifying and m easuring t he st at e of readiness of t he com pany’s cult ural, leadership, alignm ent , and t eam work obj ect ives. St rat egic readiness is relat ed t o t he concept of liquidit y, which account ant s use t o classify financial and physical asset s on a com pany’s balance sheet . Account ant s divide a firm ’s asset s int o various cat egories, such as cash, account s receivable, invent ory, propert y, plant and equipm ent , and long- t erm invest m ent s. These are ordered hierarchically according t o t he ease and speed wit h which t hey can be convert ed t o cash —in ot her words, according t o t he degree of t heir liquidit y. Account s receivable is m ore liquid t han invent ory, and bot h account s receivable and invent ory are classified as short t erm asset s since t hey t ypically convert t o cash wit hin 12 m ont hs, fast er t han t he cash recovery cycle from such illiquid asset s as plant and equipm ent . St rat egic readiness does m uch t he sam e for int angible asset s—t he higher t heir st at e of readiness, t he fast er t hey cont ribut e t o generat ing cash. H u m a n Ca pit a l Re a din e ss All j obs are im port ant t o t he organizat ion; ot herwise, people wouldn’t be hired and paid t o perform t hem . Organizat ions m ay require t ruck drivers, com put er operat ors, product ion supervisors, m at erials handlers, and call cent er operat ors and should m ake it clear t hat cont ribut ions from all t hese em ployees can im prove organizat ional perform ance. But we have found t hat som e j obs have a m uch great er im pact on st rat egy t han ot hers. Managers m ust ident ify and focus on t he crit ical few t hat have t he great est im pact on successful st rat egy im plem ent at ion. John Bronson, vice president of hum an resources at William s- Sonom a, est im at es t hat people in only five j ob fam ilies det erm ine 80% of his com pany’s st rat egic priorit ies. The execut ive t eam of a chem ical com pany has ident ified eight j ob fam ilies crit ical t o it s st rat egy of offering cust om ized innovat ive solut ions. These j ob fam ilies em ploy, in aggregat e, 100 individuals—less t han 7% of t he t ot al workforce. Kim berlee William s, vice president of hum an resources at Unicco, a large int egrat ed facilit ies- services m anagem ent com pany, says t hat t hree j ob fam ilies are key t o it s st rat egy: proj ect m anagers, who oversee t he operat ions in specific account s; operat ions direct ors, who broaden t he relat ionships wit hin exist ing account s; and business developm ent execut ives, who help acquire new account s. These t hree j ob fam ilies em ploy only 215 people, less t han 4% of t he workforce. By focusing hum an capit al developm ent act ivit ies on t hese crit ical few individuals, t he chem ical com pany, Unicco, and William s- Sonom a can great ly leverage t heir hum an capit al invest m ent s. I t is sobering t o t hink t hat st rat egic success in t hese t hree com panies is det erm ined by how well t hey develop com pet encies in less t han 10% of t heir workforces. Once a com pany ident ifies it s st rat egic j ob fam ilies, it m ust define t he requirem ent s for t hese j obs in considerable det ail, a t ask oft en referred t o as “ j ob profiling” or “ com pet ency profiling.” A com pet ency profile describes t he knowledge, skills, and values required by successful occupant s in t he j ob fam ily. Oft en, HR m anagers will int erview individuals who best underst and t he j ob requirem ent s t o develop a com pet ency profile t hey can use t o recruit , hire, t rain, and develop people for t hat posit ion. To see how t his m ight be done, consider Consum er Bank, a com posit e exam ple dist illed from our

experiences in working wit h about a dozen ret ail banks. Consum er Bank was m igrat ing from it s hist oric st rat egy of prom ot ing individual product s t o one offering com plet e financial solut ions and one- st op shopping t o t arget ed cust om ers. The m ap for t his new st rat egy ident ified seven crit ical int ernal processes, one of which was “ cross- sell t he product line.” Hum an resources and line execut ives t hen ident ified t he financial planner as t he j ob m ost im port ant t o t he effect ive perform ance of t his process. A planning workshop furt her ident ified four skills fundam ent al t o t he financial planner’s j ob: solut ions selling, relat ionship m anagem ent , product - line knowledge, and professional cert ificat ion. For each int ernal process on it s st rat egy m ap, Consum er Bank replicat ed t his approach, ident ifying t he st rat egic j ob fam ilies and crit ical com pet encies each required. The result s are sum m arized in t he exhibit “ Hum an Capit al Readiness at Consum er Bank.” H u m a n Ca pit a l Re a din e ss a t Con su m e r Ba n k Sidebar R0 4 0 2 C_ B (Locat ed at t he end of t his art icle)

