The Halo E(A)ffect on VeraSage

Recently, I read The Halo Effect by Phil Rosenzweig. It did the one thing that I really look for in a book, it made me think. The basic premise of the book is that concluding successful companies all share certain characteristic like a brilliant strategy, a visionary leader, and a great culture is a delusion. (The book offers a great analogy for understanding the difference between and illusion and a delusion. An illusion is seeing Michael Jordan fly; a delusion is thinking you can be Michael Jordan.) This challenges many of today’s most successful business books from Peters and Waterman’s In Search of Excellence to Jim Collins’ Good to Great.

I will not repeat all eight delusions here, but if you are interested they are posted in several of the reviews. Including one that I agree with, this would have been better presented as an article than a book. To me the point do seem to get quite repetitive. For example, Phil Rosenzweig presents the stories of Cisco and ABB to illustrate his point. I felt one was sufficient.

The book does raise some serious questions about even some of our beliefs here at VeraSage. The first of which is, “Is there a Halo effect of firms doing Value Pricing?” We trumpet our Trailblazers, but I have had many stories of firms trying to go to value pricing and failing miserably. I usually conclude that these were half-hearted attempts that were little more than cost-based, fixed-price engagements that lacked sufficient scope, but maybe there is something to it.

A second question raised is “Can there be any predictive indicators?” Ron Baker and I have talked before many audiences making a claim that there are. One of my mantras is citing a Xerox study from the 1960s that concluded “employee satisfaction yields customer satisfaction which itself yields financial performance.” In our defense, both Ron and I think that both employee satisfaction and customer satisfaction are measured too infrequently, certainly not as often as financial performance is measured. The Halo Effect does not address this issue of frequency of measure. Rather is only looks to annual measurements of each of these. Perhaps this is one answer to Rosenzweig’s criticisms.

This question also affects some of the work of David Maister. In fact, I emailed him about this and he responded with an excellent post that assisted in my thinking. However, his method, structured equation modeling, while it has many proponents also has its detractors, most notably Deirdre McCloskey. To be honest, I lack the understanding to argue either side, so I will just take the journalist’s way out and report the facts.

A third question is, “Has anyone looked for causality beforehand?” Rosenzweig does state that “Just to be clear, I think strong customer orientation probably does lead to better performance.” In addition, he argues that there is, in fact, partial causation from many factors. He makes a great point that most business people do not want to hear about partial causation, they want the one thing. This is absolutely correct. The belief that there is one thing or one path to success is a major problem. However, I am happy to have partial causation.

The Halo Effect does emphasize a widely held belief among the Fellows at VeraSage – Business is not physics, it is not even science. To quote Phil Rosenzweig, “We can’t put companies in Petri dished and run neat experiments. And since even the best studies of business, ones that carefully follow stringent research methods, ones that make sure to avoid Halos and that control for rival variables and make sure not to confuse correlation with causality, can never achieve the precision and replication of physics, then all the claims of having isolated immutable laws of organizational performance are unfounded.”

Economics is the one area of study that truly attempts to blend business and science together. However, The Halo Effect points out that only studying success is not good science, one must look at failures as well. This has touched off a dialogue between Ron Baker and me about the following question, “Does The Halo Effect (and Fooled by Randomness and The Black Swan by Nassim Nicholas Taleb) create a problem for one of the principle sources of our work, Adam Smith’s Wealth of Nations?”

I offer:

  • Premise 1: In order to have valid scientific conclusions, we must look at successes and failures.
  • Premise 2: Wealth of Nations looked only at successes. (Ron has often said we learn nothing by looking at poverty except of course how to create more of it.)

These are in apparent contradiction. As Aristotle said, if you have two premises and they are in contraction, one of them is in error. So, which is it?

Perhaps some solace can be obtained by looking at the work of economist Joseph Schumpeter, who believed that the basic force at work in capitalism is that of competition through innovation. i.e., creative destruction. I posit this is true of companies as well as the economy as a whole. What this does mean is that if you follow this path there is significant chance you will fail as well as succeed and this is what many business people do not like to hear. Choosing a strategy implies risk of being wrong, but you can’t play it safe. Most companies pick strategy but do not fully execute it, preferring to hedge their bets on old standby formulas. However as we do believe at VeraSage, profits come from risk.

To conclude I will leave you with a paraphrase of one of The Halo Effect’s great lines – “Idiosyncratic contingency” and “causal ambiguity” are how PhD’s (and this blog writer) say, “I don’t know.”

Success is a calculated gamble, but gambling it is.


  1. Great post Ed, I love this discussion, but not sure I agree with your two Premises. Aren’t the two premises results vs. process?

    Nassim Nicholas Taleb, in The Black Swan, divides it up this way: Mediocristan vs. Extremistan. The former can be explained with statistics, such as the Bell Curve. The latter cannot, and is driven by Black Swans (it’s more than this, but my head hurts). Medicoristan is like a casino, you can predict it. The notion of a standard deviation is meaningless outside of Mediocristan.

    One analogy he uses to explain the two: suppose you filled a stadium of 1,000 random people and plotted height, or weight. No single instance will significantly change the aggregate. This is Mediocristan, where the Bell Curve applies.

    Now suppose you plotted those 1,000 people’s wealth, and added Bill Gates. He’d have 99.9999%, which no one person could significantly alter. You could do the same with 1,000 random authors and their book sales, by adding JK Rowling to the sample. In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or total.

    Height, weight, a baker’s income, gambling profits in a casino, car accidents, IQ, are all part of Mediocristan. Wealth, income, book sales, damage in earthquakes, deaths in war, sizes of companies, financial markets are all in Extremistan.

