Marina Gorbis's Blog, page 1349

Our Misguided Obsession with the Tax Code

Over the past two months, three prominent columnists at The New York Times (Andrew Ross Sorkin, Joe Nocera, and Floyd Norris, in case you’re keeping score) have given prominent play to University of Southern California law professor Edward D. Kleinbard’s finding that U.S. corporations really don’t suffer much from this country’s comparatively high corporate tax rates and taxation of worldwide income. “[W]hether one measures effective marginal or overall tax rates,” Kleinbard writes in a recent paper, “sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

So it’s a little surprising to crack open the chapter on tax reform in Kleinbard’s new book, We Are Better Than This: How Government Should Spend Our Money, and discover that he thinks “the federal corporate tax rate — nominally, 35 percent — is much too high relative to world norms” and that the U.S. would be better off with a “territorial with teeth” tax system in which income earned overseas isn’t taxed here. (He’d also be happy with keeping the worldwide system but no longer exempting from it, as the tax code does now, earnings that are retained overseas.)

Kleinbard, it turns out, is a centrist — maybe even center-right — wonk when it comes to tax policy. As a partner for more than two decades at the New York-based law firm Cleary, Gottlieb, Steen & Hamilton, he became a regular at NYU law professor (and blogger) Dan Shaviro’s tax colloquium. He adopted the late Princeton professor David Bradford, something of an icon to center-right would-be tax reformers, as his mentor in the economics of taxation. In practice that means he favors the lowest possible tax rates, the broadest possible tax base, not too much tax progressivity, and lower rates on capital income than earned income.

But now, after two years in Washington (where he was chief of staff to the Joint Committee on Taxation) and five at USC, Kleinbard has concluded that tax policy just isn’t the most important thing. It’s how government spends the money that really defines who we are as a nation — and to some extent how our economy performs. Taxes are simply a means of raising that money, if all goes well as unobtrusively as possible.

This of course goes against the grain of much public and academic discussion since the 1970s in the U.S., with claims and counterclaims about the benefits of tax cuts often crowding out any talk of the merits of government spending on infrastructure, education, R&D, and social insurance.

Kleinbard’s book is an epic attempt to rectify this, with most of its 509 densely packed pages devoted to making the case for spending a bit more than the U.S. does now in order to invest in the future and provide adequate insurance against bad luck. The “fundamental premise of this book,” Kleinbard writes at one point, is “that material outcomes are determined by an undifferentiated porridge of personal efforts and brute luck.”

A secondary premise is that to pay for increased investment and insurance and shrink the deficit to a reasonable size, the U.S. will need moderately higher taxes. Because he’s a centrist tax wonk, Kleinbard’s plans for increasing revenue mostly avoid raising income tax rates, as he calls instead for curbing itemized deductions, increasing gas taxes, and removing the cap on taxable wages for Social Security purposes, among other things. But he also argues that going back to the higher income tax rates that prevailed before 2001 wouldn’t be a bad thing at all. It would dramatically improve the deficit picture, and there’s no convincing evidence that it would be a drag on growth. In fact, of course, the 1990s saw much stronger economic growth than the lower-tax 2000s.

“History suggests that we all get on with the business of living, and doing business, under very different tax structures,” Kleinbard writes. “That is not to say that we should be recklessly indifferent to tax system design, but only that we should not assume that lower tax rates, always, are unequivocably necessary and sufficient conditions to economic growth.”

This seems like an important message not just for politicians and voters but for the CEOs who frequently argue that our nutty corporate tax code is a (or the) major obstacle to economic growth and job creation in the U.S. Yes, we have a nutty corporate tax code, and we should fix it. But the corporate tax code most likely isn’t the main reason why U.S. median incomes have stagnated or job growth has been anemic. Other things matter more.

Focus More on Value Capture

Stefan Michel, professor at IMD, says your business should rethink how it captures value, not just how it creates it. For more, read his article, Capture More Value.

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3 Big Economic Ideas in Waiting

In what has now become an iconic statement about American politics, and maybe politics everywhere, former White House Chief of Staff Rahm Emanuel (now Chicago Mayor) declared that “a crisis is a terrible thing to waste.” He was making the point that it is always hard to summon the will to enact big, new policy ideas, even when they appear perfectly logical. Until some dramatic development galvanizes people to act, they sit on the shelf. And what a pity it is if that dramatic moment passes, and there they still sit, perhaps never to be put into law or regulation.

Thinking about that phenomenon, you’d be wise to wonder: what transformative ideas are sitting on the shelf right now? Three of the biggest, I would argue, come from the work of economists. They address very specific problems in very smart ways. But they might only be adopted when concern about the federal government’s deficit is again at a fever pitch.

Congestion pricing

Multiple studies have shown what all Americans can see: in many places of the country, especially on too many of our nation’s bridges, our infrastructure is either crumbling or excessively crowded. By some accounts, the bills for just public facilities (excluding additional privately funded broadband investments) could run into trillions of dollars. In principle, even with huge federal budget deficits, such investments could be funded through a special “capital budget” as they are at the state level. But past proposals for a capital budget have gone nowhere, so the only politically realistic way of funding them instead is through some kind of public infrastructure bank, which at this writing has some bipartisan support, but still not enough to get the bank created and adequately funded.

