Marina Gorbis's Blog, page 1537

The Bonus Employees Really Want, Even If They Don’t Know It Yet

Ask your employees this: “How would you like to be rewarded for your efforts and performance, in addition to your fixed salary?” They will likely respond by asking for a cash reward in the form of a raise or bonus, which they can then spend on themselves. They might even convince you that spending this extra cash on the newest tablet on the market, or Daft Punk’s next album, will motivate them to work “harder, better, faster, stronger.”

Take what they say with a grain of salt.

Giving your employees money, and the freedom for them to spend it on whatever reward they choose, might sound like the recipe for a happy and more productive workplace. But evidence from an array of scientific studies says otherwise. Individual rewards—ranging from pay-per-performance to bonuses—have been shown to be detrimental to employee morale and productivity.

First, monetary rewards tend to decrease the individual’s intrinsic motivation and interest for the job. Second, unless the job is extremely simple (requiring no creativity, problem-solving, or complex reasoning abilities), monetary rewards can paradoxically impair performance by leading employees to focus too much on the up-coming extra cash. Finally, when employees compare their end-of-year bonuses, we see more jealousy, anxiety, and competition, and less trust, sharing, and teamwork in the workplace. If your employees are working in groups, the effect is compounded: deterioration of these relationships damages both their individual happiness as well as how they work together as a team.

So, should you throw away the carrot once and for all? Not quite. We suggest that you try something new and potentially far more effective: prosocial bonuses.

Instead of giving your employees more money to spend on themselves, what if you provide them the same bonuses with one caveat: they must be spent on prosocial actions towards charities and co-workers? We tested this very idea, with our collaborators Lara B. Aknin, Michael I. Norton, and Elizabeth W. Dunn: in three countries, we examined the power of prosocial bonuses across different professions and cultures.

First, National Australia Bank gave some of their employees money to spend on charities. This differs from the classic corporate social responsibility model, where the company donates a lump-sum amount of money to a charity usually selected by the CEO. In this method, the company cannot measure the impact of this act of kindness on the dynamics within the firm or on public image. As an alternative to lump-sum donation, the bank gave each employee their own charity voucher and encouraged them to spend it on a cause that they cared about, whether it was to fund cancer research or save Australian ducks. After redeeming these prosocial bonuses, employees reported being more satisfied with their jobs and happier overall.

Next, we wanted to see what would happen if people were nice to others they personally know, rather than being charitable towards strangers. We also wondered whether prosocial bonuses are motivating for everyone, or just for bankers (!), who might often spend money on themselves. In our next set of examinations, we encouraged spending on co-workers and teammates. We gave cash to some members of dodgeball teams in Canada and pharmaceutical sales teams in Belgium and asked them to spend on each other. When asked to give gifts to one another, team members reported indulging in a box of chocolate or bottle of wine, and one team even reported buying a piñata, which they gladly bashed together. Prosocial bonuses appeared to change the way team members thought of their interactions with one another, resulting in gifts that increased shared experiences. Most importantly, we found that teams that received prosocial bonuses performed better after receiving the bonuses than teams that received money to spend on themselves.

Earlier, we mentioned that it is nearly impossible to measure the return on investment in corporate social responsibility. With prosocial bonuses, however, we were able to measure the dollar impact on the bottom line. On sports teams, every $10 spent prosocially led to an 11% increase in winning percentage compared to a two percent decrease in winning for teams where members spent on themselves. On sales teams, for every $10 spent prosocially, the firm gained $52.

Nowadays, people spend more and more time at work, yet less than half of working Americans report being happy with their jobs. Maybe it is time to be creative with the rewards and switch from a self-centered to an altruistic paradigm. Rather than spending a significant amount of time wondering about the big holiday bonus, what if your employees spent some time figuring out how their donations can impact the world, or what kind of gift will make their co-workers happy?

Maybe then money can be a path to spreading happiness and productivity in the workplace.

Entrepreneur, Fire Thyself

When entrepreneurs first start their businesses, they are usually involved in everything: running operations, keeping the books, and making sales calls. But as a company grows, one of the smartest things an owner can do is to fire herself from role after role. Letting go of anything critical to business outcomes is a challenge, but successful entrepreneurs have all learned to replace themselves – and serial entrepreneurs even develop it as a skill.

Why be in a hurry to hand off important work? By building a team to handle operational responsibilities, entrepreneurs can find more time to focus on strategic priorities and even bigger goals.

In the EY Entrepreneurial Winning Women program I sponsor, which is designed to recognize high-potential businesses and help their women founders scale them, teaching this process is a priority. “You can’t micromanage your way to growth,” says Dr. Mary Jo Gorman, founder and CEO of Advanced ICU Care, which provides high-quality critical care to patients in intensive care units. A member of the 2011 North American class of Entrepreneurial Winning Women, Gorman says, “This is more than delegating. This is about building a team that allows you to not think so much about the day-to-day, and a team that comes to you with new ideas.”

Gorman’s comment connects well with three warning signs we tell entrepreneurs to heed. You are probably spending too much time working in your business, and not enough on it, if you:

Begin to get overwhelmed with small details of office management, which takes your attention away from the big picture.
Find yourself with no one to challenge your thinking, because you’re the only one with all the answers.
Are not challenging yourself on a regular basis.

