Analytical Forecasters Needed

The ability to forecast results is now the top concern of US, Asian, and European chief financial officers according to a recent survey of nearly 1,300 senior finance executives by CFO Europe, Tilburg University, and Duke University (CFO, April 2009). That finance chiefs now rank their ability to forecast effectively as their top internal concern is instructive for the future of enterprise management. Other issues, such as working capital management, maintaining morale, and counterparty risk, stood behind forecasting as the top concern. As the global economic crisis continues its onslaught across the enterprise landscape, there appears to be a crying need for experts (and expert systems) in analytical forecasting around the world.

Risk Management in Demand

As the global financial disaster continues unabated, research is beginning to percolate findings about some of the causes of the storm, as well as the precautionary measures that might avert future crises of this nature. In a recent survey of over 500 key financial executives conducted by MPI Europe (April 2009), several important views prevailed. One of the survey's strongest findings was the perceived need to develop a “risk management culture” in today’s financial institutions, including bolstering the relative power of risk management functions vis-à-vis its trading counterparts. Now, as good as that sounds, I am skeptical as to whether our financial services industry has it within itself to embed a new risk-aware culture without demonstrable intermediate measures to lead the way (after all, our world is inspired by capitalism). The good news is that several other findings were more specific and actionable. Over 75 percent of the respondents saw a shortage of sufficiently and appropriately trained personnel as having a “high impact” on creating the crisis. Additionally, a significant majority of respondents wanted to see an improvement in their “risk management applications,” to include a shift from predominantly quantitative measures toward qualitative methodologies (e.g., internal controls). Both of these latter measures are fully actionable through increased investment in risk management technologies and training. Moreover, implementing stronger spreadsheet control regimes, coupled with stricter guidelines for spreadsheet checking and auditing, are another immediate requirement. Finally, I would argue that by funding and initiating improved risk management technologies and training, executives will be taking the first vital steps toward creating the risk management culture that they seek. The recognized need for effective risk management is gaining traction in today’s financial services industry. The real question remains whether the industry’s leaders will have the courage to recognize the deficiencies of their existing risk management structures, and respond by investing in the technologies and training that can address these shortcomings.

Valuing Business Intelligence

I have a theory I am pondering based on my reading of the emerging business intelligence literature. My hypothesis is that the more efficient and simple the analytical framework between the data and the decision, the more valuable the intelligence becomes. Said another way, if intelligence is what connects data to decisions, then the value of the intelligence increases as the analytical framework that supports and generates the intelligence is simplified. A related research question would be whether decision-makers who do their own analytical work make better decisions than those who rely on intermediaries. If I ever test the theory, I suppose the results could have implications for existing and emerging enterprise resource and risk management regimes, as well as management science in general. If you are contemplating a future research topic, this might provide you with a starting point.

The Ten Commandments of Risk Analysis

The Ten Commandments of risk analysis according to Prof Granger Morgan and Prof Max Henrion (1990):

• Do your homework with literature, experts, and users
• Let the problem drive the analysis
• Make the analysis as simple as possible, but no simpler
• Identify all significant assumptions
• Be explicit about decision criteria and policy strategy
• Be explicit about uncertainties
• Perform systematic sensitivity and uncertainty analysis
• Iteratively refine the problem statement and analysis
• Document clearly and completely
• Expose to peer review