Even if this should happen, however, many economists have argued for years that before much construction of additional roads in particular is undertaken, existing roads, which are less than full during off-peak hours, could be more rationally used, reducing somewhat the need for potentially hundreds of billions of dollars in new roads. That rational way is by charging drivers more during congested periods when their presence on the road generates “negative externalities” for other drivers.

However much congestion pricing may make sense to an economist, the politics make it all but a non-starter: people accustomed to driving on public roads for free are not likely to embrace these charges, even if they are told it will mean less taxes required for building new roads. The regressive nature of the charges only complicates the politics.

A very different result may be possible, however, as more states and localities authorize the construction of roads that are privately owned and financed, or even sell off existing roads and other infrastructure in order to relieve their own budgetary pressures. Private owners are likely to have greater freedom in how they set tolls than is the case for governments. Private ownership of roads and infrastructure raises a host of other issues — such as whether certain roads are deemed to be so essential that their rates are regulated to prevent monopoly exploitation — but in our “new normal” age of austerity, taxpayer funding of roads seems less and less likely, leaving private financing and ownership as the principal way to rebuild and expand a good portion of America’s aging physical infrastructure.

Medicare vouchers

Another idea waiting for implementation at some point that will have major implications for the entire health care industry is vouchers (euphemistically and for political reasons probably called “premium support”) for Medicare, and possibly Medicaid, as a replacement, or at least an option, for those over 55, in lieu of the current fee-for-service reimbursement system. Under such a system, beneficiaries would purchase health care insurance on their own (without regard to preexisting conditions, of course), with insurers receiving a support payment.

In some versions of this idea, initially proposed in the 1990s by Brookings Institution scholars Henry Aaron and Robert Reischauer, the supports would be geographically based, and in all versions would increase with the growth of the economy, and perhaps with the cost of medical care itself. Clearly, the lower the escalation factor for the voucher, the greater would be the incentives of premium support for medical care cost control, but also the greater risk that beneficiaries would have to pay more for care out of pocket (which for many seniors would translate into receiving less care).

Another long-time Brookings Senior Fellow (and public policy servant extraordinaire) Alice Rivlin briefly agreed on a premium support plan several years ago with Rep. Paul Ryan, the current chairman of the House Budget Committee, but the two later parted ways over the magnitude of the escalation factor. Even though medical cost inflation has slowed in recent years, economists have not agreed on how much of the slowdown is cyclical and how much is likely to be permanent.

Whatever the facts, the continued aging of the population means that Medicare spending will continue to rise, and it is because of this fact that federal policymakers eventually may be driven to adopt some kind of premium support plan. When then happens, look for even more pressure for medical cost control than exists now including downward pressure on provider earnings. Also look for more cost-effective medical delivery models, such as Minute-clinics in pharmacies, and also innovation and entrepreneurship aimed at cutting the growth of health care spending.

Tax on carbon

A third policy idea that has been on the shelf for some time and which has many intellectual “fathers” and “mothers” is a carbon tax, which has two rationales. One is to correct an “externality,” namely the contribution of carbon dioxide emissions to climate change (though the magnitude of that contribution continues to be hotly disputed, pun partially intended). A second benefit of a carbon tax is that its revenues could make a significant contribution toward long-term deficit reduction. For example, a tax of $20/ton on carbon, would raise roughly $1 trillion over a decade, though the net increase in revenue would be somewhat smaller to the extent that some of this amount would (as it should) be rebated to lower income households because of the tax’s regressive nature. A potentially more politically palatable way of introducing a carbon tax is to trade it for a reduction in the social security tax and thus keep the whole package revenue neutral, but at least tax a “bad” (pollution) while encouraging a “good” (the supply of and possibly the demand for more labor).

Any one of these ideas, if implemented, would change the economic environment for firms and compel them to respond strategically. The thinkers behind them would join the pantheon of the trillion dollar economists whose ideas have transformed business. For now, they’re on the shelf, still in waiting for their crisis.

When Start-ups Should (and Shouldn’t) Partner with Industry Leaders

The hard work and dedication you’ve devoted to your startup has finally paid off; your industry’s largest incumbent has invited you to join it as a partner and key supplier. Should you accept?

On the surface, the decision may seem straightforward, but before you sign on and cash in, there are risks to consider. A high-profile test case is unfolding before us in the space race between Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX. Their opposing tacks present an opportunity to evaluate the trade-offs for start-ups in partnering with an incumbent.

First, some background: On September 17th, NASA announced the winners of the $6.8bn “space taxi” contract which will fund the development and launch of new platforms to ferry astronauts to and from the International Space Station. As expected, the incumbent, United Launch Alliance (a joint venture between Boeing and Lockheed Martin), won the lion’s share of the contract; notably, SpaceX was awarded a portion of the contract to promote price competition. Most pundits, however, jumped over the details of the contact to point out that United Launch Alliance (ULA) will use engines made by Bezos’ Blue Origin.

It’s not hard to see why a partnership between a strong, but staid incumbent and an innovative startup appears attractive. Blue Origin gains instant credibility and access to ULA’s capital, regulator relationships, and deep well of experience. ULA benefits from access to Blue Origin’s innovative designs and lean operations. However, to effectively understand any partnership, you have to analyze each firm’s Resources, Processes and Priorities. In the case of a startup and an incumbent, it’s even more important because of the significant power asymmetry between the companies.

