Jeffrey Pfeffer's Blog, page 6

The Reason Health Care Is So Expensive: Insurance Companies

As Congressional budget battles heat up—or roll along, depending on your time perspective—the cost of health care in America receives a lot of attention. Unfortunately most of the discussion is largely off the mark about where the preventable, unnecessary costs really are. Yes, there is certainly over treatment, particularly of people in their last days of life. Yes, doctors under a fee-for-service arrangement do have financial incentives to do too much, and the fear of malpractice can lead to overtesting and overtreatment. As the recent article in Time by Steven Brill illustrated, pricing of medical care is neither invariably transparent nor sensible. And it would certainly be nice if care were better coordinated across functional specialties.

But the thing that few people talk about, and that no serious policy proposal attempts to fix—the arrangement that accounts for much of the difference between health spending in the U.S. and other places—is the enormous administrative overhead costs that come from lodging health-care reimbursement in the hands of insurance companies that have no incentive to perform their role efficiently as payment intermediaries.

More than 20 years ago, two Harvard professors published an article in the prestigious New England Journal of Medicine showing that health-care administration cost somewhere between 19 percent and 24 percent of total spending on health care and that this administrative burden helped explain why health care costs so much in the U.S. compared, for instance, with Canada or the United Kingdom. An update of that analysis more than a decade later, after the diffusion of managed care and the widespread adoption of computerization, found that administration constituted some 30 percent of U.S. health-care costs and that the share of the health-care labor force comprising administrative (as opposed to care delivery) workers had grown 50 percent to constitute more than one of every four health-sector employees.

What remains missing even in the discussion of the enormous administrative burden is not just how large, both in absolute dollars and as a percentage of health costs, it is, but also how few incentives there are for insurance companies to stop wasting their and everyone else’s time. Most large employers, including mine, Stanford University, are self-insured, which means they pay for their own medical claims. These large employers invariably hire health insurance companies to “administer” their health-care dollars, doing things such as paying claims. Employers typically reimburse the insurers the amount of money they pay out to health-care providers plus a percentage of these costs. In Stanford’s case, we pay Blue Shield 3 percent of the amount, about $3 million a year. (Note that the overhead costs of Medicare are less than one-third as much at slightly less than 1 percent.)

Because insurers are paid a fixed percentage of the claims they administer, they have no incentive to hold down costs. Worse than that, they have no incentives to do their jobs with even a modicum of competence. To take one small personal example, I have reached the age of Medicare eligibility but, because I continue to work full time, have primary health insurance coverage through my employer. Blue Shield, of course, wants to be sure it doesn’t pay for any claim it doesn’t have to, so I was asked to attest to the fact that I have no other insurance. No problem there, except such attestations seem to be required on almost a monthly basis—requiring my time on the phone (and on hold) with Blue Shield’s customer service, an oxymoronic term if there ever was one, and also requiring my doctor and laboratory to call me, call Blue Shield, or both, and thus also waste their time and resources.

This story and the many others of the same sort but even worse, magnified across the millions of people subjected to private health insurance companies, is why American health care costs so much and delivers so little. Unless and until we as a society pay attention to the enormous costs and the time wasted by the current administrative arrangements, we will continue to pay much too much for health care.

(This post was originally published in BloombergBusinessweek on April 10, 2013)

Ray Lane, Hewlett-Packard, and the State of Corporate Governance

With the resignation of two directors and Ray Lane’s relinquishing his role of board chairman, the turmoil at the top of Hewlett-Packard, a tale of almost soap opera proportions, continues. But HP’s story is scarcely unique. Many companies make unsuccessful acquisitions, boards continue to search for corporate saviors from the outside, and few directors suffer any consequences for overseeing catastrophic problems. All this provides evidence that corporate governance remains a problem in many publicly traded companies.

