Marina Gorbis's Blog, page 1359

Workers Don’t Have the Skills They Need – and They Know It

How do workers feel about the adequacy of their skills? Until now, few studies have examined their views. Today, a survey of employees is being released that provides strong confirmation of the notion that employees need better skills to do their jobs well, especially skills related to technology.

Over the past decade, employers have repeatedly reported that they have difficulty finding workers with the skills needed for today’s jobs. But influential voices have challenged this finding. For instance, The New York Times Editorial Board calls the notion of a skills gap “mostly a corporate fiction,” saying “don’t blame the workforce.” They claim that employers just “want schools and, by extension, the government to take on more of the costs of training workers that used to be covered by companies as part of on-the-job employee development.”

The new survey, commissioned by Udemy, a company that provides online training courses, sharply challenges the view that the skills gap is a corporate fiction. Polling 1,000 randomly selected Americans between the ages of 18 and 65, the survey found that 61% of employees also feel that there is a skills gap. Specifically, 54% report that they do not already know everything they need to know in order to do their current jobs. Moreover, about one third of employees report that a lack of skills held them back from making more money; a third also report that inadequate skills caused them to miss a promotion or to not get a job.

The most important skills that employees are missing are computer and technical skills. Of those reporting that they needed skills for their current job, 33% reported lacking technical skills, including computer skills. Management skills were second most important.

The skills gap is not mainly about too little schooling. Survey respondents made clear that the skills learned in school differ from those required on the job; so while schooling is important, it’s not sufficient preparation for success at work. Of survey respondents who went to college, only 41% reported that knowledge learned in college helps them succeed in their current job. Seventy-two percent of respondents report that they needed to learn new skills for their current job. More generally, respondents reported acquiring those new skills in a variety of ways: some took formal, in-person classes, some took online courses, and many relied on informal learning from colleagues and other sources.

According to the survey, employers generally play an important role in helping workers learn. Employers paid for the majority of workers who reported taking paid online or in-person courses. And 30% reported that employers are very helpful at helping them gain new job skills; another 46% report that employers were somewhat helpful.

The overall picture is consistent with the view that new technology — especially information technology — is raising the skill level needed to thrive in the workplace. Schools don’t teach all of these skills and consequently on-the-job learning is very important. Employers aren’t the only ones who recognize this challenge. Employees know the skills gap is real, and they’re trying to close it.

People Are More Selfish and Dishonest After Doing Math

Research participants who had spent 15 minutes solving math problems were 4 times more likely to lie for personal gain in an ethics game than those who had answered randomly selected verbal questions from a standardized test, says a team led by Long Wang of the City University of Hong Kong. The act of calculating appears to crowd out people’s social and moral concerns, resulting in behavior that is more self-interested and even immoral. Stimuli such as family photos that prompt thoughts about social values appear to diminish these negative effects, the researchers say.

What Apple Gets Right with Its Smartwatch

When people say Apple has built things people didn’t know they need, it’s not really true. Apple has built things that meet the needs people have always had. More than any other consumer company, Apple gets what people really, fundamentally need. That’s why announcements like last week’s Apple Watch tend to have the cultural impact they do.

When we think of needs and products we often go right to Maslow’s Hierarchy of Needs, the ubiquitous theory that human needs manifest in a specific sequence, from base survival to the pinnacle of self-actualization. Marketers have spent decades figuring out at what level of Maslow’s hierarchy their customers are stuck, and then offering products and marketing for that need. Think of Campbell’s “Mmm-mmm Good” campaign at one end and Lexus’s “Relentless Pursuit of Perfection” at the other. If Maslow was right, brands needed to target a single need, satisfy it well, and be done.

But it turns out that Maslow wasn’t entirely right. My own research at Forrester Research has focused on synthesizing a much more complete and empirical description of people’s fundamental needs based on research in psychology, economics, and neuroscience. When we talk about human needs, we use four categories:

Connection
Comfort
Uniqueness
Variety

Crucially, we’ve learned that these needs are not hierarchical. Think of yourself: You don’t wake up in the morning and only think about food, then worry about making money, then think about loftier pursuits. Neither your day nor your life unfolds like that. It’s messier, because of our adaptive and clever biology. Our hormones, our neurotransmitters, even our gut bacteria cause us to think about base needs like survival and loftier ones like personal fulfillment simultaneously. In fact, they compete with one another for our attention, and we prioritize and re-prioritize them on the fly, as context changes.

Apple’s understanding of this is what sets it apart when it comes to launching market-changing products, including the newly announced Apple Watch. Apple doesn’t lock into one need on the hierarchy (soup that satisfies hunger, or perfect luxury car), but instead builds and markets products that connect on all four of the human needs that we’re grappling with constantly. Let’s use the Apple Watch as an example:

Connection: Texts, finger-drawn emoticons, even the feature some consider hopelessly gimmicky, heartbeat sharing, are all central to the device keeping you connected.

Comfort: Connections to loved ones is part of comfort, and so is the built-in health and fitness tracking, which makes the device something of a coach in your quest to improve yourself.

