Jeffrey Pfeffer's Blog, page 4

The single best goal you can set for 2015

It’s a new year—time for those resolutions.

Even the U.S. government is getting into the act by providing a list of the most popular resolutions and tips on how to achieve them. Some 45% of Americans usually make New Year’s resolutions, according to Statistic Brain. The most popular are losing weight and getting organized.

So, in the spirit of the New Year, here’s one resolution that, if you make and keep, will make you happier, more powerful, and help others around you develop their potential more completely. The resolution: become less judgmental, particularly about people, but also more generally.

Judgment and happiness

When the reality television program “MasterChef Australia” somehow persuaded his holiness the Dalai Lama to appear as a guest judge, the program thought it had achieved a real coup. Of course, following the teachings of Buddhism, the Dalai Lama refused to render judgment on the food. “As a Buddhist monk it is not right to prefer this food or that food.” Buddhism teaches that constantly comparing what “is” with some desired state of “what should be” sets people up to be chronically dissatisfied. As Guardian contributor Barbara O’Brien wrote, “There is a 6th century Chinese text…that says, ‘To set up what you like against what you dislike is the disease of the mind.’”

I discovered how much happier you can feel if you reserve your judgment and pursue its opposite, curiosity, at the closing dinner of an executive program in Barcelona. I had talked about non-judgment earlier in the day, but as the hour approached 10 p.m. and we had yet to get any food or even bottle openers for the wine and beer, I was into full-throated restaurant critique. A tablemate, an executive from Airbus, noted the inconsistency between my words earlier that day and my behavior that evening.

He was right. So, following the American poet Walt Whitman’s advice to be curious, not judgmental, the people at the table decided to suspend judgment and we fanned out through the restaurant downstairs (we were in a private dining room) to understand the clientele, the business model, why we were not being served, and so forth. People returned to the table with insights from their fieldwork and, with a mindset of intellectual curiosity, we were all in a much better mood than when we were impotently complaining about the service.

Judgment and power

Workplaces are filled with interdependencies—we need the cooperation of others to get our work done and, for that matter, to advance in our careers. But sometimes we may not like or respect these people. As Caesar’s CEO Gary Loveman has often told my Stanford class on power in organizations, as you rise up in a hierarchy, there comes a time when you cannot afford to let personal feelings interfere with critical relationships—these relationships just have to work.

Making a relationship work will be more difficult if you decide that the other person is characterized by a bunch of negative adjectives. Once you see that someone is important to your work and success, forget about whether you like them or don’t like them and put aside other personal judgments. Your views can get in the way of your ability to build a productive working relationship.

Unfortunately, we live in a world filled with judgment and we make them constantly, automatically, and quickly. But as social workers Linda and Charlie Bloom recently noted, being too judgmental can cause problems in relationships. They noted that once we form a judgment of another individual, it becomes difficult to see that person differently, even if you get new information.

Moreover, the negative judgments we hold of others push them away, as few people are such good actors that they can successfully hide their feelings. People are unlikely to like those who hold or express negative opinions of them. So, if you want to build power—and power depends importantly on your ability to forge relationships with others—resolve to be less judgmental.

Judgments and human development

Stanford social psychologist Carol Dweck published a book called Mindset, which summarizes decades of research on what she and her colleagues call two different goal orientations that affect how we approach others and ourselves. One orientation is a learning or growth mindset where people work to become more competent and embrace challenges. The other is an evaluative—or judgmental—mindset in which people “seek to gain favorable judgments of their competence or avoid negative judgments.” This evaluative orientation causes people to shy away from challenges and risk, all to avoid failure.

In her research on children and adults, Dweck has consistently found that people assume different goal orientations based on what they are told, and that these mindsets are not permanent. She also found that different orientations have very different implications for development, learning, and growth. With an evaluative or judgmental mindset, if someone plays golf and has a high score, the person has learned that he is not very competent at the game so should avoid it. With a growth or learning mindset, a person who gets the same score will believe that they have not become proficient yet, so they should practice more and maybe hire a coach. In the second case, there is some chance that the novice player will improve and maybe even achieve mastery. In the first case, though, there is no such opportunity, as those people will simply move on to other activities at which they already do well.

The automaticity of judgment

Unfortunately, becoming less judgmental will be a tough resolution to keep. Research co-authored by the late Stanford social psychologist Nalini Ambady repeatedly demonstrated that people begin to form judgments of others within 10 seconds of meeting. Moreover, she and her Harvard psychology colleague, Robert Rosenthal, found that impressions formed on the thinnest slices of observed behavior were quite accurate.

These findings reinforce the importance of the idea of practice, as in to “practice” a religion, such as Buddhism or any other. Many of these teachings are difficult to implement, which is why mindfulness and practice are necessary. But the payoff of being less judgmental, or at least expressing those judgments less frequently, is substantial. That makes the effort so worthwhile.

(This post was originally published on Fortune on January 13, 2015)

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All I want for Christmas are the newspapers I paid for

Without for a moment denying the technological, competitive, and customer challenges that newspapers face, much like many brick-and-mortar retailers, such traditional print media companies have consistently made decisions that worsen their fates.

You might think that an industry that has spawned a website listing the newspapers that have closed, curtailed frequency, or moved to a solely online model; an industry where 39% of subscribers have cancelled a subscription in the past five years; and an industry facing circulation that has declined by 10% in the last decade and advertising revenues that have fallen by half just since 2006; would also be an industry that might want to take good care of the 56% of American adults who still prefer a printed paper and have remained subscribers.

But you would be wrong.

This sad tale offers a lesson for many businesses that continue to make cost-cutting decisions that irritate and drive away their customers, spurning essential revenue.

There’s the Orange County Register, which told customers who did not receive their paper because the company failed to pay The Los Angeles Times for providing delivery service to “come pick it up” and asked its employees to field calls from unhappy customers. There are the newspapers that, for subscribers who lived too far away, decided to use the U.S. Postal Service for delivery—with dire results. A quick Google search using the term “newspaper delivery problems” reveals a plethora of complaints from cities all over the U.S. including Akron, Philadelphia, Portland, and Jacksonville, to name a few.

And then there’s the San Francisco Chronicle, coming in at No. 5 on a list of the top 10 newspapers in trouble, that, together with the venerable but equally foolish New York Times, decided to change its delivery service in the fall of 2014. The plan: hire a new vendor that would deliver both papers in Northern California.

The result, according to my many conversations both with newspapers’ circulation customer service lines and an area circulation manager: catastrophe.