Elevating the Roles of Risk Analysts and Managers

The ongoing economic crisis has brought with it a heightened interest in risk analysis and management. Yet, something seems awry at the risk management desks of our nation’s largest banks and financial institutions. Goldman Sachs CEO, Lloyd C Blankfein was recently quoted as saying, “too many financial institutions and investors simply outsourced their risk management -- rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them.” Mr Blankfein contended that banks and financial institutions must elevate the status of risk analysis in order to alleviate the “systemic lack of skepticism” that he alleged was precursor to the ongoing economic crisis. Mr Blankfein suggested that banks and financial institutions redefine the roles of risk managers, including giving them equal stature “with their counterparts in revenue producing divisions.” This redefinition of roles includes delegating greater responsibilities and authority onto risk managers, whereby “if there is a question about a mark or a disagreement about a risk limit, the risk manager's view should prevail” (WSJ, April 7, 2009). My personal interpretation of Mr Blankfein’s statements is that those trained and charged with risk analysis and management were apparently left standing outside the boardroom as our nation’s banking and financial “executives” undertook investment policy-making in isolation. Let us hope that the regulatory changes to come might at least mandate that risk managers and analysts get a seat at the table.

It's All About Skills...

I was recently asked the following question about higher business education: "Does an MBA breed authenticity and humility or arrogance in the name of leadership?" Well, if we can first transcend experience and degrees, and ask instead about skills (both hard and soft), then we begin to ask better questions, such as, "Who has the skills to get the job done?" Of course, skills can be acquired through both experience and higher education (or not). For this reason, I always ask management applicants about their skills, rather than their education or experience. "What skills do you bring to the table?" Responses such as, "I have years of experience," or "I have years of college," evade the question. My advice to everyone is make your experience and higher education translate into more and more skills, and do not assume that simply being "present" in experience or education is the same thing. As for where a person acquires their skills, who cares. If we can all focus on skills, rather than experience and education, then we can be best assured the right people are in leadership.

Working on Wall Street

In some ways, the financial services industry is overdue for a good house-cleaning. And no doubt, the culture of the money management business will change accordingly. Whereas excesses in staffing have been common at many financial services firms in recent years, the reality is that only those who produce value will have a place in the reworked financial services industry. Creating value in financial services is not easy. Which leads to one of my favorite interview questions for job applicants, "Explain how one creates value through finance..." Those who can respond effectively to that question have a future in financial services.

On Management "Style"

The matter of "baby-boomers" remaining in control of their destiny has significant implications for management, particularly since society has yet to send the "Bob Hope" generation packing. For example, the US Congress is still dominated by members born prior to World War II. For this reason, there may actually be a generation "skipping" tendency in favor of younger leaders from diverse backgrounds -- witness Barack Obama's rise to power. My sensing is that there is a large segment of our society that views "change" as the replacement of anyone born prior to 1955 with much younger leaders. The impact of these views on management selection could be significant in the coming years. The second issue confronting management is the continuing demise of elitism, the entrenchment of populism, and the rise of pluralism. The net result could be a generation of leaders who insist on securing more than a simple majority in support of their decisions, but rather require a plurality of support closer to two-thirds majority. Imagine if the US President vetoed legislation because it did not come with two-thirds support of Congress. If the same approach took hold in corporations, it would require boards to listen carefully to all of their stakeholders in depth. In summary, I believe that generational issues coupled with society's move toward pluralist thinking will require mangement to change its "style" of decision-making in the coming years -- probably for the best.

Risk Management in Review

I recently responded to a question in a public forum regarding the limitations of risk management. The specific question posed was, “What limits our ability to effectively manage risk?” This is an interesting question given the financial crisis still underway. My response follows:

Risk management continues to be a misunderstood discipline. The truth is we do have the analytics to understand and manage most kinds of risk (at least to some extent). The more serious problem confronting our society is our apparent inability to apply that knowledge. I'm reminded of the story of a civil war soldier who was listening to one of his officers read from a newspaper. The story goes that the officer quoted from a story by commenting, "...it says here there were fifty percent casualties at the battle of..." The soldier who was listening to the officer's comment responded by asking, "...wow, is that a lot?"

The point is that having the analytics to describe risk, and having the knowledge and training to understand the analytics are two different things. My impression is that many (if not most) business leaders are poorly trained at understanding risk analytics beyond what might be described as layman's terms. What is most needed today is for our business leaders to become more knowledgeable of how to understand and use risk analytics in an effective and meaningful manner. The days of making guesses based on institutions are long gone, especially when those decisions can result in losses of billions of dollars, as well as suffering amongst the ranks of employees and other stakeholders who are ultimately victimized by those decisions.

