Marina Gorbis's Blog, page 1526

Why Law Firm Pedigree May Be a Thing of the Past

Have you ever heard the saying: “You never get fired for buying IBM”?  Every industry loves to co-opt it; for example, in consulting, you’ll hear: “You never get fired for hiring McKinsey.”  In law, it’s often: “You never get fired for hiring Cravath”.  But one general counsel we spoke with put a twist on the old saying, in a way that reflects the turmoil and change that the legal industry is undergoing.  Here’s what he said: “I would absolutely fire anyone on my team who hired Cravath.”  While tongue in cheek, and surely subject to exceptions, it reflects the reality that there is a growing body of legal work that simply won’t be sent to the most pedigreed law firms, most typically because general counsel are laser focused on value, namely quality and efficiency.

There’s no question that the legal industry is going through upheaval.  Law schools are shuttering and powerful old firms have fallen.  In Dina’s recent article “Consulting on the Cusp of Disruption,” she and co-authors Clayton Christensen and Derek van Bever argue that despite the disruption in consulting and in law, there will always be complex, high-stakes problems for which a brand-name, solution shop firm will be required, but that as disruption marches up-market and more problems find commoditized solutions, there will be a thinning at the top of the pyramid.  Only those firms that can change quickly enough to meet their clients’ increasing demands for greater value will survive.

A recent survey of General Counsel at 88 major companies conducted by AdvanceLaw (an organization founded by Firoz) supports this argument.  The results suggest that GCs are increasingly willing to move high-stakes work away from the most pedigreed law firms (think the Cravaths and Skaddens of the world)… if the value equation is right. (Firms surveyed included companies like Lenovo, Vanguard, Shell, Google, NIKE, Walgreens, Dell, eBay, RBC, Panasonic, Nestle, Progressive, Starwood, Intel, and Deutsche Bank.) The results of the two questions the survey asked are below.

That 74% of GCs preferred the less pedigreed firm under the circumstances described in question 1 reaffirms that clients are becoming more and more comfortable with using a wider range of firms.  Moreover, in the U.S., the current cost premium for an AmLaw 20 firm relative to, say, an AmLaw 150 or 200 firm is typically far more than 30%.  Factoring in lower hourly rates as well as the greater efficiency most clients say the other firms deliver, we are likely talking about an overall cost premium in the 60+% range.

What can also seem non-intuitive is that only 11% of GCs surveyed felt that pedigreed firms, despite the price premium, actually were more responsive (a key element of client service).  However, this actually mirrors Firoz’s experience at AdvanceLaw, where firms of varying sizes and pedigree are successfully unseating AmLaw 20 and Magic Circle incumbents on high stakes work (e.g., a recent M&A deal valued at $500 million; national trial counsel for a significant multi-state class action).  These firms have been receiving impressive evaluations from GCs and in-house counsel on responsiveness, expertise, quality and efficiency.   One reason for this is that top talent is increasingly dispersed, not residing solely at the most pedigreed of firms.

This AdvanceLaw survey suggests that clients are serious about moving high-stakes work away from the most pedigreed (and expensive) law firms.  So, are white shoe firms feeling the impact of this mindset change?  When we examined revenue per lawyer (a proxy for a law firm’s ability to command a price premium) across a sample of firms, we found that growth was highest among non-pedigreed firms.  Our sample of 15 especially highly reputed firms (including the likes of Cravath, Skadden, and Sullivan) experienced an average increase of only 2.9% in revenue per lawyer over the 5-year period from 2007-12.  In comparison, a sample of 15 smaller, comparatively less known firms posted average growth in revenue per lawyer of 12.7% in the same period.

Surprisingly, many (though not all) pedigreed firms are choosing to not yet compete on value, arguing that this would diminish their future ability to compete for the shrinking pool of high-stakes / high-margin work.  However, as the survey and financial analysis reveal, this ends up opening the door for other law firms (as well as non-traditional providers) to slip in and chip away at what we all once assumed were unassailable relationships between the most pedigreed law firms and their clients.

But it would be unwise to count out white shoe firms’ ability to adapt over the long run. Their higher margins could be reinvested into client service innovations.  They also have the potential to roll out differentiated lower cost solutions (as some have already begun doing in the form of contract lawyers).  Of course, there are many challenges to any of these strategies, not the least of which is firm culture.  But make no mistake: the competition for market share in the legal space is tough and getting tougher.

How Twitter’s Leadership Drama Explains its Success

One founder pushed aside in the early days of the company, his name scrubbed from its founding story. Another ousted from the CEO role by a co-founder, former boss, and seed investor. That founder himself booted from the CEO role later on by VCs, only to watch the company’s initial CEO return to the day-to-day operations alongside yet another chief executive, who joined well after the founding.

This is the origin story of Twitter, at least according to New York Times reporter Nick Bilton, whose forthcoming book on the subject is excerpted in the Times’ Magazine this week. And it’s a far cry, he asserts, from the version that the company and its current leadership have repeated to the press.

Bilton’s account of how the company actually got its start reads like high drama, but is it at all surprising? Not to those who’ve been through a few startups, or studied the challenges that founders face. Earlier this year, Harvard Business School professor Noam Wasserman published The Founder’s Dilemmas, the result of a decade’s worth of survey data on the challenges startups face. His work suggests that Twitter didn’t just succeed in spite of all the drama Bilton reports, but to some extent because of it. Put another way, the frequent swapping out of executive roles at different stages has almost certainly been key to Twitter’s success to date.

If that seems counterintuitive, consider the “fundamental tension” that Wasserman presents in his book (and in a 2008 article for HBR): founders can choose to be “rich” or to be “king.” Of course, they may end up neither, but Wasserman’s research finds they seldom end up both:

The “rich” options enable the company to become more valuable but sideline the founder by taking away the CEO position and control over major decisions. The “king” choices allow the founder to retain control of decision making by staying CEO and maintaining control over the board—but often only by building a less valuable company. For founders, a “rich” choice isn’t necessarily better than a “king” choice, or vice versa; what matters is how well each decision fits with their reason for starting the company.