If Blue Origin were merely providing a resource — like intellectual property — that ULA would plug into its own processes, the partnership would likely perform well for both parties because resources are fairly easy to transfer. However, when combining processes and priorities is necessary, stress fractures are likely to emerge. Processes and Priorities create problems because they are shaped by shared experiences and are resistant to change. Processes develop as an organization repeatedly overcomes similar problems and develops an institutional understanding of the techniques that succeed when facing those kinds of problems. Processes aren’t designed to change. Priorities are even more deeply rooted in an organization. Priorities develop to reflect a company’s business model and over time become enshrined in the company’s culture.

At first glance, it appears that Blue Origin is merely supplying a resource, its innovative BE4 engine, to ULA. In reality, it will be nearly impossible for Blue Origin and ULA to maintain separate processes and priorities because the final product, ULA’s rockets, is built on an interdependent platform.

Interdependency refers to product architectures where the parts cannot be developed independently. Interdependent products have custom interfaces, like a house whose rooms have to be designed so that the doors to each room meet at the same point on the wall. Modular architectures form the other extreme. Modular products have internal components that connect in standardized, highly defined ways. For example, a USB port is a modular interface because every component with that standardized plug will work regardless of its design outside the plug.

Modular products are flexible and easier to design but in exchange they typically compromise on performance. Interdependent products are just the opposite; expensive and complex but extremely high performing. Rockets clearly fit in that category.

As the supplier of a critical component in an interdependent product, Blue Origin will need to work closely with ULA on all future innovations to make sure that the parts fit and the combined system achieves its goal. This is where the process and priority conflicts begin creating stress fractures for both organizations. Innovations developed in tandem will need to progress through a shared process and designs will need to balance each company’s priorities.

Because ULA is the “customer” and sits between Blue Origin and NASA, it’s likely that their processes and priorities will dominate the relationship. Ultimately, ULA is responsible to NASA for “Perfect Product Delivery” and is unlikely to allow a supplier to compromise that with a sub-optimal design or less-thorough, but streamlined, process. This will likely create tension and frustration as both sides of the innovation team grapple with a lack of consensus that accomplishes neither company’s objective.

For entrepreneurs this provides a valuable lesson. Before agreeing to join a strong incumbent, consider how your organization will contribute to the end product. Is your relationship modular or interdependent? If it’s modular, you will likely lose little in the way of autonomy; however, a competitor with a similar product could easily replace you. If your relationship is interdependent, your organization will be difficult to replace, but your autonomy will likely decrease as you are forced to adhere to the incumbent’s processes and adopt their priorities.

So where does this leave SpaceX and Blue Origin? It’s apparent that Blue Origin has jumped into the “Big Leagues” of the industry and leap-frogged SpaceX in terms of immediate impact. But theory would predict that over time, through its partnership, Blue Origin will evolve to resemble ULA. Designs that would have compromised performance to reduce cost will likely evolve into high-performance, high-cost products built with established, low-risk processes. SpaceX, without the help of a strong partner, may gain industry acceptance more slowly. But because it’s unencumbered by a partner’s processes and priorities, it’s more likely to develop radically different rockets, disrupting the industry and eventually producing similar results at lower prices.

Stop Trying to Control How Ex-Employees Use Their Knowledge

The free flow of workers between companies is central to economic growth and innovation. Yet employers are increasingly taking legal action to prevent former employees from using knowledge and skills learned on the job.

More and more frequently, firms are asking new hires to sign post-employment agreements, which prevent former employees from working at rival firms or starting up their own companies in the industry. And U.S. state policymakers have aided and abetted these efforts by changing the law to enable employer control over workers’ knowledge. States that continue to side with controlling firms over skilled employees are hampering their economic prospects and inviting brain drain to more enlightened locales.

While noncompete and non-disclosure clauses were once standard only in the employment contracts of key executives and technical personnel, many firms now require a wide range of employees to sign them including, in some cases, even yoga instructors, designers and camp counselors.

Some of these restrictions are drafted as non-solicitation or non-dealing clauses precluding the employee from dealing with the former employer’s customers and others are drafted as restrictions on using any information learned on the job. And more firms are going to court to prevent former employees from working at rivals, charging that allowing them to do so would inevitably reveal proprietary trade secrets. The number of lawsuits filed over noncompete agreements and trade secrets has increased dramatically since 2000.

This trend has been fueled not only by the contemporary talent wars and the much debated skills gap, but also by changes in the law that have expanded employers’ control over employees’ knowledge. Although it might seem that greater control and stronger enforcement are beneficial—it is important for firms to protect key trade secrets, after all—the evidence shows that these changes critically undermine employee incentives to learn and innovate.

The law governing trade secrets and noncompete agreements is largely state law and it varies significantly from state to state. In California, for example, employee noncompete agreements are generally not enforced and trade secret enforcement is relatively narrow. Economics research shows that these policies are a key reason why Silicon Valley startup firms succeed relative to tech companies in many other states. Despite differences from state to state, however, the last two decades have seen a significant expansion of trade secret law.