My advice to business leaders at all levels is to make risk analysis a centerpiece of their training in graduate school. If you puzzle over terms such as variance, standard deviation, stochastic, optimization, and so forth, then it may be time to schedule some training in these skills as part of your lifetime learning plan.

Implications of the Financial Crisis

Recently, I was awaiting a flight from Singapore to New York City and was looking for a good book that might occupy my time during the 22-hour journey. What caught my eye was Dr George Cooper’s, “The Origin of Financial Crises” (2008, Vintage).

In his book, Dr Cooper makes an interesting case for markets being more inefficient than efficient, and further argues that the origins of the current financial crisis stem from the delusionary concepts of economic equilibrium, monetary stability, and rational behavior. Of course, this is not the first book to argue these points.

However, it was the book’s conclusions regarding the near-term monetary and fiscal policy options for responding to the ongoing crisis that struck me. Dr Cooper outlines three options for confronting the crisis, all of them dismally painful:

1. The “free market route,” which entails allowing the credit contraction and underlying asset deflation to play out. In other words, we allow Adam Smith’s “invisible hand” to handle the details of the crisis, while keeping faith with the a priori assertion that “prosperity is just around the corner,” as argued by Herbert Hoover during the 1930’s. Of course, Franklin Roosevelt and his “New Deal” program soon defeated Hoover as support for a new economic approach became a political imperative under the weight of the human suffering and hardships that accompanied the depression. The recent election of Barrack Obama holds parallel implications.

2. “When in trouble, double,” which means continuing to apply fiscal and monetary stimulus in an effort to trigger a new economic expansion that would have the power and momentum to negate the current credit contraction. While this option appears more palatable than the “free market route” at least in the short-term, the long-term implications for debt-fueled spending may only amplify the crisis for future generations. Whether this approach will or can work remains to be seen. However, when one adds significant new spending for universal health care, the imminent social security bailout, and the continuing war on terror into the equation, it seems unlikely that fiscal and monetary stimulus alone can be sufficient.

3. “Unleash the inflation monster,” which is simply “printing money” in order to negate debt through either state-funded handouts or deliberate inflationary spending policies. Despite the fact that this gives today’s borrowers a “get out of jail free card” at the expense of savers, the political implications of this approach may well be the least unpalatable of the three options outlined. Recent increases in the prices for food, energy, and certain commodities provide initial evidence that this approach may already be underway.

After considering Dr Cooper's policy options, I concluded that we are probably already committed to “unleash the inflation monster.” Moreover, I realized that the implications of the crisis are more important than the causes at this point. My advice is that we all prepare ourselves for double-digit inflation within the next 3-7 years and quite possibly sooner. For consumers holding fixed-rate debt, the future looks bright, assuming they can stay employed. For pensioners and those living on fixed incomes, get ready to reduce your lifestyle. As for the government and corporate debt-holders, good luck!

Chaos, Order, and Music

One of my favorite quotes about the epistemology of music comes from Dr Anthony Storr’s book, Music and the Mind (1992, p. 64):

Language does not emanate from the Earth, but from the human brain. So does music. The universality of music depends upon basic characteristics of the human mind; especially upon the need to impose order upon our experience… Languages are ways of ordering words; political systems are ways of ordering society; musical systems are ways of ordering sounds. What is universal is the human propensity to create order out of chaos.

Higher Education, Experience, and Skills

One of the questions I regularly pose to my economics students is whether a college education is a contributor to productivity. Intriguingly, what I get in response often parallels the views of Greg Ip of the Wall Street Journal (2008, “The Declining Value Of Your College Degree”), who argues “college-educated workers are more plentiful, more commoditized and more subject to the downsizings that used to be the purview of blue-collar workers only. What employers want from workers nowadays is more narrow, more abstract and less easily learned in college.” In essence, the value of a college degree is said to be “not what it was.”