I finally cancelled my Sunday-only Chronicle subscription because, as I told the nice person on the phone, I never received it. As for the Times, it does come occasionally, but it is never double-bagged so it’s always soaked whenever we have the good fortune to get rain in drought-stricken Northern California. Months after the problems began, nothing has improved, and the same nice customer service people tell me that their pleas to the higher ups have fallen on deaf ears. Of course, both papers are losing subscribers.

A spokesperson for The New York Times told Fortune that the company is aware of the problems with its delivery vendor partnership and that they are working to resolve those issues. The Times also said that it plans to hold off on a home delivery subscription price increase for those affected by the delivery issues in Northern California until July. Fortune did not receive a response to a request for comment sent to the San Francisco Chronicle.

Providing customer service is invariably expensive for companies in all industries. That is why my local Safeway, soon to be acquired by private equity firm Cerberus, had one checkout lane open in a 60,000 square foot store in the evening during a recent evening—with a predictably long line. That is why Uber and Airbnb have made it difficult to find a customer service phone number for real-time assistance. And why, even though we supposedly live in a service economy, many companies have cut their costs by providing limited to no customer service.

If you call an airline, you will go through a phone tree and then wait interminably. And service on airplanes has declined as companies either eliminate those free bags of peanuts or substitute with less expensive versions, for instance, of food and wine. Many retail stores are bereft of sales people, apparently believing that the merchandise will sell itself. And the list goes on.

But these companies—newspapers, hotels, airlines, and retailers—don’t have cost problems. They have revenue problems. And providing lousy or nonexistent customer service won’t improve revenues.

The most frequent comment I hear when I bemoan the absence of service is, “We can’t afford it,” whatever “it” is. Maybe, maybe not. It depends on whether strategically increasing costs to provide better customer experience will increase revenues by even more.

Consider Stanford University. The school, which also happens to be my employer, is building a new hospital because the old one is seismically unsafe. During the construction, parking has been disrupted and access roads can be a mess. Some people drive to Stanford for hours to obtain its specialty and acute care. But Stanford competes with many other local health systems for patients. What to do?

As one vascular surgeon explained, when hospital personnel told the CEO, Amir Rubin, that patients were experiencing frustration getting to the hospital and finding a place to park, Rubin implemented a valet parking service. Now people’s first impression comes from being met by helpful valets, not struggling to find parking in a construction zone. Sure, there are costs, but the hospital is creating a great patient experience that will drive patient loyalty. As Bain consultant Fred Reichheld noted long ago, loyalty produces revenues and profits.

Companies obsessed with cutting costs can always go all the way and cut it all down to zero—shut down. As this counterfactual makes clear, cost minimization is never, or at least never should be, the most important goal. And sensible, well-run organizations understand that fact.

So, to my friends in the newspaper industry: Grocers can and do deliver, restaurants deliver, Amazon and Google are making rapid delivery a specialty. What’s wrong with newspapers?

In the meantime, maybe the Times and its brethren can add an item to their ubiquitous holiday season product offerings: a newspaper dryer to help subscribers “process” wet newspapers, if they happen to get one at all.

(This post was originally published on Fortune on December 23, 2014)

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3 critical lessons from Sony’s email hack

The media is having a field day with the recent (and continuing) leak of Sony Pictures’ e-mail exchanges. And why not, because, as one commentator put it, the leaking incident itself would make a great movie, what with money, ego, and temper tantrums on full display.

But behind the pyrotechnics, this incident raises three fundamentally important issues.

First, am I the only one who sees the huge contradiction between the endless stories about how everything—from payments, to control over houses, power plants, factories, and even moving vehicles—is moving to the web and the ample evidence that the Internet is completely unsafe and that essentially everything—ranging from credit cards to emails to financial data—can be hacked?

How can it be sensible to put ever more economic information and transactions and ever more control over physical activity on an infrastructure that is demonstrably unsafe and unreliable? It’s like saying, “We have a plane that is prone to crashing with unpredictably disastrous results, so let’s put more precious cargo on the plane.”

I understand the attraction of the Internet of things, the cashless society, and cloud-based everything, but this looks like an unfathomably large disaster waiting to happen. Or maybe it has already happened, as one recent report makes clear. No wonder so much venture capital money is flowing to security companies.

Second, having observed better and worse executives for decades, I find one of the most important leadership skills to be completely missing among all of the participants in this fiasco. That skill is thinking and behaving strategically at all moments and in all interactions. Yes, senior leaders have huge egos and maybe tempers to match. And, as research consistently demonstrates, the possession of great power often brings out the worst in people. People in power feel free to pay less attention to those with less power and are emboldened to ignore all sorts of rules, including norms for polite behavior.

But the best, smartest, savviest leaders understand that with great power and prestige inevitably comes great visibility. Subordinates watch senior executives more closely than they do people of lower rank, as they seek to learn how to behave in a particular workplace. And as all the executives who have written books can attest, the public at large also watches those in power, and the more power someone has, the greater the public attention they receive.

Therefore, there are no “offhand” or off-the-record remarks. Everything is public, or may be. Consequently, the smart thing for leaders is to put a filter between their brains and their mouths—or fingers, in the case of emails—and ask, “Is this communication going to help me achieve my goals?” If the answer is no, rethink what you were about to say or write. Letting off steam is fine for a teakettle, not so fine for people presiding over enormous enterprises who spend vast sums of money on attracting, retaining, and, most importantly, nurturing talent. And that holds true for leaders at all companies, not just the movie industry.

The third lesson hinges on how much attention we pay to feelings, ego, and relationships, and how little focus there is on business and making money. And no, this is not a phenomenon confined to the movie industry. As the endless saga of boardroom coups and executive shuffles illustrate, even at for-profit entities, financial results often take a back seat to personal agendas. This fact helps explain why so many companies fail to perform at their potential.

Those who lead the best enterprises understand that their first priority is to ascertain not how others make them feel or whether they like, or don’t like, particular team members, but instead who is best able to get the job done and improve performance. Simply put, a focus on results may be the most important determinant of whether those results are good or not. And as the Sony dust-up illustrates, too many executives are not focusing enough on results.

(This post was originally published on Fortune on December 12, 2014)

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How to make a fortune without ‘doing’ anything: The Uber, Airbnb story

Uber is much in the news recently, for mostly the wrong reasons. One of its senior executives threatened to investigate journalists who wrote negative things about the taxi service platform. An Uber passenger was allegedly attacked by a driver. And an Uber-affiliated driver ran over a pedestrian in San Francisco. And the company’s CEO has been accused of fostering a frat boy culture.

