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September 12, 2006

Why Smart Companies Do Dumb Things

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Not a day goes by when I don’t ask myself, “Why do smart companies do such dumb things?” We all know companies that cook the books and throw outrageous parties at one end of the spectrum to sell lousy products at the other. A sweeping answer is that companies are run by smart people, and smart people do dumb things as we’ve learned.

However, when smart people assemble in companies, they are still capable of doing dumb, if not even dumber, things. Wouldn’t you think that groups would provide checks and balances? Let’s tap into Why Smart People Do Dumb Things again because it’s a cornucopia of ideas, recommendations, and provocations that can explain why smart companies do dumb things.

  • Consensus. When it comes to doing dumb things, the sum of the parts is less than the whole. Throwing more minds at the problem means more data, more perspectives, more possible solutions, more critiques of these solutions, and more minds (and hands) implementing the solution, right?

    Possibly, but there’s also the downside of more people: once consensus starts to build, it’s harder to alter a decision. It’s one thing to argue against a few people; it’s much more difficult to argue against the wisdom of a crowd. Individuals who hold out, question, or disagree are labeled as clueless, uncooperative, and not team players.

  • Conviction. Consensus rears its ugly head during the decision-making process. The situation can get worse once implementation occurs because the organization marches along with a firm belief in what it’s doing. At that point, a decision takes on a sacred life of its own, and a company cannot see flaws.

    Conviction is not inherently bad, and truthfully, it’s an important component of success. The trick is to combine conviction with open eyes and open minds to reduce the likelihood of having a conviction in the wrong thing.

  • CEOs. There is one kind of consensus that is particularly powerful and dangerous: a CEO (or any top executive) who provides cues about what she likes. (CEO=Consensus Executive Officer?) Then, disagreeing takes on the gravity of career risk; however, smart people don’t necessarily turn into thumb-sucking dweebs just because the CEO likes something, so what gives?

    It could be that people, no matter how smart, rearrange reality. They do not simply follow the dumb cues of the CEO. Instead, there’s an intermediate step: they see the cues, rearrange the facts in their mind, and then conclude that the CEO is right. The result is the same, though.

  • Experts. If there’s anything smart people worship it’s other smart people. For example, you don’t know much about geography, so you hire an consultant who’s an expert in geography, and he tells you that the earth is flat. It’s touch to be strong enough to not defer to an expert.

    Most experts have a tough time accepting surprises that are outside of their comfort zone. For example, if you come to me with a marketing problem, I will usually tell you that evangelism is the answer. :-)

  • Good news. A company, any company, is constantly assaulted by its competition, customers, governments, and schmexperts (schmucks + experts). Faced with this onslaught, good news is an addictive, illegal, and dangerous drug. It makes you crave more good news, and you refuse to communicate bad news up the chain of command. Ultimately, it may even make you refuse to hear bad news at all. How many commanders-in-chief of armies has this phenomenon probably brought down over the course of history?

  • Lofty ends. Lofty ends can justify all sorts of weird and inappropriate means. Look no further than the quests for peace that produce mayhem and violence. Or, the desire to make a profit (something that is genuinely good for shareholders and customers) that warps a company’s code of ethics even though the company is made up of smart, honest people. Companies trying to achieve a lofty goal can start believing that any means to achieve it is okay.

In addition to what the book discusses, I’ve noticed three additional factors that make smart companies do dumb things.

  • Budgets. Ideas take on a life of their own in the form of convictions. That’s bad enough, but then the implementation of ideas can also take on a life of its own. This is called a budget. It is a holy document that takes the place of management, observation, decision-making, and analysis for an entire year. Then the flawed thinking of the budget serves as the basis for the next year’s implementations. You’ve heard of stem cells. You can think of many budgets as stupid cells.

  • Greed. You’ve heard of concept of “good to great” by Jim Collins. There’s also “good to greedy,” and greed usually trumps intelligence. When a company wants it all, it usually doesn’t let rules, regulations, and common sense get in the way.

  • Arrogance. This is greed’s twin brother. Arrogance sets in when a company claims success as if it’s a God-given right. Arrogance also means that a company believes it’s above the law—that no one and nothing has claims against it.


Here are my thoughts on ways to prevent or minimize doing dumb things:

  1. Say, believe, and act in a way that convinces employees that differences of opinion and diversity of thoughts are good things. Frankly, a couple of curmudgeons is a good thing for a company.

  2. Don’t be in a rush to meet consensus. In particular CEOs should not rush into a decision even though the image of decisiveness is so seductive.

  3. Spell things out. It’s not enough to say, "Plug this leak in our company" and assume that it will be done legally. You should say, "Plug this leak in our company by using only legal, ethical, and reasonable methods." That’s when you’re done.

  4. Move the crowns. When employees go around saying, "We need to do it this way because Bill/Steve/Carly/Larry wants it this way,” you’re in trouble. It means that employees are making decisions based on what they think will make kings and queens happy—as opposed to what’s right for the customer, employees, or shareholders. Good CEOs put the crown on the heads of customers, not themselves.