The path to value typically requires a change in leadership, not because VCs are somehow nefarious, but because they recognize that different stages of a startup require different kinds of leaders. As Wasserman wrote for HBR:

A technology-oriented founder-CEO, for instance, may be the best person to lead a start-up during its early days, but as the company grows, it will need someone with different skills.

That fits Jack Dorsey, who became Twitter’s first CEO after playing the role of lead engineer as the product was being developed within co-founder Evan Williams’ previous company Odeo. Williams, who previously had sold Blogger to Google, later took the reins and managed the company for two to three years. Sure enough, the company’s growth soon warranted yet another shift, and the board put COO Dick Costolo in the CEO role.

These shifts are the stuff of truly riveting journalism, but aren’t surprising. As Wasserman summarizes:

When [founders] celebrate the shipping of the first products, they’re marking the end of an era. At that point, leaders face a different set of business challenges. The founder has to build a company capable of marketing and selling large volumes of the product and of providing customers with after-sales service. The venture’s finances become more complex, and the CEO needs to depend on finance executives and accountants.

Sound like anyone you know? From Bilton: “Dorsey had also been managing expenses on his laptop and doing the math incorrectly.” Continues Wasserman:

The organization has to become more structured, and the CEO has to create formal processes, develop specialized roles, and, yes, institute a managerial hierarchy. The dramatic broadening of the skills that the CEO needs at this stage stretches most founders’ abilities beyond their limits.

That proved true even for the relatively more experienced Williams.

Nor is it surprising that these shifts caused drama within the team.

Four out of five founder-CEOs I studied resisted the [appointment of a new CEO], too. If the need for change is clear to the board, why isn’t it clear to the founder? Because the founder’s emotional strengths become liabilities at this stage. Used to being the heart and soul of their ventures, founders find it hard to accept lesser roles, and their resistance triggers traumatic leadership transitions within young companies.

But there is one insight from Wasserman’s research that does push back on the narrative presented in the Bilton piece: the focus on executives’ shortcomings as a motivation for change. No doubt Dorsey and Williams did each struggle with the managerial challenges of such a fast-growing company; everything we know about startup leadership predicts as much. What Wasserman points out, though, is that these challenges are the result of executive success more than failure:

Success makes founders less qualified to lead the company and changes the power structure so they are more vulnerable. “Congrats, you’re a success! Sorry, you’re fired,” is the implicit message that many investors have to send founder-CEOs.

And Twitter has no doubt been a success, at least if Williams and Dorsey hoped to be rich rather than king. (Interestingly, Williams is mentioned in Wasserman’s HBR article for having bought back control of Odeo from investors, in order to restore his kingship.)

From the perspective of value creation, what investors ultimately care about, the executive shifts at Twitter were probably critical to the company’s continued growth. When the case study on Twitter is eventually written, it will likely be less about personal drama and more about the leadership transitions necessary for startup success.

Don’t Treat Your Career Marathon Like a Sprint

In high school, I was on the cross-country running team. I was only a decent athlete, and midway through the season, my coach demoted me to the “B team.” I wanted to prove to him I deserved to be back on the “A team,” so I launched into my first “B race” at a far faster pace than normal.

I was leading the pack almost the entire way, and, even though my legs were burning, I thought that I could win, get a shiny medal, and more importantly, get my deserved promotion higher up the team pecking order. My coach was thrilled by my “all in” performance. Coming down the last ½ mile of the 3 mile race, however, my legs turned to jelly and I fell from the lead all the way to the back. I even threw up at the end of the race. Afterwards, my coach asked what happened.

I think he knew the answer, and most of us who work in competitive fields know it too. I hadn’t paced myself. I lost my race because I treated a three-mile run like a 100-meter dash. As a result, I had no energy in reserve for the last, most important stretch.

It’s possible in the realm of knowledge work, too, to work so hard for so long under so much pressure that we run out of energy, not just to the detriment of our family lives or our mental and physical well-being, but also with terrible consequences for our long-term job performance. Yet many of us launch into our workweeks, six-month projects, and even whole jobs as 100-meter dashes, seemingly oblivious to the long race over uneven terrain we are actually running.

According to a recent Families and Work Institute study, one third of employees report chronic overwork. Those reporting chronic overwork cite:

Extreme job demands, in that they are given more work than can be reasonably accomplished even in 60 hour workweeks
Expectations that they stay connected to work remotely (email, phones, text) after work hours
The inability to avoid “low value-added” tasks such as paperwork or unnecessary meetings
Having too many projects to work on at one time, diminishing their ability to focus and prioritize among projects and creating too many interruptions and distractions.

As a believer in work-life balance, I often make the argument that “all in” and “work before all” corporate cultures and work expectations are actually enemies of sustained high performance. Smart companies, who know they stand to gain most by retaining the talent they develop, know better than to make their people choose between employer and family.

However, I also firmly believe that the problem is circular, and a worker’s own lack of balance can lead to chronic overwork, and, by extension, to poorer work performance over time.

A few months ago, I was at a Leadership Summit for the Thirdpath Institute, an organization that advocates for work-life balance. One speaker told an anecdote that stuck with me. It was the story of a man who ran a small law firm, talking with a potential client. The client questioned whether to hire this firm because it had advertised itself as a family-friendly workplace. “What happens when an emergency comes up during my case?” asked the prospect. “How do I know you’ll be able to respond?”

“We can respond better because we have a balanced approach,” explained the attorney. “And here’s why. We prioritize better, are staffed more appropriately, schedule time for long-term planning, and yes, allow for time outside of work for our lawyers to have full family lives. Because my lawyers aren’t chronically overworked, they have the capacity – in terms of time, energy, and mental focus – to respond effectively to your crisis situations. We are much more able to rise to these occasional challenges because we don’t treat every day like a crisis.”

