VeraSage Daily Now Available

EXTRA! EXTRA! READ ALL ABOUT IT!

VeraSage Founder, Dan Morris found a neat web service called paper.li which created a daily “paper” based on the Twitter activity of a designated group.

Today we are please to announce the availability of The VeraSage Daily.

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The VeraSage Daily will be built on tweets from VeraSage Fellows and Friends (mostly Trailblazer firms).

To subscribe simply click on the link or graphic above and click subscribe on the top of the right-hand column.

We hope you find this new way of keeping up with us. Please let us know what you think.

BTW – .li is the domain for Lichtenstein, not Libya, we do not have to worry about Old Muammar pulling the plug on us.

The Chisconsult Newsletter

John Chisholm from Melbourne Australia is a third-generation attorney, a consultant to the legal profession, a wine connoisseur, and a terrific guy.

John hosted me last August for a tour in Australia talking to legal firms, young attorneys, general counsel, and government officials.

He publishes a newsletter that is quite good.

His Spring edition is now out, which you can access at The_Chisconsult_Circle_-_Issue_2.pdf

You can also register to receive the newsletter at John’s Web site. Well worth reading if you have an interest in the legal profession, or wine—John’s daughter Kate offers reviews of some fantastic Australian wines.

Book Review: The Management Myth

The schism between management theory and economics is profound, and one of the reasons is the study of management theory is relatively young compared to its older sibling economics, which dates back hundreds of years. In their piercing book The Witch Doctors: What Management Gurus Are Saying and Why It Matters, John Micklethwait and Adrian Wooldridge, two staff editors for The Economist, level this charge against the immature discipline of management theory:

Management theory, according to the case against it, has four defects: it is constitutionally incapable of self-criticism; its terminology usually confuses rather than educates; it rarely rises above basic common sense; and it is faddish and bedeviled by contradictions that would not be allowed in more rigorous disciplines. The implication of all four charges is that management gurus are con artists, the witch doctors of our age, playing on business people’s anxieties in order to sell snake oil. The gurus, many of whom have sprung suspiciously from the “great university of life” rather than any orthodox academic discipline, exist largely because people let them get away with it. Modern management theory is no more reliable than tribal medicine. Witch doctors, after all, often got it right—by luck, by instinct, or by trial and error.

This book gave voice to the backlash against the “profession” known as consulting. The four defects of the witch doctors of our age are mortally accurate. The profession has yet to refute successfully the charges against it, so eloquently articulated in this book. I thought I’d never see another book as good this one on the shortcomings of consultants.

Until, that is, The Management Myth by Matthew Stewart, which is destined to become a classic, advancing tremendously The Witch Doctors criticisms and shortcomings of the consulting industry with the added bonus of taking on business education in general, and the ridiculous idea that management needs to be a profession.

Whereas The Witch Doctors pulled its punches, Stewart is fearless, equating consultants to viruses and their clients as hosts.

Even though Stewart was hired by a consulting firm in 1988, his real passion is philosophy, in which he holds a PhD, specializing in 19th century German Philosophy. This focus on philosophy and the humanities shines through this work, adding an impressive dimension to his case against consultancy and the myth of management science. He writes:

Gradually it dawned on me that management is indeed a neglected branch of the humanities, and that the study of management belongs, if anywhere, to the history of philosophy. Management theories lack depth, I realized, because they have been doing for only a century what philosophers and creative thinkers have been doing for millennia. This explains why future business leaders are better off reading histories, philosophical essays, or just a good novel than pursuing degrees in business.

Stewart lays out his bold and ambitious purpose of the book this way:

…the modern idea of management is right enough to be dangerously wrong and it has led us seriously astray. It has sent us on a mistaken quest to seek scientific answers to unscientific questions. It offers pretended technological solutions to what are, at bottom, moral and political problems.

My aim in this book is to trace the genealogy of this idea, to expose its flaws, and to replace it.

The management idol, I hope to show, stands in need of a good, hard knock.

Stewart indeed punches hard, taking down, one by one the gurus of management, beginning with historical icons Frederick Taylor and Elton Mayo to the modern titans, such as Michael Porter, Jim Collins, Tom Peters, and yes, even Peter Drucker.

Intertwined with Stewart’s deconstruction of the management myth is his personal story of his experiences in the consulting industry, and the founding of his new firm during the Dot.com boom which grew from 140 to 700 employees and $50 million to $250 million in revenues, in four years. It’s a fascinating and suspenseful story, eloquently retold by Stewart, giving life to his many criticisms of the industry.

Taking Down the Gurus

Stewart’s first victim is Frederick Winslow Taylor, the father of Scientific Management. He shows that there was never any evidence that Bethlehem Steel realized any significant benefits from Taylor’s Pig-Iron (Tall) Tale. Taylor “became famous for the idea of what he was supposed to have achieved—not for what he actually achieved.”

There’s no such thing as a universal science of efficiency, a point Thomas Sowell and economists have made so well for centuries. Efficiency is inextricably linked to your purpose and what you are willing to pay for. Positing a universal science of efficiency as Taylor did was nonsense, as Stewart humorously illustrates:

One can go grocery shopping with a scientific attitude. But it does not follow that there is a science of grocery shopping.

Rather than being a falsifiable theory, Taylorism was a tautology: “An efficient shop is more productive than an inefficient shop.” Stewart rightly points out that Scientific Management was never a science; it was, and is, a business, today reincarnated as Lean and Six-Sigma and other dogmas peddled by consultants. Even Peter Drucker, Gary Hamel, and a lot of others pay homage to Taylor, recognizing him as the world’s first management consultant. Stewart proves he lied and fudged his experiments.