Nonetheless, a college education remains an important predictor of productivity (and earnings) in the marketplace. Even Ip concedes that “the average American with a college diploma still earns about 75% more than a worker with a high-school diploma and is less likely to be unemployed.” Given these facts, how can it be that students are so vexed by the value proposition of their education?

I have previously written about our new economy, the need for good people in our society, as well as the importance of polyvalence in the workplace. I argue here that there exists today a crying need for people with versatile skills sets in what is a transforming global economy and that the university offers the best opportunity to acquire the knowledge required to succeed in this environment.

This leads to the next contention I often hear from students, that “experience counts more than education?” My response to this view is, “not really,” because what is paramount is neither experience nor education, but skills, and if one is complacent in acquiring new skills experientially, embedded knowledge eventually becomes obsolete. The good news is that experience often translates into new more refined skills. The bad news is that breadth and depth of knowledge are not assured through experiential learning. Hence, attention is required to ensure one’s career track includes a multiplicity of experiences in organization and management across a diversity of functions, and eventually industries. In my view, the university offers the most efficient place to acquire breadth and depth of knowledge, as opposed to the workplace, where resources and opportunities for the same are typically limited. Experience that does not result in additional skills has little value in the workplace.

Finally, there is the matter of college graduates who are anomalously incompetent. This happens, and when it does, these people are released for cause. Those who finish a college degree program while somehow avoiding skill acquisition, do so at their peril. Acquiring new skills is the responsibility of all workers who wish to enhance or expand their careers, but especially college graduates. To attend a college or university and not acquire new knowledge along the way is a bewildering and perplexing outcome that defies good judgment.

Concluding, a college education is the most reliable track to improving skills, productivity, and earnings. And while experience can certainly result in new skills, the typical worker will find acquiring the breadth and depth of knowledge necessary to enhance or expand a career through experience alone, challenging. A college degree is still the most profound symbol of embedded knowledge available in our society today.

Competing on Analytics

Now that analytics have come into vogue, we are seeing the beginnings of what might be called “quantitative showmanship” whereby companies leverage their analytic capacities in the marketplace seeking competitive advantage. Still, it is difficult to “fake” analytic reasoning, which might explain why competing on analytics is so powerful. In truth, while some companies are truly taking the lead in analytics, others may be deluding themselves into believing their analytic capabilities are greater than they are.

Companies seeking to become analytically competitive should first assess the current state of their extant capabilities. Prof Thomas Davenport and Jeanne Harris in their book, Competing on Analystics (Harvard, 2007), present a framework of five stages of analytic development (see below). "These stages can describe the path that an organization can follow from having virtually no analytical capabilities to being a serious analytical competitor." But, while many companies fancy themselves to be analytic competitors, many possess only localized capacities, and some are simply analytically impaired.

Source: Adapted from Davenport & Harris, Competing on Analytics (2007), p. 35.

Being someone who works with analysts from around the world on a regular basis, I have a unique vantage point from which to assess how companies and governments are doing. Here are some lines that epitomize what I see more often than not:

Leaders who “don’t get it.” There is nothing more discouraging for an analyst than the leader who listens to an analytical proposition, and then asks something like, "is this experimental?” Leaders who are not versed in financial risk analysis might consider reviewing these subjects with a statistics coach in order to reacquire their poise and confidence with quantitative reasoning.

People who “hate” numbers. Let’s face it, not everyone is an analyst, which is fine. Still, some people truly despise thinking quantitatively. As companies foray deeper into analytical competition, it is necessary that we begin to recognize and advance the people who in fact “love” to think quantitatively.

Processes that “swirl” in support of conjecture. For example, many IT installations are premised on false hopes and promises, and implementation of technology solutions in isolation cannot affect analytic advantage. It is important that we begin to discipline IT departments to ground technology projects upon facts that are validated by hard rather than soft evidence.

