We are here to INSPIRE...
Inspire vision, direction, clarity of economic thought and above all the creation of an environment in which human dignity and rights are preserved, in order to give life force to the ideas of hope and prosperity, not at any cost, but at responsibly true and fair economic factor costs; so that we can encourage the growth and development of sustainable human endeavours
...the rest is just noise! (...and if you where wondering - It's Basics)
Risk has as one of its essential elements trust as a foundation.
Trust on the other hand has many other factors that interplay and interact on it.
Markets are created when there are needs that are immediately met from you local environment and therefore scarcity around. Market participants step in to fill the void.
As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.
Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth. Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.
Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management. (For more information or to contact us, please click on the Contact us link).
Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation amidst the regulatory compliance constraints added to your management agenda.
Cost cutting has been a priority in the private sector, ever since the financial credit quake started in 2008, yet the words currently are ‘austerity measures’ and budget cuts in the public sector.
Most of the cost cutting in organisations has been along the tactical and operational lines and we believe that in the ‘age of austerity’ we are within, revisiting cost cutting from a more strategic perspective would add significant value to both the private and public sector organisation alike.
A Zero Based Approach
Within most organisations budgeting and budget setting is an incremental affair. It is very much focused on a business as usual mentality and the status quo is rarely questioned or scrutinised with any level of depth and rigour, as long as the financial plan delivers the numbers senior managers anticipate and the investor community expects.
Yet this is exactly the kind of ‘tyranny of the status quo’ that has destroyed a significant proportion of value in organisations over the past two years.
A zero based approach addresses some of the short comings associated with incremental budgeting and financial planning. It is by no means a perfect replacement for incremental budgeting, it cannot address all the strategic issues and it is fraught with its own pitfalls, yet we assert that a focus on some recent lessons learnt in organisations that have implemented cost cutting via a zero based approach can add value to our clients budgeting and financial planning systems.
Zero-based budgeting can be summarised as the process of preparing financial plans from a change perspective, normally building the financial plan from scratch (the zero base), viewing the process as if the organisation has not delivered the particular service of product in focus before.
Some of the lessons learnt are briefly listed below:
Many versus few – Instructions and the interpretation thereof by individual users
Focus on the Full Time Equivalents (FTEs) and people cost early in the process
Check Payroll Data integrity
Understand thoroughly the organisational restructuring issues (get Human Resources understanding the financial budgeting language early in the process)
Ensure a distinction between building a Business Case versus Budgeting
Confidentiality (how, who, what and staff and managerial morale implications)
Education process and ensuring skills, knowledge and information convergence to ensure the budget is delivered as a value added ‘conversation’
Appreciation of management style versus timetable for budget delivery
Over communicate (more information is better than more or inadequate assumptions)
Concentrate on the budget story (strategy and changes) and ‘hang’ the budget numbers on the end of the storyline (Making the budgeting process less ‘threatening’ to budget owners)
These lessons can be separated into two distinctive themes, namely the Human Capital dimension and the Systems issues.
Themes to be aware of
As far as the Human Capital dimension is concerned the major lesson is to ensure that both the budget holders and prepares are fully cognisant and understand the language of both budgeting and what the inherent risks and concerns around a zero-based approach is.
Key issues and risk are around work stream teams from different disciplines (HR, Finance, Operations, IT and marketing) not always having a common language and frame of references for similar linguistic terms and phrases. Ensure that potential for misunderstanding the objectives and delivery mechanisms are addressed early in the Zero Based Budgeting approach.
Foster a culture of empathy within the management ranks and never underestimate the emotional impact that getting rid of people can have on both the managers having to make the tough calls and both the staff being called upon to leave and the staff morale of the people earmarked to remain behind and deliver the business as usual processes.