In a skillful twist of the McKinsey Maxim—If you can measure it, you can manage it—Stewart says consultants motto might well be “If you can’t manage it, measure it!” This measurement for measurement sake is endemic among organizations and consultants, thanks to Taylor’s obsession with time-and-motion studies.

Stewart’s next victim is Elton Mayo, father of the infamous Hawthorne experiment, which his posthumous critics described as “worthless scientifically” and “scientifically illiterate.” Stewart writes that Mayo’s Hawthorne experiments proved a tautology:

If you are nice to people, they will usually be nice back to you. But this is a timeless precept, grounded in ethics…It is not and never will be a “scientific” finding.

Even Peter Drucker fell for Mayo’s work, citing the Hawhthorne experiments in his 1954 book, The Practice of Management, and declaring:

the reports of [Elton Mayo and his associates] on the work at Hawthorne are still the best, the most advanced and the most complete work on the subject of [human relations.]

Douglas McGregor‘s Theory X and Theory Y are also knocked down, as they depend on Theory U according to Stewart—for utopian.

Even Michael Porter, the academic father of business strategy, is not immune to Stewart’s indictment. He recounts a meeting at Boston Consulting Group wherein founder Bruce Henderson was trying to decide how to compete with McKinsey. They needed to specialize, but in what?

“What about business strategy?” Henderson proposed.

Robert Mainer, another partner at the meeting, objected “That’s too vague. Most executives won’t know what we’re talking about.”

“That’s the beauty of it,” Henderson replied. “We’ll define it.”

Stewart defines strategy consulting as “extremely expensive,” before critiquing Porter’s work. His major indictment is Porter’s use of “frameworks” as opposed to “models.” A model makes predictions about the future, which is the ultimate test of its value. A framework merely justifies its utility “if it helps practitioners change the world in positive ways.”

This test is far too weak, as astrological charts and voodoo dolls have high utility for many people as well.

Porter’s framework claims that there are three generically successful business strategies, and that strategy-making processes should aim at the singular goal of excess profits. Stewart believes these hypothesis are mostly false or unsubstantiated. Another tautology according to Stewart:

To say that a company has a “sustainable competitive advantage” is thus merely to restate the fact that it makes excess profits. …[Porter’s] framework may explain excess profits, it does nothing to predict them.

The self-contradicting Tom Peters is delivered many body blows by Stewart. He cites Peters admitting that In Search of Excellence was “phony baloney.”

Jim Collins of Good to Great fame is also taken down, with Stewart observing that the “384 million bytes of computer data consists chiefly of press clippings.”

You have to love Stewart’s wit here:

Reading through the guru’s favorite companies from the past two and half decades is like watching a parade of homecoming queens from years past. The sad procession serves mainly to prove that time destroys every conceit.

Best of all, Stewart doesn’t spare Peter Drucker, who claims to have established management as a discipline and as a field of study. Here is what Stewart writes:

In fact, neither [Drucker] nor his successors established a discipline; they merely asserted the idea of a discipline. (And, for what it’s worth, it was Taylor, not Drucker, who had the idea first).

This is by no means an exhaustive list of gurus that Stewart deconstructs in the book, and he even mentions in the Bibliographical Appendix “there is a large population of gurus on whom no comment should be offered. They are best left in the trash can of history.”

5 Easy Steps to Becoming a Guru

Amusingly, but poignantly, Stewart lays out five easy steps to establishing a popular management religion, citing the gurus major achievement as transforming the religion of management into a demotic one—a people’s religion:

  1. We are all going to die! The guru’s obsession with the instability of the present—that is, a dynamic capitalist society.
  2. The bureaucracy is killing us! An expression of the democratic and egalitarian instincts of American culture, and it can serve as an important check on the excessive concentration of power.
  3. There is good news in America! The necessity of a happy ending.
  4. You have the power! We are all CEOs now. Presumably it’s just our paychecks that have to catch up.
  5. Just look at me! What the medieval theologians called “the argument from authority.”

Stewart thinks the management religion is a form of false consciousness:

Although it promises freedom, it in fact delivers a more refined form of servitude. As the semiestablished church of our times, its global effect is to perpetuate rather than to challenge managerial authority.

If religion is the opium of the people, as Marx suggested, then management theory should probably count as a kind of amphetamine. It causes agitation and hyperactivity. It does have the unfortunate side effect, however, of making people feel much more efficient than they actually are.

Should Business be a Profession?

Stewart points out that the “professionalization” [of business] project rests on a fatal misunderstanding about the ethical foundations of a profession, pointing out that trust is a critical component of a profession, along with standards of admission, licensing requirements, and disciplinary procedures.

Scholars have long agreed that there are, primarily, three necessary characteristics to be a profession: A common body of knowledge. Autonomy. And a Spirit of Service. Business management only meets the last of these, as any one can be labeled a “manager.” This is also why journalism is not a profession.

As Stewart rightly points out about the new Harvard Business School pledge to consider oneself a “professional”:

Most managers, to be sure, are good people; and it seems unlikely that a couple of years of pseudovocational training will spoil them. But it is foolish to imagine that they will behave well merely because they are told in business school that they should regard themselves as professionals.

Insofar, as an education can have any effect on the ethical life of the individual, it can do so only by forming intellect and character. For that purpose, the study of obtuse textbooks on organizational behavior will always rate as a very feeble alternative to the study of Aristotle or Shakespeare.

The movement to make management a profession is not only misguided and misinformed, it’s not necessary. Business is all about serving the public within an ethical and moral framework.