Technology that fails to capture, sort, and make sense of data. For example, companies have reached the point where fancy office applications alone do nothing to add value. What is needed are better analytical tools that have the capacity to acquire, encode, modulate, and output information arrays in a form that is useful and actionable for creating and sustaining competitive advantage.

While I am delighted to see analytics moving into the limelight, we have a long way to go before companies across America can honestly claim to be analytic competitors.

From Populism to Pluralism

With presidential elections underway in the US, it seems a new electorate stands ready to participate, not just as voters, but as purveyors of power. By this, I mean that today’s voters seem less interested in the presence and content of who a candidate is, than in reshaping the nature of the presidency itself, regardless of who eventually fills the office.

Indeed, we live in exciting times as populist values, myths, and mores come face-to-face with the forces of pluralism. Evidence of a new economy is now indisputable as we head deeper into the third millennium. But, what of a new politic as well? I ask this recognizing that historically, political reform tends to lag economic upheaval.

If it is true that universal suffrage solidified populism in the modern age, it now appears that America is once again restless as it agitates for reform of the presidency as an institution, away from its modern function as the podium of populist pundits, into a fulcrum from which the voices of pluralist reason are leveraged, of and for the people.

The peoples’ call for change is not simply about electing a new president, but about changing the very nature of the presidency as society navigates its way through populism toward pluralism in the new century. Perhaps we will see democracy reborn in our time.

IT Implementation Failures

An alarming number of information technology (IT) projects fail. The oft-cited statistic is that greater than half of all IT implementations are out of variance with one or more critical requirements or specifications.

Of particular concern is that value-added resellers dressed up as "independent" consultants are frequently behind these failures. The troubling pattern is that the problem or opportunity to be solved is never validated by hard evidence. Hence, the client buys the "wrong" solution, while the "real" problems and opportunities remain out of scope. To be fair, not all value-added resellers focus on aligning specific IT solutions with any and every problem. Other problem-solving approaches such as evidence-based management and consulting are gaining traction in response. In the mean time, more and more firms are seeking some "fix" for a failed or failing IT initiative.

How do you know when your IT project is "going bad?" Here are some warning signs offered by CIO Magazine (2007):

• Project team lacks substantial buy-in and interest in the project’s success
• Poor communication between stakeholders and project team members
• Few interim deliverables, so tangible progress is not demonstrated
• Bad news isn’t allowed to be shared, meaning denial is pervasive
• Project team works lots of overtime, suggesting the schedule is slipping
• Project resources are frequently diverted to other activities
• Interim milestones are often missedReducing project scope is viewed as an acceptable means to meet budget and schedule requirements

ESL International (2006) offers this list of flags:

• No one has a firm idea of when the project will be finished and most people have given up trying to guess
• The product is laden with defects
• Team members are working excessive hours—20 or more hours per week of involuntary overtime
• Management has lost its ability to control progress or even to ascertain the project’s status with any accuracy
• The customer has lost confidence that the project team will ever deliver the promised goods
• The team is defensive about its progress
• Relations between project team members are strained
• The project is on the verge of cancellation
• The morale of the project team has hit rock bottom
• The customer is threatening legal action

I recently had a career IT professional say to me that most of the IT projects he had been involved with over the years were, in his words, "experimental." The remark stunned me, but perhaps explains why so many IT implementations fail. Many IT professionals started their careers as programmers, network administrators, and installation specialists. In each of these roles, "trial and error" problem-solving techniques prevail, so it is not surprising to see the same cohort of IT experts continuing to rely on these same methods. What is changing however is that IT projects now undergo continuous scrutiny for return on investment, and many IT professionals are unprepared for this reality by either training or temperament.

If your IT project appears to be in one or more of the states described above, it may be time to bring in another set of eyes to see just what is going on, and perhaps consider an entirely different approach to your firm’s needs.