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 Amazon.com 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.