As far as the Systems issues are concerned, ensure that enough time and preparation goes into the planning and delivery of the Zero Based Budgeting mechanisms and tools, as you will be running a process that has not been utilised and thoroughly tried and tested under operational conditions before. There are risks in the following areas to be aware of:
Data integrity
Spreadsheet modelling and calculation errors
Documentation and the support services (handling budget holder queries and concerns)
Skills and knowledge of the budget holders and preparers might be limited
Conclusion
As was suggested in the Lessons Learnt listing above, over communicate with managers, budget holders and preparers and staff. Ensuring that adequate information is made available in comprehensible and non-technical language is the key to success. Too often we have seen ‘lazy’ and shortcut assumptions being made, when a little bit of extra effort, ‘digging’ and asking the right people with the operational knowledge the right questions would ensure a more robust and rigorous budget.
Finally, ensure that both the process and outcomes are well documented and articulated as they serve as your shield and defence when the reality does not turn out as the best laid financial plan might have anticipated.
We view Zero Based Budgeting as a risk-based change management tool that assists and informs the senior managers in any organisation of the opportunities and risks inherent in designing and building innovative change processes to help add value to the organisation’s overall performance.
Chance and spontaneity are two interesting phenomenon required for innovation and creativity.
We were reminded of this in an interview recorded of a LinkedIn executive recently*. He stated that chance encounters are "where we make some of our most significant connections", be it your life partner, business associates, etc. and that speeding up those chance encounters was one of the fundamental principles and aims of social networking.
That idea struck a chord with us. Like our free market principle of ‘Spontaneous Order’, random collisions and network creation, leading to opportunity exploitation and ultimately wealth and welfare maximisation is intuitively an attractive proposition.
So, we have the mechanisms in place, with online tools and social networking sites, but how much of this activity is outward focussed revenue and income generating? What is meant by this is that the revenues are not focussed on increasing advertising and network operator revenues, but individual participant to participant’s opportunity flows.
And beyond building an online presence with followers and individuals being influencers and thought or trend leaders in their domains, how many of us focus on being revenue leaders and wealth and welfare ‘maximisers’ in this space?
Do you have personal metrics of success, which help inform and modify and moderate your personal behaviours to ensure that you maximise your ‘Return on Ether-time’? [ROET]
Maybe it is well worth a thought because in the neo-classical world of market participation, if you aren’t in the market and making a living (or a half descent living) from it, you might get marginalised and lose out on the wave that hit us when Web 2.0 arrived.
“Don’t waste a good crisis” – not entirely sure who first uttered these immortal words, although a Google search on initial analysis seems to attribute it (or some very similar words) to Rahm Emmanuel, the current Chief of Staff of the White House, part of the Barack Obama administration. The actual phrase might be attributed to an economist called Paul Romer.
However, irrespective of who uttered the words initially, it is true that borne out of crisis the spirit of innovation always seem to rise like a new Phoenix bringing both hope and opportunity with it.
That is the great gift that the ‘study of scarcity’ that is economics provides us with.
We have the chance to think creatively about new platforms of collaboration and how Charles Handy's ‘Shamrock Organisation’ will eventually play out.
At the moment we are conducting a research study into how nano and micro businesses might find new routes to market and sustain themselves during these strained economic times as part of the extension of the outsource provider to the Shamrock Organisation. We will be trying to uncover some of the factors that lead to collaboration and other forms of formal and informal business structures that promote and underpin this form of collaboration.
Please watch this space for updates in the very near future.
Today’s post is a very short and concise post, yet these are some inspirational quotes and extracts from two chapter’s of Charles Handy’s 1997 book entitled: “The Hungry Spirit“:
A Life of our own
Capitalism, efficiency and markets have their flaws, but also their uses. They are neither the complete answer to our dilemmas nor the only cause of the. They provide some of the context of our lives but not the purpose. For that we need a philosophy not an economic system.
A better capitalism
Left to themselves, things do not necessarily work out for the best. Laissez faire is value free. No one is responsible for anyone else. That is improper selfishness and can self-destruct. We need something better. Capitalism as an idea includes social capital as well as economic capitalism. One without the other will not work for long.
