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Sunday 25 April 2010

The Value of the Synthesist (as opposed to the Analyst)

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:

Saturday 3 April 2010

Where is our competitive advantage?

Competitive versus Comparative advantage.

What is the difference?

Comparative advantage is attributed to David Ricardo and 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 cost than 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 advantage on 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 19th Century 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 the Military 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 around 1.2 million people, 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 from 3.5% of GDP back 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.

theMarketSoul ©2010

Thursday 1 April 2010

The "Harsh" Market

It is true. This is not a playground, kinder-garden experience...

As we don’t live a purely Command and Control or 100% Free Market environment we have to constantly adjust our actions and interactions with the market around us based on factors such as:

• Geography
• Jurisdiction and cultural norms
• Experiences
• Sophistication levels
• Access points
• Openness

There are many other factors to add to the list above, but we are referring to the behavioural aspects inherent in any market interaction.

One of the greatest challenges facing the political class in the UK at the moment is the Truth or Dare conundrum.

We are specifically referring to the urgent need to cut public sector spending, yet the painful reality that it is:

a) Very difficult and not politically expedient to admit the ‘Truth as seen by any politician’ (see the ‘Force of Hell’ reference uttered by Alistair Darling on trying to speak the truth
b) People cost money (and a lot of money)
c) Efficiency savings are akin to an admission of guilt and proof of mismanagement

Most public sector jobs are not subject to ‘market-forces’ at the best of times, therefore the automatic adjustment mechanism and signal that ‘price’ sends is not a factor in the equation.

What do we mean by this?

In a free market driven environment, price is the single most important signal and measure against which both suppliers and ‘demanders’ (consumers) measure value. In the absence of all other qualitative factors, price has a very important role to play in ‘clearing the mismatch between supply and demand. 

So when we experience either a supply or demand shock, as the Credit Quake of 2008 – 2009 has proved; we need to face harsh realities and make serious behavioural changes.

We are still not able to face up to the difficult ‘adjustment phase’ that both ‘deleveraging’ and the new economic reality, post election 2010 has in store for UK plc.

Many a household across the length and breadth of the UK (and beyond) has had to come to terms with the stark realities of the ‘market mechanism’ and adjusted their behaviours and ‘prices’ to move towards a new economic equilibrium, yet the public sector has not had to face this tough reality.

Maybe because the Public Sector in Britain now accounts for between 52.1% - 53.4% (depending on which economic Think Tank’s research you believe), the crowding out of the private sector and ‘loss of touch’ with the economic reality of market mechanisms has been softened.

However, irrespective of who governs Britain and runs UK plc after the ‘expected’ elections in May 2010, the winner will have to make a few very hard choices:

1. How to reduce the dependency on and of the Public Sector and bring the percentage that the Public Sector ‘consumes’ of GDP to below 40%
2. How to ‘financially engineer’ the public debt and bank guarantees the current administration dished out in 2008 – 2009 (Anywhere between £200 - £350 Billion)
3. Run the country along more traditional market disciplines,

Therefore managing the country along market principles as opposed to a ‘socially engineered’ artificial egalitarian level playing field. 

The ‘ladder’ exists for a reason in the true market environment, to help set aspiration and make the system work in order to ensure progress, growth (over the long-term) and advancement.

This all favours innovation as a driver for feeding the need for progress, growth and advancement.

In our next article we will continue our theme of Innovation, with part 6 of the series.

Let’s keep on ‘following the money’ on this occasion

theMarketSoul ©2010