Let’s begin with some facts. It is almost impossible to overstate the devastation wrought by an HP board that couldn’t shoot straight.  Although recent commentary has focused on the ill-fated Autonomy acquisition and an associated $8 billion charge, that is scarcely the only snafu. As Pete Carey of the Mercury News documented last fall, HP since 2008 has spent some $32 billion on acquisitions, which included Electronic Data Systems ($8 billion writedown of the $13.9 billion purchase price) and Palm ($885 million writedown of the $1.2 billion purchase price). In the fall of 2012, HP’s market capitalization was $10 billion less than it had spent acquiring companies over the preceding four years. And speaking of acquisitions, there was also the controversial deal for Compaq that left HP with a dominant position in the low-margin and slowly disappearing personal computer industry.

But it’s not just in overseeing ill-fated acquisitions that the H-P board has failed.  One of the most important responsibilities of boards is to ensure effective leadership development and succession. Indeed, HP used to be a source of talent for the entire Silicon Valley. It was a company that practiced promotion from within and had an organizational culture that inspired admiration. When David Packard died in 1996, the company’s stock price was about $100 a share, and The Economist obituary noted that “some 25 of the Valley’s top executives are HP alumni.”

No longer. George Anders, who wrote a book about the company, has persuasively argued that HP’s lousy acquisition record is due in no small measure to its constant board reshuffling and revolving door of outside chief executives brought in as the organization tries to find its salvation in external hiring.

Unfortunately, much of this tale is all too common. As Bob Sutton and I noted in a book on evidence-based management, too few companies base their strategies on facts, and the evidence is clear that most acquisitions are failures.  Harvard Business School professor Rakesh Khurana noted the rise of outside succession and how flawed the external search process frequently was, while his colleague Boris Groysberg has documented the limited circumstances in which talent, even if it can be accurately identified, is portable—in the sense people of performing equally well in a new company.

Meanwhile, few directors suffer from overseeing succession or acquisition failures or even from more outrageous scandals. No one from the Enron or Worldcom boards was prosecuted because of those massive frauds, and it would be tough to name, let alone observe, any adverse consequences for the directors on the boards of Citicorp, Bank of America, Countrywide, Lehman Brothers, Bear Stearns, or any of the other financial disasters requiring government bailouts.

So while proxy advisory firms such as Institutional Shareholder Services do, on rare occasions, recommend against some board member or slate of candidates—something that occurred in the recent HP annual meeting—mostly nothing happens. No accountability = no change. Even though there is lots of talk about corporate governance and its improvement, I, for one, don’t see much action.

(This post was originally published in BloombergBusinessweek on April 8, 2013)

Don’t Blame the Internet for the Post Office Blues

As the U.S. Postal Service, running enormous deficits, closes processing centers, sells off real estate, and inexorably counts down to the day in August when it will cease Saturday mail delivery unless Congress intervenes, its senior leaders blame the Internet, Congress, almost everything but the Postal Service itself. Ah, the well-documented tendency to blame problems on the environment and attribute success to leaders’ brilliance. But the problem with the USPS, like problems with most businesses, is inside, not outside, the organization. According to the American Customer Satisfaction Index, the USPS’s customer satisfaction is 75, well below the score for the consumer shipping industry, 82.

Wonder why its customer satisfaction is below competitors’? Here’s a recent experience I had (I’m sure every reader has his or her own example): I am at my local post office and there is no line—but then again, although there are two service windows open, there are no employees at either one. And why am I at the post office to buy stamps? Because the USPS has instituted a policy that it won’t accept checks for its stamps-by-mail program without printed addresses on the checks. This means I can buy a $20,000 Toyota Camry with a check, but not $36 worth of postage. In general, lines at the post office are long, service is poor, mail gets misdelivered, and, most significant, as a consequence the USPS is losing revenue and market share to its competitors.

Let’s be clear—the Internet has decreased the volume of first-class mail as people send fewer cards and letters and pay bills online. But people now shop on the Internet in increasing numbers for an enormous volume of goods. Online commerce totaled $289 billion in 2012 with retail shopping comprising some $186.2 billion, and one market forecast of online shopping projects $362 billion in sales by 2016. Many, if not most, of these retail purchases get delivered to people’s homes. That’s why UPS (UPS) and Federal Express (FDX) are doing pretty well. Not only are both companies profitable, but UPS, for example, had 2012 U.S. package delivery revenue of almost $33 billion, compared with the Postal Service’s $11.6 billion. Simply put, there are plenty of available customers and business for the USPS to obtain, presuming it enhanced its operations and service to be able to do so.