Without downplaying the seriousness of these events, I believe the fundamental issues posed by Uber have less to do with the company’s specifics and more to do with a business model that works by offloading responsibilities, something that many other platform companies—businesses that make money by making connections rather than providing a real product or service—do as well. I am not sure people fully appreciate the many problems inherent in this type of business.

This summer, I used Airbnb to rent a house in Claremont, Calif. The booking fee was $79—more than 10% of the rental cost. Did the house have a king-sized bed, I inquired of the owner? She would put one in time for our rental, she assured me by e-mail.

Four weeks before the reservation date, I tried to reach her. No response. Airbnb provided only modest help, with a long lag between e-mailing them and getting any reply. In the end, no king-sized bed, so we stayed at the Sheraton in Pomona as hotels in Claremont were fully booked by that time. Airbnb did, with some prodding, refund our entire booking fee, but they didn’t have to. As the company’s terms of service clearly state, this is an online platform and “Airbnb is not an owner or operator of properties.”

What a great business model. Airbnb collects money for providing a matching service on a highly scalable IT platform but faces none of the normal operating costs entailed in providing accommodations. The company is not responsible for maintenance and repairs, cleaning (or cleanliness, an issue that has caused a colleague of mine in Berkeley to stop using them)—or anything, really.

Making a business out of not being responsible

Of course, Airbnb is not alone in perfecting a business model in which companies take fees for doing nothing other than facilitating transactions. As it makes abundantly clear in its terms of service, Uber does not function as a transportation carrier nor does it provide logistics services. Passengers and drivers, and maybe even pedestrians in the way of Uber cars, are pretty much on their own.

Similarly, eBay is not a retailer. As it explains in its user agreement, eBay does not “guarantee the existence, quality, safety, or legality of items advertised.” I bet the retailers who get stuck with toys with lead in them or with inventory they can’t sell wish they had thought of such a clever out.

The list of companies that build platforms but eschew responsibility for the quality or even availability of goods or services grows daily, and why not? Margins can be enormous if you don’t have to deliver anything other than a website.

Give these companies credit for learning from experience. Remember Webvan, the startup run by a former Accenture executive that ran through $1 billion in an effort to build a business delivering groceries to homes? Webvan hired employees to drive trucks that the company purchased to haul products from its own distribution centers operated by extraordinarily complex software. Dumb business plan. Today, companies such as Instacart use contractors, not employees, to buy products at existing grocery stores and deliver it to people. Much less investment and risk.

Amazon could follow suit and raise its profit margins significantly. Why should it have warehouses or warehouse employees? It, too, could turn itself entirely into a transaction facilitator and simply take a cut for bringing buyers and sellers together—never needing to house a book or anything else it sells.

No responsibility, greater profits

So, what’s wrong with this? Nothing, if you don’t mind a sort of Wild West business ecosystem. The nice thing about big companies with substantive physical businesses is that you can collect taxes from them, regulate them, enforce employment laws, and do all the other things that go out the window in the “new economy.”

For example, while Airbnb posts requirements for its “hosts” to adhere to disability and anti-discrimination laws on its website, enforcement is obviously much tougher than it would be in dealing with a hotel chain. Many cities and counties that have passed hotel and occupancy taxes aren’t going to collect from Airbnb, which has finally agreed to collect taxes only in a handful of cities and leaves it to the individual “hosts” to comply with tax regulations.

There are regulations that govern how long people, particularly in transportation, can work. These regulations seek to protect drivers and others from accidents. Good luck enforcing those rules on thousands of independent contractors. And say goodbye to unemployment insurance and employer contributions to Social Security—because most of the people working for these companies are independent contractors, not employees.

The other nice thing about real businesses providing real products and services is that if there are problems, there is an entity that can offer remedies. The old Webvan would be responsible if it delivered rotten produce or bad meat from its warehouses, but not the new delivery services. Retailers like Nordstrom guarantee their products’ quality, not eBay. Limousine companies have established liability for hiring and supervising their drivers, and paying when things go wrong. Not Uber, although that remains to be seen as cases wind through court. Hotels carry liability insurance and have the financial wherewithal to protect guests who are assaulted by their workers or otherwise harmed by building safety problems. Not Airbnb, which certainly has plenty of financial resources but, as a “non-operator,” has shed any responsibility for what happens to you in your temporary rental.

Offloading responsibility, including the responsibility for liability insurance, compliance with government regulations, and payroll taxes, saves costs, lots of costs. This gives new economy companies an inherent, and maybe even unfair, advantage over the competition.

Company attempts to shed responsibility for their employees—and costs—is an old story. Many years ago, some employers decided that having actual employees was a pain. There were the payroll taxes, the expense and time of hiring, legal exposure to wrongful discharge and discrimination suits if you fired people; all in all, too much trouble. So, employers offloaded employees and their work to temporary help agencies and contracting organizations, which is one reason that “nonstandard employment” has grown so rapidly and there are even associations representing the interests of the many companies operating in this industry.

The IRS and state employment services feared that they were going to lose out on unemployment and payroll taxes from independent contractors. So, they developed a checklist to ascertain whether “nonemployees” doing work for some company actually were or were not employees, and they conducted audits to ensure employees were treated as such.

The jig may soon be up

Cities and states are beginning to try to impose some oversight on at least some of the new economy companies, although such efforts are often met with derision and characterized as stifling innovation. I am not sure that avoiding responsibility and legal liability is really as “innovative” as is sometimes claimed. Bypassing zoning regulations on where hotels can be located and negating licensing requirements related to who can pick up passengers poses risks that, if you believe the terms of service agreements, truly should make the buyer beware.

For those people who worry about income inequality, there is another reason to think twice about these new business models. In a careful analysis of 53 countries from 1960 to 2006, University of Michigan business school professor Gerald F. Davis and a colleague found that the higher proportion of employees who worked in large companies, the lower the level of income inequality. This makes sense because internal labor markets and the greater social contact among employees reduces variation in wages much more so than in market-like arrangements.

Call me old-fashioned, but I actually like a company whose “terms of service” entails providing the product or service I am purchasing rather than stating all the things it is not responsible for. I prefer to buy from a company that stands behind its products, with management that cares enough about its customers to provide oversight of its employee workforce and quality assurance for its services.

(This post was originally published on Fortune on November 24, 2014)

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Openness and transparency will not solve our problems

On Election Day this year, voters defeated a proposed soda tax in San Francisco (although they passed one in Berkeley) and defeated laws requiring the labeling of genetically modified food ingredients in Colorado and Oregon. We know that beverage companies spent at least $9 million in San Francisco, that biotechnology and food companies spent $14 million in Colorado, and that in Oregon, DuPont and Monsanto alone put up more than $10 million to defeat the food labeling initiative.