“The whole transition from working in the business to working on the business means letting go of what you’re comfortable doing,” says Gorman. “You always need to be thinking big and challenging yourself.”

What should you do if you want to transition from being a small one-person band to the leader of a high-growth business? Consider these six tips as you begin the process of building your team – and firing yourself:

Decide what will be for your hands only: Your time and attention should be reserved for those few things that only you can accomplish. For many entrepreneurs, this means focusing on the most valuable sales and marketing opportunities — meeting with key prospects and building markets for your product or service. If you, too, need to focus on being the face of the company, then tap into others for help with the rest.
Focus on growth: Once you’ve brought in others to handle the tasks you don’t need to perform directly, such as bookkeeping and managing the office, allow yourself to focus more intently on the keys to growing the business. And by the way, there may also be growth-oriented activities, such as consulting services, that you will discover can and should be managed by others.
Set the tone: As you delegate to others, set clear goals and responsibilities for each new position from the beginning, and make sure each person you hire understands them. Otherwise, you may find yourself spending too much time managing people instead of the next stage of growth.
Hire ahead: Hire people who can grow with the company. If you hire someone who can perform a task required today, but nothing more, you will won’t have the talent needed for the next phase of growth.. “You usually don’t have time to do on-the-job training,” Gorman advises. Make sure the people you hire understand the company’s goals and where you want to take the business over the next three to five years.
Manage expectations: Be careful not to give employees inflated titles. Entrepreneurs are often inclined to give a new hire an executive title, such as vice president, in lieu of a high salary or an equity stake in the company. But if the person is not equal to the demands of that role in a larger company, then your growth will force you to bring in someone above him or her. Why set yourself up for conflict that may distract you from the bigger picture?
Find advisors who will keep you thinking: Consider setting up an advisory board to help you secure talent and determine the overall structure and strategy of your business. You need others to infuse new thinking and to help you figure out how to delegate your responsibilities.

Tactics like these have helped many of the entrepreneurs in the Entrepreneurial Winning Women program build excellent organizations – teams of people who share their entrepreneurial frames of mind and their vision and energy for growing their businesses. At the same time, these entrepreneurs have learned to make strategic use of tools such as business reporting to get a better handle on the state of their companies and determine the best path forward. By stepping outside the day-to-day, they were not only able to grow their revenues and create jobs but also to build a valued team of colleagues who share in the responsibilities and rewards of their ventures.

Understanding Fairness is the Key to Keeping Customers

Remember Netflix — with the DVDs that came in the mail?

In July 2011, Netflix decided to unbundle its streaming and DVD products. This move was textbook strategy. In fact, it is taught at HBS as an example of how economically informed decisions can benefit both company and customer.

Textbook logic goes something like this: you’re charging $10 per month for a subscription to all your customers, who value streaming and DVD services differently. On average, 35% value streaming at $10 and DVDs at $2; 35% value streaming at $2 and DVDs at $10, and 30% value both streaming and DVDs at $8. If you unbundle prices, charging $8 for each service, 70% of your customers are better off! Cinephiles pay $8 for DVDs only, Youtubers pay $8 for streaming, and impatient cinephiles pay $16 for both. And Netflix also wins, increasing its total revenue 4% and attracting new customers to buy lower-priced individual services.

But, as we know, when Netflix tried such a change in 2011 the outcome was different: outrage,  opprobrium, subscription cancellations. Netflix lost a million customers in the month after unbundling. My dad still won’t use Netflix, because they “tried to screw him.”

Fairness, it turns out, is critical to understanding customers’ perceptions of your business.

What happened? 

Netflix triggered people’s fairness response. Customers interpreted unbundling not as a move that would create consumer surplus, but as one designed to profit at their expense. So they canceled subscriptions, not based on any rational calculation, but rather to punish Netflix.

Executives could have predicted this reaction, had they studied psychology and sociology, as well as economics.

Customers think businesses with higher prices must have higher profits. Consumers consistently underestimate firm costs and overestimate profits, attributing price differences to profit, and conclude that prices are unfair. Interventions such as providing historical prices, explaining price differences between businesses, and suggesting costs customers hadn’t considered are only modestly effective at decreasing perceived unfairness.

Customers think prices should only go up when costs do. They think it’s fair to maintain prices as costs decrease or to raise them if costs increase, but not to raise them if costs remain constant. Increasing prices because of increased demand is seen as unfair. Usually, firm profit is seen as “at the customer’s expense.”

Customers infer bad motives when businesses raise prices. These negative inferred motives make customers see price increases as less fair, and decrease satisfaction and desire to buy again. The importance of motive also suggests that price discrimination to help “the less fortunate” is OK – senior citizens’ discounts, for example — and that transparently explaining motives can reduce the harm from increasing prices.

Customers think higher prices for quality is fair. Customers are willing to accept price increases for better product quality, suggesting that firms should demonstrate better quality as justification for price increases.

Most people will punish unfairness, given the chance. In interpersonal experiments, around 85% of people tend to punish unfairness, given the chance, even when it is costly and has no immediate payoff to them. This helps explain the risks to firms of implementing strategies that customers deem unfair. 

Why do these lessons matter? 

Fairness — and the tendency to punish unfairness — is instinct, which we transfer from personal interactions to firm interactions.