    Extremistan can produce Black Swans, since a few occurrences have a huge influence on history. This is the main idea behind Taleb’s book.

    Taleb would believe that books such as Good to Great, etc., are examples of selective corroborating evidence. He calls it “naive empiricism–successions of anecdotes selected to fit a story do not constitute evidence.

    He also says this: “So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to the aggressive trial and error, not by giving rewards or “incentives” for skill.”

    Business books study the results, and tend to ignore the process. They certainly ignore random and uncertain events, such as the meteoric rise of Google, etc.

    Now Taleb doesn’t mention the importance of private property, institutions that help facilitate wealth creation and protection (judicial system, credit and bank system, etc.).

    You are right that many firms have tried Value Pricing and have failed, and they are certainly not in the VeraSage Trailblazers selection (though I’d have no problem if they were). I believe it is because they are lousy pricers and/or don’t catch scope creep with Change Orders. On a discussion of Value Pricing vs. no timesheets on the UK Web site, (, Jon Gammon wrote:

    “The problem with this subject is…..
    that you only ever hear from people whose method is successful for them. Personally, even though I hate them, I cannot see how our practice could function effectively without timesheets. We would, without any shadow of a doubt, make less money if we didn’t have them. But that is just my opinion and our way of doing things.

    What we don’t hear from (with the exception of one brave, but anonymous, correspondent) are people who have abandoned timesheets and don’t make it work. We know of only two practices within a 20 mile radius of us who don’t run timesheets–and the grapevine tells us that both of them are in dire straits.

    That issue doesn’t apply the other way around. So, although timesheets may be a real bore – they are at least “safe”! Small wonder that the vast majority of practices (at least those of any size) will not be abandoning timesheets any time soon.”

    This is a cause and effect fallacy, in the same way that I avoid the hospital that is 3 miles from my house since I hear people die there. We know the reason firms fail without timesheets: they are lousy pricers, it’s not because they don’t know their costs. But to know that, you have to study process, not just financial results.

    I suppose I’m saying that we need to study the process, not just the result, while at the same time understanding Taleb’s point that we have no idea which processes might be successful without aggressive trial and error. That is what Joseph Schumpeter means by creative destruction. I’m not sure this means we have to study failure, but we do have to endure lots of it to get one Black Swan.

    I also suppose that this is why Drucker wanted to write a book on ignorance (but never did). Our knowledge is exceeded by our ignorance, and those are the Black Swans that make life worth living.

    We can’t know everything. And now I shall go light my pipe and have dinner.

  2. Tim McKey says:

    Hi Ed,

    I have read neither The Halo Effect nor The Black Swan yet, but I have read your post, Ron’s comment, and the various reviews of The Halo Effect. I am not often compelled to comment but somehow this topic of a “specific formula”, or more appropriatly, debunking a “specific formula” for success, reminded me of one of my Dad’s favorite sayings…”there is more than one way to skin a cat.” My add on to his saying is that “sometimes you don’t know the best way to skin the cat until you begin the skinin'”.

    Business success is very much art as opposed to science. And what may be success for one may be considered mediocre performance for another. In Good to Great Collins simply states HIS criteria for success and measured against the criteria. Each business owner (manager) creates (or should create) his/her own criteria. As a consultant, we should assist said owner in defining HIS/HER definition of success, then assist him/her in driving toward THAT success.

    I believe that there are many good…even great… business books that describe practices that put businesses in the place of most potential to succeed. However, there are no guarantees. The only guarantee is that if you do nothing or don’t plan or do it “the same way we’ve always done it”…your business will be left behind. I read business books to pick up what might work…again, there are no guarantees.

    Success…in my opinion…demands constant attention to detail and attention to changes all around…both within and outside the walls of the business itself. It then demands changes (or attempts to change) to meet the first set of changes. In other words, businesses and markets are constantly changing. And this means formulas for success are constantly changing. At the old RAS Boot Camp Paul Dunn repeatedly said, “Test it.”

    We repeat this mantra to your customers. “What do you think will work and why?” Then, “Can we test it?” The results of the test then provides us with a lagging indicator of success or failure. We then begin looking for a predictive indicator.

    As an example…in consulting with a small personal injury law firm, we felt that more client contact through update letters and a monthly firm newsletter would generate more client sign-ups and more revenue for the firm. We tested it and, yes, there was a measurable increase in sign-ups and revenue. After several months of very detailed measurement we simply began asking, “What was your postage expense for the month?” We found that the more the postage, the more sign-ups and revenue in the following month or two.

    My point is simply this…there is no set fomula for success, as the definition for success is not consistent between customers. Just as value is defined by the customer…so is success.

    Maybe it is a classic example of cognitive dissonance but I do not believe I must pick either the Good to Great formula or The Halo Effect lack of formula as right or wrong. They are just different.

    There is, in fact, more than one way to skin a cat!


  3. Ed Kless says:


    Great comment. Ron and I are probably making this way to complicated.

    I agree that success must be defined by the individual (or company). However, many of the business books use exclusively revenue and/or profit to define success. I think what Halo Effect debunks is the “this will always work” formula.

    I have come to the conclusion that Halo Effect has done for me is clarify my thinking. My belief has been the following: employee satisfaction yields customer satisfaction which in turn yields financial performance. This is a basic set of predictive indicators.

    I have become stonger in my belief that businesses must begin to measure on a regular basis (i.e., monthly or quarterly) employee satisfaction and customer satisfaction. Most of us rely way too much on only looking at financial numbers.

    PS – I love your example linking postage to revenue!

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