In fact, as Michael Novak as argued so compellingly in Business as a Calling, business is a serious moral enterprise, since it teaches many virtues—risk-taking, prudence, accountability, serving strangers (i.e., customers), etc.

Trying to elevate it to the level of a profession would be asking something of it which it is not capable. Business is based on creative destruction, not the slow, plodding progress of most professions.

The Future of Management Education

Businesses routinely confuse “training” with “education.” We train our pets, but human beings are educated. Stewart offers some very innovative thinking with respect to what should happen with management education in the future:

After 100 years of fruitless attempts to produce such a discipline, it should be clear that it does not exist. Preparing managers to manage, in fact, is not different from preparing people to live in a civilized world. Managers do not need to be trained; they need to be educated.

If business schools would drop the pretense of providing practical training and engage in disinterested, critical study of business and management practices and culture, they might actually make a significant contribution to society.

The fact that business schools pander to its customers—the students—is not a new charge, but Stewart makes another compelling case:

At the end of the game, the business schools will be all business and no school. “Customer satisfaction” is a good way to sell shoes; but it is a bad way to relieve ignorance. It is fundamentally stupid to base the content of an education on what the as-yet uneducated person decides is best.

Stewart goes on to illustrate the number of functions that a business school performs that has nothing to do with knowledge: recruiting festival; signaling device; status symbol; language school; and network maker. Economists have been pointing out these functions of college degrees for decades.

I also wholeheartedly agree with Stewart’s conclusions:

The central insights of management theory are, in fact, the stock in trade of the humanities disciplines.

Management theory, in fact, is already a branch of the humanities—it just may not know it yet.

The questions that the management theorists raise and the insights that they offer belong not to a speciously practical discipline of management, but to the history of philosophy, and they should be taught and studied as such.

By this definition, of course, a good manager is nothing more or less than a good and well-educated person.

In all fairness, Peter Drucker did believe that business was a branch of the humanities.

This is not to say I agree with everything Stewart writes. He seems to have an inherent trust in government regulation, stating that markets aren’t born free, they are made free. Made free by government? Is he kidding? I’ll take liberty and occasional abuses over the loss of liberty due to the stifling foot of a nanny-state government trying to protect us from ourselves.

Disagreements aside, this is a masterful book. Stewart’s book has laid out a compelling case against management consultants, just as The Witch Doctors did 13 years ago.

My conjecture is the gurus will ignore The Management Myth, not having the intellectual firepower to counter its arguments.

Those who hire consultants, however, can’t afford to ignore this book.

Was Drucker Wrong About Knowledge Workers? A Book Review

The following is a review of a book that I recently read, which I shared internally with my VeraSage colleagues. Warning: It’s long, about 2,400 words.

It deals with a vital topic: how to increase the effectiveness of knowledge workers, what Peter Drucker said the well-being of our entire society depended upon.

After reflection, I thought our readers might like to weigh in on these issues, so I’m posting the entire review and asking everyone to contribute their thoughts through the comments section of this post.

If you are firm leader who employs knowledge workers, this is the most important task you face in creating a dynamic, sustainable firm—one you’d be proud to have your son or daughter work for.

Book Summary: Reinvent Your Enterprise: Through Better Knowledge Work by Jack Bergstrand, Founder, Brand Velocity, Inc.

This is a thought-provoking book, one I wanted to share with everyone at VeraSage. The Foreword is written by Rick Wartzman, Director, The Drucker Institute. This is an organization I have tremendous respect for, as they are trying to advance the legacy of Peter Drucker.

Drucker identified the greatest challenge of the 21st century: enhancing knowledge worker productivity. Drucker coined the term in 1959, when about 1/3 of the workforce was engaged in manufacturing (compared to about 10% today).

The author’s mission is to explain how businesses should actually go about doing these things. He is attempting to advance a framework to enhance the effectiveness of knowledge workers, to tackle Drucker’s warning: “The well-being of our entire society depends increasingly on the ability of…large numbers of knowledge workers to be effective.”

The author gets it. He worked for more than twenty years at Coca-Cola, running the global information technology function until 2001. A recurring theme in the book is that Knowledge Workers (KWs) has been constrained to a significant degree by the same scientific methods that helped companies successfully manage manual work for much of the 20th century.

The author has also done his homework, with an extensive bibliography that cites many of the same books we have read. I truly appreciated the level of thinking that went into this book.

We at VeraSage know how hard these ideas are to transmit to most business audiences. It sounds like a management fad to talk about KWs, even though the idea is 50 years old, and demonstrably true. We simply don’t have a framework for KW efficiency/effectiveness, which is why I greatly admire this contribution. He’s thought about it quite a bit. And has even prototyped a consulting firm based on KW principles.

That said, there’s much in the book I don’t agree with. It will cause great cognitive dissonance. Perhaps some of it is linguistic, but that’s the entire point if we subscribe to the Peter Block notion that all change is linguistic. Half of wisdom is calling things by their proper names.

Definitions

We are all familiar with the debate between efficiency and effectiveness. But let’s start with a clear definition of these terms, as the author does.

  • Efficiency focuses on doing things right.
  • Effectiveness concentrates on doing the right things.
  • Productivity is about doing them both at the same time.
  • Knowledge work is how individuals and groups use ideas, expertise, information, and relationships to get things done.
  • Knowledge work productivity is the effectiveness and efficiency of these tasks.

He goes on: productivity improvement, through inventing and reinventing Enterprises, is what generates the surpluses that pay for our standard of living.

My dictionary defines “productivity” this way: the effectiveness of productive effort, esp. in industry, as measured in terms of the rate of output per unit of input.