First, many states have adopted a broader notion of the range of employee knowledge that the employer can seek to protect. In the past, trade secret law only protected well-defined knowledge such as the formula for Coca Cola or the code of software programs; now, in many states, the law also extends to cover less well defined knowledge, such as employee know-how, customer relations, basic skills, and knowledge that is not used commercially. For example, in many states, trade secrets now include lists of actual or potential customers and suppliers, as well as pricing lists and marketing strategies, making it virtually impossible for a former employee to compete over clients.

Second, in some states, such as Illinois and Florida, a firm can take legal action against a former employee who has not actually misappropriated secret knowledge; all that is necessary is a “substantial threat” of misappropriation or a claim that the former employee will “inevitably disclose” secret information. For example, IBM got a court to enjoin a former IBM executive from taking a job at Apple; the executive had managed semiconductor and server engineering at IBM and IBM argued that he would inevitably disclose trade secrets in his new job managing iPod and iPhone engineering. In this way, firms can prevent former employees from taking jobs in the same industry, even when employees have not signed a noncompete agreement or when noncompete agreements are not enforceable.

Third, some firms have gotten federal authorities to initiate criminal proceedings against former employees under the Economic Espionage Act. For instance, last year a former Goldman Sachs computer programmer was sentenced to eight years in prison for saving some of the files he worked on to his own computer account. Currently, Congress is considering a further expansion by allowing civil lawsuits and injunctions in federal courts.

The law has given employers new powers over employee knowledge and firms are increasingly using these powers. However, economic researchers have firmly established that these changes are shortsighted both as a matter of public policy and firm strategy. Indeed, empirical evidence shows that overall these changes have not been good for firms or for society. Why? Because firms need to strike a delicate balance between protecting secrets and encouraging employees to learn new skills and knowledge. Employees’ incentives to learn on the job are weaker if they cannot use that knowledge later in their careers. They invest less in acquiring knowledge, reducing their skills and innovativeness.

Evidence shows aggressive enforcement leads to less learning, a loss of talented people, and less innovation in the long run. Stronger enforcement of noncompete agreements and trade secret law also result in lower pay and reduced employee mobility. That might seem like a benefit to employers, but that too is a double-edged sword: it also means lower incentives to learn on the job and greater difficulty hiring talented workers. Indeed, researchers studying state-to-state differences find that states with stronger enforcement of noncompete agreements have a “brain drain” effect: inventors tend to migrate to states with weaker enforcement, and that trend is especially strong among the most productive inventors. Not surprisingly, stronger enforcement is also associated with less investment in capital and R&D.

Instead of relying on the threat of litigation, today’s most innovative companies are finding creative ways to positively incentivize and motivate their employees, such as Zappos’ peer-to-peer reward program, Qualcomm’s patent reward system, or Starbucks’ employee tuition reimbursement plan. Companies are also increasingly identifying the ways in which their former employees, similar to university alums, can strengthen the firm’s ties and collaborations as well as aid new recruitment.

These findings and developments provide a stark message to managers: the law provides an increasingly powerful tool to control the use of knowledge that former employees have learned on the job, but it is a tool that should only be used sparingly. Managers need to protect real trade secrets, but overly aggressive enforcement undermines employee motivation, makes hiring talent more difficult, and undercuts firm innovativeness. Excessive use of post-employment restrictions or overly aggressive trade secret litigation against former employees amounts to giving the legal department too much control over human resources policy. The result may be less innovation and a depletion of human capital.

Research: More Than Half of Top Female Execs Were College Athletes

All managers want to hire people with discipline, determination, and drive. Women executives are no different.

And according to a newly-released study, women executives who once played competitive sports, in college or elsewhere, prefer to hire other people with athletics in their background.

The study by EY Women Athletes Business Network and espnW surveyed more than 400 female executives in five countries (20% were U.S. women). Half are C-Suite level executives, meaning that they serve as CEO, CFO, COO or the board of directors at a company. Of these top executives, over half (52%) played a sport at the college or university level. Only 3% did not participate in sports at any point in their lives.

Three out of four of the C-suite women executives said that candidates’ involvement in sport influences their hiring decisions, because they believe people who have played sports make good professionals. These executives attribute participation in athletics to qualities like a commitment to bringing projects to completion and greater abilities in motivating others. These intangible skills are hard to learn in a classroom, says Beth Brooke-Marciniak, EY’s Global Vice Chair for Public Policy. The executive women also put a premium on the discipline honed by sports, which they see translating to a person’s determination and work ethic.

But even more important are two other strengths: competitiveness and teamwork. Both are critical to success in today’s marketplace. Donna de Varona, Olympic Champion and adviser to EY’s Women Athletes Business Network, put it this way to me:

If you try out for a basketball team but quit in the middle of the first game, or if you choose not to pass the ball to your talented teammate because you don’t like her, or if you are unwilling to spend extra hours to work on a weakness, you aren’t going to get very far. Sports teaches fundamentals for success and that is why both men and women executives like to hire athletes. C-suite executives hire these women because they share a common bond and know when the pressure is on they will not be let down.