  5. Restrict the use of experts to narrow areas. Never use experts to create your product roadmap or marketing plans unless you want MBAs who have never run anything larger than a school snack bar to decide your fate.

  6. Ask for bad news. Don’t assume it will find you—you have to find it. You should allocate a time that’s specifically for communicating bad news.

  7. Don’t shoot the messenger who brings the bad news unless he caused it.

  8. Don’t reward the messenger who brings good news unless he caused it.

  9. Approach budgets as working guidelines, not policies set in stone. If your budget doesn’t change for the whole year, you’re either clairvoyant (there are probably easier ways to make money if you are) or clueless.

  10. Squash arrogance and greed. I’ll be honest: I don’t know how to do this. If I figure it out, it will be the topic of an upcoming blog.


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Comments

I'd share some points I'd observed from my experience as an ex-manager in Fortune 50 companies and management consultant.

Companies who hire AND retain managers/leaders who cares more about "culture fit" ends up hiring "toe the line" people who put their careers first and others second. The next sequence of events is invariably
- employees morale drop leading to
- declining revenue (and /or customers defection) which in turn lead to
- high employee turnover followed by
- crisis mode and ends with
- blame game (often by the said manager/leader).

As for the "rally against consultants" comment, I've to agree that most of the "consultants" should look at what the verb "consult" mean. Most of their contribution is rehashing methodology and their drive is primarily measured in billable hours. It has created a strong perception among many clients that consultants do not add value. That's why individuals and small consulting practices win deals from referrals from satisfied clients.

Arrogance is a natural behavior by-product of success and the posturing and pumping we do to help achieve success. Rigging things so reality continually intrudes on every business process reduces the cover for organizational and individual arrogance, and may help reduce its practice and influence.

As for greed, that one's tough. How do you mark where hard-charging for continued success ends and greed begins? Since greed is an overreaching by agents for one or more resources in a complex system (to borrow terminology from the complexity folks), perhaps the best governor is a strong competitive environment wherein rules evolve and, periodically, upend.

I have to think there are some things to be learned from looking at capitalism's strengths.

Large companies don't typically operate like capitalist economies; they are usually about command and control and five year plans (ok, maybe the time span is a little shorter). At the same time as they are planning everything, they are doing things to get short term results to show the market. A bit of a contradiction.

Imagine how much more quickly these doomed initiatives would die if supporters had actual capital at risk in them and could take steps to get back what hasn't been wasted yet. People are a lot more focused when they have their own skin in the game.

I'm thinking Ricardo Simler is on to a lot of such thinking that will eventually filter into corporate America.

I don't know if there's a single rule for combatting arrogance and greed but I think you can treat the symptoms effectively.

My experience is that arrogance manifests itself in two dangerous beliefs:

1. "We're smarter than our customers" (and we don't mind telling them that)
2. "We're smarter than our competition" (or have an indisputable 6-month lead, or unstoppable whiz-bang proprietary technology, etc.)

Guarding against these two beliefs should be the duty of every senior person in the organization.

Greed is a by-product of arrogance that pops up when you think you can start cashing the checks you're sure your customers will write when they realize how smart you are. Get rid of arrogance and you stifle greed.

1. A company goals are different from individual goals of people working in it. Money isn't the only driver of people behaviour. Position in a company hierarchy is more important for many individuals.

A local maxima for individuals do not sum up to a global maximum for a whole company. The bigger company is, it is harder to create a system to make good correlation between company and employees goals. A correlation below certain level causes companies with smart people to make dumb things.

(goals correlation level * weight average of employees competence = a company stock price trend ;-)

2. It is easy to judge something as dumb after a fact. In general we are not as smart as we think. We are smart after something already happened.

i have to disagree with 40 % of this post ...

****************

That's fine. I'll take 60% agreement.

Guy

Great post. Professor Sydney Finkelstein of the Dartmouth Tuck School published "Why Smart Executives Fail" in 2003. He spent 6 years studying 51 companies -- all led by impeccably credentialed executives (who were pretty smart). Yet, all failed. Yes, there were some VC-backed ones in the mix... Boo.com, Webvan.... It's a great read and was #1 in the US and Japan for a while on Amazon. The URL is www.whysmartexecutivesfail.com . And here's a link to Syd speaking last Fall on this topic at Dartmouth: http://breakoutperformance.blogspot.com/2006/08/why-smart-executives-fail-video.html . Cheers, Eric

Good, detailed list. Here's some more thoughts & suggestions:

11. Don't be afraid to make mistakes: People get stuck on advancing forward in fear of going the wrong direction - while the fact is - one stays put, moves nowhere! It's better to act boldly, and admit if you've made a mistake.

12. Don't be afraid to admit you've made a mistake: we all make mistakes, that's okay. But doing same mistakes over and over is what we should be concerned. If we make a mistake or fail - then let's admit that. Learn from it, and then try something else. Fail again, admit, correct our course of action and eventually fail, fail, fail so often that we finally arrive where we wanted.

I don't agree with the statement below, but I do get your intentions.