Later in the book, he admits that productivity is output divided by inputs, and knowledge is one of the chief inputs in a KW environment. This leaves a glaring void with respect to effectiveness.

Implications

Yet the entire debate centers on effectiveness. Just because you are efficient doesn’t mean your effective. Examples abound: buggy whip, slide-rule, typewriter, and dot matrix printer manufacturers might have been at the apogee of their efficiency. So what?

There’s nothing more useless than being efficient at something that shouldn’t be done in the first place. A business is not paid to be efficient.

So it’s clear that efficiency and productivity are always a measurement—a ratio of outputs divided by inputs. Effectiveness, on the other hand, is always a judgment.

There is no such thing as “generic efficiency,” as Thomas Sowell has explained in his Basic Economics book, and I’ve written about extensively. It depends on what you’re trying to accomplish and the price you are willing to pay.

Our automobiles are inefficient from an output/input ratio calculation, since they are idle a majority of the time. But they are highly effective at taking us where and when we want to go.

So what? Well, after discussions with many of you, here are some iron laws that are beginning to formulate:

  • Effectiveness always and everywhere trumps efficiency.
  • It’s possible to increase effectiveness and efficiency at the same time.
  • It’s not possible to increase efficiency and increase effectiveness.
  • Efficiency does not provide a sustainable competitive advantage; only effectiveness can.
  • Efficiency is a table stake, like having restrooms. Effectiveness is what creates a competitive differentiation.

We are looking for anomalies to these propositions. I thought of computers doing tax returns, which greatly reduced mistakes and thus led to more effectiveness. But Ed pointed out that the end result was just a correct tax return, which could have been hand-checked under the old method several times, albeit with less efficiency, yet the result would have been the exact same—a correct tax return.

I’m also pondering Wal-Mart, obviously greatly concerned with efficiency. They squeeze costs out of the system with technology, reduced inventory, etc., then pass these costs on to customers through price discounts. Is that efficiency or effectiveness? Southwest does the same. How does this fit?

Consider another example: the ratio of overhead to spending for a charitable organization. This one measure is often touted as the single biggest clue as to the charity’s effectiveness. But is it?

You still have to judge the results. What if Jonas Sulk’s foundation spent 60% on administration and overhead but still developed the cure for polio? Is that inefficient? How about the Manhattan Project spending the same ratio? If the Bill and Melinda Gates Foundation cured AIDS but spent 90% on administration and salaries, should we care?

No matter how good our measures are we still need judgment. And this is where the efficiency experts fail miserably, especially in a knowledge environment. Was Einstein efficient? How would you measure it?

Efficiency is like painting by the numbers. It’s no doubt more efficient; but it produces crappy art. If we believe KWs are artists—and I know this is debatable because of Dan’s contention that most professionals aren’t KWs—aren’t efficiency experts (Lean, Six-Sigma, etc.) doing nothing more than creating paint-by-the-numbers kits?

Back to the book

This book needs to be read with this profound difference between efficiency and effectiveness understood. I’m not sure the author understands it completely (hell, I’m not sure I do either, but I think we are closer to the truth). I don’t agree with his political comments in the book, they are economically illiterate when discussing budget and trade deficits, healthcare, education, and energy challenges, so I’ll just focus on his business advice.

For example, it’s hard to disagree with this:

Efficiency focuses on inputs and tries to reduce them whereas productivity [his definition] concentrates on outputs and tries to increase them. Cost cutting does not drive productivity. Reinvention does.

True. What good is it to be producing dot matrix printers efficiently right before Apple produces the LaserWriter and decimates your market? Reinvention is what capitalism is all about. I have severe misgivings that large organizations are as capable of this as the author wants them to be.

But it doesn’t matter. The market will produce the Black Swans, either from existing organizations or new ones (who used Google 12 years ago?). I, for one, am glad the buggy whip manufacturers are gone. Henry Ford reinvented them without their consent.

How KWs Are Different

I liked how the author contrasted knowledge work with manual work, with our bracketed language added:

Manual work

  • Define the task
  • Command and control
  • Strict standards
  • Focus on quantity [measure]
  • Measure performance to strict standards
  • Minimize cost of workers for a task

Knowledge work

  • Understand the task
  • Give Autonomy
  • Continuous innovation
  • Focus on quality [judgment]
  • Continuously learn & teach
  • Treat workers as an asset not as a cost [Volunteers]

The author points out that waste in a manual environment is seen by everyone, but with KWs it’s not nearly as visible. He suggests the following litmus test for productive knowledge work:

Ultimately, these results should be judged based on whether one of the following occurs:

  • When something successful that never existed previously is now up and running.
  • When something successful that existed previously has been improved or expanded.
  • When something unsuccessful that existed previously has been stopped.

Notice he used the words “these results should be judged,” not measured! This is why I believe the author is confused by this essential difference.

Since knowledge and good ideas have a short life span, the author continuously emphasizes that speed is important:

In the Knowledge Age, what matters most is not what you know but how fast you can apply it.

But this reminds me of the husband whose driving aimlessly and when his wife asks him where they are, he replies: “I have no idea, but we are making great time.” Effectiveness is more important than speed, though I’ll concede speed shouldn’t be ignored.

Framework for KWs

The author suggests the following framework for KWs:

  • Envision—subjective knowledge. Where do we intend to go and why?
  • Design—objective knowledge. What do we need to do and when?
  • Build—objective work. How can the work best get done?
  • Operate—subjective work. Who is responsible for which tasks?

The middle of the book explains each of these steps, and along the way makes some excellent points on the difference between KW and manual environments.