Uniqueness: An easy box for Apple to check. Though many were surprised by the Apple Watch’s conventional look (which pundits immediately declared savvy), Apple actually took the traditional winding crown of a watch and with it created a unique UI and UX, making it a tool for zooming in and out of maps or menus. The same is true in Apple’s creation of an original touch interface which distinguishes between a tap and a press, giving the small screen twice as much utility as it would otherwise have.

Variety: Design plays a big role here through interchangeable watch bands. We’ve seen recently examples even in Apple’s own marketing of customers celebrating uniqueness even though the products are remarkably uniform. Think of the commercial that flashes through the lids of dozens of MacBooks, each been dressed up with its own clever stickers, literally wrapped around the company’s brand mark. Variety can of course also come from the suite of apps available to put on your watch.

But couldn’t other smart watch entrants do the same thing? Forrester survey data shows that interest in wearing a wrist-based computing or sensoring device had grown from an already-high 28% in 2013 to an impressive 42% in 2014, all before the Apple Watch was a thing. But ask an average person if they know about the Pebble, the Samsung Gear products, or the new Moto 360 and you’ll get blank stares in return. They may know the Nike Fuel Band or Fit Bit.

I’d argue that none of those devices delivers on our four needs as fully or as conveniently as Apple. For example, even though Pebble is aiming for all four needs, it has used less-convenient technology to deliver on those needs — admirable as the early entrant but insufficient at this stage in the market. Samsung, on the other hand, has created a device that promises to meet these four needs fully, but as a company it doesn’t have the market power to draw other app makers into the environment as quickly as Apple can, giving Apple an app variety advantage from its first day on sale — as the mobile payment system announcement demonstrates. And in the mind of the potential buyer, Samsung and the others suffer vis-a-vis Apple because none can offer the reassurance — itself a form of comfort — that the company behind it has delivered on this before.

That’s another secret to Apple’s dominance. Once it established itself as a company that could meet these needs, people tend to trust the brand more — maybe more than it deserves, but certainly more than other entrants — giving it an advantage that other brands need to fight just to get people to listen; that’s why so many competing companies literally use Apple in their marketing, comparing their own products and features to the one’s that seem to hog all the attention: Apple’s. Apple seems to own the conversation. Other, highly-regarded smartwatches already exist, but now people are talking about Apple’s proposed definition of a smartwatch.

This was precisely the strategy that Apple used to sell the iPad, showing dialogue-free commercials that merely depicted the magical things the iPad could do for you. This made some people buy an iPad, and others know what they would want when they finally got a tablet from another manufacturer. Either way, Apple dominated by controlling the expectations the user had about what needs the iPad would fulfill.

The watch experience will be harder to illustrate than the iPad’s, to be sure, but I suspect Apple’s not done creating this experience. The smartwatch is the spearhead to a broader wearable experience, populated with a phone, a watch, an earpiece, health monitors, and more things that, deep down, you know you need.

A Brief History of America’s Attitude Toward Taxes

The changing attitudes toward and laws around income taxes has been a major driver of the rise of America’s modern talent-based, knowledge economy.

Two things strike me as I study the history. First, it is hard to see the historical development of US income taxation as a gradual evolution. Rather, it is characterized by major swings. Second, it is interesting to see a very consistent cycle in the tax treatment of the super-rich. I think that today we are approaching an inflection point. Unless we do something about the current set up, the tax system may end up as a major factor in the fall of that talent economy.

As I see it, the tax system has moved through four distinct eras over the last century and a half. During each era, government and society subscribed to a theory about what taxes were for, which was eventually replaced by another theory, flipping us into another era. Let’s look at how the pendulum has swung and how the treatment of the super-rich has changed. All the data is from the very handy Tax Foundation website. I have inflated all the incomes to 2013 dollars to make comparisons more easily understood.

The First Era: 1862-1915

From its inception in 1862 and up to 1915, personal income tax was not unlike a modern day state sales tax: a percent or two of income, with richer folks paying a slightly higher level. For example, in 1915 a $1 million earner paid income tax at a 2% rate. Like a sales tax, income tax was seen primarily as a revenue earner and not as a tool for influencing behavior. It was only mildly progressive: the rate was 1% on incomes up to about $450,000. In this era, the rich (e.g., $1 million earners) were taxed exactly the same as the super-rich (e.g., $10 million earners).

The Second Era: 1916-1931

In 1917, with the First World War at its height, Congress passed the War Revenues Tax Act, which changed thinking about personal income taxation dramatically. The new theory was that personal income tax could fund the war effort. And within that funding, rich people could and should pay more — and the super-rich much, much more.

Under the new Act, rates skyrocketed: a $1 million earner paid a 16% rate and the top marginal rate, which kicked in at $36 million, was a hitherto unimaginable 67%. A year later the rates went up still further: 43% for the $1 million earner and a 77% top rate kicking in at a $15 million income level.

After the war ended, rates drifted back down (the top rate went down to 25% in 1925) though the prewar rates were gone forever. But interestingly, the level at which the top rate kicked in fell all the way to $1.3 million by 1925. So although there had been a meaningful distinction between the rich and super-rich during the height of the war, after the war, they were all lumped together and the $36 million earner, who in 1918 had paid at a rate over four times that of the $1 million earner, was paying at the same rate in 1925-1931.