To t ake t he next st ep—assessing t he current capabilit ies and com pet encies of each of t he em ployees in each st rat egic j ob fam ily—com panies can draw from a broad range of approaches. For exam ple, em ployees can t hem selves assess how well t heir current capabilit ies fit t he j ob requirem ent s and t hen discuss t hose assessm ent s wit h a m ent or or career m anager. Alt ernat ively, an assessor can solicit 360- degree feedback on em ployees’ perform ance from t heir supervisors, peers, and subordinat es. From t hese assessm ent s, em ployees get a clear underst anding of t heir obj ect ives, m eaningful feedback on t heir current levels of skill and perform ance, and specific recom m endat ions for fut ure personal developm ent . Consum er Bank est im at ed t hat it needed 100 t rained and skilled financial planners t o execut e t he cross- selling process. But in assessing it s recent t arget ed hiring, t raining, and developm ent program s, t he bank’s HR group det erm ined t hat only 40 of it s financial planners had reached a high enough level of proficiency. The bank’s hum an capit al readiness for t his piece of t he st rat egy was, t herefore, only 40% , as t he exhibit shows. By replicat ing t his analysis for all it s st rat egic j ob fam ilies, t he bank learned t he st at e of it s hum an capit al readiness and t hus whet her t he organizat ion could m ove forward quickly wit h it s new st rat egy. I n for m a t ion Ca pit a l Re a din e ss Execut ives m ust underst and how t o plan, set priorit ies for, and m anage an inform at ion capit al port folio t hat support s t heir organizat ion’s st rat egy. As wit h hum an capit al, t he st rat egy m ap serves as a st art ing point for delineat ing a com pany’s I C obj ect ives. I n t he case of Consum er Bank, t he chief inform at ion officer led an init iat ive t o ident ify t he specific inform at ion capit al needs of each of t he seven int ernal processes previously ident ified as crit ical t o t he bank’s new value proposit ion. For t he cust om er m anagem ent process “ cross- sell t he product line,” t he workshop t eam ident ified an applicat ion for cust om ers t o analyze and m anage t heir port folios by t hem selves ( a cust om er port folio self- m anagem ent syst em ) as a t ransform at ional applicat ion. The workshop t eam ident ified an analyt ical applicat ion for t he sam e process ( a cust om er profit abilit y syst em ) and a t ransact ion- processing applicat ion ( an int egrat ed cust om er file) . The int ernal process “ underst and cust om er segm ent s” also needed a cust om er profit abilit y syst em , as well as a separat e cust om er feedback syst em t o support m arket research. The process “ shift t o appropriat e channel” required a st rong foundat ion of t ransact ional syst em s, including a packaged CRM soft ware suit e t hat

included m odules for lead m anagem ent , order m anagem ent , and sales force aut om at ion. For t he operat ions process “ provide rapid response,” part icipant s ident ified a t ransform at ional applicat ion ( cust om er self- help) as well as an analyt ic applicat ion ( a best - pract ice com m unit y knowledge m anagem ent syst em ) for sharing successful sales t echniques am ong t elem arket ers. Finally, t he “ m inim ize problem s” process required an analyt ical applicat ion ( service qualit y analysis) t o ident ify problem s and t wo relat ed t ransact ion- level syst em s ( one for incident t racking and anot her for problem m anagem ent ) . Aft er defining it s port folio of I C applicat ions, t he proj ect t eam ident ified several required com ponent s of I T infrast ruct ure. Som e applicat ions needed a CRM t ransact ions dat abase. Ot hers required t hat a Web- enabled infrast ruct ure be int egrat ed int o t he bank’s overall Web sit e archit ect ure. The t eam also learned about t he need for an int ernal R&D proj ect t o develop a new int eract ive voice- response t echnology. All t oget her, t he bank’s planning process defined an inform at ion capit al port folio m ade up of 14 unique applicat ions ( som e of which support ed m ore t han one int ernal process) and four I T infrast ruct ure proj ect s. ( See t he exhibit “ I nform at ion Capit al Readiness at Consum er Bank.” )