We know these facts because there are disclosure requirements that make campaign contributions fairly transparent. But as these election results demonstrate, transparency—knowledge about company actions—frequently doesn’t change outcomes.

I am a fan of transparency—more disclosure is better than less, more information is often helpful. But transparency alone can’t fix many problems. This is why I have little sympathy for the “new power” and “social media changes everything” set, with their Pollyannaish views of how the world works.

Colleagues and the media repeat the mantra all the time: the Internet and social media have changed everything. In 1999, Larry Ellison, Oracle’s then-CEO said, “When I say the Internet changes everything, I really mean everything.” And Harvard Professor Rosabeth Moss Kanter blogged about a G-8 Forum in Paris where the Internet “was venerated as a revolutionary force” and a tool for empowering people.

The logic behind these statements: Everyone (at least people with an Internet connection and an access device) can know almost everything about companies, products, political leaders, countries, and elections. People can communicate what they know and see to others quickly and inexpensively. Transparency, so the theory goes, constrains bad actors and provides powerful incentives for companies to become better employers and behave better to their customers.

Moises Naim has proclaimed The End of Power because, as one review of that book noted, “the ability of elites to use their assets to influence and shape the world has dissipated” because elite behavior is now out in the open. This year The Great Place to Work Institute, when it released its 4th annual best multinational workplaces list, proclaimed “the dawn of the great workplace era” because “transparency is exposing and punishing less-than-great organizations and rewarding good ones.”

Not to throw water on the GPTW’s kumbaya parade, but I don’t see any evidence of nirvana arriving. To take just two, out of scores, of data points, Gallup reports that only 13% of employees are engaged at work, and the Edelman Trust Barometer report for 2014 found that just one-quarter of the public “trusts business leaders to correct issues” and just 20% think that business leaders will tell the truth and make ethical decisions.

So, why is transparency less of a panacea than you might expect?

We don’t always pay attention to what’s put in front of us

Remember when there was a big push to first disclose the costs incurred by various mutual funds and then make those disclosures easier to understand? Costs didn’t change much and neither did the proportion of money going to various funds.

It was a similar story for the costs of 401(k) retirement plans. Even though the federal government requires that plan fees and costs be disclosed, as a recent article on this issue noted, “few employees question how much they are being charged.”

People are busy going about their lives. Just because information is available doesn’t mean that individuals will access or use it.

Sometimes, we don’t have much choice in the matter

Even if people want to use the ever-more-available information, such as those ubiquitous consumer ratings, they may not be able to.

It is scarcely an accident that in the American Customer Satisfaction Index scores for 2013, the lowest ranking industries were the U.S. Postal Service, wireless telephone service, Internet service providers, airlines, and subscription television services. Why? Because these are industries that don’t have to respond to customer desires, so they don’t. Most locales offer a very limited choice of television and Internet providers and wireless plans. Tom Wheeler, the chairman of the FCC, commented that 75%of American homes have no choice at all if they want high speed Internet. The Postal Service is a monopoly for first class mail, and airlines, through the fortress hub strategy—controlling a substantial proportion of the traffic from one hub airport—are essentially monopolies in many places. If you live in Detroit, you are probably going to fly Delta, and in Dallas, it will be American Airlines. So why bother looking at customer satisfaction ratings or user reviews? You can’t use the information to make decisions.

Sites like Yelp and TripAdvisor affect business behavior and empower consumers because the markets they aggregate data about—hotels, restaurants, business, and personal services—are for the most part highly competitive with many available options. In those circumstances, people can change their choices and act on information. But in many markets, the absence of choice renders transparency essentially useless.

We are terrible at incorporating and discounting information

Since 2009, the beverage industry has spent more than $117 million to defeat or eliminate soda taxes. According to Michael Jacobson, executive director of the Center for Science in the Public Interest, “they have had a good track record.”

That’s because people are notoriously unsuccessful at altering their judgments based on knowledge of the funding behind persuasive messages they receive. What is salient is the message, repeated endlessly, not the disclaimers in small type that explain where the money for those ads came from.

Similarly, even though there is evidence that studies funded by drug and medical device manufacturers are more likely to produce results favorable to the funder, and even though payments by drug companies to doctors must now be disclosed, “drug and device companies made 4.4 million payments … adding up to about $3.5 billion”just between August and December 2013. These companies are not wasting their money. They know that disclosure of such payments will not completely eliminate their effects on physician advocacy, which includes prescribing behavior and reported research results. Moreover, drug companies understand that even when people know the funding sources, they will be psychologically incapable of sufficiently discounting the publications touting drug or device efficacy.

Simply put, buying influence and persuading others is possible even if people are aware of the details of the transaction.

We rationalize decisions that serve our interests

When a Malaysian civilian airliner with almost 300 people was shot down over eastern Ukraine, it did not matter if Russia had been actively helping the rebels or might have supplied the missile that caused the tragedy. Russia has a big energy industry, and the foreign oil companies that profit from doing business with Russia steadfastly opposed sanctions—the facts about what Russia was doing be damned. For instance, Christophe de Margerie, the late CEO of French oil company Total, called European Union sanctions “unfair and unproductive” and opposed efforts to economically isolate Russia. BP worried that “further economic sanctions could adversely impact our business” while the company stuck to a business-as-usual policy with Russia.

Don’t believe for a moment that China’s government is worried about the images coming out of Hong Kong as it copes with the demonstrations. The Chinese, too, know that people are readily able to rationalize doing what they want to do even in the face of transparent information. And there are many countries, businesses, and universities that see doing business with China as essential to their economic success.

In an article entitled “Tip of the Hat, Wag of the Finger,” some marketing scholars described the two processes people employ to overcome moral qualms so they can continue doing business or supporting questionable actors. They are called moral decoupling and moral rationalization. Moral decoupling implies that behavior in one domain is irrelevant to decisions in another—shooting down an airliner is disconnected from securing energy supplies, for instance. Moral rationalization maintains that the bad act isn’t so bad after all—for example, the Chinese are only exercising their legitimate control over a part of their territory ceded to them by the British.

A person’s ability to develop rationalizations to continue doing what they want to do or perceive to be in their interests has the power to overcome any element of transparency.

Transparency can have perverse effects

To make matters worse, recent psychological research has found that transparency and disclosure can actually increase bad behavior. One set of experimental studies, which examined the effect of disclosures of conflicts of interest, observed two processes that produced this perverse result. First, when business advisors knew that conflicts of interest had become transparent, they felt freer—morally licensed—to provide more biased recommendations in the first place. Similarly, when people know that those that they are transacting with are going to have legal representation or other agents working on their behalf, they feel freer to try and take advantage of their counterparties. The knowledge that someone has a good advisor excuses those interacting with that individual from a sense of moral obligation to help care for the other person.