He got the client.

In a highly competitive global economy, employers need people to put in full days working hard, and sometimes to put in longer days than others. But if workloads are draining more energy than is being replenished, the pace cannot be sustained. How many talented contributors do we lose because of extreme job demands? How much productivity and quality do we sacrifice because of accumulated fatigue? Occasional overwork may be a necessity, and even embraced by ambitious men and women trying to make the “A team.” Chronic overwork leaves everyone, employees and managers, in the dust.

Case Study: A Short-Seller Crashes the Party

When the well-known hedge fund manager and short-seller Jeremiah Hughes first put Terranola in the spotlight, issuing ominous warnings about unsold products, a looming patent expiration, and flawed growth projections, the considered judgment of the executive team was to do nothing.

“I refuse to dignify this attack with a response,” said Henry Guillart, the CEO, just hours after Hughes had given his initial negative presentation at an investor conference in New York. That decision turned out to have serious consequences. Terranola’s stock began tanking that afternoon, precipitating a slide that took the Seattle-based company’s reputation, employee morale, and ability to raise capital along with it.

A month later, when Hughes mounted a second attack, everyone expected Terranola to counter. But behind closed doors, its leaders were torn: They realized that responding this time might lead to even more trouble.

(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.)

The Power of the Power Bar

Terranola is the company behind those granola bar machines you see on every kitchen counter nowadays. It’s hard to believe that little more than a decade ago people didn’t even think of making their own snack bars at home. That’s a testament to the speed and thoroughness with which Terranola has dominated the business sector it invented.

By now everyone has heard the story of how the company’s flagship product, the Express bar-making machine, came to be. Henry Guillart had been running an organic food distributor when he came across a sandal-wearing inventor in a Whole Foods store demonstrating what was then called the Power Bar Press. It was ugly, clumsy, and expensive, but Henry immediately saw its potential and bought the idea. He renamed his company and put a team of engineers to work solving the product’s mechanical, food safety, cost, and design flaws. When the Express finally emerged, it was a peach: simple, speedy, and elegant. Henry positioned it for several customer segments at once: gadget lovers, foodies, hikers, moms packing their kids’ lunches, and people with dietary restrictions, such as nut allergies.

The business model centers on the old razor blade strategy: Sell the machine at just above cost and make high margins on the system’s consumable element – patented plastic pods. These come in fill-it-yourself kits for consumers who like to exercise their creativity: If they’re tired of cinnamon-oat-raisin, they can make pistachio-millet-honey-blueberry. The pods are also available prepacked with nuts, grains, dried fruits, and flavorings for Express owners who simply like using their gadgets.

Half a dozen companies worldwide are licensed to manufacture the machines and pods and sell them to retailers and distributors, paying royalties to Terranola on each sale. So although the company makes almost no money on the machines, it earns a profit of about 15 cents on each pod, not to mention additional licensing fees from food brands, such as Kellogg’s and Nature’s Promise, that are keen to be associated with a wildly popular product.

Investors adored the Terranola story. When the Express launched, sales of food bars in the United States were already $2 billion annually and expanding by double digits. Europe and Asia were the next frontiers. Terranola’s first five years of sales were unprecedented for kitchen gadgets, and revenue soared to $1.1 billion. Competitive products came on the market, but none were as popular as the Express. Michelle Obama bought one for the White House, and the president gave one to David Cameron as a Christmas gift. Terranola’s market cap skyrocketed to $8.1 billion, and even then many analysts remained bullish, saying that household penetration of Express machines could increase threefold in the United States and Canada alone.

Yet the company also attracted a lot of short-sellers – investors who borrowed shares from a brokerage and sold them, hoping to buy them back later at a discount, return them, and pocket the difference. At the stock’s peak, nearly a third of shares were sold short. It seemed that many market players, notably Jeremiah Hughes, thought the Terranola story was too good to be true.

Doom and Gloom

Hughes was the founder of a hedge fund managing more than $6 billion in assets. He had become known for bringing down overvalued companies by shorting their stock and then publicly shaming them. The first thing he did in his 20-minute presentation at the Council of Value Investors was to show, on the basis of household income and food bar consumption data, that Terranola might conceivably be able to double its sales in the coming years, but it certainly couldn’t triple them. Then he made a few ominous comments about warehouses full of unsold pods and launched into an analysis of threats to the company’s intellectual property – specifically the looming expiration of a key patent on Terranola’s pods and the possibility that its own licensees would soon be able to make identical, lower-priced ones for use in the Express or copycat machines. He argued that the company’s current effort to get a patent extension was bound to be unsuccessful, because its so-called technical improvement consisted of a trivial change – making the pods fluted rather than smooth.

In a final flourish, Hughes recalculated Terranola’s likely earnings per share at just one-third the level that was being bandied about by the bulls. “Once the patent expires next year,” he told the crowd in the Waldorf Astoria ballroom, “this business model will crumble – just like an old, stale granola bar.”

A.J. Densmor, Terranola’s CFO, saw those words on Twitter about one minute after Hughes had uttered them. An agitated Henry burst into his office only a few seconds later. “Jeremiah Hughes is talking trash about us!” he nearly shouted.

“I know,” A.J. said.

They called in the company’s investor relations and PR chiefs and, after a long discussion, agreed to hunker down and watch how the situation played out. “Everyone knows that a short-seller is just trying to make money for himself by driving the stock down,” Henry insisted. “This will blow over.” A.J. wanted to believe him. But of course Hughes’s presentation was a tipping point. It irrevocably changed the way investors perceived Terranola.

A week later A.J. spoke up. “We have to rebut,” he told Henry. “We’ve got a legitimate chance for a patent extension. Investors need to know that.”

Henry shook his head. “What he’s doing is unethical and immoral, and I’m not going to get down in the mud with him. I know the investors will come around.” Confident words. But A.J. sensed a deep discomfort in the CEO, as if Henry was afraid to tangle publicly with Hughes.