The Third Era: 1932-1981

The Great Depression precipitated the next big swing. The rate for $1 million earners shot up from 22% to 35% in one year between 1931 and 1932 and the top rate from 25% to 63%. Within just a dozen more years (1944) those rates were 84% and 94% respectively, with the top rate kicking in at only $2.6 million. At those rates, the average present-day mid-level investment banker would be giving the federal government all but 6 cents of his/her last dollar earned, which would seem to us to be a huge disincentive.

But in the third tax era, income of that scale was not typically assumed to something you could earn by working; it was something you derived by virtue of owning a particular asset, and earning from that asset what the economists call a “rent.”   According to the theory, most rich people were basically rentiers and their income from owned assets could — and should — be taxed at very high rates with no adverse impact on their behavior or the economy.

Financing WWII could have been used as an excuse for these highly confiscatory rates, but rather than dropping after the end of war, they continued to rise. By 1963, the $1 million earner was paying 89%. So in the mid-1960s, anybody in America that would be considered reasonably rich was keeping a mere 10% of marginal earnings — and that is before paying all state, municipal and indirect taxes; with all of those added in, they probably kept less than 5 cents on the extra dollar.

From about 1960, however, the economy began to change, as I describe in this HBR article, with an increasing proportion of earnings and wealth being tied to value created by way of the exercise of talent through work. With this change there came a growing awareness that 90% personal income taxation had a disincentive effect. Between 1963 and 1981, therefore, the rate on a $1 million earner slid from 89% to 70%. But, somewhat paradoxically and echoing the 1920s, the level at which the top rate kicked in plummeted to $272,000 — meaning that by 1981 virtually everyone who was upper-middle class or above paid the top marginal rate.  There was no longer a distinction of any meaningful kind between rich and super-rich.

The Fourth Era: 1982-Present

It was not until the 1980s, by which time the idea that the economy was knowledge driven had firmly taken hold, that our lawmakers finally abandoned the prewar assumption that all rich people were rentiers and recognized that at the prevailing rates talented people were being put off work. Instead, the new theory was basically that all income should be considered to be the product of exercising talent and that people should be taxed less so that they had a motive to work.

But with the abandonment of the rich-as-rentier concept, lawmakers no longer drew a distinction between the rich and other folks, making it easier to justify reducing tax thresholds to compensate for falling rates. This is exactly what happened: in 1982 the top rate dropped to 50% but kicked in at $101,000. By 1988, it had fallen to 28% and kicked in at $29,000, which meant that America effectively had a flat tax of 28% (the 15% rate for incomes below $29,000 would have applied to very few fully employed Americans). Since then the top rate has drifted up to 39.6%, kicking in at $220,000. But the progressivity of the system is still extremely modest.

Towards a Fifth Era?

A quick look at this brief history dispels a common misperception among American Baby Boomers, Generation X’s, and Millennials who all think the current system is “the way America taxes” because it is the only thing they have ever known. It is actually a modern phenomenon — a product of the most recent theory change, in this case from a rentier theory, in which economic growth is seen as the product of exploiting assets, to a talent theory in which growth is driven by the exercise of talent and the application of knowledge.

The history also demonstrates that the current system of equal treatment of the rich and the super-rich (and in this case also of the same as the upper-middle class) is not typical or normal. Rather, it happens to be at one of the two poles across which the system has oscillated over history.

So will the current system endure? I think not. In times of crisis, America has shown that it asks the super-rich to pay a lot more than the rich and I think this will happen based on the feeling that it is a time of economic crisis in America. Also, although applying a rich-as-rentier theory (implying tax rates in the 70% plus range for high incomes) isn’t really fit for purpose in a talent-driven economy, it’s also not justifiable to have a maximum rate that doesn’t distinguish between a mid-level executive and a hedge fund manager.

My bet is that the Fifth Era will look a lot like the early Third Era — after the height of the Great Depression but before the inception of WWII. That is, $10 million earners paying in the 75% range, $1 million earners in the 50% range and $500,000 earners in the 35% range.

How high or low the rates of the Fifth Era structure will be will depend, I think, on whether talent is seen as engaging primarily in trading value or primarily in creating value for their fellow citizens (in terms of better products and services and more jobs). If it is the former, they will be taxed more highly as unworthy rentiers and there will be little concern for incentive effects. If the latter, they will be taxed as important economic assets whose incentives must not be dampened. Right now, sentiment is trending more in the former direction than in the latter — a perception that the talented people on the Forbes 400 list have done little to dispel.

Why Terrorist Groups Are So Bureaucratic

I typed the words into the pristine white search field, hoping they didn’t land me on the NSA’s no-fly list: “How to manage a terrorist organization.”

There is a lot of academic work out there on what constitutes terrorism; the psychology of terrorists and terrorist acts; and the military precepts of asymmetric warfare. There’s not a lot on the basic management issues faced by your run-of-the-mill al Qaeda cell.