That said, I found the framework complicated. It was as if he substituted Frederick Taylor’s framework with his own, needlessly complicated system. He certainly understands the difference between the parts and the whole, since a company is an interdependent system that you can’t simply break into parts and impose 100% efficiency on each. This reduces the effectiveness of the whole.

Yet, my head began to hurt reading the details of this framework. I believe a shave with Occam’s Razor is in order, and I think Google Time (20% for KWs to work on what they want), combined with Before Action Reviews and After Action Reviews, accomplishes the same objectives.

Prototyping a Pure Knowledge Firm

Perhaps the most interesting part of the book is the last section where the author describes founding a consulting firm, Brand Velocity, Inc., on the basis of Drucker’s KW principles.

He laments that many of the incentive structures in business were founded by Scientific Management principles in order to control workers. Retention incentives, fur-lined handcuffs, the author argues, can have the long-term effect of keeping the least productive people while scaring off the best and brightest.

He also understands that a small proportion of the best KWs create an overwhelmingly disproportionate amount of output (this is true across knowledge sectors, from programmers, to lawyers, and is backed up by many studies). Bill Gates once said that Microsoft was essentially 20 programmers, and this was in the late 1990s, not when it was a start-up. The same was said of Pixar when it sold to Disney, except it was three people.

Another principle the author articulates is that if firms can’t manage KWs outputs from a distance, they probably aren’t managing them productively in their office buildings either. He believes, just like the number of farms has shrunk over the last century while farming output soared, so will the number of offices housing KWs.

If, as the World Bank writes, 75% of wealth resides in human capital, this leads to another important principle: people have value, not jobs. KWs will need to be “compensated based on their personal contributions, without the company taking more than its fair share. At the same time, KWs will need to directly feel the pain when the goals of the Enterprise aren’t achieved.”

Brand Velocity he calls an economic pass through, and as such, there are no caps to compensation and there are very few socialized costs (Category 3 spending in our lingo) linked to personalized benefits.

The author writes, “if you have an Enterprise where employees aren’t able to earn more than their bosses, your company probably won’t be as productive as it could be.”

Given VeraSage’s discomfort with the partnership model, and our search for an alternative model, here’s how Brand Velocity distributes its income:

At Brand Velocity, there is a 20% structural cost advantage, so operating income is capped at this amount. All surplus profits are redistributed to employees based on their contributions tracked by “points” within the firm related to the company’s top three business drivers: selling great work, delivering great work, and recruiting and developing a diverse group of great people. …Other activities are important, but they don’t earn points.

The result is that high contributors—regardless of rank—can earn more at Brand Velocity than they can if they start their own company or work for another firm.

From a technology perspective, employees have complete choice of their own tools. Some have Macs, some use windows, some iPhones, some Blackberries. They also advance money for expense accounts at the beginning of every quarter. If the employee has any left over at the end, they earn it back, after taxes. This takes them out of Category 3 and places them into Category 1 spending—a smart way to align incentives.

And here’s a thought-provoking idea: they work to increasingly replace judging with coaching. He writes, “dogs perform and people contribute.” No performance reviews, with the author wondering how effective a performance review for Einstein would have been.

The author also puts employees through strategic profiling, such as Myers-Briggs Type Indicator, and this is where he lost me (but Michelle would love it). You can see his individual profile at www.StrategicProfiling.com. There are fifteen categories! Occam’s Razor anyone?

This needless complexity made me think that he’s substituting Taylor under the rubric of knowledge work principles.

In the final portion of the book, the author writes that “Scientific Management helped develop the profitable mass market. Now, the challenge is to profitably develop the tailored market.”

Also, “innovation is important. But, it needs to be productive innovation created with customers.” This belies history, as Henry Ford said: “If I had listened to my customers I would have produced a faster horse.”

Not Final thoughts

If Drucker was right, if the major challenge facing the 21st century is to increase KW effectiveness, why aren’t more companies doing it, especially among PKFs? There are examples: Best Buy’s ROWE program; Google, Apple, Intel, Cisco, Novartis, etc. But the list is sort of short.

One possibility is Drucker was wrong. We have to face this possibility.

Alternatively, just as with implementing Value Pricing, this is just too hard, and most firm leaders don’t know how to tackle the issue.

There is a 40 minute interview with the author and director of The Drucker Institute here.

Of course, I am interested in all of your opinions on these issues. Please post your comments and let’s start the dialogue.

What a WEEK in Pricing!

It has been an interesting week in the world of pricing.

In case you have not heard, Chris Anderson of Wired is set to release his new book Free (the title, not the price), and before it even comes out stirs up a controversy. Surprisingly, the book does not seem to be available on Kindle. Hmmm.

UPDATE: Free is now available for free, at least in audio version. According to a video posted on Wired. Free will be available in most electronic formats for free. The exception is the three hour abridged audio version which Anderson believes has more value than the full-length edition (posted above) because of the opportunity cost trade off of listening to the longer version.

Anyway, first, Malcolm Gladwell chimed in in the New Yorker. Then, Seth Godin responded to Gladwell.

In my opinion, the camp of Anderson/Godin is right and Gladwell is wrong. I think Gladwell misses the idea that free does not mean there is not a business model. He is right that youtube and other free services (Twitter) have yet to create a business model, but that does not mean they never will be able to create one.

Gladwell uses the example of former head of the Atomic Energy Commission, Lewis Strauss’ famous late 1950’s prediction that “our children will enjoy in their homes electrical energy too cheap to meter.” To say that since this prediction has not come to fruition would be shortsighted. Gladwell is right (currently) about that fact that power infrastructure costs are larger that power creation costs, but I can foresee a time when we have personal (or neighborhood) nuclear reactors. This of course will reduce, and almost eliminate, those infrastructure costs.