The t eam t hen t urned t o assessing t he readiness of t he bank’s exist ing port folio of I C infrast ruct ure and applicat ions, assigning a num erical indicat or from 1 t o 6 t o each syst em . A score of 1 or 2 indicat es t hat t he syst em is already available and operat ing norm ally, perhaps needing only m inor enhancem ent s. A score of 3 or 4 indicat es t hat t he syst em has been ident ified and funded but is not yet inst alled or operat ional. I n ot her words, current capabilit y does not yet exist but developm ent program s are under way t o close t he gap. A score of 5 or 6 signals t hat a new infrast ruct ure or applicat ion is needed t o support t he st rat egy, but not hing has yet been done t o creat e, fund, and deliver t he capabilit y. Managers responsible for t he I C developm ent program s provided t he subj ect ive j udgm ent s for t his sim ple m easurem ent syst em , and t he CI O was responsible for assessing t he int egrit y of t he report ed num bers. I n t he I C exhibit , we can also see t hat Consum er Bank aggregat ed t he readiness m easures of individual applicat ions and infrast ruct ure program s—designat ing t hem green, yellow, or red, based on t he worst case applicat ion in t he cat egory—t o creat e a port folio st at us report . Wit h such a report , m anagers can see t he st rat egic readiness of t he organizat ion’s inform at ion capit al at a glance, easily pinpoint ing t he areas in which m ore resources are needed. I t is an excellent t ool for m onit oring a port folio of inform at ion capit al developm ent program s. Many sophist icat ed I T organizat ions already use m ore quant it at ive, obj ect ive assessm ent s of t heir inform at ion capit al port folios t han t he subj ect ive process we’ve j ust described for Consum er Bank. These organizat ions survey users t o assess t heir sat isfact ion wit h each syst em . They perform financial analyses t o det erm ine t he operat ing and m aint enance cost s of each applicat ion. Som e conduct t echnical audit s t o assess t he underlying qualit y of t he code, ease of use, qualit y of docum ent at ion, and frequency of failure for each applicat ion. From t his profile, an organizat ion can build st rat egies for m anaging it s port folio of exist ing I C asset s j ust as one would m anage a collect ion of physical asset s like m achinery or a fleet of t rucks. Applicat ions wit h high levels of m aint enance can be st ream lined, for exam ple, applicat ions wit h high operat ing cost s can be opt im ized, and applicat ions wit h high levels of user dissat isfact ion can be replaced. This m ore com prehensive approach can be effect ive for m anaging a port folio of applicat ions t hat are already operat ional. Or ga n iza t ion Ca pit a l Re a din e ss Success in perform ing t he crit ical int ernal processes ident ified in an organizat ion’s st rat egy m ap invariably requires an organizat ion t o change in fundam ent al ways. Assessing OC readiness is essent ially about assessing how well t he com pany can m obilize and sust ain t he organizat ion change agenda associat ed wit h it s st rat egy. For inst ance, if t he st rat egy involves focusing on t he cust om er, t he com pany needs t o det erm ine whet her it s exist ing cult ure is cust om er- cent ric, whet her it s leaders have t he requisit e skills t o fost er such a cult ure, whet her em ployees are aware of t he goal and are m ot ivat ed t o deliver except ional cust om er service, and, finally, how well em ployees