The market is capricious. We are paraphrasing a line from one of Bernard Cornwell’s series of historic novels on 9th century England, where he referred to the ‘old gods’ (pagan gods) of the Danes and Vikings as capricious.
So if the impulsive nature of markets is to be appreciated for what they are, then why are we trying so hard to manage risk completely out of existence?
We will focus on two specific factors today in what we refer to as the ‘dumbing down of risk’.
A strict or narrow definition (old financial language) of risk is possibly that it is a quantifiable number with a probability ranking and we can therefore attach a statistical inference to the occurrence of the risk event.
In our mind, if the risk cannot be quantified and expresses on a scale of probabilities, then it is not a risk, but an uncertainty. And we can manage both risks and uncertainties, but the emphasis is different.
Maybe any situation or health and safety ‘risk’ can eventually be codified on a risk probability matrix, but the cost involved in getting to this situation is prohibitive, so we shall stick to our guns and call a health and safety issue a ‘Health & Safety Uncertainty’.
Let’s recap briefly the difference between what risk is (supposed to be) and what uncertainty is:
Risk in investment and market participation is the likelihood of a quantifiable measurable outcome either occurring or not occurring.
Frank Knight In his seminal work Risk, Uncertainty, and Profit, Frank Knight (1921) established the distinction between risk and uncertainty.
“
… Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term “risk,” as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. … The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. … It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We … accordingly restrict the term “uncertainty” to cases of the non-quantitive type.”
Too summarise therefore, risk should be a measurable and quantifiable occurrence, whereas uncertainty is what the HSE addresses, but misinforms as risk, namely the likelihood of something occurring, but that likelihood is not quantifiable.
So where does this detour into the use of language leave us as far as the Capricious Market is concerned?
We suppose that because market participants are both humans and mechanical systems (eg. ETS – Electronic Trading Systems), one of these participant groups, namely the humans have a level of sophistication and complexity (irrationality) that leaves the best construed risk models in tatters, once the uncertainty element of human emotion and the perception factor unleashed.
Therefore, to construct models of rational behaviours, the outcome and predictability of non-human mechanical systems (in other words more models) should be able to predict the behaviours of other models. But to extend this to human actors clearly moves us more firmly into the domain of uncertainty and not risk.
Therefore, we conclude that the markets will always be capricious as long as irrational beings are willing and able participants. Until this ceases to be, let us ensure that we get the use of our risks sorted out from our uncertainties.
We link today’s article to one of our main themes on our home page, namely the ‘Battle against the Status Quo’, or as per the title of this posting, ‘The Morass of Mediocrity’.
The underlying intent and theme is that of competition and competitive behaviours and the difference between rules based and principles based standards.
It is our opinion that a rules based culture encourages more insular and introspective behaviours, where the rush is for the middle ground of mediocrity, rather than as the opposite principles based culture would be the encouragement for the search for innovationand competitiveness at the margins and extremes of the ‘functional envelope’. By this we mean the parameters and frameworks set-out in the principles based environment, to ensure that a well-defined playing field (not necessarily level), is established and market participants understand their boundaries and culture norms they have to adhere by as part of the participation process.
Yet, apparently, a more principles based regulatory framework is exactly what is being blamed for the Credit Quake of 2008 – 2010.
And if we analyse the circumstances that led to the regulatory failure and debt driven imbalance we currently experience, we would discover that it is because we operate in a hybrid world with symbiotic elements in the relationships between the private, public and third sectors.
Some of these factors include, but are not limited to:
Market structure – free market versus socialist structures
Regulatory framework – the disjointed regulatory frameworks and mixed agendas and the sense of urgency in the global regulatory framework
Cultural setting – Anglo-Saxon, European, Middle Eastern, Far East, etc.