I would love to hear each of your thoughts on this.

Aries Technology Adds a Blog

VeraSage Technology Trailblazer Firm, Aries Technology in Knoxville, TN has added a blog to their web site.  John Shaver has written an interesting post on the San Francisco Giant’s experiment with what amounts to yield management for their tickets.

He writes, “How many of us have reexamined and rethought our pricing philosophies lately?  I think the current economic conditions present a great opportunity for all of us to look for more creative pricing strategies.”

Excellent thought John and good luck with the blog.

Book Review: Money, Greed, and God

This book belongs in my Pantheon of books that defend capitalism from a moral perspective, along with Wealth and Poverty by George Gilder (and his Soul of Silicon address to the Vatican); Thou Shall Prosper by Rabbi Daniel Lapin; Business as a Calling by Michael Novak; Doing Well and Doing Good by Richard John Nuehaus, among others.

This is not your simplistic “greed is good” defense of capitalism. In fact, it sets to accomplish just the opposite: to explain how capitalism channels self-interest to serve others first, before you can achieve your own self-interested objectives.

Like so many intellectuals before him (Thomas Sowell comes to mind), Richards started out hating capitalism in the 1980s as a college student. He writes he had a “sophomoric infatuation with Marxism” but then moved on to Democratic Socialism when he learned that Communism led to misery and death. He quotes American novelist John Dos Passos:

Marxism has not only failed to promote human freedom, it has failed to produce food,

And Thomas Sowell:

Socialism in general has a record of failure so blatant that only an intellectual could ignore it or evade it.

Citing the scholarly study of communism—led by French scholar Stephane Courtois in The Black Book of Communism—this ideology was responsible for 85-100 million deaths, leading Richards to propose the following macabre equation:

Extreme moral passion — Reality = Mass Death

Rather than creating a heaven on earth, communists brought up hell instead. Winston Churchill said it well:

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

Richards is obviously someone who has given this topic major thought, holding leadership positions at the Discovery Institute, and the Acton Institute for the Study of Religion and Liberty. He’s currently a visiting fellow at the Heritage Foundation (Patri Friedman, David Friedman’s son and Milton Friedman’s grandson, might say he’s overinvested in think tanks).

He’s also the executive producer of two excellent documentaries, The Call of the Entrepreneur and The Birth of Freedom. I had the pleasure of seeing Richards with George Gilder and Father Robert Sirico at the premiere of the former movie in New York in December 2007.

Capitalism is Consistent with Christianity

The book is also attempting to make the case for capitalism to Christians, who usually cite various Biblical passages to argue against materialist progress, such as:

The love of money is the root of all evil;

You cannot serve both God and Mammon; and

It is easier for a camel to pass through the eye of a needle than for a rich man to enter the Kingdom of heaven.

Richards takes these objections seriously, providing intelligent and religiously consistent arguments for the morality of free markets.

This line of reasoning may contradict some famous Christian thinkers, though Pope John Paul II’s 1991 encyclical, Centesimus Annus, actually made the case for the moral superiority of capitalism, as explained by Michael Novak and Richard John Nuehaus in the books cited in the opening paragraph.

Richards quotes Rich Karlgaard, the Christian publisher of Forbes magazine, who says listening to a pastor or priest preach on business “is like hearing a eunuch lecture on sex: He may have studied the topic but really knows little about the mechanics.”

The Eight Myths of Capitalism

The main thesis of the book, laid out in eight concise chapters, is to refute eight simple myths Christians make with regards to economics. This is especially important since we are defined far more by our beliefs than by our knowledge. The eight myths are:

  1. The Nirvana Myth (contrasting capitalism with an unrealizable ideal rather than with its live alternatives).
  2. The Piety Myth (focusing on our good intentions rather than on the unintended consequences of our actions).
  3. The Zero-Sum Game Myth (believing that trade requires a winner and a loser).
  4. The Materialist Myth (believing that wealth isn’t created, it’s simply transferred).
  5. The Greed Myth (believing that the essence of capitalism is greed).
  6. The Usury Myth (believing that working with money is inherently immoral or that charging interest on money is always exploitive).
  7. The Artsy Myth (confusing aesthetic judgments with economic arguments).
  8. The Freeze-Frame Myth (believing that things always stay the same—for example, assuming that population trends will continue indefinitely, or treating a current “natural resource” as if it will always be needed).

For a capitalist economy to prosper, various moral virtues are a necessity: cooperation, respect for private property and rule of law, stable families, self-sacrifice, delayed gratification, risk taking based on hope, which Richards makes clear are all consistent with the Christian worldview.

The essence of capitalism is not greed, self-interest, private property, rule of law or many of the other justifications made for it. For Richards, the moral superiority of capitalism is because it works and allows wealth to be created. Since wealth is the only known antidote to poverty, this is critical in alleviating human misery. Michael Novak, who also began his intellectual life as a leftist, also makes this point in his books.

This is precisely why Adam Smith studied the wealth of nations (not individuals), since poverty needs no explanation. Man is born poor; poverty is ubiquitous. What’s more, even if we understood the “root causes” of poverty, what would we do with that knowledge? Spread more poverty? The only answer to poverty is wealth creation; unfortunately, capitalism is not ubiquitous.

The wealth-creating gift of capitalism—which even Karl Marx acknowledged—is a central theme running throughout the book. For instance, I liked Richards’ argument against the minimum wage:

It’s a form of price fixing that tries to distribute wealth before it’s been created.