Second, the research demonstrated that when people are told they are receiving advice from someone with a conflict of interest, the individuals don’t sufficiently take this information into account when deciding whether or not to act on the advice.

What can you do about it?

Transparency and sharing information through social media does not remove the need for vigilance and even the use of power. Passing soda taxes or food licensing or imposing sanctions on nations that violate human rights requires more than data or even dramatic pictures—it requires that proponents develop and use political and economic power just like their adversaries do. Don’t count on transparency alone to keep misbehavior at bay or empower ordinary citizens. Except in unusual circumstances, it won’t.

(This post was originally published on Fortune on November 13, 2014)

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Why health insurance companies are doomed

It’s that time of the year. No, not Halloween, but something almost as scary—open enrollment season.

It’s time to choose among the many plans offered through the various health exchanges as part of Obamacare, among the variety of Medicare Advantage and prescription drug plans offered by private insurers as part of Medicare (for those who are age-eligible), and, for the 62% of employeeswho are have the opportunity, time to sign up for an employer-sponsored health insurance plan.

As we struggle to make sense of the health insurance landscape, it’s a good time to consider why health care costs in the United States are so high and outcomes so relatively poor and, more importantly, what the future is likely to bring.

For now, the U.S. is unique among advanced industrial economies in its reliance on private insurers to administer much of the health care payment system. But this situation is almost certainly going to change. Cost containment and competitive pressures will transform, if not doom, health insurance companies. Here’s why.

We have a performance problem

Let’s put the U.S. health care system in some comparative context. U.S. healthcare is exceedingly expensive. According to OECD data released in 2014, among 34 advanced industrialized countries, the U.S. spends $7,662 per person (adjusted for purchasing power parity differences), which is more than 2.6 times the OECD average. The U.S. devotes 16.9% of its GDP to health care, 1.8 times as much as the average. In the case of health care spending measured any way you want, the U.S. is No. 1 by a large margin.

Despite all that spending, America’s health system does not perform particularly well. That same OECD report shows that the U.S. ranks 27th for life expectancy at birth. This comparatively low ranking is not merely a consequence of higher infant mortality, where the U.S. ranks a dismal 53rd in deaths per 1,000 live births. Even considering life expectancy for men aged 65 places the U.S. in 23rd place.

The U.S. ranks so poorly on health outcomes partly because it is the only advanced industrialized economy that has not provided health care to everyone, a situation that persists even after the passage of the Affordable Care Act. Not having health insurance adversely affects access to health care, which in turn affects mortality and morbidity. One Urban Institute analysis estimated there were about 22,000 excess deaths annually because of a lack of universal access to care, while a study published in the American Journal of Public Healthcalculated that there were approximately 45,000 excess deaths in 2005 because of the absence of universal health coverage. Numerous research studies have analyzed some of the pathways that lead to these excess deaths, including reduced use of preventive screenings among the uninsured, which means that disease is detected later when it is more difficult and expensive to treat.

U.S. health care costs are not only high, but they continue to rise and more of those costs are being shifted to individuals. For instance, even though overall health cost inflation has been curtailed by the recent recession, in 2015, the cost for covering my spouse and myself through Stanford-provided health insurance will go up by an astounding 25.5%. Although this is an unusually large increase, the Kaiser Family Foundation reports that in the last decade, employee premiums have increased more rapidly than total health insurance costs as employers—using a combination of increasing premiums, deductibles, and copayments—have relentlessly shifted health care costs to their workers.

A bureaucracy that would make Kafka blush

It’s June 2014, and unfortunately I need back surgery. My back surgeon, having carefully reviewed my MRI, turns me over to his “scheduler,” a full-time employee who spends all day every day on the phone talking to insurance company functionaries (or waiting on hold to speak to them) to get authorization to deliver medical care. This staffing is typical of most medical offices, particularly for specialists, who confront endless forms, prior authorizations, and other manifestations of bureaucracy. And then there are the other people doctors and hospitals have to hire to hound the insurance companies for payment once the care is delivered.

The time spent dealing with insurance intermediaries costs money and aggravates physicians and their patients. As one doctor lamented in a column in The Wall Street Journal, “U.S. doctors spend almost an hour on average each day, and $83,000 a year … with the paperwork of insurance companies.” And for every call coming from a doctor’s office or hospital to an insurance company, there is someone at that insurance company on the other end of the line to process the call.

In 2012, more than 460,000 people were working in the health insurance industry, and employment growth in health insurance is much higher than for the providers of actual health care. Of course, managing all these people is expensive—very expensive. In 2011, the CEO of Blue Shield of California made $4.6 million and the organization’s top 10 executives earned $14 million in total, although of course none of them did any medical research or delivered any care to real patients. The Affordable Care Act mandated that health insurers had to spend at least 80% of their collected premiums on medical care. The very inclusion of that provision implies that at least some health insurers had overhead rates in excess of 20%. All of this seems expensive and wasteful, and it is.

There are other models. Kaiser Permanente, a health care provider that combines both a health insurance plan and care delivery in a single organization, serves more than 9 million members and employs more than 17,000 physicians. Without a separate insurance company intermediary, Kaiser saves money, which it then uses to offer lower health insurance rates. For instance, for 2015, the total cost (Stanford’s portion plus my contributions) of purchasing the Blue Shield-administered plan in which my wife and I participate is 39.7% higher than the cost of getting health insurance through Kaiser Permanente. Although many factors might explain this huge difference in price, the simplification of access and the reduction of administrative overhead is a big part of the story. Kaiser, by being both health plan administrator and care provider, has eliminated the insurance company intermediaries that raise administrative costs.

To be clear, that’s precisely what insurance companies are—intermediaries. Health insurers receive payments from employers, individuals, and governments and then send that money to health care providers such as pharmacy benefits managers, doctors, and hospitals, of course keeping some for themselves to cover overhead and, in some instances, profit. To take one informative example, Stanford University, which has its own medical school, hospital, and doctors, sends money to Blue Shield on behalf of those employees who use Stanford Medical Center services (and others). And then Blue Shield sends that money back to Stanford for the services Stanford renders to its own employees! The obvious questions are: how much does this intermediation cost and what valuable purpose does it serve?

Let’s consider evidence on the cost issue first. In 1991, Steffie Woolhandler and David Himmelstein, two Harvard doctors with an interest in health policy, published a paper in The New England Journal of Medicine in which they estimated that health care administration constituted somewhere between 19% and 24% of total spending on health care, an amount that was 117% higher than what it was in Canada and much more than in the U.K.