But that’s exactly what Princeton professor and former Naval officer Jacob Shapiro studies. The author of The Terrorist’s Dilemma: Managing Violent Covert Organizations and numerous academic papers on the topic, he examines terrorist groups like al Qaeda, Islamic State (also known as ISIS), and others through an organizational lens. I called him to pick his brain about it. What follows are edited excerpts of our conversation.

HBR: Why look at terrorist groups through a management lens?

Shapiro: One area where it’s very useful is in identifying the constraints terrorist groups face. For instance, one of the things you saw with Islamic State in Iraq in 2007 and 2008 was that most of the foreigners that are coming in to fight for them had very modest levels of education, at least as reported by the group itself, and very few useful skills. They had to invest a lot in training according to recently declassified HR documents.

So you think, “Wow, there were huge numbers of Iraqi men in 2007, 2008, 2009 that had to develop military skills, whether they had to develop them to fight for a particular side or for self-defense. Why do they even need all these unskilled foreigners?” It has to be they’ve had a tough time recruiting Iraqis. So looking at what their “talent pool” was back then can help reveal the constraints the current incarnation, the Islamic State or ISIS, is likely under now, and help you understand where you might clamp down on them.

 

But why use a business lens rather than, say, compare them to a traditional military structure?

Militaries are exempt from many of the concerns of other kinds of organizations. I think the critical thing that makes terrorist organizations seem more like businesses than militaries is that [in a terrorist group] you don’t have a cadre of people who live their lives within the organization. You don’t have well-defined career paths. What you do have in terrorist groups is a lot of turnover. So the groups that do sustain themselves over time and become a durable threat are the ones that put in place relatively low-cost business practices and coherent succession plans and all the things a business with high personnel turnover would need to sustain itself.

So what makes Islamic State so “successful”?  

Organizationally, one thing that is striking about Islamic State, looking at its lineage — from al Qaeda in Iraq to Islamic State in Iraq to ISIL to ISIS to Islamic State today — there is a fair amount of continuity in leadership and management. If you look at the documents that group produced in 2008, 2009, 2010, they were quite structured in how they did things (or at least it looks like they were). They were fairly systematic in tracking personnel, spending, income, all the things you need to track to realize economies of scale in a large organization. That’s something you need to do any time you want to organize large numbers of people to act collectively. Management without record-keeping is really hard. You can’t keep a thousand fighters in your head.

I’m sort of surprised terrorist groups are so bureaucratic.

They seem to use bureaucracy to make sure everyone is toeing the party line and to prevent splinter groups from breaking off. Terrorist groups have disgruntled and disobedient members just like any other organization, so the leaders try to rope people into a particular way of doing things by setting up standard operating procedures and making sure those are followed.

I do remember an example of one captured document in which Ayman al-Zawahiri castigates a Yemeni cell for essentially a sloppy expense report: “Will all due respect, this is not an accounting… you didn’t write any dates, and many of the items are vague.”

He is a notorious micromanager. The thing is, there are a lot of examples like this in the documents that have been captured. For instance, some ISI documents from 2007 sent out to local cells included a standardized form for reporting on your fighters and expenses, along with a set of instructions on how to fill it out. Among these were rules that the fighters had to keep their receipts and obtain two signatures for every expense. Maybe my favorite example is a memo sent out by the ISI media office in 2006 that basically said, “In order to help us produce better martyr videos, please fill out this form, copy it, and send it back. If you don’t have a copy machine, let us know, we’ll get the forms to you.”

I say this somewhat tentatively because this is a serious matter and I don’t want to make light of it. But there is something sort of funny about that. When you talk to people about these issues, is there gallows humor that people can’t resist? There seems to be something almost Monty Python-ish about it – in a way, it’s absurd.

People do react that way a lot, I think to the inherent mundaneness of it. But if you stop and think about what it takes to run one of these organizations, well you realize of course they must do this stuff. Bureaucracy is just endemic to the human endeavor. Writing things down is an incredibly powerful technology for managing complicated stuff.

But the good thing about the bureaucracy is that there is an inherent constraint in how big you can grow as long as someone is paying attention. If you’re facing competent governments, when you get to a certain size you start kicking off a level of information that attracts attention and which government forces can use to target you and degrade your organization.

To understand them, it is useful to think about terrorist groups as normal organizations. You examine them group by group — what is their goal, how do they use violence to advance that goal, and what’s their operational environment? Then you can think about their constraints, and about how would an organization deal with those constraints, if it were staffed and led by extremely committed, but deeply misguided, people.

Making African Health Care Radically Cheaper

When I flew into Lagos last month – only a few days after Nigeria had confirmed its first case of the Ebola Virus Disease – the city was clearly deep in risk management mode. Government agencies were scrambling to communicate consistent information releases to locals, while international companies were lining up employees at airport departure lounges to fly them to safety. Nearby in Guinea, Liberia and Sierra Leone, the situation was even more dire, with border closures and international flight bans in full force.

And it’s no wonder. As the tragedy of this particular Ebola outbreak has grown, it has become increasingly evident that health systems across West Africa are painfully underprepared to handle such a crisis. Diseases like Ebola do not discriminate between the rich or poor; West Africa needs health delivery systems that are equally democratic.