Reliance on macro-economic tools including monetary and fiscal policies
Skewed nature of national performance measurement
Balance between equilibrium and disequilibrium clearance mechanisms in the economy
Erosion of moral hazard and other distorting signals
However, as a mainly libertarian focussed publication, it would be remiss of us not to endorse the principles of minimal interference (small government in other words), yet we also realise that this has to be tempered with personal responsibility. However, because the symbiotic (hybrid) relationships have become so skewed and dysfunctional over the last few decades, was it any surprise that the uncertainty this created led to opportunist behaviours? Because a ‘moral compass’ is a very relative term, is it no surprise that depending on your own individual position and point of view, that the direction it indicates will be different from others?
The G20 are meeting again this weekend and the global regulatory framework will again be in more detailed focus, yet other priorities are again distracting the main thrust and issues on the agenda.
Therefore to conclude this brief interlude into the ‘morass of mediocrity’, the real question is:
If we all run and work hard for the centre ground, who will remain at the margins, pushing the envelope and ensuring that we break the tyranny of the status quo by exploring new unchartered territories and responsible risk taking behaviours?
The focus on sustainability and sustainable practices is a self defeating objective. Sustainability means that business leaders take their eye off the equity holder’s value creation ideal, as it flies in the face of self-interest as promoted by Adam Smith some 234 years ago (The Wealth of Nations , 1776).
Self-interest and the pursuit therefore is being clouded by a multitude of other non value adding factors that is diluting the message and contributing to more uncertainty and risk and therefore capital flight and volatility in the financial and capital markets as we have experienced over the last 2 years.
This process and Zeitgeist will not disappear or be properly understood, unless we develop a deeper understanding and familiarity with uncertainty as a driver of the innovative spirit of human endeavour.
Risk management per se is not the answer and panacea it is held out to be, and if it promotes a more risk-averse society, then we are heading for the middle ground of mediocrity, tyranny and decline in social values and structures that have taken many hundreds of years to create.
Being part of the system with a myopic view, rather than standing outside the system with a holistic and reflective frame of mind is causing more damage than good.
Yet how are we to live and deal with the cognitive dissonance that these two views by the very nature induce?
Let’s open up to good honest debate, search and reflection, rather than to dogma and a narrow focus on defending vested interests and old world models.
We are in the midst of a major cultural, economic and world order paradigm shift and the outcome is uncertain, potentially destabilising, but we must embrace this exploration of uncertainty and chaos the will inevitably ensue.
It is one of the key ingredients of a dynamic market process, yet is competition and the potential negative consequences of short-sightedness a means or an ends in itself?
Today we argue that the unfettered aspiration of competing for competition’s sake and the shedding of what is seen as non-core processes and competencies in organisation will eventually lead to sub-optimal performance and is an unsustainable practice.
In the unrelenting search for shareholder value creation, which is the fiduciary and main responsibility of the board of any shareholder / equity owned organisation, we believe that sub-optimal decisions are being taken, both because of target operating model enhancements and short-term return of investment (ROI).
One of the underlying objectives of International Harmonisation of Financial Regulatory Standards (as currently promoted by the IASB & FASB) is the desire for greater transparency and ultimately more regular and frequent reporting cycles. The view is that the greater the frequency in reporting, the less information asymmetry will be in the market, thereby eliminating insider trading and other undesirable ‘sharp’ market practices that regulatory bodies such as the SEC, London Stock Exchange, NYSE, NASDAQ, DAX, etc., are trying to stamp out.
But if we extend this logic, or rather shorten the current reporting cycles from the regular quarterly updates to say monthly, weekly , daily or even hourly updates, the already short-sighted mentality will become even more sharply focussed. And this begs the question: “How will CEOs and other business leaders have to ‘defend’ their decisions on a minute by minute basis under this unrelenting 24 hour news and sensationalism culture”; thus leading to an even more intense short term focus on their part. Certainly, this must be the worst of all downward spirals and tyranny of information overload?
But, by logical extension, this is exactly where we are heading in a decade or two’s time.
So, if the focus is then on more short-term results and ‘core processes’ where does this leave the current wave of outsourcing, off-shoring or near-shoring of non-core processes?