About a decade later, the researchers decided to revisit their earlier examination of U.S. healthcare administrative inefficiency. They wanted to determine whether changes in the medical care system—including the rise of managed care and numerous hospital mergers, and changes in technology, including the growing use of computers and the Internet—had changed the administrative burden.

They found that things were worse.

Their updated estimate, once again published in The New England Journal of Medicine, found that administration accounted for about 31% of health care spending and that more than 27% of all of the people employed in health care worked in administrative and clerical occupations.

This large administrative expense is not surprising. It costs money for health care providers to deal with multiple insurers, each with its own protocols, forms, and requirements. And it costs money for insurers to be able to transact with multiple providers and to furnish the oversight—which many would consider more annoying than helpful—of health care delivery.

What do we get for all that spending?

You may be thinking, “All right, insurers certainly cost money. But don’t they and their health insurance brethren help control costs as they efficiently administer care delivery?”

Not really. First of all, health insurance companies often improperly reject claims and deny coverage. As just one example, a recently reported audit of Medicare Advantage plans conducted by the Center for Medicare and Medicaid services found that “in 61 percent of audits, insurers ‘inappropriately rejected claims’ for prescription drugs” and “in more than half of all audits, ‘beneficiaries and providers did not receive an adequate or accurate rationale for the denial’ of coverage when insurers refused to provide or pay for care.”

In some cases, such as the use of advanced imaging services, there is evidence that health insurers have helped constrain inappropriate overuse. Of course, any savings come at a cost. One physician, complaining about prior authorization as “a wasteful administrative nightmare,” noted that “prior authorization requests consumed about 20 hours a week per medical practice.” And studies of prior authorization for prescription drugs tend not to find savings. For instance, a study of the effects of prior authorization for Type 2 diabetes prescriptions reported higher costs for patients who requested authorization for a medication and did not receive it. The article concluded that “failure of a member to take a medication deemed necessary by his or her physician could translate into inadequate control of the diabetic condition and result in an excess of resource utilization and costs for treating the disease.”

Why has nothing changed? Lobbyists.

If insurance intermediaries frustrate doctors, vex patients, drive up costs, and provide few consistent benefits in administering health care, a reasonable person might wonder how they have maintained their central role in health care for so long? The answer: particularly when health care reform gets debated, the health insurance industry spends a lot of money to make sure its interests are well-served. After all, health spending in America is approaching $3 trillion, and 30%—the estimated overhead rate—of $3 trillion is an enormous sum.

When the Affordable Care Act was proposed and debated, a report carried by CNN noted that between lobbyists, political donations, and television advertising, the various health care constituencies including hospitals, doctors groups, and health insurance companies spent $375 million. Another news report noted that America’s Health Insurance Plans, an industry association representing the health insurance industry, funneled more than $100 million through the U.S. Chamber of Commerce in an effort to defeat Obamacare. Consulting a database of reported lobbying expenditures (which understates the money spent attempting to influence policy) reveals that in 2013, some $154 million was spent by insurance lobbyists. The two biggest spenders were Blue Cross/Blue Shield and America’s Health Insurance Plans.

This pot is about to boil over

Although the health insurance industry is powerful, betting on their survival seems like a long shot. That’s because increasing levels of competition among health systems, particularly in large metropolitan areas, will eventually cause many large health care providers to do what Kaiser Permanente has already done—offer their own health plans and disintermediate the insurance intermediaries.

In June 2014, I gave a talk to a group of health care executives from Sutter Health as part of a leadership development program. Sutter is a large, multi-unit health care organization in Northern California that owns both hospitals and some physicians’ practices. The people in the room, including one member of the board of directors, were stressed. Known as a “high-cost” provider, Sutter has been losing market share to Kaiser Permanente and was worried about the emergence of other potent competitors. For instance, Stanford’s medical center had begun to offer Stanford employees (and, in the future, probably the public) access to Stanford hospital and doctors and at Kaiser prices. Although initially Stanford relied on Blue Shield, because Stanford Medical Center was not yet licensed by the state to offer health insurance, that could change, particularly as the medical center purchased physician practices throughout the Bay Area.

Many people of all political stripes have long advocated for more competition in health care. That competition is coming, particularly in large metropolitan areas.

The Sutter group’s conclusion: if they are to compete, they have to offer their own health plan to see the full patient picture and reduce overhead costs. They have such a plan, Sutter Health Plus, which began earlier this year in the Sacramento and San Joaquin Valley areas. It now has more than 7,300 members, a number expected to double by 2015. The plan includes 1,800 physicians and a multi-hospital network. Sutter needs to expand this offering throughout Northern California, and many Sutter employees know it. To take one example of why this is a prudent move, a person from their Palo Alto Medical Foundation, a doctor’s group serving the South Bay, reported that Blue Shield negotiated lower prices from PAMF and then did not fully pass those reduced prices on to employers, leaving Sutter disadvantaged in its pricing during open enrollment.

To be sure, Sutter’s story concerns just one health care system in one region of the U.S. And while Kaiser Permanente operates in many locales throughout the U.S., it is far from ubiquitous. But the evidence demonstrates that one important source of excess health care costs in the U.S. is administrative overhead, as physicians and pharmacy staff spend more and more time learning various insurance company rules and procedures. As cost containment pressures increase and as more health care systems introduce their own insurance offerings, those that rely on intermediaries will be at a major disadvantage.

This should not come as a big shock. After all, in industry after industry, ranging from travel to publishing to finance, we have witnessed the disruptive effects of disintermediation or its beginnings. Travel agencies shrank as airlines and hotels moved distribution to the Internet and user ratings permitted people access to information on quality. Self-publishing grows as companies such as Book Baby, Lulu, and others make it possible for anyone to produce and sell books online, reducing the role of traditional publishers. Bloomberg recently reported on disintermediation in finance, with banks left out as lenders and borrowers connect directly. There are websites and services that match car drivers with passengers and eBay matches buyers of merchandise with sellers. There is absolutely no reason to believe that the $3 trillion health care industry will be immune to pressures to eliminate or reduce the costs of intermediaries that do not make the process any easier or cheaper.

The late economist Herbert Stein once said, “if something cannot go on forever, it will stop.” The ever-expanding administrative costs of health care will eventually reach a limit, and this will happen sooner than many people expect. Health insurers’ dismal customer service and high overhead costs make them easy and inevitable targets. These companies’ survival depends on fundamentally reinventing their business models. Otherwise, they are doomed.