It’s been over 40 years since Title IX passed, compelling American high schools to spend on women’s sports in equal amounts to their spending on men’s. Its supporters dreamed of the day that participation levels would also be equal. We still have a ways to go. Betsey Stevenson’s analysis of national data shows that the median state has a 17 percentage point difference between the ratio of male athletes to male students and that ratio for girls. In fact, according to the Women’s Sports Foundation, the gap between male and female athletic participation at the high school level has grown in the past five years. When sportswomen become hiring executives, and favor candidates for the qualities that athletics engenders, they send a valuable signal that participation in sports is not only a right – it can offer many rewards.

The Freelance Economy Still Runs on Word of Mouth

We may well be entering a new age of work, in which tasks can be sliced into bite-sized chunks and allotted online to freelancers all over the planet. But we’re not quite there yet, according to a new survey conducted for MBO Partners, which provides back-office services to independent workers — which it dubs “solopreneurs.” Independent workers still get the vast majority of their assignments through the old-fashioned channel of word of mouth, and this is even more pronounced for the most successful among them:

When independent workers listed their top three sources of assignments, social media was mentioned by 18%, and online talent marketplaces for 10%. For those making more than $100,000 a year — 56% of whom are 50 or older — the numbers were 1% for social media and 6% for online marketplaces.

Overall, there are now an estimated 17.9 million “solopreneurs” — people working at least 15 hours a week outside of traditional jobs — and another 12.1 million “side-giggers” who do regular independent work but for less than 15 hours a week, according to the fourth annual “State of Independence in America” report from MBO Partners. The number of solopreneurs making more than $100,000 from their independent work was estimated to be 2.7 million.

The 17.9 million estimate, derived from an online poll of 2,017 people, is up from 17.7 million last year and 15.9 million in 2011, the first year of the survey. That 12.5% rise since 2011 contrasts with a 1.1% growth in the overall U.S. labor force over that period. But this year’s combined total of 30 million solopreneurs and side-giggers (this was the first time the survey included the second group) is a lot smaller than the total of 53 million freelancers announced just last month by the Freelancers Union and Elance-oDesk.

That difference is all about definitions, says Steve King, partner at Emergent Research, which designed the MBO Partners survey and has also done work with the Freelancers Union. I talked to King about that, and the enduring power of word of mouth for independent workers. What follows are edited excerpts of our conversation.

What are the things that make this number different from the Freelancers Union/Elance-oDesk number?

The big difference is that we’re focused on people that do this regularly, so we screen out anybody who says they don’t work as an independent worker in an average workweek. When you look at the Freelancers Union, their focus is to try to understand everybody who does anything that’s non-traditional. You could show up in their numbers if you fixed your neighbor’s computer for money, once in a year.

They’re both important questions, and I like what the Freelancers Union did. Their study, probably even more than our study, will spark quite a bit of debate about second jobs. They said 23.6 million people have multiple jobs, and the Bureau of Labor Statistics puts it at 6.7 million. That’s a big difference, and our work supports the Freelancers Union more than the BLS in this case. We’ve found that when you ask people if they have a second job, they tell you no. But when we ask them in interviews, “Do you have any other sources of income? Do you do anything else?” people who have told us they don’t have a second job will then tell us they have a second job. It’s the psychology of what is a job. And the BLS, on their multiple income questions in the household survey, they use the word “job” a lot.

In terms of the trajectory, the independent-worker, “solopreneur” category is growing faster than the overall labor force, but it’s not growing quite as fast as was expected back in the 2011 survey, where the projection was that it would be 20 million by now. Is that just mainly because the economy’s been so anemic?

The job market’s gotten stronger, and that has a tendency to take people out of independent work. I was actually thinking this year, given how unusually strong the job market’s been relative to past years, that we might see a decline in those numbers, and we didn’t. To me that’s an indication of the structural shift that’s going on, even in the face of a strong job recovery. It’s still growing, and it’s still growing at a pace faster than the overall workforce.

The thing that struck me — and I guess it shouldn’t be surprising, but it’s kind of interesting — is how dominant word of mouth is as a means of getting work.

We do a lot of surveys of different freelance groups, independent worker groups, and word of mouth just consistently comes out in that range. It doesn’t matter who we talk to. The network is incredibly important to independent workers. It just is overwhelmingly how they find work.

The electronic stuff, the Elance-oDesks, TaskRabbits, they’re growing very rapidly. They didn’t really blip much back in 2011, and they’re still not showing up high, but they’re clearly growing fast. We do see work moving more and more online, but it’s going to be a long time before that overtakes your personal network that you’ve built. And you’ve built that now not just face to face — a lot of that is now virtual — but it’s still word of mouth in the end.

We did a study earlier this year looking at a different definition of what we call successful freelancers, they were people that had been doing it for at least eight years and made at least $80,000 a year. They came in right about where the $100,000-plus group did in this survey in terms of word of mouth. What really hit me when we did that one, we asked them to rank the attributes that they felt were important to being successful as an independent worker. They ranked your professional skills and expertise first, your personal attributes — which mostly had to do with diligence and dealing with insecurity and so forth — as the second most important attribute, and third they ranked networking. They ranked sales and marketing sixth. When we interviewed people, what they told us was, “Well, networking is sales now. It used to be different, but …”

Even when you’re talking about moving to these online systems like Elance-oDesk, your reputation becomes so important, and your reputation is a function of your network. And I have to add when I started in tech, networks weren’t that important. If you had a good idea, you could get a hearing, and you could get funded, and you could build a business. Quite honestly today if you don’t have access to a network that gets you introduced, you can be brilliant and get nowhere.