As CFO, A.J. was painfully aware of the consequences of the stock slide, which now amounted to 20% from the peak, with no bottom in sight. Beyond the intangibles of poor publicity and anxious employees, a sinking share price wreaked havoc with the company’s compensation structure, which relied on stock options as incentives. Even more important from a strategic perspective, creditors would balk at further loans until the uncertainty was resolved, making it harder for the company to raise money.

The timing of all this was particularly bad. Terranola had been moving forward with A.J.’s plan to acquire all six of the licensees that made Express machines and pods. With the company’s share price sinking and its cost of capital rising, those deals might have to be put on hold. But if they didn’t go forward and the patent expired, the licensees might indeed become competitors, and Hughes’s prophecy would be self-fulfilling.

In subsequent weeks, as the stock sank to 30% below its peak, Terranola’s silence created an information vacuum into which all sorts of rumors and speculation rushed. One analyst pointed out that although the company’s earnings were spectacular, often beating forecasts by 40%, its sales were more modest, typically meeting forecasts or bettering them by just a little. “How is that possible?” she asked, implying that the books were somehow being cooked. Shareholders began contacting the company, demanding that it do something. Still Henry refused to respond.

But when his marketing chief got a tip that a global snack industry website was about to publish an interview with Hughes about Terranola, A.J. could tell that Henry was ready to reconsider. He suggested a meeting of the executive team to plan a response or even launch a preemptive attack, and the CEO agreed.

The discussion was heated. There were calls for a lawsuit against Hughes. Someone suggested that they advise the New York attorney general’s office to initiate a case against him for stock price manipulation. Terranola’s chief counsel floated a plan to ask shareholders to demand the physical certificates for their shares, preventing brokers from lending them to short-sellers and possibly forcing people like Hughes to cover their positions. A.J., for his part, said the company should launch an aggressive PR campaign, encouraging reporters to examine the company’s assumptions and forecasts in detail.

But everything changed when the Hughes interview appeared the next day.

A Veiled Threat

“What’s your reaction to Terranola’s silence about your analysis?” the interviewer had asked.

“I’m impressed by it, to be honest,” Hughes replied. “I would have thought they’d do what ExSolv did back in the 1990s. ExSolv claimed to have a technology for extracting oil from sand. Investors didn’t believe the hype, so they shorted it, and the company fought back tooth and nail. They told shareholders to request immediate delivery of their stock certificates. They hired private investigators to find out who was spreading misinformation. They even sued one fund manager. They damaged a lot of people’s reputations and cost a lot of people a lot of money. And lo and behold, the company turned out to be a fraud. That’s chutzpah!

“I’ve come to believe that the harder a company fights me, the more likely they are to be lying. So I’ve always got more ammunition in store. I always know a lot of things that I don’t say publicly. I wait and see how a company is going to react – I let them take the lead. If they come after me with lawsuits and investigations and accusations, I let them have it. And in the case of Terranola, believe me – well, enough said.”

A.J. went to Henry’s office after reading the interview. The two men were thinking about the same thing: Hughes’s cryptic reference at the Waldorf Astoria to warehouses full of unsold pods. For a long time Terranola had been buying machines and pods from its licensees to sell through its website and branded sections in department and big-box stores. As a result, it booked hefty royalty payments before the products were actually in consumers’ hands. That’s why the company’s earnings were so much better than its sales.

But A.J. knew perfectly well that much of this inventory was indeed being stored, and that the ingredients in the prepacked pods would have to be discarded if they sat around too long. He’d repeatedly told Henry that they should stop the practice or they’d risk being accused of self-dealing and juicing the company’s earnings. But he’d also figured that the problem would go away when Terranola acquired the licensees. Unfortunately, it seemed that Hughes had somehow found out. He probably didn’t have enough solid information to go public, but if pushed, he would undoubtedly dig around and get it. A.J. could only imagine how that would look to analysts and to Terranola’s shareholders. Would the share price – and, indeed, the company – ever recover?

Just then the chief marketing officer, Janet Washington, came in. She’d read the interview with Hughes too, but she didn’t know about the royalties practice, so she was puzzled by his comments.

“What was he talking about?” she asked.

Henry and A.J. were silent.

“I think we should go ahead and get aggressive with him,” Janet said. “Who is he to tell us what we can do? The sooner we get our side of the story out there, the better. When can we start?”

Question: How should Terranola respond to the short-seller’s accusations?

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

 

What It’s Like to Work for Jeff Bezos (Hint: He’ll Probably Call You Stupid)

You'll Never Buy Anything the Same Way AgainThe Secrets of Bezos: How Amazon Became the Everything StoreBusinessweek

Ever wondered what it's like to work at Amazon? Or to be one of its competitors or potential acquisitions? Or even to be related to founder Jeff Bezos? Look no further than this lengthy piece by Brad Stone, whose book on Bezos and his company comes out in later this month (natch, that's an Amazon link). On my first question, Bezos isn't a particularly nice boss. Amazon's culture is "notoriously confrontational," with Bezos regularly embarking on what employees call "nutters," which largely consist of him shooting off phrases like "Are you lazy or incompetent?" "I'm sorry, did I take my stupid pills today?" and "If I hear that idea again, I'm gonna have to kill myself." And yet many people who work there thrive in this environment and generally find that Bezos is right on target when he flippantly dismisses an idea or prioritizes a customer complaint over being civil to his underlings.

And unlike many top companies that offer employees flexible working arrangements and other perks, Amazon gives new employees "a backpack with a power adapter, a laptop dock, and orientation materials," and reimburses only part of their public-transit passes. This is a huge jump from the 1990s, however, when "Bezos refused to give employees city bus passes because he didn't want to give them any reason to rush out of the office to catch the last bus of the day."

As for my second and third questions, you're going to have to read the article. In particular, what happens when Stone tracks down Bezos's biological father is astonishing.