Research demonstrates two things, both of which help account for the USPS’s underperformance. First, companies that blame their problems on seemingly uncontrollable, external factors do worse—for instance, in terms of subsequent stock price—than those that attribute underperformance to controllable, internal causes. This finding makes complete sense because seeing a problem as something external and uncontrollable reduces everyone’s motivation and sense of efficacy to fix it.

Second, financial performance is not about the industry—in this case, package and mail delivery. Although there is much discussion in the strategy literature of the importance of being in the “right” industry, a recent study by consulting firm Booz & Co. confirmed what several previous studies had shown: that industry didn’t matter that much but organizational competence and execution did in explaining company performance. The study of more than 6,000 companies in 65 industries from 2001-2011 revealed that there were top-performing companies in every industry and also that the intra-industry differences in returns were many times larger than the differences in returns across industries.

Ironically, the Postal Service’s efforts to cut costs may drive even more business away as both small and large shippers seek reliable and convenient service. So instead of complaining about external factors over which it has little control, the USPS should do what it takes to enhance the service and customer experience that would enable it to compete effectively in the many package delivery markets that are actually growing.

(This post was originally published in BloombergBusinessweek on March 18, 2013)

Getting the Record Straight on Health Care Reform

Many people criticize the Affordable Care Act (sometimes called Obamacare) with misleading and factually incorrect implications. But distortions, repeated often enough, too often come to be taken as truth. It is important, therefore, to be clear on the many virtues of ACA and its effects on employees.

One criticism is that employers will adjust employees’ hours to avoid having to purchase health insurance, thereby harming workers by reducing their total incomes (because of the reduced hours). Since hourly workers generally earn less, the argument is that it is the most economically vulnerable who will be most at risk. This argument fails to acknowledge that the practice of employers adjusting hours to avoid paying benefits is already incredibly widespread, particularly in retail, and is already harming the most vulnerable workers in the labor force. Employers for decades have adjusted employee work hours so they can avoid offering not just benefits such as health insurance but also vacations and paid time off — any benefits that have minimum hours for eligibility associated with them. The health care law will not change this pre-existing behavior. However, ACA will allow people currently not receiving health benefits to get coverage through the new health insurance exchanges, with premium tax credits to make such insurance more affordable.

The second fallacy is often called “the perfect is the enemy of the good.” There is no question that employers will try to game the Obamacare rules. Employers currently try to game overtime rules and regulations defining who is and is not an employee to avoid paying payroll taxes; there have been numerous high-profile settlements (think Microsoft among others) penalizing companies for incorrectly classifying employees as independent contractors. While Obamacare is not perfect, providing health coverage to more people is desirable, both from the moral standpoint of stopping the 50,000 needless deaths that occur each year because people do not have access to health care, and from an economic standpoint of increasing workplace productivity and job mobility. Waiting for a law that ensures employers won’t engage in any attempts to game the system will paralyze us from ever achieving any progress.

A third oft-repeated fallacy is the “benefits destroy jobs” argument or its variant, benefits reduce wages. This was the argument used by the restaurant association to try and stop Healthy San Francisco, a city ordinance requiring that employers either provide health insurance to their employees or else give their workers an hourly pay subsidy so they can buy their own coverage. Healthy San Francisco was to be the end of business in the city, in particular the restaurant business. Ha! Try getting a dinner reservation in a city with an expanding workforce and with technology and media companies moving into the city, not out.

The most pernicious fallacy about ACA pertains to “costs.” As OECD and World Health Organization data amply demonstrate, health care costs too much in the U.S. and delivers health outcomes below those of many other developed nations. The problem is partly one of getting care too late–in the emergency room rather than when disease is less advanced and more easily treated. That’s why initial evaluations of Healthy San Francisco show a reduction in emergency room visits when people are able to see primary care doctors. But Obamacare also puts in place several paths to improve quality, efficiency, and outcomes — reducing hospital re-admissions, health care associated infections, and fraud and waste, among others. And, by expanding health care coverage, Obamacare will eliminate the billions of dollars of lost productivity from an unhealthy workforce who cannot access quality care. That just makes economic sense to us.