We contend that the already well established trend of ‘letting go’ of all non-core processes and competencies has a negative effect on the longer-term sustainability of the organisation.
Succession planning could already be outsourced and thus not on the board’s agenda, as recruitment consultancies now fulfil the non-core ‘attraction of suitable candidates’ services, with the traditional Human Resources fulfilling a more Risk mitigation / management functions of ensure compliance with Health & Safety Executive , employment law, equality laws, etc.
Another unintended consequence is the fact that because organisations more and more frequently utilise professional specialists to deliver projects and programmes, the esprit d corps is disappearing from organisational life. It is difficult for managers to gain this motivational force of esprit de corps when they are managing ‘virtual teams’ and a cadre of temporary service providers through dysfunctional processes of ‘on-boarding’, induction, project management, quality control, motivational traps, engagement, focus, etc.
Therefore, to conclude this opening article in a new series around the ‘new labour market models [1][2][3]’, currently being practiced in the western free market democracies, let us ask the key question that is one of the foundations of the factors of production in achieving economic advancement:
“How do we recognise, incubate, nurture, develop and sustain talent and talent management in our organisation, when this critical activity is handed over to outside consultants who have a different business model and agenda to our corporate ambitions?”
We know that there are some ‘labour supply aggregators’ or forward thinking recruitment consultancies that realise that their own models of engagement has to change, in order for them to move into the value creation and value addition space, but there are still far too many ‘factories’ with conveyor belt mentalities out there. Not to let the corporate ‘talent managers’ off the hook, because if you don’t have people and processes in place to manage the talent anymore, you only have yourself to blame when the ‘transparency machine’ of financial regulatory reform forces you down the channel of short-term decline...
If ‘the Law’ is the codification of cultural norms and practices, does the Law then not inform culture?
Policy, social malice and engineering of social outcomes bend these laws into legislative blunt instruments designed to enforce cultural behavioural changes on a grand scale, trouncing the common law of good judgment, neighbourly relations and common sense and thus freedom in their wake?
Within the above question and assertion lies the ‘malice of the free market’; where misguided and misinformed regulation channels behaviour and economic interactions in directions and with outcomes not anticipated or foreseen. Thus unleashing the ‘law of unintended consequences’.
Take as an example the economic condition referred to as Moral Hazard.
A definition is:
Moral Hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.
Moral Hazard therefore flies in the face of the principles of personal responsibility and thus accountability for our actions to a wider stakeholder community.
Is Moral Hazard perhaps promoted and therefore amplified by the fact that business leaders are not more formally educated in their fiduciary responsibilities?
Is this a function of weak or inefficient corporate governance structures and frameworks, or merely an oversight that is readily addressed by ‘occupational licensure’ or the professionalization of directors by only allowing formally qualified persons to serve on certain corporate boards?
Would this formalisation process of understanding fiduciary responsibility hinder the spirit of free enterprise and risk-taking or enhance the governance and risk aptitudes in a controlled and more channelled and focussed practice? Would it have as a positive consequence an amplifier effect for raising the corporate governance and Enterprise-wide Risk Management practices?
The authors identified 5 key drivers affecting the business environment, namely:
1. Changing finance and capital conditions,
2. The decline of trust in business and markets,
3. A less benign macroeconomic environment,
4. Social and demographic change where the recession will have a major influence,
5. Sustainability and resource issue.
We pick up our cue from the fifth driver being Sustainability for today's post.
Our comment serves more as an aide-mémoire to return to in more detail in future articles. This post also does not serve as a commentary on the CBI's report, but rather as a general opinion on the nature of sustainability and human a nature and is therefore pure conjecture.
We believe that sustainability as understood to mean the impact we have on the planet and the resources we consume, is not a natural human phenomenon, in the face of self-interest (as per the economic definition of the term) and competition for scarce resources.
In other words sustainability flies in the face of human kind's natural tendencies to compete for resources, either by war and confiscation, or by trade and exchange for those scarce resources.