Barbarians at the GateMaking the Leap Into Developed Markets London Business School

How will established companies in the U.S., Europe, and Japan respond when companies from emerging markets invade developed economies with "good-enough" substitutes for what the incumbents have been successfully selling in the homeland? It's going to happen sooner or later. Tata Motors, for example, is expected to launch a full-scale attack on American markets with its ultra-cheap cars. When the assault comes, companies can take a lesson from Gillette, which dealt with a similar threat from Bic's cheap disposable razors in the 1990s. By introducing disposable-razor innovations such as lubrication strips, Gillette seized the initiative and essentially redefined the market, writes Costas Markides. Gillette "managed to convince consumers that they should expect more from their razors and that Bic was not really 'good enough' for them." This kind of nimble response from tough, wily corporations in the developed world will likely limit the invaders' success in wresting market share from the incumbents, Markides says. —Andy O'Connell

HabitsWhy You Can't Stop Checking Your PhoneBoston Globe

Forming habits is one of the ways we become more productive. Essentially, our brains create shortcuts when it comes to things we do often, like turning off the lights, thereby saving our mental bandwidth for times when we need to make an important decision. This is all well and good, explains Leon Neyfakh, except when it comes to checking your phone while you drive.

With distracted driving, which injured 387,000 people and killed 3,331 more in 2011, the impulse has been to increase public awareness (filmmaker Werner Herzog directed this 30-minute stunner of a campaign, for example). But that approach may not work. Your phone programs your brain to habitually check it. And when checking text messages or Twitter becomes a neurological shortcut, we may not even be aware we're picking up our phones, particularly because the act of driving preoccupies our prefrontal cortex, which controls inhibition. So how do we make ourselves, and others, safer? Some suggest social campaigns to make checking phones in certain situations socially taboo. Or we can fight habit with habit, teaching our brains that there are times when we should turn our phones off. 

Rashomon in Silicon Valley All Is Fair in Love and TwitterNew York Times Magazine

Hope you like start-up soap operas. In this downright juicy excerpt from Nick Bilton's forthcoming book Hatching Twitter, we finally get to the bottom of the social network's origin story. And it ain't what developer and self-proclaimed Twitter inventor Jack Dorsey has peddled all these years (among other things, he supposedly invented Twitter on a playground, or when he was 8 years old, or because he was fascinated with trains and maps).

There are far, far too many wonderful details to squeeze in here (like the time Ev Williams told Dorsey, “You can either be a dressmaker or the CEO of Twitter," but not both, or when Dorsey insisted that employees use Twitter rather than text messages, which resulted in a six-figure monthly bill). But the most resonant aspect of the piece is that after Dorsey was essentially forced out as CEO, he spun his own origin story, portraying himself as the heart and soul of Twitter in order to maneuver his way back to the top of a company he once struggled to run. In the end, Bilton reminds us that the creation of Twitter was truly a collaborative effort. Some people are making a ton of money because of it. Others, like Noah Glass (heard of him?), the man who actually came up with the name "Twitter," aren't. 

Self-Absorbed with an Open Wallet? The Millennial Male Is Not Who You Think He Is Adweek

Traditionally, American men between the ages of 18 and 34 have been a lucrative target for marketers. But, says Sam Theilman at Adweek, the recession and lingering underemployment have made the millennial generation a very different breed of youth from their counterparts of old. Collectively, millennials carry an eye-popping $1 trillion in student loans, even though only a quarter of the males among them managed to get a degree. Just 62% of millennial men have jobs; half of those work less than full time. And they’re not being paid much for their efforts. According to the Bureau of Labor Statistics, the gap between productivity and real hourly compensation has never been wider, which means they’re doing a lot more work for a lot less money.

The upshot: Millennials are poor, which is making them very frugal consumers. New cars are beyond them, and even cable is too expensive. More than a third still live with their parents. Unless the economy starts generating better-paying jobs, they’re unlikely ever to turn into the kind of consumers the Baby Boomers and Gen Xers were at their age. —Andrea Ovans

BONUS BITSWhen Things Go Badly

Why It's So Hard for Companies to Make Digital Transformations (Sloan Management Review)
Blackberry, Disruption, and Woulda, Coulda, Shoulda (Learning by Shipping)
The U.S. Debt Ceiling Crisis Explained (The Guardian)

Overcoming Fragmentation in Health Care

America is a nation of innovators and entrepreneurs. We are a nation that cares for our fellow citizens, yet we have failed to create a health care system that fully meets the needs of people in this country. Health care is fragmented, and the quality of care varies widely, which leads to unsustainable health care spending.

As the Affordable Care Act (ACA) continues to be implemented, we are seeing increased access to insurance coverage for many. But the ACA does little to address fragmentation, quality of care, and the sustainability of the financial model for U.S. health care — how health care is paid for. More work is needed to achieve the drastic change in market forces that is necessary to create a sustainable health care system. To achieve this, we must reduce fragmentation of care, ensure that the highest quality care is delivered in all settings, and build a sustainable health-care financial model.

Addressing Fragmentation

Health care is experiencing a significant trend of consolidation through mergers and acquisitions. At Mayo Clinic, we have chosen a different path — a path focused on sharing our most scalable product:  our knowledge. We believe that fragmentation and variability in care may best be addressed by creating tools to share knowledge than can be used by providers as they care for patients in their own communities.

At the foundation of our approach is a knowledge-management system — an electronic archive of Mayo Clinic-vetted knowledge containing evidence-based protocols, order sets, alerts and care process models. This system, which can be made available to physicians in any location, brings safer care, better outcomes, fewer redundancies, and ultimately cost savings for our patients. Ask Mayo Expert, one of the many tools in our system, helps physicians deliver safe, integrated, high-quality care. Through this system, physicians can find answers to clinical questions, connect with Mayo experts, search national guidelines and resources, and find relevant educational materials for patients. This knowledge is updated in real time and made widely available.