Why would that be more so?

It’s just gotten so much bigger. There’s so much going on, and at this point there are key gatekeepers and key people that you need to get to. The industry used to be a lot smaller, and you could meet people at shows, or you could just cold call them and they’d answer the phone, and that stuff just doesn’t happen anymore.

You came into this from the tech industry?

Yeah, I was with Lotus Development for a long time, mostly overseas. Then I left them and went to work for Macromedia — Flash, Dreamweaver — I was their chief marketing officer for a few years in the late ‘90s, and then after that I started this firm. Initially I was doing tech advising and angel investing, but I got asked by Intuit to start studying small businesses and independent workers, and that kind of crowded out all of our other work.

I bet you got that gig by word of mouth.

I did get it by word of mouth.

Could Your Stroke Risk Have Something to Do with the Soil Beneath Your Feet?

Why are all 10 of the South Carolina counties with the highest rates of patients suffering from strokes located on the coastal plain, while all 10 of the state’s counties with the lowest stroke rates are in the Blue Ridge/Piedmont region? Researchers theorize that early-life exposure to the microbes in coastal soil affects the makeup of the bacteria and viruses living inside the area’s residents, with the result being an increased risk for cardiovascular problems, according to Agricultural Research. The Coastal Plain extends from Virginia through the Carolinas, Georgia, and the Florida panhandle, as well as into Alabama, Mississippi, Louisiana, and Kentucky — a region known to medical researchers as the “stroke belt” for its high incidence of stroke.

Case Study: Second Thoughts About a Strategy Shift

Augustín Rey, a celebrated European businessman and the new presidente of the century-old retailer Emilia, drove an SUV full of teenagers into the Spanish city of León to show them the revolution firsthand.

A few hours earlier he had been visiting close friends, Camilo and María Veiga, in their home near the provincial capital, and had animatedly explained his plan to revamp the chain’s merchandising strategy and redesign some of its dowdiest stores. The store in León, for example, was getting a complete makeover: An indoor central “plaza” would provide space for young people to listen to musicians or watch movies projected onto walls; stalls and pushcarts along radiating “streets” would offer merchandise selected to appeal to Spain’s youth culture.

The Veigas’ son and daughter had been intrigued. Emilia? they had asked. That old place? So Augustín had invited them and three of their friends for a sneak preview. María had decided to come along as well.

The group’s midmorning arrival at the store, which was in the final stages of its renovation, caused quite a stir. Awestruck employees lined up to shake Augustín’s hand as the teenagers fanned out among the piles and boxes of merchandise.

Nearly all the company’s stores in Spain, France, and Italy had already been renovated to at least some degree, Augustín told María. About 10% of them, including this one, were getting the full treatment, and most of those were already up and running. But that was just the first wave: Every Emilia store was to be redone over the next four years.

“They seem to love it,” María said, watching her kids and their friends cruise along the indoor streets, touching the skinny jeans and baby-doll dresses on display. “Usually they turn up their noses at Emilia — they say it’s a store for old ladies.”

“Sure — it’s a great layout, and the clothes are beautiful,” Augustín said. “But what will really hook this generation over the long term is this little detail.” He held up a square black price tag bearing “€21” in large type and, in smaller letters, the word diario — “every day.”

“This is the revolution,” he said. “Realness.” He let the words sink in and then added, “These kids represent a chance for retail to start over and get real. They are young and idealistic and untainted by the money games that have been plaguing retail for too long — the ridiculous markups followed by sales and two-for-one deals and special promotions. The young, the old — all retail customers — want straight talk: hablar claro. And we’re going to give it to them.”

“Hablar claro” was the name of Augustín’s strategy for turning Emilia into the next Spanish retailing miracle, and it had initially thrilled investors. Results for the first full quarter of operation under the new strategy had been outstanding. But second-quarter performance was disappointing, and what Augustín didn’t tell María was that the most recent results would show further deterioration. Customer traffic was down significantly, and same-store revenue had dropped. When the results were made public, in a few days, the muted criticism that had begun a few months earlier might burst into demands that he change the strategy.

But you can’t chicken out in the middle of a revolution.

Editor’s note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.

 

A Great New Hope

Augustín’s first retailing success, years before, had been his reimagining of the showrooms of Hogar, a European home-design company. But it was his stint as head of retailing at the fast-fashion chain Xela that had made him a star. His initial focus had been operational efficiency; to drive that home, he had stripped the stores down to their essence, sometimes even exposing wires and ducts. His second focus had been cutting-edge style; to emphasize that, he’d created in-store teams of genios de moda — great minds of fashion — to provide style tips and listen to shoppers’ ideas. The teams were hailed as retailing’s first really new concept in decades.

So it was considered a great coup when Emilia’s board announced that Augustín had been recruited as the company’s next leader. His mandate was to radically reinvent an enterprise that seemed to have lost its way in the face of challenges from fast fashion, big-box stores, and e-commerce.