(This post was originally published on Fortune on October 20, 2014)

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How airline loyalty programs seduce and abandon you

Had a nice summer flying on crowded, often-delayed planes and being charged extra for every conceivable service ranging from checked bags to sitting in an exit row to talking to a customer service agent on the phone? Well, at least you earned all those airline miles, as you carefully selected trip routings that permitted you to fly on the airline to which you consistently show your loyalty. Too bad that loyalty isn’t reciprocated.

Airline mileage programs are designed to be psychologically attractive, even addictive, to customers. But as their benefits have decreased, so too has passenger loyalty.

As everyone knows, airlines are free to change their rewards programs whenever and however they want, and they do. Program changes, such as those announced earlier this year first by Delta and then by United, invariably make it harder to earn miles, obtain better seats without paying some upcharge, and require ever more miles to get the free trips or upgrades to premium cabins that travelers seek.

Mileage programs are big business for the airlines, which sell miles to credit card companies and other vendors such as hotels to in turn give away to their own customers. How big is the mileage business? In 2012, United sold $5.1 billion in frequent flier miles compared to $25.8 billion in actual airfare revenue, and there has been talk of airlines spinning off their mileage arms as separate companies. Better yet, airlines get a lot of that money for nothing! For instance, United expects that 25% of the miles that it is selling will never be redeemed.

Complaints about mileage programs are unending. So why do people fall for these tricks?

Mileage and similar reward programs employ several psychological principles to get you hooked. First and most importantly, there are those mileage balances. Such “quantification influences judgment and decision making,” according to research published in 2005 by the journal Contemporary Accounting Research. Using terms such as “balance” and showing you statements with your “balance” causes people to treat even ephemeral assets as though they were real. And nothing is quite as ephemeral as airline miles. Unlike cash, miles can and do expire. And, exhibiting hyperinflation on steroids, miles become worth less each year.

Second, mileage programs send you those cards with your number on them and, at a certain level, luggage tags. The principle here is psychological identification, creating a relationship between you and the airline. Because you carry an airline card, you are a card-carrying member of that company’s loyalty program. You are more closely identified with the airline whose card you hold, and therefore more likely to think well of it.

Third, there are the levels or tiers. You can “earn” (notice the language, as the common psychological expectation is that when you earn something, that something has real value) status. But of course, free upgrades are largely a thing of the past on ever-fuller flights with more people competing for them. Nonetheless, the achievement of higher status levels hangs like a proverbial carrot in front of the horse—you—to induce you to try and achieve something that is of limited value.

My advice: wean yourself from the idea that your airline mileage balance is like a bank account with actual value—it isn’t. Stop identifying with a company that probably is providing ever worse service at ever-higher prices. Cease showing loyalty to an entity that is not reciprocating your love. And stop trying to concentrate your trips on one carrier for the dubious privilege of learning that the many supposed advantages of elite status get reduced almost every year. Instead, book each trip with a psychologically clean slate. Find the best combination of seat, route, and price each time you travel.

If and when you heed this advice, you will be just doing what the most sophisticated travelers already do. As a report by Deloitte on airline loyalty programs noted, only 40% of business travelers fly at least 75% of their air miles on a single airline. Many frequent travelers belong to two, three, or even four airline rewards programs. After the airlines consistently made rewards programs less attractive, some people have wised up and resisted the psychological tricks. That leaves mileage programs with diminishing value both to travelers and to the airlines, which now must confront reduced customer loyalty. Better use—or in the case of airlines, sell—those miles while you can.

(This post was originally published on Fortune on October 1, 2014)

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Bad Behavior at Business School Becomes Corporate Misconduct Later

One of the striking aspects of the recent financial crisis is not just that there were few criminal prosecutions (virtually none) of people who oversaw the writing of fraudulent loan documents, the botching of foreclosures, and the misleading of unsophisticated consumers with unclear loan terms. What should truly shock you is the near-complete absence of stigma adhering to corporate boards or executives following all this corporate misbehavior.

A study of director turnover at financial companies from 2006 to 2010 found that a company’s underperformance, including needing a government bailout, was unlikely to force board members out, and the effect was even smaller at nonfinancial companies. The study also found that directors who oversaw financial catastrophes suffered no fewer opportunities to serve on other companies’ boards. One news article noted that a director from Lehman Brothers continued to serve on the board of Office Depot and that a director from American International Group had joined the board of a New York investment bank.

Since I have observed business school students for decades, it occurs to me that this habit of keeping quiet in the face of problematic action starts early. In fact, it’s evident in business school culture. There are many examples of business school students collectively letting corner-cutting slide, ranging from ignoring rather than criticizing alcohol-fueled misbehavior to not calling out students who update their Facebook pages, answer e-mails, and do online shopping during class. My colleagues at Stanford say that students regularly complain, both to faculty who fail to stop behavior and to the school’s administration, about the effects of behavior like this on the learning culture.

But few individual students, or even groups, want to enforce norms on peers, something that would ultimately be more effective than anything faculty or the administration could do.

Much of business school experience is focused on building relationships that will be useful later in one’s career, so expressing disapproval of others could compromise ties to someone who could later be successful.

Another deterrent to blowing the whistle: There’s no upside to calling out bad behavior. As an article about whistleblowing on scientific misconduct, aptly titled No One Likes a Snitch, and other research makes clear, outing bad behavior frequently results in worse outcomes for the whistleblower than for the miscreant.

As decades-old research demonstrates, peer approval or disapproval of inappropriate behavior are among the most potent forces affecting conduct. Humans, as social animals, react strongly to whether their behavior results in being cut off from the group.

People who complain about others’ behavior, either in school or in the corporate world, without being willing to to condemn such behavior, are not just hypocrites. They are helping to establish a climate in which misbehavior flourishes. After all, the very idea of a “norm” implies a standard of conduct that is both widely practiced and, when violated, brings sanctions.

Turning away and trying to ignore instances of inappropriate or even illegal behavior helps create an “anything goes” climate—an environment that makes misbehavior of all kinds and levels of severity ever more likely.

(This post was originally published on BloombergBusinessweek on September 8, 2014)

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Let’s Be Honest About Lying

If lying — or even just exaggerating a bit — would help your team win, would you do it? More provocatively: should you do it?

Consider the case study unfolding right now in Brazil at the World Cup. For many players, pretending they’ve been fouled is no big deal. Called “flopping” or “diving,” a player who has felt a minimal amount of contact will grimace in agony, fall to the ground, and, often enough, get a bit of sympathy from the referee, who will award his team possession of the ball. But the players on the U.S. and the U.K. teams, reports the New York Times, don’t like to fake fouls. Are they leaving goals — and wins — on the table?