We have used this knowledge-management system to support the creation of our Mayo Clinic Care Network, an affiliation model rather than a merger or acquisition model. This tool supports health care professionals in their communities, enabling them to provide better care locally at lower cost. This network has been built over two years and includes 21 health systems and hospitals in the United States, Puerto Rico, and Mexico — all of which use Mayo Clinic-vetted knowledge so that other patients can benefit from our 150-year history of innovating and improving patient-centered care.

Addressing Uneven Quality

The proliferation of mandated quality measures and programs is daunting and some would argue has done little to improve quality and transparency for health care consumers. Quality in health care must be based on a comprehensive look at the entirety of a patient’s experience. It is alarming to see more than a two-fold variation in health care quality across the country. Streamlining quality of care can be difficult, which is why we’ve incorporated the use of engineering principles to improve our quality outcomes, safety, and service. We purposefully design, implement, and systematically diffuse quality-improvement efforts at all of our locations around the country. Through this commitment, Mayo Clinic physicians and scientists have contributed more than 400 peer-reviewed papers on quality improvement in the last five years.

The promise of the emerging science of health care delivery is profound, some say game-changing, in its ability to both reduce costs and improve quality. The full potential will be realized through the distribution of the right tools and resources. One such resource is the work of Optum Labs, which we formed with Optum earlier this year. Optum Labs, an open R&D facility with a unique set of clinical and claims data, is being used to drive advances that will improve health care for patients and our country. We are now inviting others — providers, life science companies, research institutions, consumer organizations, and policy makers — to be part of Optum Labs. This opportunity to apply world-class analytical tools to both cost and quality will provide the evidence necessary to deliver care that reduces costs and increases quality at the same time. This effort will allow health care to finally measure value for patients and payers.

Creating a Sustainable Future

Investment in health care is critical at this time. At Mayo Clinic we are investing in new areas of research that will define the future of health care, such as individualized medicine and regenerative medicine. We are also intentionally investing in our most precious resource: our staff. We constantly strive to have the most talented health care workforce anywhere in the country and are investing in their growth and knowledge expansion. For example, we have initiated team-based methods to enhance learning about new regenerative-medicine therapies that help us tailor diagnostics and hold promise to teach the body to heal itself from within. We use the same team-based learning approach to drive ongoing improvement in the quality of care through the discipline of the science of health care delivery.

Just as the private sector must continue to fund research, the same is true for government. Funding for the National Institutes of Health and other agencies is essential for the health of Americans and the economic vitality of our country. Recent reductions in research funding put our nation’s competitiveness, economic security, and future at risk.

We also must embrace the elusive goal of value — higher quality of care at lower cost. We need a payment system that recognizes the spectrum of health care delivery across primary, intermediate, and complex care while rewarding the quality and value of each. This includes all payers — both private insurance and government-funded programs, particularly Medicare. The sustainable growth rate should be replaced with new, negotiated payment models that tie reimbursement to quality outcomes across the spectrum of care.

To transform health care in America into high-quality, patient-centered care that the nation can afford, we must address fragmentation, we must address variable quality, and we need to create a sustainable health-care financial model. Collaboration is key. Mayo Clinic has a long history of innovation focused on improving the value of health care, but we can accomplish much more by working together — integrating and sharing knowledge with one another.

Together, we must create the future of health care, a sustainable future that Americans expect and deserve.

Follow the Leading Health Care Innovation insight center on Twitter @HBRhealth. E-mail us at healtheditors@hbr.org, and sign up to receive updates here.

Leading Health Care Innovation

From the Editors of Harvard Business Review and the New England Journal of Medicine




Leading Health Care Innovation: Editor’s Welcome
Why Less Choice Is More in Health Insurance Exchanges
Doubts About Pay for Performance in Health Care
Coaching Physicians to Become Leaders

Make Your Innovative Idea Seem Less Terrifying

Four years ago, Craig Hatkoff, co-founder of the Tribeca Film Festival, approached me about a brainstorm: an event recognizing and celebrating breakthrough innovators.  When I suggested to Clayton Christensen that we partner with Hatkoff to create the Tribeca Disruptive Innovation Awards, Clay’s response was: I trust you Whitney.  If you say we should, let’s do it.  In 2010, the first year, the event was fledgling, but charming.  By 2013, we had honored Jack Dorsey of Twitter, Garrett Camp of Uber, famed choreographer Twyla Tharp, and Gangnam style pop artist Psy.

How I wish that all my ideas received this kind of reception!  Rarely have I had that kind of immediate trust and social currency when proposing something new.  More often, I’ve experienced the opposite reaction:  what I consider genius ideas have been greeted with blank faces, disapproving stares, and occasionally the outright smackdown.

New ideas tend to evoke fear and anger – we are programmed to prefer the comfort and safety of established norms. Much as I want to believe that a glaringly good idea will stand on its merits, I have come to realize that just like any product or service, ideas require good marketing if they’re going to reach their intended customers.

Potential customers for our ideas have a predilection for thinking more about what they are already thinking, of scaling the learning curve they are already on.   When it comes to embracing a new idea, most will demur unless you can pack a parachute that will allow them to jump safely from their S-curve to yours.  You create this parachute using convincing data, demonstrating your own competence, speaking their language, and socializing your idea to overcome the ever-present fear factor. This becomes especially important within a large organization where innovation is often perceived as a battle:  the heroic disruptive David against the oafish bureaucratic Goliath, or a spy game requiring stealth.

Celine Schillinger sought to change the leadership landscape of Sanofi, a major pharmaceutical company.  She loved her job, and with a background in public affairs in communications had been successful in both international business and management roles.  But as she began to consider her future at the company, she realized that all of the people above her were white, male engineers or accountants.  She also believed that Sanofi’s competitive edge was at risk because of this narrow approach to talent management.