He also provides a dose of reality to the ONE Campaign, which is the call for the USA to spend 1% of the federal budget on foreign aid, with its famous promoters such as rock musicians Bob Geldof and Bono. The former actually said,

Something must be done, even if it doesn’t work.

Citing how rich governments have sent $2.3 trillion to poor countries in the past fifty years, Richards delivers the final blow to this feel-good nonsense:

No developing country ever got rich that way.

Facts are stubborn things.

In the same chapter, Richards points out that true compassion is a spiritual gift, a free act, and implies that one “suffers alongside.” If it’s based on the coercion of the state, it’s no longer compassion, not to mention it loses its effectiveness in alleviating misery.

Chapter three does an excellent job tearing down Karl Marx’s labor theory of value, along with why scarcity, in and of itself, does not equate to value.

Richards illustrates the “trading game,” which I believe is an exercise you could use with adults and they would be amazed at the seven lessons this game illustrates (Richards’ example is from the sixth grade).

My favorite section of this chapter is “I, iPod” a take off on Leonard E. Read’s famous 1958 essay, “I, Pencil,” which illustrates how not one person in the world knows how to make a pencil, yet through the coordinated, and free, acts of millions of individuals of different ethnicities, religions, cultures, nations, etc., pencils are in abundance when we walk into Staples—all with no pencil Czar from the Obama administration overseeing everything.

How does this happen? The price system, the most counter-intuitive system in the world.

Myth #4 is one of the most pernicious of the eight myths, and Richards does an excellent job is dispelling it in chapter four. He cites Bill Gates’ address to Harvard’s graduating class of 2007 that economic inequality was a moral outrage and that “reducing inequity is the highest human achievement.”

Richards’ retort is spot on: “Nonsense. If that were true, I would be right to seethe in anger because I have less than Bill Gates. That’s envy, not justice.”

He also dispels the confusion that money is equal to wealth, citing economist Hernando de Soto (another economist in my Pantheon, especially his The Mystery of Capital):

Capital is now confused with money, which is only one of the many forms in which it travels. Money facilitates transactions, allowing us to buy and sell things, but it is not itself the progenitor of additional production.

I wish more people understood this, including a lot of professionals and businesspeople. Real economic wealth, as Adam Smith pointed out in 1776, consists of goods and services useful to others. Bill Gates on a deserted island with all his money is not a wealthy man, since he’d have to do everything for himself, which would lead, ultimately, to a nasty, poor, brutal and short existence.

Richards further points out that the federal government’s budget is much larger than the net worth of the wealthiest Americans, so if we are concerned about concentrated power why on earth would we want more of our wealth to be concentrated in the U.S. government?

I also love the conclusion to this chapter:

We rightly see poverty as a problem, just as disease is a problem. But the problem isn’t that some people are rich and some are poor, any more than the problem of disease is that some people are healthy. The problem is quite simply that some are poor. If we want to bask in the wasteful heat of self-righteous moral indignation, then by all means, let’s keep blathering on about income gaps. But if we really want to help the poor, we need to get our eyes off decoys and focus on the real problem—poverty—and its only known solution: creating wealth.

Greed Works?

The next chapter debunks the “greed is good” myth of capitalism, a non-starter for Christians, and others. Who likes greedy people? How does good result from evil, virtues from vices?

In Oliver Stone’s 1987 movie Wall Street, the Nietzschean anti-hero Gordon Gekko proclaims, “greed, for lack of a better word, is good,” as if greed is the pinnacle of virtue for businesspeople. This view is commonly attributed to Adam Smith’s famous invisible hand; but like most conventional wisdom, it is more conventional than actual wisdom, since Adam Smith never claimed that greed was good.

In fact, the term is properly credited to Bernard Mandeville (1670-1733), a Dutch psychiatrist and pamphleteer. In his work The Fable of the Bees [1714], Mandeville claims that “private vices are public benefits.” Adam Smith, in his mostly forgotten book The Theory of Moral Sentiments, disagreed with this, calling it “wholly pernicious” and the thesis “erroneous.”

Even more absurd are those who claim that Smith’s theories are based on impersonal—or psychological—and ethical egoism. Psychological egoism is the idea that everyone is always motivated to act in their own perceived self-interest, while ethical egoism is a normative theory about what people ought to do, and what they ought to do is always act in their self-interest and not concern themselves with the welfare of others.

Yet, who subscribes to these views? Taken to the extreme, this view would prevent anyone from starting a family—indeed, it would be a dagger in the heart of family life, marriage, friendship and brotherhood. Helplessness may be the only truly universal human experience, since all of us pass through infancy. The human race would not have survived one generation if every person acted as if he were unconnected to any other person. Most parents would die for their children, and this is not even considered heroic behavior but rather ordinary.

Richards also explains why good intentions don’t always produce good results, and bad intentions don’t always yield bad results, citing the example of Bernie Marcus and Arthur Blank who in 1978 were fired as executives of Handy Dan Home Improvement Centers. To exact revenge, they started Home Depot. A morally bad motive perhaps; but not a bad outcome, creating wealth for millions of consumers.

Isn’t it better to have a system that channels our more base instincts towards service to others? This is why Adam Smith draws a distinction between self-interest and greed, and so does Richards:

Every time you take a breath, wash your hands, eat your fiber, take your vitamins, clock in at work, look both ways before crossing the street, crawl into bed, take a shower, pay your bills, go to the doctor, hunt for bargains, read a book, and pray for God’s forgiveness, you’re pursuing your self-interest. Only foggy moral pretense confuses legitimate self-interest with selfishness.

