Monthly Archives: March 2013

Hans Rosling on “The Big Picture”

My first event in this year’s Edinburgh International Science Festival was to hear Hans Rosling give a statistics lecture.

This wasn’t the typical kind of statistics lecture; I reckon I have had at least four stats courses over the years, and whilst I know enough to know what to do (or where to find out what to do), I think it is fair to say that I don’t really get statistics. I can do it, but it never really makes sense. And all those stats lectures were dull, dull, dull, and dry.

This one was different. Not talking so much about stats as our ignorance of stats, and largely based on data rather significance tests, Rosling was as much entertainer as statitician. (I think on of his slides described him as “edutainer”.)

He was talking about how numbers can be used to describe the world – not to the exclusion of other inputs, but to produce a rounded picture.

The bulk of his talk was about population growth and world poverty, and the causes of change in these global phenomena – largely economics. In between, he told stories of his life amongst the numbers, when to trust them and when not. (“Not” seemed to be mostly when you don’t actually have the data – he highlighted how wrong our assumptions about the world can be.)

Rather than try to reproduce what he said (without the laughs), here are some of his TEDtalks covering similar issues…

…on stats

…on poverty

…on population growth

All the data and the manipulations he used can be viewed on Gapminder, where one can play around with the data and visualisation. A great way to while away the Easter break…

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“More Like People”?

My working life has been spent with organisations, in one way or another. (And of course my life before that: schools and universities are organisations too…) I love exploring the way organisations work – what makes them tick. That is why, believe it or not, I loved auditing: auditors dig into organisations, discovering the real processes and structures that enable to them to function. (Clue: it isn’t what managers tell you. And it doesn’t have anything to do with shareholders!)

When talking about organisations – something I do often – I repeatedly find myself describing them as dysfunctional. I don’t think that I have come across or worked in an organisation that couldn’t work better in one way or another, from multinational banks to small, two-man operations. I have long wondered why this is. It isn’t that people in the organisation don’t know this: one thing consultants learn very quickly is that what they tell their clients is very rarely news: organisations know what’s wrong, even if they need someone from outside to help them articulate it.

Their processes could be better, their communications could (almost always) be improved, their structures changed to help the business. Hierarchy and structures get in the way rather than enable, and people in organisations know the work arounds – big and small – to get things done.

(A caveat: “could be better” is a value statement: the corollary has to be “better for whom?” Customers? Employees? Managers? Owners? The wider population? The environment? These groups may not be exclusive, but better for one may very well not be better for all.)

Organisations could be – well, better organised. They are dysfunctional.

I have only one answer. Organisations are made up of people, not processes; people make the organisation work. And people are dysfunctional.

Despite the idea that organisations are separate from people, it is people that are the organisation. We pretend they aren’t. We even pretend that organisations are people!

The thing is that whilst some organisations behave as if they were psychotic, most large organisations’ dysfunctionality works in peculiarly non-human ways. (Small organisations’ dysfunctionality is just like the people behind the organisation!) The veil of incorporation lets everyone in an organisation hide behind the processes, hierarchy and bureaucracy that lets the organisation continue to believe they are “rational”.

Liam Barrington-Bush started a campaign to counter this and humanise organisations, “#morelikepeople“, and he’s developed some of his ideas into a book, “Anarchists in the Boardroom“. (I should declare an interest: I’ve known Liam for quite a while, we’ve discussed his ideas many times, I was involved in focus groups around his book, and I read early drafts of a couple of chapters; he and I agree on much, and probably disagree on more!)

Liam’s focus is on not-for-profits and social enterprises, but I think his ideas are relevant to all organisations. Broadly, Liam reckons (amongst other things) that new media – particularly social media – can act as a counter to the rigid hierarchies and management processes that twentieth century industrialisation created. This is a topic has interested me for a long while – Benjamin Ellis covered it particularly well in a one day conference at Cass Business School three years ago.

Using collaborative tools to develop self-organising structures and flatter structures would clearly have an impact on the nature of work and business; if large organisations were able to embrace them, they might become flexible and responsive.

More likely, I feel, is that small organisations – already more flexible than large, and often unencumbered by rigid structures and processes – that are likely to adapt faster to social media, perhaps becoming more openly networked rather than hierachical.

(Liam is using crowd sourcing to publish his book – itself an interesting example of the changing nature of business in a new, social and collaborative world; he is still looking for supporters.)

John Kay on Bankers’ High Salaries.