The current system of delayed care, sporadic follow-up, and cost shifting not only harms people’s well-being, it is economically inefficient as well.

(This post was originally published in the Huffington Post on March 7, 2013)

S&P Lawsuit: Lessons From a Massive Screw-up

Every CEO will at some point face a crisis that forces a choice between doing what may be good for the short-term bottom line–or doing instead what builds a great reputation that attracts clients and employees in the long term, and an ethical culture that can immunize it from further trouble.

Standard and Poor’s offers an object lesson in what not to do.

The Case Against S&P

This week, the U.S. Justice Department sued S&P, a unit of McGraw-Hill, for $5 billion–five times what S&P earned in 2011. The case against the company? Allegedly fudging its ratings of pools of subprime mortgages to make these ultimately toxic securities appear better than they were. The presumed motive is a familiar one to the 2008 financial meltdown: S&P got paid for providing ratings on securities, and apparently was afraid that if it did not give the bundles of risky assets high marks for safety, the issuers–large banks and other financial institutions–would take their business to a more compliant and helpful ratings source, thereby costing S&P money.

In announcing the suit, the government released numerous incriminating emails and other documents that make the case that, yes, S&P operated just like many businesses chasing revenues and profits at all costs. As a result, S&P created a culture of profits first–and ethical behavior a distant second.

Haven’t We Seen This Before?

Unfortunately, S&P’s response to the suit has been all too typical: Deny everything and blame the government for also failing to foresee the subprime mortgage disaster. (The careful reader will note that the government’s ability to understand the depth of the junk being packaged as gold was hindered by the ratings agencies’ own actions to rate garbage as safe).

In the recently released book Masters of Disaster, two experienced public relations executives, Christopher Lehane and Mark Fabiani, and an Oscar-winning filmmaker Bill Guttentag, outline the 10 commandments for companies facing an inevitable public relations catastrophe–something that virtually every company is going to encounter (think Apple with the problems with its maps and supply chain, Walmart with the fires in suppliers’ factories and the fact that many of its employees are paid so poorly they are on public assistance). S&P has violated many of these recommendations, including the admonition to fully disclose everything it knows at the outset, don’t accuse your accuser, and most importantly, don’t do things to keep the story in the news.

In this instance, S&P, by denying culpability, is just begging the news media to focus even more on the juicy details of its ethical lapses apparent in the already-released and as yet unreleased emails and presentations. S&P has presumably decided that it can negotiate a better settlement by denying blame than by coming clean.

By denying blame for the undeniable, S&P’s response will further damage its reputation. And its actions just set it up for more problems down the road. What companies do when they screw up sends a message not only to the public but also to the authorities. Most importantly, companies’ responses to such crises send signals to their employees about their true values. In this instance, S&P has sent a pretty clear message: We put financial costs and profits ahead of admitting blame and telling the truth. Of course, that’s precisely the attitude that got S&P into trouble in the first place.

S&P should have known about the problems in the mortgage markets because they were transparently evident to anyone who actually bothered to look. That’s the most important lesson in Michael Lewis’s best-selling book, The Big Short. People who made a fortune shorting the highly-rated mortgage securities couldn’t believe the ratings when they actually read the prospectuses and looked into what was in the mortgage pools. That’s the real lesson from the financial meltdown–numerous people, in banks and in the ratings agencies, were not only venal, many people simply did not do the job they were paid to do.

But the worst lesson of all? Few, if any, have suffered any real consequences.

(This post was originally published in Inc.com on February 6, 2013)

The American-US Airways Merger Is a Bad Idea

Endlessly repeating falsehoods won’t make them true—something that stock analysts and the press need to learn about mergers in general and airline mergers specifically. So no, the much anticipated American-US Airways merger is unlikely to be a success by any measure. That’s because, in the airline industry, as in many industries, size really does not matter for success, except possibly negatively.