share wit h ot hers t heir knowledge about t he com pany’s cust om ers. Let ’s explore how com panies can m ake t hese kinds of assessm ent s for each of t he four OC dim ensions. Cu lt u r e . Of t he four, cult ure is perhaps t he m ost com plex and difficult dim ension t o underst and and describe because it encom passes a wider range of behavioral t errit ory t han t he ot hers. That ’s probably why “ shaping t he cult ure” is t he m ost oft en- cit ed obj ect ive in t he Learning and Growt h sect ion of our Balanced Scorecard dat abase. Execut ives generally believe t hat changes in st rat egy require basic changes in t he way business is conduct ed at all levels of t he organizat ion, which m eans, of course, t hat people will need t o develop new at t it udes and behaviors—in ot her words, change t heir cult ure. Assessm ent of cult ural readiness relies heavily on em ployee surveys. But in preparing surveys, com panies need t o dist inguish clearly bet ween t he values t hat all em ployees share—t he com pany’s base cult ure—and t he percept ions t hat em ployees have of t heir exist ing syst em —t he clim at e. The concept of base cult ure has it s root s in ant hropology, which defines an organizat ion’s cult ure as t he sym bols, m yt hs, and rit uals em bedded in t he group consciousness ( or subconscious) . To describe a com pany’s base cult ure, t herefore, you have t o uncover t he organizat ion’s syst em s of shared m eanings, assum pt ions, and values. The concept of clim at e has it s root s in social psychology and is det erm ined by t he way organizat ional influences—such as t he incent ive st ruct ure or t he perceived warm t h and support of superiors and peers—affect em ployees’ m ot ivat ion and behavior. The ant hropological com ponent reflect s em ployees’ shared at t it udes and beliefs independent of t he act ual organizat ional infrast ruct ure, while clim at e reflect s t heir shared percept ion of exist ing organizat ional policies, pract ices, and procedures, bot h form al and inform al. Surveying percept ions of exist ing organizat ional policies and pract ices is a fairly st raight forward t ask, but get t ing at t he base cult ure requires a lit t le m ore digging. Ant hropologist s usually rely on st oryt elling t o ident ify shared beliefs and im ages, but t hat approach is inadequat e for quant ifying t he alignm ent of cult ure t o st rat egy. Organizat ional behavior scholars have developed m easurem ent inst rum ent s, such as Charles O’Reilly and colleagues’ Organizat ional Cult ure Profile, in which em ployees rank 54 value st at em ent s according t o t heir perceived im port ance and relevance in t he organizat ion. Once ranked, an organizat ion’s cult ure can be described wit h a reasonable degree of reliabilit y and validit y. Then t he organizat ion can assess t o what ext ent t he exist ing cult ure is consist ent wit h it s st rat egy and what kinds of changes m ay be needed. One caveat : Managers do need t o be aware t hat som e variat ions in cult ure are necessary and desirable in different operat ing unit s or funct ions. The cult ure of an R&D group, for exam ple, should be different from t he cult ure of a m anufact uring unit ; t he cult ure of an em ergent business unit should be different from t he cult ure of a m at ure one. Execut ives should st rive for agreem ent t hroughout t he organizat ion about corporat ewide values such as int egrit y, respect , t reat m ent of colleagues, and com m it m ent t o cust om er sat isfact ion. But som e value st at em ent s in t he survey inst rum ent should refer t o t he cult ure of specific operat ing unit s. So, for exam ple, surveys of t he em ployees in operat ions and service- delivery unit s would include st at em ent s about qualit y and cont inuous im provem ent , whereas t he R&D depart m ent survey m ight include st at em ent s about creat ivit y and innovat ion. For em ployees involved in cust om er acquisit ion, st at em ent s m ight relat e t o ret ent ion and growt h or t o a deep underst anding of individual cust om ers’ preferences and needs. Le a de r sh ip. I f com panies change t heir st rat egies, people will have t o do som e t hings different ly as well. I t is t he responsibilit y of leaders at all levels of t he organizat ion—from

t he CEO of a ret ail chain down t o t he local st ore m anagers—t o help em ployees ident ify and underst and t he changes needed and t o m ot ivat e and guide t hem t oward t he new ways of working. I n researching t he best pract ices in our Balanced Scorecard dat abase, we were able t o ident ify seven generic t ypes of behavioral changes t hat build organizat ion capit al, and each fell int o one of t wo cat egories: changes t hat support t he creat ion of value—such as increasing people’s focus on t he cust om er—and t hose required t o carry out t he com pany’s st rat egy—such as increasing account abilit y. The sidebar “ Seven Behaviors for Transform at ion” describes t hese behavioral changes in m ore det ail. Se ve n Be h a vior s for Tr a n sfor m a t ion Sidebar R0 4 0 2 C_ C (Locat ed at t he end of t his art icle)

To ensure t hat it get s t he kind of leaders it needs, a com pany should draw up a leadership com pet ency m odel for each of it s leadership posit ions. This is a kind of j ob profile t hat defines t he com pet encies a leader is expect ed t o have t o be effect ive in carrying out t he com pany’s st rat egy. For exam ple, one m anufact uring com pany, at t em pt ing t o creat e t eam s t o solve cust om ers’ problem s, ident ified and defined t hree com pet encies essent ial for people in t eam leadership posit ions: • Cu st om e r Focu s—Out st anding leaders underst and t heir cust om ers. They place t hem selves in t he cust om ers’ m inds and spend t im e wit h t hem t o underst and t heir current and fut ure needs. • Fost e r in g Te a m w or k —Out st anding leaders work collaborat ively wit h t heir own t eam s and across organizat ional and geographic boundaries. They em power t heir t eam s t o achieve excellence. • Ope n Com m u n ica t ion s—Out st anding leaders t ell t he t rut h. They openly share inform at ion wit h peers, m anagers, and subordinat es. They t ell t he whole st ory, not j ust how it looks from t heir posit ion. Oft en, organizat ions will m easure leadership t rait s, such as t hose list ed above, t hrough em ployee surveys. A st aff or ext ernal unit solicit s inform at ion from subordinat es, peers, and superiors about a leader’s m ast ery of t he crit ical skills. This personal feedback is used m ainly for coaching and developing t he leader, but t he unit can also aggregat e t he det ailed ( and confident ial) dat a from t he individual reviews t o creat e a st at us report on t he readiness of key leadership com pet encies needed t hroughout t he organizat ion. Align m e n t . An organizat ion is aligned when all em ployees have a com m onalit y of purpose, a shared vision, and an underst anding of how t heir personal roles support t he overall st rat egy. An aligned organizat ion encourages behaviors such as innovat ion and risk t aking because individuals’ act ions are direct ed t oward achieving high- level obj ect ives. Encouraging and em powering individual init iat ive in an unaligned organizat ion leads t o chaos, as t he innovat ive risk t akers pull t he organizat ion in cont radict ory direct ions. Achieving alignm ent is a t wo- st ep process. First , m anagers com m unicat e t he high- level st rat egic obj ect ives in ways t hat all em ployees can underst and. This involves using a wide range of com m unicat ion m echanism s: brochures, newslet t ers, t own m eet ings, orient at ion and t raining program s, execut ive t alks, com pany int ranet s, and bullet in boards. The goal of t his st ep is t o creat e int rinsic m ot ivat ion, t o inspire em ployees t o int ernalize t he organizat ion’s values and obj ect ives so t hat t hey want t o help t he