Richards takes on Ayn Rand, who believed that “capitalism and altruism are incompatible, they are philosophical opposites; they cannot co-exist in the same man or in the same society.”

Rand celebrates selfishness, repulsing many Christians. Richards posits that capitalists embrace Rand most likely because they have nowhere else to go.

I was fortunate enough to find an alternative place to go in 1981 when I read George Gilder’s masterpiece, Wealth and Poverty. Gilder argues, like Richards, that capitalism is based on altruism, giving before you receive a return.

This is a counterintuitive aspect of capitalism: gift giving precedes voluntary exchange so much discussed by economists. Before you can exchange, you must produce something to exchange, which entails paying employees, suppliers, taking risks, etc. This is why Gilder equates enterprise with altruism (alter in Latin means “other,” as in other-directed), and labels profit an index of altruism.

It’s also why Rand devoted her last speech, at Fordhall Forum in Harvard, to an attack on Gilder’s book.

Anthropologist Claude Levi-Strauss labeled this the Law of Reciprocity:

The essence of giving is not the absence of expectation of return, but the lack of a predetermined return.

The creative nature of enterprise is also a problem for economists who’d like economics to be a predictive science, like physics. Yet it’s hard to place entrepreneurs in a Petri dish to see how they respond. Creativity, which can only flourish and serve others under capitalism, cannot be planned. Black Swans create our future, not planned and predicted rationality.

The following chapter discusses the origins of capitalism, including why Max Weber’s thesis that capitalism emerged exclusively from Calvinism is incorrect, as well as a fascinating exploration of usury, and the reasons the Bible forbid this practice, while arguing there is nothing wrong with charging interest for credit in the modern economy.

Ugly consumerism is discussed next, where Richards points out the importance of production, not demand, to an economy. Supply creates demand, whereas demand really creates nothing. Africa has just as much latent demand as America, what they lack is a supply-side economy with incentives to produce good and services useful to others.

The final myth chapter deals with “natural resources” and are we going to run out? But there’s no such thing as a natural resource, except for the ingenuity of man. Resources are what we make useful. Prior to the internal combustion engine, oil was nearly worthless.

Climate change is also discussed and Richards points out that proponents of this contentious theory have been funded to the tune of $50 billion over the past decade, whereas opponents have received a paltry $19 million. So much for opponents of climate change being bought and paid for by the oil companies.

The concluding chapter lays out the ten ways to alleviate poverty—that is, ten ways to create wealth. All very true, yet banal, as none would resonate with revolutionaries or look as cool on a T-shirt as Che Guevara’s portrait.

Richards also provides data from the World Bank’s study, Where is the Wealth of Nations, showing that in the United States 82% of our 2000 per capital wealth resides in intangible capital (16% is produced capital, and only 3% in natural capital). The poorest country, Ethiopia, derives 50% of its wealth from intangible capital, 41% from natural capital, and 9% from produced capital.

The Appendix is a fascinating discussion of F.A. Hayek’s idea that the free market is an example of order emerging from chaos. Richards disagrees. He believes that the market is an example of order emerging from order. This argument will resonate with a religious—especially an intelligent design—worldview.

You’ll also learn about the Web site gapminder.org, which is a visually stunning portrayal of income distribution around the world, along with many other interesting graphical statistics.

My only complaint about the book is it needs an Index for easier reference.

Richards has done the world a great service with this book. If you believe that ignorance in economic matters is our most expensive commodity, this book is the antidote. It deserves your thoughtful attention.

AT Kearney Report Available

Recently, I became aware of a report issued by the consulting firm AT Kearney on what they call value-based pricing. It is available as a pdf for free.

The report is well done and covers ground that VeraSage has been on top of for years, so not a whole lot new here, but it is potential useful when questioned about, “Who else thinks this is a good idea?”

The is a very nice example on call-center pricing that those of you in the technology sector will find on point.

VeraSage on Social Networks

We wanted to let our readers know that many of the VeraSage Fellows are Web 2.0 savvy with accounts at LinkedIn, Facebook, and Twitter.

Fellow

On LinkedIn

On Facebook

Twitter name

Chris Marston

Yes

No

No

Dan Morris

Yes

Yes

morriscpa

Ed Kless

Yes

Yes

edkless

Mark Koziel

Yes

No

No

Mark Bailey

Yes

No

No

Michelle Golden

Yes

Yes

goldenm

Peter Byers

Yes

No

No

Ron Baker

Yes

No

ronaldbaker

Tim McKey

Yes

No

No

Tim Williams

Yes

Yes

ignitiongroup

Several of the Fellows also have blogs of their own.

In addition, there is a VeraSage LinkedIn Group you are welcome to join as well. Of course, we have a Fans of on Facebook.

AICPA Economic Crisis Resource Center

I’m excited to announce that Mark Koziel, Senior Technical Manager of PCPS/Firm Practice Management at the AICPA, has started blogging at the AICPA’s Economic Crisis Resource Center.

We’ve known Mark for many years and he is truly one of the thought leaders in the CPA profession. He was responsible for launching the Young CPA movement in New York, which has since spread to many other states.

As Mark wrote in his inaugural post:

Whether you are job hunting, seeking articles on job skills in a recession or looking for financial reporting or strategic planning guidance for your business, the Economic Crisis Resource Center is designed to help all CPAs to get through this together.

In addition to reading this blog, I would encourage any CPA firms that aren’t already to become members of the AICPA PCPS. Mark and his team have done an outstanding job putting together many excellent resources to help firms operate more effectively.

Welcome to the blogosphere Mark, we look forward to your wisdom!