Disruptive innovations can play a critical role in democratizing healthcare by making goods and services affordable and convenient enough that large populations of under-served consumers become able to access them. A well-known example is India’s Aravind Eye Hospital, which brought affordable eye care to millions in low-income communities by innovating around service delivery and optimizing patient throughput. Entrepreneurs and private-sector organizations are particularly well-placed to bring such disruptive innovations to life. They are more nimble, and have more incentives to innovate for scale and sustainability.

In sub-Saharan Africa, there are three important ways disruptive innovations can democratize health systems:

1. Improving health record-keeping. The average consumer has no primary care provider or health insurance coverage, and often has to rely on poorly regulated drug vendors, medical practitioners within their family or traditional systems of medicine. As a result there are basically no mechanisms to capture health information at a system level, or effectively stay ahead of viral outbreaks as they spread.

Patent drug vendors and micro-pharmacies are particularly well-positioned to start changing this. They are often the first port of call for unwell consumers, and in many cases their inventory systems already contain enough information to build simplistic medical histories. By linking inventory management systems to unique consumer profiles, and incentivizing consumers to regularly update their health status with simple mobile applications, these businesses can support their profit models with better customer knowledge, while creating conduits towards better macro information on community health.

2. Widening drug access. In Mexico, Farmacias Similares launched a disruptive, low-cost pharmacy model that has significantly improved access to drugs in underprivileged communities. The company’s unique business model — its pharmacies only sell cheap generic drug alternatives and are paired with clinics that provide access to a doctor for $2 — has allowed it to serve millions of low-income consumers. In less than a decade, the business grew to over 4,000 outlets, employing a franchise model to achieve penetration in every Mexican city with at least 5,000 inhabitants.

There are similar opportunities in sub-Saharan Africa to create sustainable new pipelines for mass-scale drug delivery. For example, the HealthStore Foundation (CfW) has also pursued a micro-franchising model to widen drug access in low-income communities in Kenya.

3. Building patient trust. Low patient trust is a pernicious obstacle to healthcare results across sub-Saharan Africa. The recent examples of Ebola-linked riots in Liberia, Sierra Leone and Guinea demonstrate the crippling effects of trust gaps in times of crises; but they are similarly damaging in the absence of pandemics. Quality issues, including the prevalence of counterfeit drugs and substandard hospital administration, contribute to the erosion of trust.

The solution may not always be ambitious top-down reforms to overturn the healthcare system – many of these are swiftly paralyzed by corruption. More promising is to build bottom-up oases of trust. Many consumer-facing enterprises in Africa have learned quickly that they can circumvent counterfeits by embracing innovative marketing and distribution to build strong brands. Companies such as Coca-Cola and Unilever provide ideal case studies of how to generate brand trust and loyalty at a mass scale by educating consumers and working with community influencers. In a similar way, clinics and pharmacies should actively seek to build trusted brands by engaging more proactively with under-served communities.

Viral outbreaks and health crises will continue to be a challenge in the future, and many developing nations — especially those with tropical climates, high population density and under-developed healthcare systems — will unfortunately bear the brunt of their impact. But we can do a better job of preparing for them by embracing more disruptive innovations to democratize healthcare delivery.

What Good Is Impact Investing?

Impact investing is on the rise. Yay! But, um, what is it? Last year, Michael Drexler and Abigail Noble of the World Economic Forum took a stab at defining it as “an investment approach intentionally seeking to create both financial return and positive social impact that is actively measured.” That is, you have to intend to do good, and you have to measure whether you’re succeeding. This was in a report called From the Margins to the Mainstream that did a lot to introduce impact investing to the wider investing world. Now Drexler and Noble are out with a new report, Charting the Course, that gets more into the nitty gritty of how one might go about investing with impact. (In something of a sign of the times, it’s not the only big impact-investing report out this week; the G8 Social Impact Investment Task Force has weighed in too.)

You could, Drexler and Noble write, take advantage of government subsidies to invest in affordable housing or renewable energy (something that, as they note, people have been doing for decades). Or you could participate in projects financed in part by conventional investors and in part by non-profits. Or you could try to take advantage of limitations in conventional financial metrics to get higher long-run returns by focusing on sustainability and social good. Or you could accept lower returns in exchange for accomplishing social goals.

It’s interesting to see the WEF, the organization best known for its annual Davos summit of business leaders, government officials, and other luminaries, adopting impact investing as a cause. Well, maybe not quite as a cause: Drexler, the organization’s head of investors industries, takes pains to note that “we’re not trying to be the industry association for impact investors.” Adds Noble, WEF’s head of impact investing initiatives, “We think impact investing has a lot of potential, but it may not be for everyone.” Basically, they’re totally gung-ho about it. But if you don’t want to do it, hey, really, that’s okay with them. I talked to the two recently about their efforts. What follows are edited excerpts of our conversation:

I sense that in the discussion about impact investing there have been those who have tried to narrow the definition. And your idea is “No, no, no. Let’s let people try all these different things.”