Pick your preferred performance measure, and see if it shows any relationship with size.  The well-known ranking of U.S. airline performance by Brent Bowen of Purdue and Dean Headly of Wichita State listed these airlines as best in 2012: AirTran (AAI), Hawaiian (HA),Jet Blue (JBLU), Frontier (FRNT), Alaska (ALK), Delta (DAL), Southwest (LUV), U. S. Airways (LCC), Skywest (SKYW), and American (AMR). United (UAL), following its well-chronicled integration problems with Continental, ranked 12th. In general, the bigger the airline, the lower the ranking.

How about internationally? Measured by total passengers carried, the top 10 list from the International Air Transport Association (IATA) contains not one of the top 10 of the World’s Best Airlines from 2012 as reported on the CNBC website, a list that includes, in order, Qatar Airways, Asiana (020560), Singapore (SIA),Cathay Pacific (293), All Nippon (9202), Etihad, Turkish, Emirates, Thai, and Malaysian.

But who cares about passengers—certainly not most U.S. carriers. What about profits?  From the second quarter of 2011 through the second quarter of 2012 (the most recent period available from the U.S. Department of Transportation), three of the four highest average operating margins were earned by Alaska, Skywest, and JetBlue, which ranked 7th, 8th, and 9th in size. Same story with unit costs—ExpressJet (XJT), JetBlue, and Airtran had the lowest.

The simple fact is, as Gary Hamel commented years ago, zero plus zero still equals zero.  Or in the airline business, if you take one troubled airline and combine it with another, all you get is a larger catastrophe.

The problem is not size—economies of scale are not that important in many industries, not just airlines, and are achieved in any case at sizes much smaller than the larger companies. The problem for the airlines is a flying experience that causes people to want to drive for short trips and to avoid long trips if they can. It is not by accident that some of the most consistently profitable airlines, such as Singapore internationally and Southwest domestically, consistently rank high in customer satisfaction. As research by Claes Fornell, founder of the American Customer Satisfaction Index,demonstrates, customer satisfaction drives profits—and shareholder return.

Maybe the preoccupation with size is because so many of the stock analysts and airline industry pundits are male. But in airlines, as in most industries, size does not matter.  Mergers just increase market concentration, raise prices, and make customers worse off.

(This post was originally published in BloombergBusinessweek on February 13, 2013)

Core Values: Three Ways to Cut the B.S.

Does it shock anyone these days that so many companies’ mission statements and codes of ethics seem to bear so little resemblance to what companies actually do? The words are crafted to quicken our heartbeats and bring tears to our eyes.

Bank of America, whose aspiration is to become “the world’s most admired company,” says it’s committed to helping customers and clients at every stage of their financial lives–well, maybe not every, as this is a company paying huge financial settlements because of its abuse of the mortgage origination and foreclosure processes.
BP’s core values place safety as No. 1–this for a company with employees killed in a Texas refinery explosion and a poor occupational safety and health record even before the Gulf oil spill. Under “What We Stand For,” BP states, “We care deeply about how we deliver energy to the world. Above everything, that starts with safety and excellence in operations.”
United Airlines, the company that consistently ranks low in on-time performance and toward the bottom of the American Customer Satisfaction Index’s rankings of airlines, aspires to be “recognized as the airline of choice,” in an industry where unfettered consolidation means at U.S. hub airports, there is ever less choice.

Of course, there are values-driven companies that genuinely take those values seriously–such as DaVita, the kidney dialysis equipment maker that opens its quarterly conference calls discussing not its earnings but patient outcomes; Patagonia, the clothing company that has somehow resisted the temptation to make its products in factories that burn up and employ slave and child labor; and many others. But for the vast majority of companies public and private, mission statements are cheap decorations to put on the walls and public relations gambits to make outsiders and customers feel better.