"Don’t shoot the messenger who brings the bad news unless he caused it."

This seems to directly contradict some other points you make. Specifically about arrogance and the crowns. How employees should not be motivated by the individual likes and dislikes of management. Plus, I'm sure you know, one of the best ways to shut down open communication is to shoot people when they are trying to tell you something.

I really enjoyed the posting.

The symptoms and cure have already been described, 30 years ago, by Janus and the "problem of groupthink". We're just giving examples here. Anyone actually interested in the problem should start with Janus.

I like the consensus part.

Reaching consensus in an organization is like “thermal death of universe”: nothing moves, everything is frozen.

Company makes dumb choices because of the dumb leaders at the top level. Sometimes It is real bad when the person at the top cannot make a solid decision or have vision and yet make demands on how things should be run. (His or her way)

You might say "But these leaders are 'leaders' because they are capable". Yes, in some cases, they were very dynamic and capable. Thus they are able to climb the ladder. The problem comes when they are up there, these leaders, begin to smoke their own shitake and becomes high of themselves. It is now all about making them look good and not what's good for the company.

When the company hit a road bumb, the leaders panic and call in additional help. I think this is also why so called "experts" are in the picture. To make them look good. The experts lay out common sense shitake and usually paid really sometimes uncommon cent$.

In the end, if you are led by the blind, you are most likely going nowhere.

Aahh, consultants - the people that come into your space, borrow your watch, then tell you the time...

"Individuals who hold out, question, or disagree are labeled as clueless, uncooperative, and not team players."

The best way to avoid this is:

1] As you said, "Say, believe, and act in a way that convinces employees that differences of opinion and diversity of thoughts are good things"

2] However, if you can't convince employees of this, simply designate a couple of people (rotate them) whose sole job is to play devil's advocate and punch holes in the concensus.

Don't just role play, mean it. The DA's should have carte blanche to create great debate and forcing the concensus to prove they're decisions are the right ones.

A good leader will listen to the debate and make the right choice.

Best,
George

Regarding consultants:

I have both employed consultants and been one myself from time to time.  When hiring a consultant, it's critically important to get one who actually *knows what they're talking about*.  Someone who's managed setting up manufacturing lines is probably a a good person to consult about getting your own product built in large quantities, for example. 

What gives consultants a bad name are the Arthur Andersens[1] of the world sticking the title on kids fresh out of school and billing them out at $150-200/hr.

-jcr

[1] I've seen a few too many dollars thrown down that rathole.  AA is still a bodyshop full of third-raters, and they're not fooling anyone with that "Accenture" moniker.

Squash arrogance and greed.

Don't sqash it, canalize it. We all have those two things on our mind, to a more or less high degree. Making clear that the best way to fulfill out desire to be arrogant is to be succesfull and the best way to make money is to be succesfull. Make clear for everyone that the best way to be successfull is to be great.

"Don’t shoot the messenger who brings the bad news unless he caused it."

That's SOOOO dumb!!! Don't shoot the messenger, period!

Conflict of interest can also be a very powerful factor. I was once on a management team in a situation where the best course of action was (in retrospect) blindingly obvious but would have put my job at grave risk. Because of my conflict of interest, this obvious solution never even occurred to me. My advice was faulty because I had blinders on that I didn't realize were there.

I would like to make a point on the "expert situation". With a small start up, everyone has to know their own area of competence pretty well. However, they cannot be unassailable in that area, they must invite and welcome strong opinion on what they are doing. This is tougher than it seems because it is your actions, your budget, your delivery that people will end up commenting on. Challenge and response, and no "I told you so's". Most teams in retrospect, know what mistakes they made in terms of decisions, yet there is also a tendency to refer to decisions in terms of previous "bad decisions" and that can lock you into a historical logic.

As they say "every manager gets promoted until he or she reaches her level of incompetence". Think about it - you get promoted if you are doing fine in the position, then screw things up couple of times, and you are settled. I think that a good big ol' company should be full of such managers that have successfully reached their level of incompetence. ;)

"It’s touch to be strong enough to not defer to an expert."

Spelling mistake, Guy.

**********

Fixed it. Thanks for pointing it out.

Guy

Doesn't despair.com have a poster that speaks to each of the points that the book/you made? Or maybe despair.com used the book as reference...

Then, disagreeing takes on the gravity of career risk; however, smart people don’t necessarily turn into thumb-sucking dweebs just because the CEO likes something, so what gives?

Guy, it's been so long since you've seriously had to worry about your own job security, I think you're significantly underestimating this factor. Yes, people DO ignore their own better judgement just because the CEO (or anyone else with the power to fire them) likes something. It happens all the time.

*****************

That's why I said "don't necessarily" as opposed to "don't" alone. :-)

Guy

I think the best way to kill arrogance and greed within an organization is to make sure the organization's leaders aren't showing arrogance and greed. It's not a perfect solution, but setting that culture can go a long way in to having it looked down upon.

"If I figure it out, it will be the topic of an upcoming blog."

I would hope for a book.

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