Netflix could have anticipated the risk of a fairness response to unbundling, quantified the potential cost, and either opted not to unbundle or sought to mitigate the risks. They might have been more transparent about what they were doing and why, and communicated their decision in a way that speaks to concerns over fairness:

Licensing costs for streaming content are rising as content owners renegotiate licenses. These costs do not affect DVD users, and it would be unfair to charge them separately.
Most customer rely heavily on either streaming or DVDs, so separating the services will lower costs and make most people better off.
We are separating our services so each can focus exclusively on increasing quality for streaming or DVD movie consumption. For example, Netflix just acquired licenses for a number of new films.

Obviously, Netflix isn’t the only company to make this mistake. Customer retaliation can take place whenever companies follow a similar unbundling strategy, but also in bundling or even routine price increases and experimentation. But fairness also creates opportunities for innovation.

Industries known for poor customer service or abusive policies — unfair practices — can create situations where their customers are waiting for a chance to retaliate. Gyms and some software services that create artificial exit barriers and misleading renewal policies are examples of industries that may be at risk of this.

An HBS professor once advised me, “Never use the word ‘fair’ in business – always use ‘reasonable’ instead.” While good negotiating advice, it missed a deeper point: fairness is hardwired into humanity and ignoring its business implications is costly.

Leaders, Drop Your Masks

How can leaders spark and sustain change in themselves and their organizations?

I devoted my doctoral research to this question and came up with an unconventional answer:  metaphors. My co-author Richard Badham and I wrote about four of them in this HBR article:  fire (representing ambition), snowball (accountability), movie (reflection) and mask (authenticity). Others include:  master chef (use of tools and frameworks), coach (internal and external support) and Russian dolls (organizational context), which I covered in this blog post.

These seven concepts helped all the CEOs we studied make the transition from ineffective to effective, stymied to successful, frustrated to celebrated, and in my consulting practice over the past few years, I’ve helped many more executives do the same. Interestingly, the metaphor that has sparked the greatest interest and debate is mask.

There two main ways in which leaders wear masks. Some conceal their perceived inadequacies and flaws behind the polished facade we have come to expect of “great” leaders, a bit like the Phantom from Andrew Lloyd Webber’s epic musical The Phantom of the Opera. Others take on a new persona at work that they feel is necessary for success, much like Jim Carrey’s character Stanley Ipkiss in the movie The Mask, who transforms into a flamboyant green superhero. Both types of mask undermine trust and effectiveness. They also create inner conflict, as leaders struggle to align their work and home lives. This three-minute animation provides a neat summary of the metaphor.

In my work with executives, I’ve found the mask metaphor to be particularly relevant with women. Take Christine, the highly articulate and ambitious CEO of a credit reporting and debt collection company that had been acquired by a private-equity firm. In order to justify the firm’s investment, Christine had agreed to dramatically increase her business’s financial performance. Her credibility was on the line, but she wasn’t sure her young team was up for the challenge. In response, she put on a mask of persona:  toughness.

At the time, this felt logical.  After years of working in a macho, male-dominated industry, she thought she had to be highly competitive and hard-driving to succeed. Whenever her instincts for openness, warmth, and curiosity bubbled up, she pushed them back down for fear of not being taken seriously. As a result, she created a dysfunctional work environment focused exclusively on execution and results. If you hit your target, you were a superstar. If you didn’t, you’d better raise your game. After three strikes, you were out. There were no real conversations about the bigger picture, how to get better results through clever resourcing or innovation.

It took a few new and smart senior hires to get Christine to drop the mask. They were harder to fool and made her feel comfortable shifting to a more collaborative mindset.  “We lost a lot of the unnecessary formality in our interactions and began to have very rich conversations,” she explains. “I wish I had listened to my instincts sooner instead of going through the motions of being tough. I’ve learned that authenticity comes from confidence, and confidence comes from taking risks but you can’t take risks unless you’re prepared to be vulnerable.”

Christine’s team and organization thrived under her new leadership, boosting revenue tenfold and setting industry benchmarks for performance. She has since transitioned away from executive life and now serves as an independent director on several boards and president of a think tank and networking organization for top female CEOs. Recently, I asked her what advice she gives today to rising young female executives. Her response was all about dropping the mask: “I place no value on the literature talking about how to succeed as a woman in business. It’s too binary. One school says ‘be tough,’ and the other one says ‘be a nurturer.’ It’s bloody confusing and completely unhelpful. What about ‘just be yourself’?”

Coaching Physicians to Become Leaders

Two or three times a week, a physician contacts me, in search of executive coaching.

Department chairs, managing partners, medical directors, chiefs of staff—they’re all frustrated. As a practicing physician with experience in several leadership roles, I know how they feel: They don’t recall saying to their childhood friends, “I want to be Vice President of Medical Affairs when I grow up.” Rather, they longed to care for people, to earn a good living, and to make a dent in the world’s suffering. They wanted to be doctors.

However, at some point that wasn’t enough. They found they also possessed a desire to improve their organizations. They stepped forward, spoke up, and became leaders.

Now they need help getting things done. They know they are on the cusp of revolutionary change in health care—and it is they who will make it happen. But they feel underqualified to lead. In medical school, they trained to treat pneumonia. They didn’t learn how to steer employees through a corporate matrix to meet organizational goals and hit budget targets.