John Kay, economist and chair of the Government review of equity markets and long term decision making [PDF; and it’s long!], was speaking to the Edinburgh University Business School, ostensibly on “Why are financial services so profitable?”, but essentially discussing remuneration in financial services. (This may because the answer to the original topic is a quick “they’re not!” – profits from the boom years were wiped out in the crash of 2007 and the ongoing global financial crisis: the profits were illusory).

Remuneration is of course a hot topic. The EU is developing proposals to cap bonuses; bankers’ salaries and bonuses regularly feature in the news.

The standard economic model of wages is that workers receive the same as their marginal unit productivity (I think!). The article in Wikipedia explains it better than I could… A big problem with this model is that it is very hard for organisations to know what the marginal productivity actually is. In large corporations through to the smallest business employing people, whilst the theory might say this is how wages are calculated, my guess is that actually no one knows. What is the marginal productivity of a waiter, a bar tender, a bank teller – or the CEO of a major company?

Kay discussed three different economic theories to explain real remuneration patterns and income distribution, each of which comes from different economic and political assumptions.

The first is that what may be perceived as excessive wages reflect political power and rent seeking. Economic rent the amount paid for a resource in excess of the amount to get that resource into productivity. In the example Kay used, the amount that Wayne Rooney is paid by Manchester United is probably far more than the minimum that Wooney would need to be paid to get him to play football: the difference is because ManU have to pay this excess to stop him moving to another club, who might pay more: in an open market, those other clubs bid up the price. (Kay may have been a little premature on this specific point, though the principal stands…)

The economic power in this case is with Rooney; similarly, successful bankers can threaten to move to another employer – or even another country. They could work anywhere – they have highly transferable skills – and their employers might worry that if they don’t pay their high salaries, they would lose access to the bankers’ skills. (I am not so sure that this threat is a problem now that much of their success has been proved to be illusory.)

The second model Kay covered is what he called “the estate agent problem”. The economics of estate agency is, according to Kay, curious: the rate of fees is generally static, with competition not acting to drive down prices. Estate agents generally charge the roughly the same fees as their competitors. This is because users want to pay for the best service; no one want to pay for an ok, but cheap, estate agent (let alone a bad but dirt cheap agent!), since the benefit accruing from paying a bit more for an excellent agent would far outweigh the cost.

Banks therefore pay for the quality they perceive they receive. They don’t want to pay for a mediocre performance when they believe they can pay a bit more and get excellent performance. Similarly, no board of directors is going to hire a CEO or MD they believe to be average: they will all want the best, and their recruitment firms will help – and bid up the price. But it is doubtful how much difference CEOs can actually make. Luck has an awful lot to do with their success or failure, as do the people they hire.

(Recruitment agencies and remuneration consultants have a lot to answer for, too. All firms want to be seen to be good payers – management roles, at least: job ads often describe roles – firms – as “top quartile pay”; I don’t think I have ever seen a role described as “bottom quartile pay”, though of course 25% of jobs, and firms, must be! Remuneration consultancies produce regular reports showing the market rate for specific jobs, which firms expect to have to pay to get the people they want – and the market rate inflates each year as firms adjust their rates to stay with the market.)

The third issue Kay identified is that of “bezzle“, a word coined by J. K. Galbraith to describe the undetected amount of corporate fraud. Before the fraud is discovered, the victims believe themselves better off than they are. Prior to the global financial crisis, we all thought we were better off than we actually were, because of those non-existent banking profits. As someone said (attributed to Nassim Nicholas Taleb), “we borrowed from the future, and now the future wants it back!”

Until a fraud is discovered, we are all better off! (Kay has writen about the global financial crisis in terms of the bezzle.)

The asymmetric information between financial institutions and their customers – that is, just about everyone – and between fraudsters (call them bankers, fund managers… people who are claiming their bonus for no special performance) and institutions are able to make excess profits. Until of course they get found out. Clearly, even though they have been found out, a great many still think they are worth it.

There was a discussion about how better to align reward and performance – locked-in long term share options, maybe – and perhaps a more apposite debate on the kind of people we want running our companies. This last is important. The traders who do the jobs in banks may do so precisely because they are attracted to the high risk, high return environment. Whilst we might benefit from people with less risky approaches, they are unlikely to be attracted to those jobs. Similarly, the CEOs we appoint might actually be wrong for the job – but less aggressive, flamboyant people aren’t going to apply. And what board would appoint a wall-flower against an alpha male bull? Maybe we get the management we deserve.

I’m not sure if any of this really explains extravagant remuneration and the bonus culture that has been laid bare by the crisis. Maybe it is simply greed, and people gaming the system: trying to get as much as they can.