organizat ion succeed. The next st ep uses ext rinsic m ot ivat ion. The organizat ion has em ployees set explicit personal and t eam obj ect ives aligned t o t he st rat egy and est ablishes incent ives t hat reward em ployees when t hey m eet personal, depart m ent al, business unit , and corporat e t arget s. Measuring alignm ent readiness is relat ively st raight forward. Many survey inst rum ent s are already available for assessing how m uch em ployees know about and how well t hey underst and high- level st rat egic obj ect ives. I t is also fairly easy t o see whet her or not individuals’ personal obj ect ives and t he com pany’s exist ing incent ive schem es are consist ent wit h t he high- level st rat egy. For exam ple, a large propert y and casualt y insurance com pany adopt ed a new st rat egy int ended t o reduce it s underwrit ing losses by creat ing a t ight er link bet ween t he underwrit ers, who decide whet her t o accept a new piece of business, and t he claim s agent s, who deal wit h t he consequences from poor underwrit ing decisions. Hist orically, t hese specialist s lived in different part s of t he organizat ion, and t heir incent ives were t ot ally unrelat ed t o each ot her, which clearly did lit t le t o fost er cooperat ion bet ween t hem or wit h t he line business unit s t hey support ed. To reflect t he new st rat egy, t he com pany changed t o a t eam - based com pensat ion syst em in which everyone’s incent ive pay was based on a com m on set of m easures ( t heir Balanced Scorecard) . Underwrit ers and claim s agent s, who worked in service depart m ent s shared by t he various business unit s, were now rewarded using t he Balanced Scorecard m easures relat ed t o t he business unit s t hey support ed. The com pany used a survey inst rum ent t o capt ure t he em ployees’ percept ions of t he im proved t eam work creat ed by aligning t he incent ive syst em s. Te a m w or k a n d Kn ow le dge Sh a r in g. There is no great er wast e t han a good idea used only once. Most organizat ions have t o go t hrough a cult ural change t o shift individuals from hoarding t o sharing t heir local knowledge. No asset has great er pot ent ial for an organizat ion t han t he collect ive knowledge possessed by all it s em ployees. That ’s why m any com panies, hoping t o generat e, organize, develop, and dist ribut e knowledge t hroughout t he organizat ion, have spent m illions of dollars t o purchase or creat e form al knowledge m anagem ent syst em s. The challenge in im plem ent ing such syst em s is m ot ivat ing people t o act ually docum ent t heir ideas and knowledge t o m ake t hem available t o ot hers. Most organizat ions in our Balanced Scorecard dat abase at t em pt ed t o develop such m ot ivat ion by select ing “ t eam work” and “ knowledge sharing” as st rat egic priorit ies in t heir Learning and Growt h Perspect ive. Typical m easures for t hese priorit ies included t he num ber of best pract ice ideas t he em ployees ident ified and used, t he percent age of em ployees who t ransferred knowledge in a workout process, t he num ber of people who act ually used t he knowledge m anagem ent syst em , how oft en t he syst em is used, t he percent age of inform at ion in t he knowledge m anagem ent syst em t hat was updat ed, and how m uch was obsolet e. For knowledge sharing t o m at t er, it m ust be aligned wit h t he priorit ies of t he st rat egy m ap. For exam ple, one organizat ion—a chem ical com pany—creat ed several best pract ice com m unit ies t o com plem ent t he int ernal process obj ect ives on it s st rat egy m ap. The I m prove Workplace Safet y com m unit y consist ed of t he safet y direct ors from every facilit y. They st udied t he best pract ices at t he high- perform ing plant s and creat ed a best pract ice–sharing program . The com pany’s out put m easure, “ days away from work,” dropped by 70% . I n anot her exam ple, a children’s hospit al was at t em pt ing t o reduce cost s wit hout reducing t he qualit y of pat ient care. I nt ensive discussions result ed in a t opt en list of best pract ices already being used som ewhere in t he hospit al. The hospit al t hen form ed cross- funct ional m edical pract ice t eam s of physicians, nurses, and adm inist rat ors t o im plem ent as m any of t hese procedures as t hey pract ically could. I t m easured