Here are four of the biggest challenges they face, along with some solutions that I’ve seen work for them.

Challenge #1: They feel overwhelmed by organizational noise.

Physician leaders have a cacophony of goals and demands ringing in their ears. They understand the need to transform care models and move toward value-based, patient-driven systems, but they also feel intense pressure to deliver revenue and improve cash flow. Meanwhile, their clinical responsibilities don’t let up. So they have trouble deciding where to focus their efforts.

A CMO of a large health plan felt this way. He spent his days putting out fires rather than making strategic decisions with lasting impact. His task list steadily grew. He wasn’t exercising, he’d developed high blood pressure, and he’d become irritable with his family. He considered leaving his executive post for a clinical one in a quiet urgent care facility.

Solution: Start with simple changes that make a big difference. In our initial coaching sessions, the CMO and I focused on ways he could immediately regain control of his schedule: working more effectively with his executive assistant, prioritizing his long to-do list to free him up for strategic thinking, and blocking off time for exercise and family. These efforts quickly paid off, renewing his sense of self-efficacy and instilling a new passion for his leadership role.

Challenge #2: They feel like outsiders.

Many physician executives find themselves betwixt and between: Fellow clinicians think of them as “suits” and regard them with suspicion, while other executives see them primarily as doctors. In advocating for the interests of one side, they inadvertently annoy or betray the other.

That’s what happened to a medical director of an accountable care organization. She agitated a large group of oncologists by saying they should cut back on prescriptions for an expensive medication. It was one of many edicts she had issued, and they took offense, openly discussing the difficulties of working with her versus the friendliness of a local competitor.

Solution: Ask more than tell. During coaching, through role playing and conversational recall, she realized that she had projected a voice of authority, not one of collegial intent—and that’s what rankled her colleagues. With some guidance, she used open questions (such as “How would you…?” and “In what way could we…?”) to better understand their clinical perspective. The oncologists responded collaboratively, working with her to create protocols that yielded savings and better outcomes.

Challenge #3: They feel stuck in transition.

The metamorphosis from bedside physician to leader is not easy. The traits that make doctors top-notch clinicians don’t always motivate others to do their best work. For example, the orthopedist who excels at meticulously re-assembling tiny shattered bone fragments may find herself at odds with her employees if she attempts to manage them with the same eye for detail and compulsion for control.

Solution: Build complementary teams. No leader can do it all alone. When coaching physician executives, I help them identify their strengths as leaders and build complementary teams to shore up their weaknesses.

Here’s an example: A managing partner of a large hospitalist medicine group lamented that partnership meetings had grown increasingly meandering and unproductive. A personality profile assessment at the outset of our coaching engagement gave him insight into his subjective, visionary decision-making style. In response, he assembled a small team of partners with more objective, detail-oriented styles to help him weigh options before presenting ideas to the larger group. After that, partnership meetings became much more focused.

Challenge #4: They feel trapped in a time warp.

In “clinical time,” you see a patient and either perform a procedure or prescribe treatment—and then quickly move on, usually within hours. But in “business time,” it can take months to solve a problem—to change a process, for instance. As proposals work their way up and down the organization, they’re discussed, tweaked, and discussed some more. Rarely does someone simply decide on a fix and make it happen.

Solution: Break large goals into smaller ones. In a coaching session, the chief of surgery at a large hospital talked about her struggle to change the privileging process for a cutting-edge endovascular procedure. I worked with her to reframe the larger goal as several smaller goals, around which she rallied key individuals and subcommittees over the next several months. Each incremental approval felt to her and others in the organization like a small win, setting the stage for ultimate approval by the medical executive committee.

Physician executives know they need to grow in all these areas. They attend courses on negotiation and organizational behavior, get input from members of their networks, and read voraciously. However, when they head back into the stormy sea of e-mails, meetings, and deadlines, they can lose sight of what they’ve learned.

That’s where coaching comes in. The solutions I’ve described certainly aren’t exclusive to coaching—you’ll find them in a variety of readily available sources, including blog posts like this. But coaching helps them stick. Whether it’s provided by a consultant or a colleague, it gives physician leaders a chance to practice and fine-tune their newly acquired skills and knowledge. It allows them time to explore leadership as a medical art—and that’s what it will take to make a dent in the world’s suffering, as they’ve wanted to since they were kids.

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
A Global Online Network Lets Health Professionals Share Expertise
How to Design a Bundled Payment Around Value
Providing High-Quality Health Care to Americans Should Trump Politics

Make Yourself Safe for Sponsorship

It’s not uncommon for today’s rising stars to align themselves with high-powered individuals in order to fast-track their careers — and in fact, it’s recommended. But sometimes, it’s not so simple. According to my research, 95% of men and 93% of women say they find it easiest to give and receive guidance in a one-on-one setting. Yet 64% of senior men (vice president and above) and 50% of up-and-coming women admit they’re hesitant to initiate any sort of one-on-one with each other lest their motives be misconstrued by their colleagues and rumors start poisoning the workplace. This may come as a shock to the many men and women who thought they left this sort of gossip in high school, but unfortunately, it still exists. And it hurts ambitious women’s chances for promotion. This post will focus on what a protégé can do to protect herself; tomorrow, we’ll identify what high-powered sponsors can do as well.