We therefore contend that as human actors interacting with and through the free market mechanism, we do not naturally possess a 'sustainability gene', but instead have to develop a new model and framework for ensuring that this objective is effectively pursued and becomes part of the underlying psyche of being in business and discharging our fiduciary responsibilities.
Linking to our previous post ‘The Markets do not need certainty’, we contend that it is structure that helps shape markets and creates the conditions conducive to the effective operation of those markets. Other factors will ultimately affect the efficiency of the markets and some of these factors include Innovation and such like.
In conclusion, let us wrap up with a few quotes on sustainability:
·You can never have an impact on society if you have not changed yourself. Nelson Mandela
·The very process of the restoring the land to health is the process through which we become attuned to Nature and, through Nature, with ourselves. Chris Maser
·We can learn whatever we need in nature because we are part of nature. Human beings are part of Creation. We live by the same laws as all of nature. Anne Wilson Schaef
And in the final quote above we possibly see a glimmer of hope for a possible answer to our ‘Sustainability Gene’ deficiency. Somehow Adam Smith’s ‘self interest’ and the modern free(ish) market system require an injection of nature law and justice.
We hear this management buzz word quite often touted in office settings, and conferences in the media, etc.
We argue today that silos are cultural norms. They are national cultural models possibly endemic of certain national cultures. We certainly have no empirical evidence for this, so this is pure opinion and conjecture on the part of theMarketSoul contributors.
In our previous article titled Increased Friction Costs we briefly touched on the issue of processes being back to front in Britain. Processes are very much driven by the national ‘Carrot & Stick’ approach, rather than an enablement, ‘build and they will come’ approach where solutions are found and embedded then suitable and profitable markets are found for those solutions.
Now we can argue that in a very narrowly defined risk management culture and faced with the reality of reduced opportunity to obtain and procure financing to ‘build solutions on speculation’, we just cannot afford to change our exiting disastrous management and control processes.
But this is exactly where we have to stop the train as quickly as possible and change direction to ‘climb the hill ahead’ so that we can experience the potential and opportunity to ‘see the view from another mountain top vantage spot’…
We are in a tight spot. That is a fact. However, we are being held to ransom at the moment by a ‘political’ system and governing party trying to string out the last days of their tenure in power. [This article was initially written before the General Election in Britain].
There is hope, there is a sliver of light and opportunity on the horizon. However, we will need to learn to deal with some pain, as we readjust the ‘crowding out’ of growth by the public sector and debt burden. However, we need to recognise that we will have to apply a bit more ‘market discipline’ to finding, scoping, building and implementing solutions to our problems.
Small and localism are in fact parts of (but not the entire) solution, where small providers (entrepreneurs) are incentivised and tasked with coming together to experiment and create solutions, that hopefully mitigates the risk of large scale failure, but at the same time find scalable solutions that can rapidly be deployed to solve some of the challenges we currently face.
In IT deployment and development projects they call this kind of rapid, ‘low hanging fruits’ approach to development work Agile Development or AD for short. Maybe this together with the professional service chains and clustering we will touch on in subsequent articles is the way forward.
There has again been a short period of drift and volatility in 'the markets' recently.
And yet again we have hears the old refrain:
"Markets hate uncertainty".
This we assert is yet again a misplaced turn of phrase. It is not uncertainty that markets hate, because inherent within market processes and market operations is the principle of uncertainty. This is the also known as -Information Asymmetry.
So, if it is not uncertainty that markets hate, then what is the missing ingredient that delivers these periods of volatility?
We believe what markets require above all else is:
Structure.
Yes, structure and clear operating parameters, in other words a framework within which to operate is the key.
Whether that structure and framework is delivered via regulatory mechanisms or liquidity or a political landscape that sets the parameters in terms of policy guidelines and fiscal and monetary controls, it does not matters.
Remove the nebulous shifting and drifting borders and put in place a framework that sets the framework and outline of the playing fields and markets respond positively to these signals.