success, t he out put of t his knowledge- sharing process, by t he “ num ber of best pract ices ut ilized.” The effect ive im plem ent at ion of best pract ices over t he next t hree years led t o dram at ic im provem ent s in organizat ional out com es: Readm ission rat es dropped by 50% , cost per case and lengt h of st ay each declined by 25% , and bot h cust om er sat isfact ion and qualit y of care increased. I n t hese and m any ot her exam ples in our case files, organizat ions enhanced t heir perform ance by aligning t he t eam work and knowledgesharing com ponent of t heir organizat ion capit al wit h t heir st rat egy. To get an overview of organizat ional readiness, com panies can put t he inform at ion t hey obt ain from t heir various surveys and assessm ent s t oget her in a report like t he one shown in “ Organizat ion Capit al Readiness Report .” I n t his exhibit , t he leadership m easure, drawn from t he leadership com pet ency m odel, displays t he com pany’s est im at e, based on em ployee surveys, of t he degree t o which t he com pany possesses t he key at t ribut es for leadership. At 92% , t he com pany is above t arget on it s leadership obj ect ive and can be considered st rat egically ready in t erm s of t his dim ension. The com pany’s OC wit h respect t o t eam work and knowledge sharing is also in good shape. But t he firm is perform ing inadequat ely in alignm ent and in developing t he right cult ure, and t hese problem s are lowering it s overall level of organizat ion capit al readiness.

• • • The int angible asset s described in t he Balanced Scorecard’s Learning and Growt h Perspect ive are t he foundat ion of every organizat ion’s st rat egy, and t he m easures in t his perspect ive are t he ult im at e lead indicat ors. Hum an capit al becom es m ost valuable when it is concent rat ed in t he relat ively few st rat egic j ob fam ilies im plem ent ing t he int ernal processes crit ical t o t he organizat ion’s st rat egy. I nform at ion capit al creat es t he great est value when it provides t he requisit e infrast ruct ure and st rat egic applicat ions t hat com plem ent t he hum an capit al. Organizat ions int roducing a new st rat egy m ust creat e a cult ure of corresponding values, a cadre of except ional leaders who can lead t he change agenda, and an inform ed workforce aligned t o t he st rat egy, working t oget her, and sharing knowledge t o help t he st rat egy succeed. Som e m anagers shy away from m easuring t heir int angible asset s because t hese m easures are usually “ soft er,” or m ore subj ect ive, t han t he financial m easures t hey convent ionally use t o m ot ivat e and assess perform ance. The Balanced Scorecard m ovem ent has encouraged organizat ions t o face t he m easurem ent challenge. Using t he syst em at ic approaches set out in t his art icle, com panies can now m easure what t hey want , rat her t han want ing only what t hey can current ly m easure. Even if t he m easures are im precise, t he sim ple act of at t em pt ing t o gauge t he capabilit ies of em ployees, inform at ion syst em s, and organizat ion capit al com m unicat es t he im port ance of t hese drivers for value creat ion. I n t he course of our work, we have seen m any com panies find new ways t o m easure—and consequent ly new ways t o enhance t he value of—t heir int angible asset s. The m easurem ent and m anagem ent of t hese asset s played a prom inent role in t heir t ransform at ion int o successful, st rat egy- focused organizat ions.

Reprint Num ber R0402C | HBR OnPoint edit ion 5887 | HBR OnPoint collect ion 5933

Th e St r a t e gy M a p

Sidebar R0 4 0 2 C_ A

The st rat egy m ap provides a fram ework for linking int angible asset s t o shareholder value creat ion t hrough four int errelat ed perspect ives. The financial perspect ive describes t he t angible out com es of t he st rat egy in t radit ional financial t erm s, such as ROI , shareholder value, profit abilit y, revenue growt h, and lower unit cost s. The cust om er perspect ive defines t he value proposit ion t he organizat ion int ends t o use t o generat e sales and loyalt y from t arget ed cust om ers. This value proposit ion form s t he cont ext in which t he int angible asset s creat e value. The int ernal process perspect ive ident ifies t he crit ical few processes t hat creat e and deliver t he different iat ing cust om er value proposit ion. At t he foundat ion of t he m ap, we have t he learning and growt h perspect ive, which ident ifies t he int angible asset s t hat are m ost im port ant t o t he st rat egy. The obj ect ives in t his perspect ive ident ify which j obs ( t he hum an capit al) , which syst em s ( t he inform at ion capit al) , and what kind of clim at e ( t he organizat ion capit al) are required t o support t he value- creat ing int ernal processes. These int angible asset s m ust be int egrat ed and aligned wit h t he crit ical int ernal processes.