Why the disconnect between words and deeds? Probably many reasons. One is the excessive focus on short-term, often financial, performance measures. Companies trying to meet growth or profit goals face pressures to cut corners. Sometimes they violate labor laws by calling permanent employees contractors to avoid social security and unemployment taxes; sometimes they sacrifice customer well-being by shipping products that aren’t ready for prime time; and sometimes they shade accounting rules to book revenue in advance of approved and signed contracts, move revenue across quarters, or inflate the supposed prospect pipeline. Companies focusing too much on the short term don’t ensure their suppliers aren’t going to embarrass them and do layoffs at the first sign of financial stringency, losing employee commitment as a result. Building a values-based, ethically-behaving company requires taking a longer-term view of the business and focusing on business processes, not just financial end results.

Companies incur costs when they say one thing and do another. Such behavior induces cynicism among customers and employees, in the process destroying economically important loyalty. And the words-deeds gap erodes trust, and trust is fundamental in building well-functioning entities, be they businesses or political systems.

Companies that want to get serious about aligning values with everyday behavior can do something about it. A few starter principles:

1. Start measuring for ethics and values.

You can’t achieve anything if you can’t assess how well you are doing. So the first step is to develop a set of measurable performance indicators. For safety, the measure could be the number of people killed or injured per year or number of work days lost to accidents, something that Accelor Mital Steel reports. Becoming the airline of choice means flying on time, not losing bags, and not being deluged with customer complaints. How well your suppliers pay, their accident rates, and whether you buy using criteria other than low price might be indicators of how seriously a company values human sustainability.

2. Publicly share the results.

Not only figure out some measures of your adherence to values–maybe by doing surveys of customers and employees and their beliefs about how well the company is doing–but publish the results for the world to see. That permits internal and external constituencies to hold you accountable. Are the numbers getting better or worse? Is there evidence that serious decisions about promotions and resource allocations get made to address notable deficiencies?

3. Make ethics performance part of employee performance.

Evaluate everyone by their promotion and adherence to these standards. DaVita takes employee development seriously, and has fired senior executives when they failed to give nurses, and not just MBAs, opportunities to attend internal leadership programs. Southwest Airlines will terminate employees who behave rudely to their customers and teammates. Hewlett-Packard used to make employee survey results about leader behavior part of the performance evaluation process, when HP still practiced the HP Way.

It’s actually not that difficult to close the values-behavior gap. The day-to-day measures that companies use to guide what they do and how they evaluate employees need to incorporate, in very concrete, specific fashion, the values they espouse. Unless and until that happens, profit and loss, something that is always measured, will remain the only focus of attention. As the quality movement taught us, if you want something (like quality or values adherence), measure it. What’s not measured will almost certainly be ignored.

 

Dell and Best Buy—Going Private Can Be Risky

A possible Dell leveraged buyout seems a lot like founder and former Chief Executive Richard Shulze’s putative offer for Best Buy. In each case, you have a founder of a once-successful company who believes that the stock market undervalues his baby, and that once private and under even more of the founder’s control, there will be greater opportunity to fix a threatened business model.

Maybe.

These proposed buyouts could be merely instances of several personal biases in action. One such bias is escalating commitment to a failing course of action, so that leaders don’t have to admit that they made mistakes or that they are not as competent and heroic as they would like to believe. Another is the illusion of control, demonstrated by social psychologist Ellen Langer, among others. This illusion that people are efficacious is why they are willing to bet more money on dice if they get to roll them. Then there is the above-average effect, which causes people to overestimate their capabilities and skills—something that would surely beset CEOs, who are, after all, more talented than others. This would cause CEOs—present and former—to believe that if they could just get more control over the enterprise, everything will get better.

Both Dell (DELL) and Best Buy (BBY) have wonderful stories. Dell, founded in Michael Dell’s dorm room, transformed how personal computers and then laptops were manufactured and priced. Best Buy, with its emphasis on the customer service experience, changed how electronics got sold. But in both instances, some fundamental industry dynamics have changed. Not only does Dell now face competitive pressure from Lenovo in PCs and Visio and ViewSonic in televisions and monitors, but also, more importantly, the core of Dell’s business is disappearing as the PC and laptop markets shrink.