Refrain from doing the work of 'framework establishment processes' and markets and their participants become 'restless souls' aimlessly drifting within the 'nebulous fog' of uncertainty, clearly waiting and anticipating the regularity that structure delivers to the 'Market'
We had some very rewarding conversations recently with business partners and peers regarding the Value of Synthesis versus Analysis.
Synthesis we believe to be a ‘higher level’ skill and experience set than traditional analysis. Synthesis requires a natural ‘incubation period’. Very few people are natural ‘synthesists’. You grow and mature into a ‘natural Synthisist’.
Analysts can be taught. In fact a very lucrative business education industrial complex has been built on the back of ‘creating a production line of analysts’. We call them Business Schools churning out master’s level analysts with the three letter MBA title behind their names.
Don’t get us wrong on this one. We are not criticising MBAs or the Business Schools that produce them. Far from it; because we believe that part of the ‘evolutionary process’ of ‘incubating a mature synthesist’ is having a deep and fundamental understanding of analysis and the factors that contribute to making a good analyst.
Two of the key words we used in the above paragraphs were:
1.Incubate
2.Mature
We pause to reflect on these two words, because they are part of a natural evolutionary cycle.
Synthesis is a development process. It doesn’t just occur overnight. The process takes many years, many forms, much frustration, heart-ache, high failure rates, desperation, etc. We hope you understand the philosophical underpinnings of the argument.
The drivers that help define and shape good synthesists are many fold, however, two of the more basic building blocks include:
1.The Tyranny of the Status Quo
2.The Language of the Artist
What do we mean by these two concepts?
The Tyranny of the Status Quo
Mediocrity, lack of risk taking and proper risk management, a ‘level playing field’, universal access, no economic ladder to climb and a social ideology that creates an amorphous mass of despair is what drives the tyranny of the status quo. It is the antithesis of Innovation and Creative Thought. It is the Socialist ideology that drags us all down to the lowest common denominator.
The Language of the Artists
We believe it was Peter Block who claimed in that business life has become ‘infected’ with the language of the Engineer and Scientist. We ‘Business Process Reengineer’ this and that; we ‘Reverse Engineer’ this or that process. We contain, seal and measures finite risks and processes, much like a scientist would work in a ‘Controlled Laboratory Environment’.
But what we really need is the language of the artist and philosopher. We require poetry, motion, flow and creativity in order to establish the correct environment for innovation to ‘spring forth’ naturally and spontaneously.
Even though you would think this to be a natural phenomenon, it is very difficult to achieve in the ‘controlled environment’ of Shareholder Value Creation, due to the narrow focus on hard facts and cool numbers, underpinned by the ‘negative risk management cycle’.
In an article we recently published in a boutique Risk Management Training and Consultancy’s Quarterly Risk Update, we referred to both the positive and negative risk management perspectives.
Negative risk management is “[the] approach in an organisation that is designed to prevent the downside consequences of a transaction, such as (1) mitigating a potential loss or (2) the cost of not complying with regulatory requirements”, whereas in positive risk management “the upside is managed in conjunction with a risk based approach to general management. This is the starting point of Enterprise Risk Management”.
Financial Controllers and CFOs have to ensure that shareholder value is continuously created and then as measured and reported within the framework of Internationally Accepted Financial Reporting Standards and the generally ‘rules based approach’ to compiling those Financial Reports.
This is not a simple task and should we ‘interfere’ here with the language of the artist and philosopher in this process, we are certainly dead set on the course that will lead to ‘confusion, value destruction and financial ruin’. But aren’t we there already?
Has the most recent ‘crisis of confidence’ in the financial system as practiced by the ‘Financial Engineers’ and ‘Quant-type’ mathematicians and scientists not just proved that the old paradigm does not create value, but is still subject to ‘deep-rooted and fundamental’ long-term business cycles?
And yet what do we do? We blame the ‘selfish and selfless’ market capitalists for the problem, rather than address the basic condition that drive the imbalance, namely the ‘imperfect market’ that we create with over burdensome regulation, control and ‘dare we mention the term again ‘financial and business process (re-)engineering’.