So she wrote a memo to the CEO explaining why gender balance is good for business.  Initially there was no buy-in.  But when her e-mail unexpectedly went viral after she’d shared it with a few colleagues, Schillinger became the leader of what has come to be known as WoMen in Sanofi Pasteur (WiSP), now the largest network across Sanofi with 2,500 members in fifty countries.  This might have backfired with an executive team that wasn’t as competent and as open to discussion, or if Sanofi had gone about it in a different way — in either case, they could have reacted as if she were going behind their backs. But both her tactful socialization of the idea and its contagious effect were self-validating. As the idea gained grassroots traction, the risks of buying in fell for senior management even as their respect for her expert stakeholder communication skills rose. This led to the HR VP brokering a meeting with the CEO and an invitation to make a formal presentation to the Executive Committee.  By eliminating the heightened sense of risk inherent in new ideas, Schillinger offered a parachute for potential stakeholders to jump into the unknown. Today, she’s the Head of Stakeholder Engagement for their in-development Dengue Fever vaccine — one of Sanofi’s largest business initiatives.

Or consider Scott Heimendinger, who jumped from the role of program manager on the Excel team at Microsoft to the director of applied research for Modernist Cuisine, a company dedicated to advancing the state of the culinary arts through the creative application of scientific knowledge and experimental techniques.   Making the leap to a new career curve is a bold idea that also needs to be sold, and the importance of mitigating risk for the key decisionmaker — the prospective employer — holds true.   Because Modernist Cuisine founder Nathan Myhrvold was a former Microsoftee (their first CTO and the founder of Microsoft Research), Heimendinger immediately reduced the perceived risk of hiring him by speaking their shared Microsoft language.  But what really packed the parachute was Scott’s demonstrated competence at the Seattle Food Geek blog.  And like Schillinger, Scott also has the ability to socialize an idea;  he’s recently wrapped a successful Kickstarter campaign for Sansaire, a startup he co-founded to produce a $199 sous vide cooker.

According to the research on successful entrepreneurs, their single most important trait is the ability to persuade.  Whether you’re an entrepreneur or an intrapreneur, unless your boss is as comfortable with disruption as Clay Christensen is, your ability to persuade is tightly linked to your ability to assuage fear. To get buy-in for any new idea, whether your customer is your manager, your direct reports, your teenage son, the CEO, de-risking is essential.  The ability to jump to a new vision or product or job almost always requires that those around us, our fellow stakeholders, also leap to a new curve of learning. If you’re looking for a break for your breakthrough ideas, prepare to skydive:  pack a parachute for you and your colleagues.

Executing on Innovation

An HBR Insight Center




Analysts Want You to Innovate, Except When They Don’t
When You’re Innovating, Think Inside the Box
How Good Management Stifles Breakthrough Innovation
Capturing the Innovation Mind-Set at Bally Technologies

American Companies Should Stop Being Helicopter Parents

Why do American employers act like helicopter parents when it comes to their employees’ health care?

I’m sure you know helicopter parents – the kind who hover over their kids at all times to help them navigate their lives. This parenting style doesn’t typically produce children who can look out for themselves. The same applies to employer helicoptering. Most companies provide a very small number of health-plan options, with the result that workers don’t have to – and never learn to – make significant decisions about coverage.

I recently saw the benefits of greater personal accountability in Singapore, where I traveled as an Eisenhower Fellow. Way back in 1960 – when Singapore was still a developing nation focused on the most basic needs like housing and clean water – the government introduced user fees for clinic visits, recognizing that individuals need to feel invested in their health-care decisions.

Today all wage earners are required to put savings into an individual account to cover future health-care expenses, a scheme called Medisave. Although there are constraints on such things as minimum balances and applicable services, the money belongs to the individual, who decides how to spend it. Nearly a third of Singapore’s per-capita health-care spending comes directly out of Medisave accounts. While Health Savings Accounts have existed in the U.S. since 2003, only about 8% of Americans have one.

The genius in Singapore’s health-care system is that each individual’s stake in health-care financing is clearly visible. The former CEO of a major hospital group told me, “People think twice or three times about using services.” He assured me, though, that no one goes without. High-quality outcomes and indicators suggest that for the most part, he’s probably right.

Today Singapore spends only 4% of GDP on health care, versus 18% in the U.S., and just one-third of health care spending comes from the government, compared with 45% in the U.S.

Singaporeans get better value for their money, too. The country performs better than the U.S. on measures such as life expectancy, which has risen 10 years since 1980, and infant mortality, which is among the lowest in the world.

I don’t mean to suggest that U.S. businesses should stop providing health benefits. These benefits help attract and retain talent. However, businesses can assist their workers in becoming true consumers of their own health care by taking the following approaches:

Let employees do the shopping. Americans are quite good at shopping for most things, so why not let them shop for health insurance? Despite political rancor about health-care reform, a key feature – health insurance exchanges – provides employers new options. Under the Affordable Care Act, employers can send employees to an exchange to purchase health insurance. Employers pay the bill, but employees can choose their own plans from all or a subset of available plans. We’re all experts about our own needs and preferences, so it stands to reason that employees will make better decisions about which health plan is right for them.

Offer plans that align incentives, and help employees understand them. Copayments, deductibles, coinsurance, and tiered pricing are designed to give consumers incentives to make lower-cost decisions. But these features work only if people understand them. A recent survey conducted by a Massachusetts health plan revealed that more than half of respondents had no idea what coinsurance is. Among those on subsidized insurance, the proportion was 66%. When I mention that finding to people, they often say, “Actually, I don’t know what coinsurance is.” (It’s when the patient pays a percentage of the doctor or hospital charge, rather than a flat copayment).

Employers should educate employees about their cost-sharing responsibilities and help them find health-care providers who meet their needs and their budgets.

Push for transparency. Employees shouldn’t be expected to share in paying for health services without knowing the cost. As the primary payers, employers are well positioned to demand price transparency. To retain their customers, health plans will likely respond to those demands.

Encourage savings. Throughout Singapore, I heard about people’s tendency to “save for a rainy day” and avoid spending beyond their means. Singaporeans have, on average, the equivalent of more than $15,000 in their Medisave accounts. In 2011, the average American savings account had just $5,900 to cover a full range of household expenses.