Michael Drexler: We’re very tight on the meta-level definition but we’re not tight on which sector you should invest in. As you would imagine, we put some thought behind that definition. Intentionality starts from the two extremes that you can get. The first one is, “Trust me. I’m a good guy. I have good intentions — and I’m going to destroy your money.” That to us is not the investment side of impact investing. The other extreme is, “I have no intentions but look I’ve created jobs, ex post,” and that is the post-rationalization of an economics-only business model. We see both of these things in the marketplace, and we think this confusion at the meta level really hurts the sector.

To us, the key about intentionality is that it must focus on a business model, a business plan upfront, with both economic and social impact. It’s “I tell you what I will do, how I’ll do it, and you can hold me accountable.” Once you have the intentions, once you track impact this way, whether you’re a bottom-of-the pyramid business, whether you’re sustainable agriculture, whether you’re new energy, it’s totally open.

Take micro insurance: If I allow a small-hold farmer to insure their crop, it means in the first year they can actually have less volatility around the outcome. They can put more of their assets to work because they don’t need to self-insure. So the harvest will be bigger, they become wealthier. Which in turn means they actually can run bigger farms, pay bigger insurance premiums. Both the customer and the business evolve positively together. That to me is textbook impact investing, with well-defined virtuous cycles where both sides can take part in the upside.

Abigail Noble: The other thing that we’re seeing is from the customer side — that they want things that have social impact and environmental responsibility and products that serve those needs. Whether it’s Warby Parker eyeglasses or Method home products or any one of a variety of other consumer products. People buy them because they trust the companies. They trust the governance. They trust the fact that their money is having a positive social and environmental impact and it aligns with their values.

With Warby Parker or with Method, that becomes part of the value of the product for people. In investing, doesn’t anything that detracts from maximizing investment returns give you less of the product you were signing up for in the first place?

Drexler: That’s back to the idea of virtuous cycles. With these, you actually participate in the upside of your customers, and therefore your business grows with them. That idea of a tradeoff comes from this boxed idea of here is the for-profit corporation, here is my charity next to it. There’s a fixed outflow of cash from the for-profit into the charity and there’s never a feedback from the charity back into the for-profit. Impact investing creates that feedback, in the instances where it’s done well.

Noble: Impact investing is about strategy. A lot of businesses have pursued social responsibility more out of their marketing departments or as some sort of charitable donation. Not only are they not capturing the full value because it doesn’t create that virtuous cycle, it’s just not sustainable.

Drexler: Now for the flip side, of course people and institutions in most cases are motivated by more than just financial returns. Even in the most hard-nosed of private equity firms or hedge funds you will find that people align with strategies that mean something to them, that they’re passionate about. It might not be always in a social language but there is more to business and investment than just money, and that’s not so new.

When you describe these virtuous cycles, if you want to get all Milton Friedman about it, he’d say well that’s just smart business and you don’t need to call it impact investing.

Drexler: There are two things to it. Firstly, it’s good business in many instances for very vulnerable populations. It’s not selling luxury goods on Fifth Avenue but it’s actually making an economic difference in the lives of people at the bottom of the pyramid. Secondly, it’s about combining philanthropic and financial investors. With something like the Riker’s Island social impact bond (which finances behavioral therapy for 16-to-18-year-old jail inmates in New York), the fact that Bloomberg Philanthropies provides a guarantee to that bond is very, very smart because it does two things. It brings in mainstream investors that otherwise wouldn’t go near it for risk reasons. But probably even more relevant, because it’s an insurance policy and not a grant it makes the capital of that charitable foundation go as far as what you think the default risk is. If there’s a 20% default risk, the capital now goes five times as far as it would be with a simple grant. That actually helps charities become more efficient and more useful. You then hear the blowback argument, “But the charity now enables investors to make money.” And the response is, if the charity is in the business of making their money go far, they should do that.

In Davos we had a bunch of hardcore mainstream investors explore whether social impact bonds to combat childhood obesity could fit into their investment strategy — because with childhood obesity, 20 years down the line you have huge drain on the health system, you can therefore monetize the cost. It turns out the returns for early intervention look pretty good. That’s something that government can’t do by itself because it’s fiscally constrained. The private sector can’t do it for themselves because they would need access to the public system. But in collaboration and with the right blended capital structure you can solve the problem.

Noble: It creates a lot more resilience in the economic model for governments, for businesses, and for charities when you have these partnerships. For the most part impact investing does end up creating a lot of win-win situations. Sometimes the wins are not equally distributed, but the key is to think about what you’re able to achieve because you’re forming these collaborations and partnerships.

It does result in some complicated structures, doesn’t it? Is there anything to the old Adam Smith, Milton Friedman argument of let the dang business people do their business, let government be government, let non-profits be non-profits?

Drexler: The classic Friedman argument misses a point — if you forget to look beyond the perimeter of your activities then sooner or later you’re going to make some pretty serious mistakes. I saw this personally in a former life in the private sector. People on the mortgage-trading desk were so busy optimizing their structured financial products that they forgot about the fundamentals of the mortgage business on the ground, and sooner or later that thing blew up. I think if you leave people in their silos and restrain them from cross-fertilization you end up with far less robust and far less effective systems.