H u m a n Ca pit a l Re a din e ss a t Con su m e r Ba n k

Sidebar R0 4 0 2 C_ B

Here we can see how hum an capit al at our com posit e com pany, Consum er Bank, is linked t o it s crit ical st rat egic processes and how well t he com pany scores in t erm s of t he skills and capabilit ies it needs. The t op row list s t he int ernal processes t he bank ident ified as crit ical t o delivering it s value proposit ion. The second row shows t he j obs t hat have t he great est influence on t hose processes—t he st rat egic j ob fam ilies. The t hird row list s t he com pet encies needed for each j ob, and t he fourt h row specifies t he num ber of people wit h t hose skills t he com pany requires.

The bot t om row shows how ready Consum er Bank’s hum an capit al is for it s new st rat egy. Taken t oget her, t hese int ernal assessm ent s indicat e t he ext ent t o which t he bank act ually has t he capacit y it needs. The bank is in excellent shape for it s t wo operat ions m anagem ent processes ( 100% and 90% readiness) but deficient for t he t wo cust om er m anagem ent processes ( only 40% and 50% readiness) and for one of t he innovat ion processes ( 20% readiness) . The aggregat e m easure of 65% hum an capit al readiness ( in t he red zone) is a weight ed average of readiness scores for all seven st rat egic j ob fam ilies. I n t erm s of hum an capit al, t his report t ells execut ives how quickly t hey can im plem ent t heir new st rat egy.

Se ve n Be h a vior s for Tr a n sfor m a t ion

Sidebar R0 4 0 2 C_ C

All new st rat egies require em ployees t o m ake, and leaders t o ident ify and fost er, som e specific changes in behavior. But in our research, com panies t hat have successfully changed t heir st rat egies have needed only a lim it ed num ber of behavioral changes—j ust seven, in fact —t o m axim ize t he cont ribut ions of t heir people t o t he execut ion of t heir new st rat egies. The changes fall int o t wo cat egories: • Va lu e Cr e a t ion : Behaviors t hat support value creat ion are t hose t hat increase focus on cust om ers, innovat ion, and result s. • St r a t e gy Ex e cu t ion : Behaviors t hat support st rat egy execut ion are t hose t hat increase em ployees’ underst anding of t he com pany’s m ission, vision and values; account abilit y; com m unicat ions; and t eam work. Of course, no organizat ion will t ry t o change all seven behaviors at once. Typically, a

com pany will ident ify t he t wo t o four m ost im port ant ones for im plem ent ing a specific st rat egy. For exam ple, firm s in deregulat ed indust ries like ut ilit ies or t elecom m unicat ions now place a heavy em phasis on becom ing cust om er focused and innovat ive, which are, for t hem , t ot ally new behaviors. Previously, operat ing from a m onopoly posit ion, t hey had focused on operat ing efficiency and on avoiding risks t o prot ect revenues. That said, cust om er focus was t he m ost frequent ly ident ified required new behavior in all t he com panies we st udied. That ’s part ly because virt ually every st rat egy init iat ive st art s wit h a clarificat ion or redefinit ion of t he cust om er value proposit ion. But som e new st rat egies im pose different priorit ies. Com panies int roducing shareholder value program s, for exam ple, m ay already be sufficient ly cust om er focused and will need inst ead t o focus on result s. Com panies adopt ing st rat egies t hat require high degrees of int egrat ion com m only need t o increase com m unicat ion. That was so, for inst ance, for one pharm aceut ical com pany in our dat abase t hat was at t em pt ing t o t ransfer knowledge and m arket place experience from it s com m ercial division t o it s product developm ent group.