Employers should encourage employees to save. They should make health-savings options available. They should nudge people by making those programs “opt-out” and try even small incentives to get people to save. Higher levels of savings would better enable employees to handle increased levels of financial responsibility and would give them a greater stake in their health-care spending.

There’s evidence that American companies are moving in this direction. Recently, Walgreens announced that it would begin offering benefits on a private health-insurance exchange, which would let employees make their own decisions about how to use health-care money. Indeed, one in four employers is contemplating moving to private exchanges.

Earlier this year, the Chicago Tribune did a piece about “free-range” parenting: Within a six-block area, kids are free to make their own decisions. Proponents cite benefits to children such as skill building in the areas of social decision-making, problem-solving, compromise, communication, and self-regulation.

So why not “free-range” health benefits? By providing education, tools, and encouragement, rather than telling employees what to do, employers may ultimately help drive down health costs. Even if cost reduction proves to be an elusive goal, consumers will be empowered to think for themselves about the most expensive benefit their employers provide.

Sales Alert: Making Eye Contact May Not Be Such a Good Idea

After gazing at the eyes of speakers who were trying to persuade them, research participants showed an average attitude shift of just 0.14 on a seven-point scale, compared with 0.6 if they had stared at the speakers’ mouths, says a team led by Frances S. Chen of the University of British Columbia in Canada. This and another experiment show that contrary to popular belief, eye contact decreases the success of attempts at persuasion, at least in the cultural context of the European university where the study was conducted. Because direct gaze has evolved in many species to signal dominance, eye contact may provoke resistance to persuasion, the researchers suggest.

Culture, Not Leverage, Made Wall Street Riskier

Over the summer, U.S. regulators announced new rules that would limit the leverage (ratio of debt or assets to equity) that the biggest U.S. banks can use in their business. The reasoning, backed by several respected scholars, is that leverage was a leading cause of the financial crisis. The argument makes intuitive sense, and leverage ratios provide a clear quantitative measure for regulators to monitor, so regulations have followed.

But leverage ratios aren’t the only risk factors that matter. Corporate incentives and culture may be even more important in explaining what changed on Wall Street in recent years, and by placing too much emphasis on quantitative ratios like leverage, we may be missing some other important parts of the problem.

I came to this conclusion after studying the culture of Goldman Sachs, where I previously worked for 12 years, as research for a sociology Ph.D. that has now grown into a book. Before then, I would have guessed that Goldman’s switch to becoming a public company had led it to take more risks, and that this would have been reflected in higher leverage over time. But I found out that this hypothesis was wrong — Goldman had been highly levered in its past as a private partnership, too.

The focus on finding something to blame (e.g. higher leverage) reminded me of the findings of the research into the Space Shuttle Challenger explosion done by one of my Columbia University sociology professors, Diane Vaughan. The loss of Challenger on Jan. 28, 1986 is usually blamed on a scientific design flaw in the O-rings used to seal parts of the spacecraft together. Vaughan, however, located the disaster’s roots in the nature of institutional life. Organizational characteristics — cultures, structures, politics, economic resources, their presence or absence, their allocation — put pressure on individuals to behave in deviant ways to achieve organizational goals. The design engineers kept taking incremental risks that they thought were acceptable and normalized them — until the disaster.

Leverage ratios might be the O-rings of the financial crisis. My research revealed that high leverage is nothing new for Wall Street firms, though the ratios have varied over time. In the early 1970s, for instance, the ratio of assets to equity for most firms was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1. According to a 1992 study by the Government Accountability Office, the average leverage ratio for the top 13 investment banks was 27-to-1 during 1991 (up from 18-to-1 in 1990). At that 27-to-1 leverage ratio, only a 3.7% drop in asset prices would wipe out the equity of the bank. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. Other Wall Street firms have experienced similar leverage increases and decreases.

At Goldman Sachs, one element that was different in the lead up to the financial crisis was not the amount of leverage but the constraints and incentives faced by partners.  Before the IPO in 1999, partners of Goldman Sachs owned equity in a private partnership. When elected a partner, one was required to make a cash investment into the firm that was large enough to be material to one’s net worth. Each partner claimed a percentage ownership of the earnings every year, but it was a fixed percentage — limiting the incentives for risk-taking — and the majority of the earnings stayed in the firm. A partner’s annual cash compensation amounted to a small salary and a modest cash return on his or her capital account. A partner was not allowed to withdraw any capital from the firm until retirement, at which time the capital typically amounted to around 75% of one’s net worth. Even then, a retired partner could only withdraw his or her capital over a number of years. Finally, and perhaps most importantly, all partners had personal liability for the exposure of the firm, right down to their homes and cars. The result was an intense focus on risk, including risks related to ethical standards. As a partnership, each partner was financially interconnected with the others. They had to be very careful about their standards of behavior and the people they allowed into the partnership. One bad decision from a partner could cause all of them to face personal financial ruin.

Over time, though, Goldman Sachs grew from a relatively small group of financially interconnected partners to a publicly traded corporation in which compensation took the form of individual, predominantly discretionary performance bonuses plus stock that could be sold before retirement. The fixed percentages, financial interconnectedness, and personal liability are mostly gone. Relating back to Vaughan’s research on Challenger, organizational characteristics put pressure on individual behavior. The definition of acceptable risk and the consequences of the risk-taking changed over time.

This — not the leverage ratio, which was actually lower than it had been for most of the previous decade — was one of the key elements that made the Goldman Sachs of 2006 so different from the firm of the 1990s or 1980s or 1970s. It may be that cracking down on leverage is simply regulators’ crude way of trying to address issues of corporate incentives and culture. But leverage limits may have unintended consequences for capital markets’ competitiveness, innovation, growth, and efficiency. Understanding the potential problems related to culture, incentives, and pressures, and addressing them head-on, would make more sense.