We continuously oscillate on the pendulum between the free and ‘planned or controlled’ market forces.
Until we recognise the fact that our policy interventions, ill conceived regulatory frameworks and processes and the financial reporting and ‘engineering’ standards help drive the market mechanism to points of ‘disequilibrium’ where the natural ‘clearing mechanism’ of matched supply and demand cannot function normally; then we will just have to accept the consequences of the natural ‘boom and bust’ economic cycles.
To have ever utter the immortal, nay, ‘notorious’ phrase “we have abolished boom and bust” was not just arrogant but utterly naive and demonstrated a lack of a basic understanding of market forces in the ‘planned and controlled’ market economy camp.
Therefore, to conclude this brief post on the Value of Synthesis, we challenge mature ‘incubated’ professionals to step up to the challenge of redefining the new economic landscape by utilising the language of the artist and philosopher and to practice just a little bit of ‘Loony Intelligence’ in the process.
For further information and more in depth discussion on this subject, please contact us by clicking this link:
Comparative advantageis attributed toDavid Ricardoand is an economic law which states that a market actor (individual, firm, region or country) has the ability to produce goods and services at a loweropportunity costthan another actor or market participant. This is a relative term as even if a market participant has a higher opportunity cost than another participant, by concentrating its efforts in the area where it has the least opportunity cost disadvantage it can still compete and produce output that would benefit its wealth creation possibilities.
Competitive advantageon the other hand is the theory of concentrating one’s efforts on producing the highest quality goods and selling them at the highest possible price. It has a purely price maximising focus with the hope of resulting in wealth creation. Therefore, note the subtle difference in approach where comparative advantage tries to maximise wealth creation, competitive advantage has wealth creation as a by-product of focusing on maximising price.
One can argue that comparative advantage has value creation at its centre, whereas competitive advantage has a more short-term profit driver motive behind it. Competitive advantage is attributed to Michael Porter in the 1990’s whereas comparative advantage has its roots in early 19thCentury economic philosophy.
Now that we have the definitions out of the why, we can focus on the question of competitive advantage in UK plc. We are specifically interested in this aspect as a short-term approach is potentially needed to drag us back to the growth path we abandoned a few decades ago. Yes, it is our contention that growth and wealth creation is linked to underlying fundamental economic output and not monetary economics and financial engineering driven.
For a clue we might look at some of the major ‘Industrial Complexes’ dominating economic activity in the UK at the moment.
The usual suspects tend to be theMilitary Industrial Complex, but there are others include the Financial, Prison, Sports or Healthcare Industrial Complexes.
The phrase ‘Industrial Complex’ refers to all the organizations involved in the construction, operation, and promotion of that specific industrial complex.
In the UK the NHS alone as part of the total Healthcare Industrial Complex current employees around1.2 millionpeople, excluding all the pharmaceutical and other medical devices and facilities construction services and accounts for over £108bn or around between 8 – 10% of annual GDP (Gross Domestic Product), up from3.5% of GDPback in 1949, when the National Health Services started. Putting this in ‘constant prices’ terms the NHS in 2006/2007 accounted for 9.6 times more in expenditure as it did back in 1949. Up to 1999/2000 the NHS total healthcare cost had risen by 582% versus 1949, but between 1997/98 and 2007/08, real-terms expenditure rose by 82%.
The question we beg to ask is if the total NHS cost in 1997/1998 was below £53bn and in 2006/2007 it was£104.7bn, have we experienced a doubling in “Value For Money” over that 7 year period?
This question is off course open to debate and interpretation and more importantly political expediency.
However, we believe that there are many advantages to be gained from revitalising the Healthcare Industrial Complex, by applying innovation and an outward looking market driven focus and mentality to this important economic activity driver.
In future series of this introductory article we will explore some of the Innovations and opportunities the Healthcare Industrial Complex offers UK plc in driving both growth and wealth creation in Britain.