Zia Yusuf is CEO of Streetline, a 50+ employee startup selling sensors and analyzing parking data for cities and private garages. He recently told me that there was not one PC in his entire company—lots of cloud-based server capacity to do the data collection and analysis, for sure, but no traditional PCs or laptops sitting on desks. PCs and laptop are getting replaced by iPads and devices running Google’s operating system, while Amazon and others offer computing resources in the cloud for data storage and processing-intensive analysis. In electronics retailing, Amazon and other online retailers have devastated Best Buy’s business. Neither of these trends shows signs of abating.

In Dell’s case, some analysts suggest that once it’s private, Dell can migrate to a software and services model. That is much easier said than done, as Hewlett-Packard (HPQ) has learned. Even the presumed exemplar of such a transformation, IBM (IBM), still earns a surprisingly high proportion of its profit from a mainframe business that has been revived by the growth of big data and the disappearance of most of the company’s mainframe competition. Furthermore, a private Dell will likely have to service a sizable debt load, presumably hobbling any efforts to make significant acquisitions or major investments in R&D to accelerate its move into software and services.

Which raises the question: If these are dying enterprises, why would private equity investors be interested in the transactions? The answer, of course, is fees and the possibility for the investors and other insiders, such as senior executives, to make money even if the companies eventually fail. The story of Simmons, the mattress manufacturer, is instructive. Thomas Lee Partners took lots of cash out and made a great return even as the company went bankrupt. At Station Casinos, which also went bankrupt after it went private just before the economy tanked, company insiders took out hundreds of millions of dollars as the company failed, causing creditors to sue.

Going private creates lots of money—for lawyers, investment bankers, and other parties who benefit from the fees generated. Whether these transactions will ultimately salvage either Dell or Best Buy is much less certain.

(This post was originally published in BloombergBusinessweek on January 16, 2013)

Does It Matter If B-Schools Produce Narcissists?

Commentary in the popular press and systematic empirical research both suggest that levels of narcissism are increasing among college students. James Westerman and Joseph Daly’s evidence shows that business school students are more narcissistic than others, such as psychology students. The millennial generation, raised by “helicopter parents” focused on their every success, comes in for particular criticism.

The research raises two questions: Why might business school students be more narcissistic; more important, is this a problem?

The answer to the first question seems clear. A recent study found a relationship between narcissism and materialism. To make the obvious point, business school students are likely to show higher levels of materialism than English majors, to take one extreme example. Also, the qualities commonly associated in research studies with narcissism—such as competitiveness, being willing to expect and ask for more, extraversion, emergent leadership, and enhanced performance on tasks that get publicly evaluated—are all things that most business school (and for that matter other) admissions processes are likely to select for.

Once in business school, students confront an environment in which cheating is more common than in other majors and whose consequences for poor academic performance are low to nonexistent, particularly in graduate programs. Both of these environmental factors would increase a sense of entitlement as students face few-to-no adverse consequences for poor behavior. Narcissists would also take well to a context in which classroom evaluations reward the frequency of participation, something students with higher opinions of their thoughts would excel at.

The second question is tougher. While narcissistic leaders often behave in ways that exact a price on their subordinates and maybe even their organizations, sociobiologists have long ago acknowledged that the behaviors and personal qualities that are helpful for the individual in a group and what is good for the group as a whole are not necessarily the same thing. There are trade-offs. Because business schools receive donations mostly from individuals or from companies controlled by one or a few individuals, and because B-school rankings depend mostly on the individual success (and evaluations) of graduates, it is completely sensible for B-schools to worry more about individual than organizational outcomes.

With respect to individuals, the research tells a reasonably consistent story. University of California, Berkeley professor Jennifer Chatman and Stanford professor Charles O’Reilly studied narcissism levels among high-technology chief executive officers in Silicon Valley. They found that narcissistic leaders remained in their positions longer and earned more, particularly compared with other executives in their companies. Further research shows that asking for help is both effective and—because it violates people’s norms about being self-sufficient—is not done nearly enough. Narcissists tend to be more willing to ask for and expect help, and this behavior will help make them more successful. Holding higher expectations for one’s salary almost certainly will help produce higher incomes. (One of the reasons sometimes given for women earning less than men is that women feel less deserving and therefore are less likely to negotiate over their salaries, or do so with less vigor than men.)