Consider the example of a woman we’ll call Jana. Soon after she had been promoted to vice president at a major financial services firm, Jana became aware that her boss was holding regular meetings with the four other VPs (all men) at his home over barbecued ribs and beer. “He invited them but excluded me,” she said, “and then they’d all lie to me at work about where they’d been that weekend.” Months went by. Finally, she was issued an invitation — and immediately spotted the problem. “Here I was, a youngish woman out on the pool deck with the guys, with my boss’ wife hovering in the kitchen, peering out at us.”

Jana could see how difficult it was for her boss to include her in any informal work gathering outside the office. But by excluding her, he signaled to the rest of the management team that she was not “inner circle.” She knew full well, too, that the men had developed a special camaraderie by meeting like this and that she had lost out on the trust built up over months.

Today, Jana is a managing director, two reports away from the CEO, but she feels her rate of progression suffered because she had no sponsors. The reason for her lack of sponsorship? She could not figure out how to mitigate the risk of career-wrecking rumors for her male superiors. “There were men I reported to who wouldn’t get into a cab with me, who wouldn’t allow their admin to schedule them on the same flight,” she recalled. “Looking back, I think this is what kept me always just outside the inner circle. I had a couple of near misses with sponsorship, but in the end, my bosses just couldn’t afford to go there with me.”

Sexual tension in the workplace is a problem that’s not going to go away — ever. As long as men and women work closely together, sex lurks as a possibility. With longer hours now the norm — a survey found that two-thirds of men and women, especially senior and middle managers, are spending more time at work than three years ago — men and women are putting in even more hours away from home and family, making less time for an emotionally satisfying life outside of work and adding to the pressure to develop one at the office.

But whether a sexual relationship with a superior is real or imagined, it’s the fastest way to sabotage sponsorship — now and in the future. That presents a tough conundrum. How do you make yourself safe for sponsorship?

Always telegraph professionalism. Take notice of your appearance. Appear polished, but not provocative; 73% of leaders surveyed for the Center for Talent Innovation’s research on executive presence cite provocative clothing as the number one appearance blunder for a woman attempting to climb the career ladder. This is not to suggest that you lose your personal style in the workplace. But it’s imperative that your clothing, makeup, hairstyle, body language, and communication style don’t give the wrong impression.
Meet your sponsor in public. Bagels and coffee in the conference room, lunch on campus, or a restaurant well-trafficked by office personnel where you can take the opportunity to wave to colleagues and demonstrate that you have nothing to hide — these are safe choices. Dinner on a business trip may be unavoidable, but make sure the venue isn’t the kind of place you’d ever go on a date. Ideally, you want to make meeting with your sponsor a routine, choosing the same time and place time and time again. Regularity ensures that nothing will appear irregular about meeting your sponsor one-on-one.
Don’t hide your private life. Talk about your significant others — spouse, partner, kids — and introduce these people to your sponsor. Publicize your outside commitments to church or temple, athletic league, or community organization. Put photos on your desk or screensaver that assure others you have a network of emotional ties outside work. By doing so, you’ll telegraph the completeness of your private life and tamp down the threat of an ulterior agenda.
Silence gossip by proving that you’re special. When people complain that you’re receiving special attention, they’re insinuating that you don’t deserve it. Acting surprised or super nice only reinforces their belief that you’ve got something to hide. Squelch those rumors by wowing everyone with the quality of your work, the extra hours you’re putting in, and the special skills you contribute. In a word, own your special status and demonstrate why you deserve it.

Sponsorship is vital to fulfilling your potential, turbocharging your career, and delivering your dreams. During economic downturns and corporate restructuring, it’s often the only thing between you and the door. So strengthen your career springboard — and your safety net — by making yourself safe for sponsorship.

Stop the Fear-Mongering About Default

Stop, stop it now. Don’t ever say it again.  Do not mention U.S. government debt and the word default in the same sentence.   The correct statement is that the U.S. government will not default on its debt, not now, not in the foreseeable future, not ever.

A Congressional refusal to raise the debt ceiling is analogous to cutting up your credit cards.  It would force the U.S. government to stop additional borrowing and limit spending to the revenue it takes in. The government would be forced to live within its means, something that many states and individuals currently do.

Note, for fiscal 2013 the U.S. government will have collected approximately $2.8 trillion and spent about $3.5 trillion.  Going forward without an increase in the debt ceiling means cutting expenditures back by 20% (or somehow generating 25% more revenue).  Clearly this would be a major event.  Maturing debt could be repaid by issuing new debt in the same amount — so this would not change the total debt outstanding and not affect the debt ceiling.  Thus there should be no risk that debt won’t be paid upon maturity.

No increase in borrowing (for some short period of time until Congress does raise the debt ceiling) means the President and Congress will have to decide which entitlements and/or government services to stop funding.  It should be inconceivable that the US would decide to stop making interest payments on the U.S. government debt.   There is ample revenue to pay for interest on the debt.  If there is any question about paying interest as it comes due, Congress and the President should act now to remove this question once and for all.

This then leaves the President with very painful decisions.  Should the government delay payments (paying the bills in the order they arrive as revenues arrive), reduce (or eliminate) specific programs, enact across-the-board cuts, or introduce higher fees for certain services.  The U.S. could also choose to sell assets (gold, oil, mineral rights) or the right to provide and charge for certain services (toll roads).