Noble: Economies and business operate in very complex systems. What we study in the classroom about economics and about business doesn’t always play out the way that we plan or hope in the real world. And the beauty of innovative sectors such as impact investing is that we can experiment, collaborate and try to — even in a very small way — reconcile some of what didn’t work previously.

So here’s the money management industry. They’re beset by downward pressure on their margins. Now here’s some new, not very well defined, somewhat opaque category where maybe they can actually get some margins out of their investors …

Drexler: To quote Scott Adams of Dilbert, “Wherever there is money, there are weasels.” We hope it doesn’t quite get that way any time soon. There is probably $50 billion of money under management in impact investing at the moment — that’s not going to set the world on fire for the large investment firms. But it’s been growing steadily, and I think that’ll continue. We see it having a lot of traction with family offices at the moment. If we had to make a guess, for the next three to five years that’s the major source of growth for the sector, with the institutional investors following suit. You don’t need to look very far to see other investment universes that have evolved that way. Private equity or hedge funds through the ‘80s and the ‘90s, exactly the same story.

Noble: With family offices, there is this intergenerational play. Over the next four decades the millennials are going to inherit some $40 trillion. Thirty-six percent of them think that the primary purpose of business should be to improve society and about half of millennials — millennials are people born between 1980 and 2000 — think that businesses can do more around resource scarcity and inequality.

So the millennials are going to fix everything?

Drexler: I’m not sure that capitalism is so fundamentally broken that only impact investing, or only the millennials, can save it.

Noble: It’s not going to be that all investing is impact investing. I think a lot more investment decisions will have considerations about impact and the transparency and accountability that comes with technology and social media is going to propel that. It will get harder and harder for mainstream investors to not develop some strategies in this area.

Drexler: Impact investing is an excellent tool to solve a bunch of very, very difficult problems. Those problems are big enough for impact investing to grow beyond its current niche, that’s for sure. We’re excited about impact investing because we’re close to it. But it’s not like an investment style or corporate structure will evolve that will completely sweep away everything that we’ve known in the next five years. If you start seeing everything through the impact investing lens, it starts looking like you have a hammer and everything looks like a nail. We don’t want to go there.

It’s more filling in these gaps where capitalism as currently practiced doesn’t quite get to it.

Drexler: You fill some gaps, you improve on some others, and that’s just as good as it gets. If you think about it, venture capital did the same sort of thing and it’s become big, it’s become mainstream. But not every investment is a venture capital investment, neither should it be.

Noble: And venture capital has gone through waves of contraction and expansion. Impact investing might do that as well.

What’s key in my mind about why impact investing has gotten so much attention of late is in part that financial markets haven’t delivered the returns that everyone expected but also in part that the repercussions of inequality are making people question how can we do things better. You have people feeling simultaneously connected all the time through Facebook, through email, but completely disconnected from some sort of purpose or some sort of impact of the decisions that they’re making.

It seems so simple to align that more closely. Align your intentions with your impact and the decisions you make. In the end, when you make a lot of money and that money just sits in a bank account or perhaps buys you a luxury good which in the end doesn’t give you a sense of fulfillment, then that money in the end is not serving its purpose. Impact investing is in part reconciling what markets may not be serving well. But the bigger picture is that it is reconciling the dissonance between what we think money can do and what it can actually do for us.

Use Data to Fix the Small Business Lending Gap

Access to credit is a key constraint for entrepreneurs. And limited credit is in part caused by the difficulty of predicting which small businesses will and won’t succeed. In the past, a community bank would have a relationship with the businesses on Main Street, and when it came time for a loan, there would be a wealth of informal information to augment the loan application. Today, community banks are being consolidated and larger banks are relying more and more on data-driven credit scoring to make small business loans—if they are making them at all.

With larger volumes of data being used to analyze everything from the genome to traffic patterns and lunch choices, it is natural to ask whether big data can crack the code on small business credit risk. There is reason for optimism.

My recent Harvard Business School Working Paper on small business credit explores new technology-driven entrants in the world of small business lending. These innovative players, such as OnDeck, Funding Circle, and Fundera are disrupting the market by using technology to solve problems that have made small business lending costly for traditional banks. For example, they use online marketplaces to reduce the search costs for willing lenders to find creditworthy borrowers. And they are allowing new sources of capital such as peer-to-peer lending to replace traditional bank capital. However, all these online models depend on developing accurate new predictive models of credit assessment, often using new sources of data.

At first blush, it seems relatively easy to build an algorithm that has greater predictive power than the personal credit scores that some lenders continue to use as their primary small business credit indicator. Personal credit scores like FICO consider a combination of metrics such as payment history, current level of indebtedness, and types of credit used by potential small business borrowers.

In the high flying days of 2005-2007, banks around the country relied heavily on these scores to make quick decisions on millions of uncollateralized small business loans, with disastrous results. Since the crisis, banks have reconsidered their overreliance on personal credit scores in small business lending. Many lenders have built their own predictive models that incorporate key metrics about the borrower’s business – such as industry trends and number of employees – in addition to personal scores. Some lenders – as well as the Small Business Administration, which provides a partial guarantee on some loans made by lenders – have also incorporated third-party credit scores like those produced by Dun & Bradstreet, which use propriety predictive models that contain a blend of personal and business data to better assess borrower risk.