People want to associate with winners: people who are going places and therefore can help them. Narcissists, who have higher levels of self-esteem, display more confidence and do more things that will cause them to stand out—such as being assertive—thereby attracting more people and greater talent to their team. As former Harvard professor Michael Macoby noted years ago, some of the most notable entrepreneurs and chief executives exhibited high levels of narcissism; that’s why his book was titled The Productive Narcissist.

Maybe business schools are doing just what they should: selecting precisely the people who have the greatest chance of being individually successful and putting them in environments that reward self-promotion and competitive success.

(This post was originally published in BloombergBusinessweek on January 15, 2013)

A Deadly Silicon Valley Habit: Chasing the Latest Fad

At a networking meeting I attended of influential Silicon Valley people not long ago, the consensus was clear: Direct enterprise sales is an old, out-of-fashion, even dead business model. In its place stands the modern, hip, ideas of social networking, “freemium,” and designing apps that virally attract users. The same sentiment was evident at a meeting of the advisory board of a human capital start-up—selling directly to human resources departments is so yesterday. As that start-up made the VC rounds, it got the same message from potential backers: Having a direct sales force is too costly and takes too long to scale; better to move to a bottom-up model in which other companies’ employees see the software and use it (for free, of course), which then may pave the way for enterprise adoption.

The direct sales force has become the Rodney Dangerfield of business models in Silicon Valley, drawing little to no respect. Selling is less glamorous than marketing or strategy or designing some cool new thing. Not many of today’s chief executive officers have sales backgrounds. They are more likely to come from finance or—in the Valley—from engineering.

Ah, but competitive advantage comes from doing something that is difficult but important. No sales, no revenues. Selling through direct sales to corporate customers, while out of fashion, is a process that is predictable and replicable, with prospect pipelines that can be measured and a methodology that can be taught and learned.

For every Yammer, a social networking company that attracted corporate users initially by giving the product away (bought by Microsoft (MSFT) for $1.2 billion in 2012), there are hundreds of companies that fail by having a business model predicated on capturing potential users—people who are overwhelmed by the number of business apps seeking their attention.

Then there is Workday (WDAY). Founded by Dave Duffield and Aneel Bhusri in 2005, the company set out with a very mundane strategy: Take the human capital applications sold by SAP (SAP) and Oracle (ORCL), move them to a software-as-a-service model, and then sell through a direct sales force to the companies that are, for the most part, unhappy with the level of service and support they are getting and are bothered by the difficulty and expense of upgrading to new software. (In a hostile takeover, Oracle bought PeopleSoft, a company founded by Duffield, at which Bhusri was vice chairman.)

Workday’s model is the old strategy of taking care of customers and offering them an easier path to technology they need to manage aspects of their business, albeit one that works. When Workday went public last October, its shares soared to a company valuation of over $9 billion. HR technology columnist Bill Kutik told me that at the time of the initial public offering, one Workday employee commented: “Maybe now the Valley will take enterprise applications (and sales) seriously again.”

I doubt it. The Valley is mostly about huge gambles for potentially enormous rewards, not building predictable, understandable businesses. So while Workday has a value greater than all of the companies at that Silicon Valley entrepreneurial networking meeting combined, it is not “buzz-worthy.” Too often, VCs and entrepreneurs blindly chase the latest fads, rather than ask, “How do I build something a paying customer will buy?”

As for that human-capital software company, it did follow the VCs’ advice and pivot away from selling directly to companies. It laid off its sales people while it chased “freemium,” “viral,” and all the other buzz words flying around the Valley. The company encountered a predictable result. With no sales people, there was no sales growth, which left the VC’s unimpressed. At the end of 2012, the company shut down for lack of money.

(This post was originally published in BloombergBusinessweek on January 8, 2013)