Clearly the President does not want to do any of this.  Few people want to cut back on expenditures or tell a loved one they must do so.  Handing out money is much more fun than refusing to do so.  However, this is what the budgeting process is all about.  This is what it means to be fiscally responsible.  Easy credit, greatly helped by the Fed’s quantitative easing, has allowed the U.S. government to avoid any sense of fiscal responsibility.

Capping the amount of debt someone can borrow forces a start to fiscal responsibility.  Doing so at this time in the U.S. will cause great pain and is likely to put the U.S. into another recession (which is why the debt ceiling should be raised).  But it should be made clear that it will not, under any imaginable scenario, cause the U.S. government to default on its debt.  So please Mr. President (and all others in the government and media), stop saying it might and make it very clear that the U.S. will not, under any circumstances (including a cap on the debt limit), fail to honor its debt obligations.

One last thought:  I do not understand, other than venal politics, the reason to close cash-positive government services.   For example, certain national parks like the Grand Canyon generate more cash from entrance fees and permits (at least at this time of year) than the cost to run the parks (what the government pays the park rangers).  Even worse, closing the parks causes the government to lose all the revenue (and it won’t be made up later) while the costs still accrue (they are not paying it now, but they will almost certainly pay the park rangers for the time closed once the service is restored).  This makes no sense as it hurts visitors to the parks, hurts surrounding businesses, and turns a cash-positive government service into a cost.

Leisure-Time Inventions Hit a Peak in Middle Age

Employees’ likelihood of inventing something for their jobs during leisure time – such as while talking a walk or a bath – rises to a peak at age 51, on average, according to a study led by Lee N. Davis of Copenhagen Business School in Denmark. In an analysis of thousands of European patents, the researchers theorize that by the time invention-minded employees reach middle age, they tend to be in management, and their busy schedules force them to do their creative thinking during free hours. After 51, greater detachment from inventive tasks could be the reason for declining free-time invention. 6% of the inventions in the study arose during leisure time.

How Good Management Stifles Breakthrough Innovation

We hear a lot these days about how big companies fail to innovate, but the truth is more complicated. A lot of companies excel at developing better products, yet these improvements are incremental. They’re not the breakthrough offerings that can jump-start growth and profitability. And companies’ success at cranking out these enhancements hampers them from getting better at the radical projects.

If you closely analyze unsuccessful attempts at developing breakthrough products, perhaps the most common trouble you find is not one of the usual suspects, such as lack of top-management commitment. Instead, you’ll see that efficiency-minded project managers are inadvertently discouraging the explorations – and therefore the learning – that make radical ideas practical.

There’s a history behind this problem. Frustrated by inefficient R&D, companies in the 1980s started applying standard project-management techniques such as phase-gates and key performance indicators. Textbooks on innovation advised them to allow some flexibility in the phase-gates. Yet control-minded project managers have tended to chart strongly linear paths that discourage distractions – depriving their teams of the agility and openness needed for new thinking. As development teams became more productive and their initiatives more predictable, incremental improvements soared, project managers got promoted – and radical innovation declined.

Companies soon began spending less and less time on breakthrough ideas. At BCG we’ve found that radical projects nowadays account for roughly 10% of an average company’s innovation portfolio, down from twice that in the early 1990s. (Josh Lerner cites the narrow focus of corporate R&D in his October HBR piece on corporate venturing.)

The lesson is clear. It’s not enough for executives to proclaim their commitment to innovation, develop an innovation mind-set, or even put more money into breakthroughs. Companies also need to make changes at the ground level.

They can start by treating radical projects differently, but it isn’t enough to just let these teams loose. Without some discipline, initiatives will become money pits, or nervous project managers will fall back on their conventional habits of control.

The solution is for project managers to devote less effort to predicting and directing innovation, and more effort to managing the inevitable uncertainties. They should worry less about the schedule and more about ways to reduce risk – by partnering with outside companies, say, or getting advance commitments from customers. Or they can invest in multiple options for the marketplace, rather than rushing through a single big bet.

They should certainly expand the key performance indicators to include vital insights on technology or customers, so that a worthwhile project can keep going even if it is far from a serviceable prototype. But like venture firms, they need to terminate projects that exceed a predetermined “affordable loss.” (For more on the framework BCG has developed, see this paper.)

Take, for example, a photo-technology company my colleagues and I worked with. Digital printing promised to greatly expand the designs of ceramics, furniture, and other nonpaper products, and the company hoped to pioneer the sale of industrial printers in these sectors. Its first printer was a dud, so the company rethought its efforts, creating a new development team that included marketing people as well as engineers. With this broadened perspective – and the time to explore how customers would actually use this new technology – the team realized that usage would vary greatly across industries. The project manager recognized the insight and secured funding to develop multiple kinds of printheads and other functionality. Those steps improved the likelihood of marketplace acceptance, and the resulting printer quickly won over buyers.

The combination of flexible techniques and a manager who tolerates uncertainty created something that’s increasingly rare and valuable these days: a radically new product that creates a whole new market space.