New entrants to small business lending have been taking this blended model even one step further. Online lending platforms like OnDeck have been using information on cash flows and direct deposits from small businesses’ bank accounts as a key indicator of credit health since 2006. Intuit has been experimenting with using companies’ QuickBooks data (with their permission) to create a credit score that the business can then show to lenders via a QuickBooks platform that includes several of the large banks and online lenders. Others have even gone as far as to use data from social media sites like Yelp in their predictive formulas. After all, isn’t the customer’s voice relevant if you are going to finance a plumber or restaurant?

Some worry that social media is unreliable and can often be manipulated by an aggressive competitor or by the small business itself. And early reports from the architects of these newer algorithms caution how long it takes to thoughtfully incorporate new metrics into the models. For now, the blended models based on personal scores and business-specific data continue to be the industry standard.

However, as new entrants increasingly experiment with cash-flow and direct-deposit data as a means of better predicting the ability of a small business to repay its loans, those with easy access to that data could have a real advantage.

Currently, large banks such as Wells Fargo and JP Morgan Chase, as well as credit card companies such as American Express and Capital One, have access to vast quantities of this type of data, and are beginning to incorporate it into their predictive models more often.

It is early days in the use of predictive modeling to reduce risk and create new markets for small business loans. But the likelihood for some success seems good. As new players enter the small business lending market and unveil new opportunities, large banks with both troves of data and teams experienced in this type of modeling are beginning to take note. What seems novel and niche in small business credit scoring today has the potential to be ubiquitous tomorrow.

In August, OnDeck announced an IPO valued at $1.5 billion. Some, at least, believe that new entrants and their innovative predictive approaches can change the game in small business lending. And if that’s the case, the ultimate winners will be America’s small businesses and entrepreneurs.

If You’re Feminine-Faced, You’re Better Off Negotiating by Phone

Prior to online negotiations with strangers, research participants indicated that they expected greater cooperation if photos of the strangers (whether male or female) showed more-feminine facial features, such as less-prominent eyebrow ridges and smaller noses (6.84 versus 6.05 for strangers with less-feminine features, on a 7-point expected-cooperation scale). In subsequent negotiations, participants also demanded significantly more from feminine-faced counterparts, say Eric Gladstone and Kathleen M. O’Connor of Cornell. Masculine-faced people enter negotiations with a built-in advantage, because their counterparts tend to demand less of them, the researchers suggest.

A Test to Weed Out Consultants You Shouldn’t Hire

We’ve seen a lot of consulting “misses” over the years — polished management products and services that fail to achieve what the clients want. Often it’s because executives recruit their consultants the wrong way.

They usually start the search sensibly — looking for recommendations from respected colleagues or friends, a reputation for cutting-edge work, a portfolio of similar jobs done elsewhere, deep subject-matter expertise, and industry experience. These are all good reasons to include a firm in your initial list of candidates. But once you’ve narrowed down the field to a few contenders and carefully read their proposals, it’s important to test them on two other dimensions:

Compatibility: Dig into how they operate. Have them describe their style of interaction with clients. For instance, do they want your people to participate in the project to learn something about the subject? Do they iterate with clients before framing overall recommendations? Do they suggest starting with a modest project to test the waters? Though most potential clients have strong preferences on these critical issues (one way or the other), they frequently go ahead and hire consultants without asking such questions.

In your search you’ll also want to select people who are pleasant for your team to work with. That means insisting on meeting with the key players who would staff your project (not just the partner who is selling the job) and including the principal players from your side. Any hint of inflexibility or arrogance on the part of the consultant during early give-and-take explorations is a red flag. A word of caution, however: There can be a fine line between “pleasant” and “submissive.” You want a comfortable working relationship — but you also want consultants who won’t back down too quickly when your team members disagree with them.

Results road map: Next, have the candidate firms specify how they plan to help you go from where you are to where you want to end up. Most consulting proposals don’t provide a road map — they simply describe the work the firms will do and the products they will deliver, as in “The supply chain management system that we intend to install will have the following characteristics…” But what you really need to know is how and when that new system will help you achieve your business goals.

For example, if your goals for a new supply chain management system are lower costs and improved on-time delivery, ask yourself (as an individual or as a team) what an acceptable project outcome would look like. Is it the blueprint and implementation plan for a companywide system for production forecasting, purchasing, inventory control, and related functions? A pilot system delivering bottom-line results in one plant or division? Improved performance against key metrics achieved by a certain point in time?

Spell it out for yourself and for the consultants you’re considering — don’t assume that they share your perspective. To ensure that you and the consultants are using words in the same way, request a couple of case illustrations of results — it’s OK if they are anonymous cases — and listen for the details of how and when the consulting product yielded what you want. And ask how they would do things differently in your organization.

It’s hard work to vet consultants before you hire them. But it’s not nearly as hard as suffering through a costly multi-month project that consumes huge amounts of your staff’s time and doesn’t even solve the problems you wanted to fix.