Being honest and never dissembling is very consistent with the bland axioms of a “feel good” leadership discourse, but as in the case of sports, it is also remarkably inconsistent with what actually goes on in the real world. Truth is, some of the most successful and iconic leaders, including many CEOs, were (and are) consummate, accomplished prevaricators.

There’s Steve Jobs, 2005 Stanford commencement speaker and technology icon. The phrase “reality distortion field,” coined by the one of members of the original Macintosh team, refers to Jobs’s amazing ability to present what he would like to be true as if it were already reality.

There’s Larry Ellison, one of the richest men in the world and Oracle CEO and co-founder. Not only did Ellison and Oracle get into trouble in the early 1990s from misrepresenting the company’s actual sales in financial filings. As nicely described in David Kaplan’s book about the origins of the Silicon Valley, Ellison was great at telling customers that a product was available even if he was just thinking about designing it – possibly in response to the potential customer’s inquiry.

In a darker vein, there are the tobacco industry executives, testifying under oath in front of Congress that they had no idea cigarettes had adverse health effects. The CEOs of Lehman Brothers and Bear Stearns, among others, claiming their balance sheets were in great shape days before both firms collapsed. Former Senator Jon Kyle of Arizona maintaining, in 2011 as the federal government hurtled toward shut-down, that he could not support a continuing resolution that provided funding for Planned Parenthood because more than 90% of Planned Parenthood’s funds went to provide abortion services (the real number is more like three percent). Kyle’s statement, his office later claimed, was never intended to be factual – something that provided fodder for Jon Stewart’s Daily Show.

My takeaways? First of all, the amount of hypocrisy, in the world but particularly in the writing and speaking about leadership, is almost too vast to comprehend.

Second, all the moral “cluck-clucking” about how harmful this dishonesty is does nothing — or maybe even less than nothing — to change anything. Because people mistakenly believe that expressing disapproval is sufficient, they fail to follow through with initiatives that might actually compel people to be (more) honest.

Third, organizations — whether they are companies or soccer teams – exist in ecosystems and if you want to change individual behavior, you need to change the systems in which that behavior occurs. Or as a software company chairman once put it to me in conversation, “if everyone else is misrepresenting product availability, can we afford not to?” (This is where vaporware emanates from.)

Fourth, even as people express outrage over deception and misrepresentation, research shows that many, many people frequently engage in two processes that permit them to continue to do business with and support companies and leaders who have engaged in moral transgressions. One psychological process is moral rationalization — convincing themselves that the misbehavior wasn’t actually that serious. The other process is moral decoupling – arguing that the particular transgression is not relevant to the decision at hand — for instance, that sexual misbehavior is not probative of an athlete’s skills on the field.

Lying is incredibly common in everyday life in part because it helps to smooth over relationships. And the ability to convince people of something even if it is not quite the case, the art of salesmanship, is a quality actually both common to and useful in leaders. Note that even one of the early, iconic stories of truthfulness, George Washington admitting to his father than he cut down the cherry tree, is itself made up.

(This post was originally published on the HBR Blog Network on June 18, 2014)

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Here’s Why Amazon Is More Ruthless Than Walmart

With no stores and an IT infrastructure that makes the cost of adding inventory close to zero, Amazon doesn’t have to care about its suppliers

The recent dustup between Amazon and publisher Hachette reminds us that retail is a brutal business — tough on employees, really hard on suppliers. Walmart, the largest physical retailer, and Amazon, the largest retailer online, illustrate the pain produced in the effort to make consumers’ prices as low as possible.

Consider the plight of those working in retail. According to the Bureau of Labor Statistics, retail salespeople and cashiers were the two largest occupations in the U.S. in 2013, together employing almost 8 million people. These are low-paid occupations under the best of circumstances. While the median hourly wage for all employed people was $16.87, cashiers made just 58% of the median, and sales clerks just 60%.

Numerous news articles document the tough working conditions for both Amazon and Walmart employees. Both employers face suits for not paying employees for all their required time at work, including time waiting to go through a security check at Amazon’s warehouses to guard against shoplifting. Amazon’s German employees have been striking over wages since last year. A homeless shelter in Jeffersonville, Ind., has had between two and six Amazon distribution-center employees living there at all times. Many articles describe the harsh work culture at Amazon, some calling it a “soul-crushing experience.”

Walmart is scarcely better. Fifteen percent of Walmart’s Ohio employees are on food stamps. Employees receive $2.66 billion in government assistance annually. A study by the University of California, Berkeley’s Center for Labor Research and Education noted that, even after statistically controlling for differences in geography, “Wal-Mart workers earn an estimated … 14.5 percent less than workers in large retail” and that “several recent studies have found that the entry of Wal-Mart into a county reduces both average and aggregate earnings of retail workers and reduces the share of retail workers with health coverage on the job.”

But it’s Amazon’s relationship with its suppliers that makes the company worse than Walmart. There’s no doubt that Walmart pressures suppliers for the lowest possible price. But once the products are in the stores, both Walmart and the chosen suppliers’ interests are well aligned — to sell as much as possible of the stocked items. It costs money to build stores and ship products to them. More important, choices are necessarily limited in a physical store. So Walmart wants to move as much of the merchandise it decides to sell as possible. Having chosen a supplier and negotiated a deal, there is at least some degree of temporary commitment by Walmart to the vendor.

By contrast, Amazon — with no stores and an IT infrastructure that makes the cost of adding items to sell close to zero — doesn’t care what you buy, or even which of their online partners you use, as long as you buy the product through Amazon. Take books, the focus of the recent conflict. Walmart stocks a relatively small selection, so it wants to move the specific books it offers. Walmart’s interests line up quite nicely with the authors and publishers it promotes. Amazon stocks everything (except apparently now books published by Hachette), so it doesn’t care which particular book you buy. Simply put, Amazon has less incentive to make any specific supplier successful. To Walmart, for books or anything else, selling a million units of one item is great; selling one unit of a million items is impossible in its physical stores. For Amazon, who cares? That’s why relationships with suppliers, always contentious, will be particularly problematic at Amazon, especially when Amazon controls so much of the retail market share.

Some believe that low-paid, overworked, unhappy employees are the new model in an Internet age of offshoring, outsourcing and computer-monitored work. It’s quite possible that online retailing is also creating a new model of retailer-supplier relationships, with much less sense of partnership and shared fate than in the past. If so, Amazon’s fight with Hachette presages trouble for lots of suppliers, not just book publishers, in the very near future — at least if Amazon’s market dominance persists.

(This post was originally published on TIME.com on June 11, 2014)

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