Executing on Innovation

An HBR Insight Center




Capturing the Innovation Mind-Set at Bally Technologies
Good News, Bad News: An HBR Management Puzzle on Innovation Execution
Why Conformists Are a Key to Successful Innovation
Implementing Innovation: Segment Your Non-Customers

Understanding the Game Being Played in Washington

Some portray it as a Manichean struggle between good and evil. Warren Buffett says it’s “extreme idiocy.” I’d like to recommend another way of looking at the government shutdown and the looming battle over the debt ceiling in Washington. It’s a game, played by flawed-but-not-crazy human beings under confusing circumstances. In other words, it’s an interaction among “agents” who “base their decisions on limited information about actions of other agents in the recent past, and they do not always optimize.”

That quote is from economist H. Peyton Young’s “The Evolution of Conventions,” one of several works of game theory I plowed my way through this week in an attempt to find a way to think about the government shutdown and looming debt ceiling fight that didn’t make me want to bang my head against a wall. My reading made the dynamics at work in Congress and at the White House a bit clearer — and thus slightly less maddening, if not less ominous.

The debt-limit game

There are lots of different games being played in Washington at the moment, but the main one I have in mind pits the Democratic White House and Senate against the Republican House of Representatives over the federal budget. The deadlocked players have already landed us in a partial government shutdown, but it’s the 18th since 1976 and thus really not that big a deal. The far bigger stakes involve the federal borrowing limit that is due to be breached in a couple of weeks if Congress doesn’t approve an increase. Without further borrowing, much higher taxes, or draconian spending cuts — none of which may be possible or even legal on short notice — the government might not be able to service its existing debts, leading to a default. Congress has never allowed this to happen, so the consequences are unknowable, but they could be really bad.

Threatening to cause something really bad to happen in order to get your way is a negotiation tactic known as brinkmanship. Here’s a description from game theorist Thomas Schelling, in his 1960 classic The Strategy of Conflict:

If I say “Row, or I’ll tip the boat over and drown us both,” you’ll say you don’t believe me. But if I rock the boat so that it may tip over, you’ll be more impressed.

Not all brinkmanship is seen as acceptable. If a member of Congress showed up in the Capitol with a bomb and threatened to blow the place up unless his colleagues agreed to name a post office after him, he’d surely end up dead or in jail. The debt limit, originally written into law during World War I and raised many, many times since, has often played a role in budget negotiations, and been the subject of much political posturing through the years. But no majority party in the House or Senate appears to have seriously threatened not to increase the ceiling when needed before 2011. That year, a new GOP majority in the House used the threat of a debt ceiling breach to force a number of concessions on government spending, and since then debt-limit brinkmanship has been a recurring feature of the Washington scene.

Democrats and commentators of varying political leanings have argued that by putting the debt ceiling in play the GOP is effectively breaking the rules of the game. They’re right that such behavior hasn’t been the norm. But the don’t-push-it-too-far-with-the-debt-ceiling convention is, like most political norms, subject to revision. With a few Constitutionally determined exceptions (and even those are of course subject to repeated reinterpretation), the rules of political conduct in the U.S. change over time, not in a smooth progression but along a path of punctuated equilibrium. That notion was imported from evolutionary biology (where it’s not entirely uncontroversial) into political science in 1993 by Frank Baumgartner and Bryan D. Jones, with the book Agendas and Instability in American Politics. In this account, politics is usually in equilibrium, with the rules clear and the opportunities for change few. But things can change, and when they do it usually happens quickly.

Trial and error

In game theory, which had long been dominated by the idea that games tended toward a single, rational equilibrium result (a “Nash equilibrium,” for you Beautiful Mind fans), similar notions began bubbling up in the 1990s. If the players in today’s Washington were all perfectly rational and oozing with foresight — or, better yet, could repeat the debt-ceiling game a few hundred times, switching positions from time to time and experiencing the consequences — they would probably settle into a long-run equilibrium that didn’t involve brinkmanship. But real people aren’t perfectly rational, and they usually don’t get to keep playing games until they’ve got them down pat. Instead, they proceed by “trial-and-error … without having any clear understanding of the strategic realities of the game they are playing,” game theorists John Gale, Kenneth Binmore, and Larry Samuelson wrote in 1995. “They simply learn that certain stimulus-response behaviors are effective.”

This paper, and other work by Binmore and Gale in the 1990s, was an attempt to explain the results of the Ultimatum Game, a bargaining experiment first conducted in the early 1980s by economists Werner Güth, Rolf Schmittberger, and Bernd Schwarze that bears some similarities to the current debt-ceiling quandary. In the Ultimatum Game, the proposer decides how to divide a sum (in the original experiment it varied between four and 10 German marks) between himself and a respondent. If the respondent accepts the share he is offered, both get to keep the money; if the respondent rejects the offer, neither player receives anything.

Economists had argued that the equilibrium result of this game is one in which the proposer offers the respondent a penny (or a Pfennig), and the respondent accepts (because a penny is better than nothing). When people played the game in experimental economics labs, though, things didn’t work out that way. As Richard Thaler described in his “Anomalies” column in the Journal of Economic Perspectives in 1988 (highly recommended: the 1994 compilation of these columns titled The Winner’s Curse), proposers offer 50-50 splits more often than any other allocation, and offers below about a quarter of the total tend to be rejected.