Emilia, named for the mother of the chain’s founder, had acquired a distinctly matronly air over the decades; it was where frugal middle-aged women shopped for sensible clothing for themselves, their husbands, and their school-age children. This didn’t exactly constitute a thriving market. Even worse, Emilia’s customers had become conditioned to buying only when prices had been slashed. No deal, no purchase. So for years Emilia had competed aggressively on price, offering more and more “door breaker,” holiday, and clearance sales and churning out circulars with coupons, just to get customers to visit the stores or go to the website.

“We have to break people from their addiction to discounts,” Augustín said to María as they sat on a bench outside the store. Then he asked, “Do you remember my aunties, Tía Marta and Tía Teresa?”

María smiled. She and her husband had known Augustín since school days in Galicia, and she well remembered the aunts, who had often taken him in when his parents were traveling for business.

“They would put on their matching hats and take the bus and spend the day going into one store after another, hunting for bargains,” Augustín said. “I still remember the junk they came home with. And why? Because some shop owner had made up a ‘full’ price for a fan or a pair of gloves and then, after much haggling, dramatically caved in and slashed the price to what it should have been in the first place! Whereupon my aunties would gladly pay the so-called bargain price and go running out of the store, crowing about their great victory.”

María laughed. “It was a harmless form of recreation for them.”

“Perhaps. But on a huge scale in today’s retail environment, it’s not harmless. It’s mutual victimization: We victimize the customers by deceiving them — we lure them with huge reductions from artificially inflated list prices and then try to get them to buy other things while they’re scooping up their discounts. Meanwhile, they victimize us by forcing us to cater to their irrational need to find bargains. Do you know that in the year before I was hired, Emilia spent more than €700 million to execute 590 different sales and promotions? And 72% of its revenue came from products sold at less than 50% of the list price. The average discount needed to get customers to buy has soared from 38% to 60%.”

“It’s all part of the game, Augustín.”

“Retail should not be a game. Hogar and Xela are the paradigms. They excel by being straight with customers. No gimmicks. No deception. That’s the ethos I’m going to bring to Emilia.”

“But Emilia has such different customers from Xela,” María said. “Won’t they be upset?”

“A few will be upset. To which I say, ‘Fine. Be upset.’ Others will be relieved.”

“Won’t you need new customers to replace those who defect?”

“Just look,” Augustín said. The last of the young people had come out of the store, chattering excitedly about what they had seen inside.

“Them?” María asked.

“Yes, them. As well as older teenagers and twenty-somethings. Emilia will truly become a store for the whole family, by appealing to different family members in different ways. Older customers will want to come here for value; young adults will want to come here to be with their friends. They’ll walk along those indoor streets, hear their music, see images of their idols wearing our hip new clothes. It will be a retail playground for them — while their mothers are upstairs trying on sensible shoes.”

“But this generation is so obsessed with the internet, I doubt they’ll ever set foot in stores again.”

“We are replicating the in-store experience online,” Augustín said. “But I think physical stores will continue to be very important to people. Buying clothing is a touch-and-feel experience. Young people will use social media to spread the word that Emilia is a fun place to meet and socialize.”

“OK, but what if they — or their mothers, if they have no money — refuse to pay for the cool stuff?”

“They won’t refuse,” he replied. “We’ll stay inexpensive. We offer ‘everyday low prices,’ as they say in the States.”

“I guess retailers are born optimists,” María replied.

 

The Reckoning

The most recent quarter’s results were every bit as bad as Augustín had expected. He studied the numbers during a visit from two board members at his Andalucían home overlooking a golf course and the distant Mediterranean. The loss had widened to €211 million. Same-store revenue was down by 19%, and customer traffic had dropped by 10%. The chances now seemed remote that this year’s holiday shopping season, which was right around the corner, would provide much of a lift.

“But it’s a four-year plan,” Augustín said as he closed the folder. “Not a one-year plan. We need time for the changes to play out — for all the stores to be renovated, for customers to understand our pricing strategy.”

“It can’t be a four-year plan if the company doesn’t survive for four years,” said the board chairman, Nicomedes Mallo.

Augustín was startled. Nico had recruited him and had always been his staunchest supporter. Quietly he said, “Survival is the whole reason for the four-year plan. We are extricating Emilia from the death spiral of a shrinking customer base, deal-obsessed customers, tired merchandise, and escalating price promotions.”

“But customers don’t like the new approach,” Nico said.

“They need to be educated,” Augustín replied. “If our new strategy has one weakness, it’s in marketing execution. In fact, I’d like to start a new campaign: Haz los cálculos — ‘Figure it out.’ It will be aimed at educating consumers about our competitive everyday prices. We have the data to back it up: A random bucket of items shows that although some items are slightly more expensive, overall Emilia is significantly cheaper than all its direct competitors. Plus we have a policy of matching any other store’s price.”

“If the straight-talk campaign isn’t working, what makes you think ‘Figure it out’ will fare any better?” Nico asked. “You haven’t done any research on this.” He reminded Augustín that the board had agreed to run hablar claro without testing it first, buying in to his argument that the company needed to get out in front of consumers rather than be led around by their misguided desires. The board didn’t want to make the same mistake again.