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M e a su r in g t h e St r a t e gic Re a din e ss of I n t a n gible Asse t s

The St rat egy Map The st rat egy m ap provides a fram ework for linking int angible asset s t o shareholder value creat ion t hrough four int errelat ed perspect ives. The financial perspect ive describes t he t angible out com es of t he st rat egy in t radit ional financial t erm s, such as ROI , shareholder value, profit abilit y, revenue growt h, and lower unit cost s. The cust om er perspect ive defines t he value proposit ion t he organizat ion int ends t o use t o generat e sales and loyalt y from t arget ed cust om ers. This value proposit ion form s t he cont ext in which t he int angible asset s creat e value. The int ernal process perspect ive ident ifies t he crit ical few processes t hat creat e and deliver t he different iat ing cust om er value proposit ion. At t he foundat ion of t he m ap, we have t he learning and growt h perspect ive, which ident ifies t he int angible asset s t hat are m ost im port ant t o t he st rat egy. The obj ect ives in t his perspect ive ident ify which j obs ( t he hum an capit al) , which syst em s ( t he inform at ion capit al) , and what kind of clim at e ( t he organizat ion capit al) are required t o support t he value- creat ing int ernal processes. These int angible asset s m ust be int egrat ed and aligned wit h t he crit ical int ernal processes.

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View Back Issues | February 2004 > Measuring t he St rat egic Readiness of I nt angible Asset s > Hum an Capit al Readiness at Consum er Bank

M e a su r in g t h e St r a t e gic Re a din e ss of I n t a n gible Asse t s

Hum an Capit al Readiness at Consum er Bank Here we can see how hum an capit al at our com posit e com pany, Consum er Bank, is linked t o it s crit ical st rat egic processes and how well t he com pany scores in t erm s of t he skills and capabilit ies it needs. The t op row list s t he int ernal processes t he bank ident ified as crit ical t o delivering it s value proposit ion. The second row shows t he j obs t hat have t he great est influence on t hose processes—t he st rat egic j ob fam ilies. The t hird row list s t he com pet encies needed for each j ob, and t he fourt h row specifies t he num ber of people wit h t hose skills t he com pany requires.

The bot t om row shows how ready Consum er Bank’s hum an capit al is for it s new st rat egy. Taken t oget her, t hese int ernal assessm ent s indicat e t he ext ent t o which t he bank act ually has t he capacit y it needs. The bank is in excellent shape for it s t wo operat ions m anagem ent processes ( 100% and 90% readiness) but deficient for t he t wo cust om er m anagem ent processes ( only 40% and 50% readiness) and for one of t he innovat ion processes ( 20% readiness) . The aggregat e m easure of 65% hum an capit al readiness ( in t he red zone) is a weight ed average of readiness scores for all seven st rat egic j ob fam ilies. I n t erm s of hum an capit al, t his report t ells execut ives how quickly t hey can im plem ent t heir new st rat egy.

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M e a su r in g t h e St r a t e gic Re a din e ss of I n t a n gible Asse t s

Seven Behaviors for Transform at ion All new st rat egies require em ployees t o m ake, and leaders t o ident ify and fost er, som e specific changes in behavior. But in our research, com panies t hat have successfully changed t heir st rat egies have needed only a lim it ed num ber of behavioral changes—j ust seven, in fact —t o m axim ize t he cont ribut ions of t heir people t o t he execut ion of t heir new st rat egies. The changes fall int o t wo cat egories: • Va lu e Cr e a t ion : Behaviors t hat support value creat ion are t hose t hat increase focus on cust om ers, innovat ion, and result s. • St r a t e gy Ex e cu t ion : Behaviors t hat support st rat egy execut ion are t hose t hat increase em ployees’ underst anding of t he com pany’s m ission, vision and values; account abilit y; com m unicat ions; and t eam work. Of course, no organizat ion will t ry t o change all seven behaviors at once. Typically, a com pany will ident ify t he t wo t o four m ost im port ant ones for im plem ent ing a specific st rat egy. For exam ple, firm s in deregulat ed indust ries like ut ilit ies or t elecom m unicat ions now place a heavy em phasis on becom ing cust om er focused and innovat ive, which are, for t hem , t ot ally new behaviors. Previously, operat ing from a m onopoly posit ion, t hey had focused on operat ing efficiency and on avoiding risks t o prot ect revenues. That said, cust om er focus was t he m ost frequent ly ident ified required new behavior in all t he com panies we st udied. That ’s part ly because virt ually every st rat egy init iat ive st art s wit h a clarificat ion or redefinit ion of t he cust om er value proposit ion. But som e new st rat egies im pose different priorit ies. Com panies int roducing shareholder value program s, for exam ple, m ay already be sufficient ly cust om er focused and will need inst ead t o focus on result s. Com panies adopt ing st rat egies t hat require high degrees of int egrat ion com m only need t o increase com m unicat ion. That was so, for inst ance, for one pharm aceut ical com pany in our dat abase t hat was at t em pt ing t o t ransfer knowledge and m arket place experience from it s com m ercial division t o it s product developm ent group.

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