One interpretation of this is that real people care a lot more about fairness than the self-interested “economic man” of the textbooks does. Another, explored by Gale, Binmore, Samuelson, and others, is that we are self-interested but not all-knowing. Humans seldom make optimal choices, but we do learn, from playing the game and from similar experiences in life, what we can get away with. It’s an evolutionary process — one that, if repeated enough times under exactly the same circumstances might lead to an optimal result but under more realistic conditions is more likely to oscillate between different norms/conventions/equilibria.  “If … the players sometimes experiment or make mistakes,” wrote H. Peyton Young, whom I cited at the beginning of this piece, “then society occasionally switches from one convention to another.” I don’t get the sense that anyone has figured how to build this realization into a reliable predictive model — no game theorist is going to be able to tell you with great confidence how the budget standoff will play out. But the very exercise of looking at the current showdown as a game in which the players have limited knowledge but are able to learn illuminates a lot.

Let’s consider what House Republicans have learned from their two years of debt-limit brinkmanship. They have learned, first of all, that it works. They got the White House to agree to a bunch of automatic spending cuts (the sequester) in 2011, and then in early 2013 they were able, from what seemed to be an exceptionally weak bargaining position after President Obama’s reelection, to keep most of the Bush-era tax cuts from expiring and to force yet another debt-ceiling battle only a few months later. More broadly, Republican office-holders and activists have learned over the past couple of decades that making what at first sound like unreasonable demands (no new taxes, no gun control) and repeating them for years on end can actually shift the terms of the debate to the point where the demands seem normal. It has been a successful strategy.

There have been downsides to the GOP’s debt-ceiling brinkmanship. It was a drag on economic growth, for one thing, but that’s pretty distant and diffuse and hard to prove. More tangibly, it also probably played a role in the Republicans losing six seats in the House and failing to unseat President Obama in the 2012 election.

From the perspective of the 30-odd hardline members of the House GOP that for the sake of convenience I’ll call the Tea Party, though, this wasn’t actually bad news. Their districts tend to be pretty safely Republican, so their jobs aren’t at risk. A smaller Republican majority in the House increases their leverage within the caucus. And in part because Republicans controlled the redistricting process in most states after the 2010 census (a byproduct of the anti-Democrat backlash in the 2010 elections), they don’t have to worry much about the GOP losing its House majority soon. As for Obama’s victory over a Republican nominee the Tea Party never fully embraced, that wasn’t the worst thing in the world either — it certainly helps with fundraising and energizing the base. So while it has become popular to label the Congressional Tea Partiers, and their seemingly increased zeal after a lost election, as “crazy,” most of their behavior can be pretty readily explained by self-interest and learning from recent experience.

For Speaker John Boehner and most of the rest of the House GOP, the loss of seats and failure to unseat Obama was bad news. But Boehner is now playing such a complex game, with the White House, the Senate, and a big chunk of his own delegation his adversaries at least some of time, that the 2014 election must seem awfully far off. All he’s trying to do is survive to fight another day.

Finally, for President Obama and Senate Majority Leader Harry Reid, the lesson from the last two years is that negotiating over the debt ceiling is a loser’s game. Every time they accede to House Republican demands, the GOP comes back a few months later demanding more — even after a clear election loss. So it shouldn’t be surprising that Obama and Reid might be willing to risk economic calamity in order not to have to submit to such blackmail again.

Put all this together, and it looks like we have the makings of a train wreck. It also looks like it’s probably up to Boehner to avert it, which he appears to acknowledge. But that’s not as reassuring as it might sound when you consider how unstable the tactical ground is upon which he stands. So, that’s depressing.

Room for negotiation

But looking at the short-term interests of the different players, as opposed to their stated goals, does open up opportunities for negotiation and cooperation. When you focus on others’ interests, rather than their passions, you’re far likelier to be able to predict their behavior and to come to some sort of accommodation with them. I got that idea from the 17th and 18th century thinkers quoted in Albert O. Hirschman’s The Passions and the Interests, but I think it’s a major theme of the negotiation bible Getting to Yes as well. I definitely know that, as somebody who has on occasion been driven to indignation by the statements of the Tea Partiers, the simple act of writing the last few paragraphs has significantly lowered my outrage level and increased my empathy with them (if not necessarily sympathy for them).

Determining just what the opportunities for negotiation and cooperation might be isn’t so easy, of course. The most obvious commonalities of interest involve President Obama and the Tea Party — the Tea Party owes its very existence to Obama’s presidency, while he owes the current unity of the Democratic Party and possibly his 2012 reelection to the Tea Party. But it’s hard to see how to translate this into deals. Would fire-breathing Georgia Republican Paul Broun trade a vote to raise the debt limit for an Obama promise to come to his district and loudly condemn him on the day before the next Republican primary? Probably not.

Still there must be room for horse trading somewhere. And it’s much more likely to be discovered if the different players actually talk to each other. I’ve been dubious of the frequent calls for more face-to-face contact between the two sides in Washington (more “schmoozing,” as Jack and Suzy Welch argued the other day). But the lesson from game theory is that yeah, schmoozing can help.

The reason is that if the players in a game don’t or can’t talk to each other about what they’re doing, they have to fall back on trial-and-error and the prejudices and misconceptions they held going into the game. To go back to Schelling, whose work in the 1960s and 1970s prefigured much of modern economic thinking about games: “Excessively polarized behavior may be the unhappy result of dependence on tacit coordination and maneuver.”