“Recent customer surveys show that people see Emilia as offering less value than competitors,” Nico added. “And to take advantage of the situation, our competitors are ramping up their sales. They’re offering them every weekend, issuing savings passes, and flooding the airwaves with advertising about new low prices. Customers are responding. That’s why our numbers are so bad.”

“We’re starting a realness revolution,” Augustín said. “We knew we’d have to take a few arrows in the back.”

Nico asked the other board member, Celso Peres, for the papers they had drawn up and spread them out on the glass coffee table. “We are proposing a modification of the new approach,” he said. “One that more closely addresses the expressed desires of our existing customers, whom we cannot abandon.”

“First,” he continued, “we give up the hablar claro idea. Customers seem to find it condescending. Second, we go back to our old policy of ‘best price weekends.’ Third, we show the list price for every item so that customers can compare it with the discounted price. Fourth, we reintroduce the words ‘sale’ and ‘clearance’ into our marketing communications. Fifth, we go back to printing circulars and coupons. This will make it simpler for customers to understand our stores. It will show that we are on their wavelength.”

Nico slid the papers across the table toward Augustín. “This isn’t a coup,” he said. “We still believe in you. We’re still behind your vision to cater to younger customers, to turn the stores into social hubs, and to be more transparent about pricing — to a degree. But we know those changes will take a while, and in the meantime we don’t want to alienate our existing customers.” He tapped the papers with his finger. “You don’t have to follow this plan to the letter,” he said. “But it’s the sense of the board that your new strategy is too extreme for our customers. They don’t know what to make of Emilia anymore.”

Augustín looked at the plan. It was nothing short of a return to business as usual. To him, it represented a colossal failure of nerve.

Question: Should Augustín abandon his bold strategy?

Please remember to include your full name, company or university affiliation, and e-mail address.

 

 

Why Some Women Negotiate Better Than Others

Women continue to make less money than men, and be less likely to hold top leadership positions. And whenever a grim new study is released, a news-making essay or book is published, or high-profile woman is criticized for being “too pushy,” it renews the debate over the underlying reasons behind this persistent inequality.

One explanation has to do with culturally prescribed gender roles, and the social price one pays — or expects to pay — for violating them. In possibly the best-known example, many women choose not to negotiate for higher salaries because they believe such assertive behavior will trigger a social backlash — a fear that negotiation researchers have determined to be well-founded. The backlash occurs when observers perceive, consciously or not, that a woman’s behavior clashes with her traditional feminine role. The consequences of social backlash can vary from clearly biased hiring and unequal pay allocation to more subtle reductions of social and professional opportunities at work.

At the same time, we can all point to exceptions: some professional women do manage to obtain equal positions of power and pay in male-dominated professions. Surprisingly, little research has attempted to investigate what these successful women may have in common. What distinguishes the women who have cleared these hurdles from other professional women who tried and failed?

Some have suggested the style one chooses to adopt makes all the difference. Take, for example, Sallie Krawcheck. She is one of the most influential women on Wall Street and is renowned for a management style that draws on both gender roles. And one of the most successful women in Silicon Valley, Facebook’s Sheryl Sandberg, endorses findings by Mary Sue Coleman that the women who get ahead are “relentlessly pleasant” and advises, for example, asking for pay raises with a smile.

But here’s another explanation based on a line of research into what is known as identity integration: Women who succeed in challenging careers have a personality trait by which they regard their two “selves”— their professional identity and their gender identity — not as in conflict but as fundamentally compatible.

My work with colleagues Pranjal Mehta, Ilona Fridman, and Michael W. Morris has focused on assessing people’s varying degrees of identity integration, and then finding correlations between that and aspects of their professional performance. We determined levels of gender/professional identity integration using a questionnaire that asked participants to indicate their level of agreement with eight statements, including: “I do not feel any tension between my goals as a woman/man and my goals as a businessperson” and “I keep everything about being a woman/man separate from being a business person.” Two weeks later, we placed participants in negotiating situations.

First, we found that, although women and men both vary in the extent to which they perceive their gender identity to be compatible with their professional identity, these variances seem to have performance consequences only for women.

Across five experiments, we found that women who perceive their gender roles and professional roles as highly compatible are more effective than other women in competitive bargaining situations. Women with high degrees of identity integration were more likely to bargain on their own behalf, because they were less concerned about a social backlash. Those women also achieved better outcomes than those who didn’t ask for more — and they didn’t incur a social backlash as a result of their assertive behavior. These results held both for businesswomen and for women in engineering and computer science.

Furthermore, when our women subjects were “primed” to tend more toward identity integration before entering a salary negotiating session (we asked subjects to recall a time when their gender and professional identities felt particularly compatible to them), they were more likely to ask for higher pay and less likely to expect social backlash for asking. This suggests a possible strategy for women hoping to negotiate more effectively on their own behalf: it might be valuable to spend time reflecting on how being a woman is compatible with being an excellent professional, as opposed to dwelling on perceived incompatibilities.

Changing male-dominated corporate cultures will require more, of course, than women who are personally unconflicted about their gender and professionalism. But knowing that identity integration matters to outcomes could yield a better understanding of the factors that are derailing women’s success, and clarify which they themselves can change.