Falsity is more powerful than confirmation

Being involved in business consultancy and education has a number of interesting by-products. One of them is that I am constantly being asked for my views of the latest strategic analysis tool, financial metric or two-by-two matrix, usually by people who have a vested interest in promoting its virtues.

A great response to these queries is to ask the question ‘how do you know it works?’ It is a slightly dangerous strategy; you always run the risk that people will take your scepticism personally, and on one occasion I have narrowly avoided being punched. However, once over this hurdle, the answers you get are always very interesting and usually very similar.

Most people will begin to recite the numerous times they have used this idea, and it has ‘worked’ for them. As if racking up instances of success is the same as proof. I am a chemist by training, and this isn’t the way that the scientific community go about proving a proposition. Whenever a new scientific theory or model is proposed, the peer community instantly set about trying to disprove or break the model. In other words ‘falsity’, or more specifically the absence of falsity, is seen to be far more powerful evidence than a thousand confirmation events.

Sadly, this doesn’t seem to be the way that the economic, finance and commercial world operates, and this often leads to catastrophic errors. In 2007 many of the world’s largest banks had racked up massive positions in a whole range of complex financial instruments. Their key probability analysis tool, called Value at Risk (Var) had decreed that the risks in these portfolios were ‘acceptable’. In 2009, once the dusk had begun to settle after the biggest financial crash since the Great Depression, various commentators began to understandably ask how bankers could have put so much faith in a model which had effectively crashed the world. The rather piqued response from these otherwise very intelligent finance professionals has been to quote a long list of instances prior to 2007 when VaR worked perfectly! And in stable, normal market conditions it does work. The problem is that no scenarios had ever been run through the VaR model to see how it coped with extreme events. In other words, it had never been tested for failure.

So add the question ‘how do you know it works?’ to your commercial toolkit, and then listen to the response you get. Look for the models and ideas that have been challenged, pulled apart and tested for failure, and are still here. Don’t be seduced by pretty matrices and clever theories. As Albert Einstein once said, ‘Elegance is for Tailors’.

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What you measure is what you get

The commercial world and the public sector have become obsessed with measurement. I’m all for a bit of performance evaluation, but these days you can’t move for kpis, efficacy indicators, metrics, incentive schemes, outputs, targets and the like. It’s a wonder anybody gets any real work done.

The performance management culture is most visible within public sector services such as education and health, where the emphasis on measurement has become the metaphor for all that is wrong with a meddlesome, opinionated and ill-informed Whitehall elite. But beyond the rhetoric there lies real danger with an ill-conceived and poorly implemented set of performance measures.

We have a saying in finance; ‘what you measure is what you get’. If you incentivise a sales team with a revenue target of £10m, then you are very likely to get £10m of revenue, especially if you link people’s bonuses to the achievement of the target. The problems is that single, qualitative indicators like this are too much of a blunt instrument, and the unforeseen side effects on other outcomes could be catastrophic.

As a case in point, take the recent debacle over the Work Capability Assessment contract. DWP outsourced the task of assessing disability claimants ‘fitness for work’ to Atos, the French services company. The fee structure was very simple; Atos were paid for every completed assessment. Having effectively incentivised Atos to get through as many assessment interviews as quickly as possible, it should have been no surprise to DWP that they did just that. But quality was sacrificed for speed, and errors, re-referral rates, stress levels for claimants, and public outrage, went sky high.

Fair’s fair though. Sometimes government does get it right. I recently read the NAO report on the privatisation of Royal Mail (it’s been a slow month). The Coalition had one very clear stated objective with that deal, simply to get the transaction done well within the current parliament. And that is what happened. The recent media driven navel gazing on whether the taxpayer got value for money on the price is a red herring. That was never the point. Lazard & Co, the lead consultant, were incentivised on the one simple metric of getting the deal done, which they delivered on 100%. And with that the Coalition gained massive bragging rights by achieving something that the previous Labour administration had not achieved in twelve years of power; the removal of the toxic asset that is The Royal Mail from the government balance sheet.[1]

In hindsight, these mistakes look obvious and deeply embarrassing, but at the time I am sure everybody thought that they were doing the right thing. What’s needed here is a little less clever performance management theory and a little more ‘nous’. The moral for government and indeed any organisation that parachutes in a new performance measurement system is ‘be very careful what you wish for’. You are almost certainly going to get it…



[1] Well, not entirely. The government and by extension the taxpayer still retain the great privilege of funding the pension deficit, which according to recent calculations is roughly the size of the GDP of a small South American country

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We live in exponential times

This morning I watched my three year-old son (and he is only just three) turn on his mother’s ipad, sweep over the slider bar to unlock it, find the you tube app, and start watching his favourite steam train video. When we called him in for breakfast he touched the screen to activate the video controls, hit pause, and then sauntered into the kitchen for his Cheerios. I wouldn’t mind but we have only had the thing for a month. It’s taken my wife that long to get used to it. My mother still cannot find the on button…

The world into which our children have been born, and within which they appear so comfortable, is so different from that of even five years ago as to be unregognisable. Back then tablet computers effectively didn’t exist, and nobody saw the need for them. There are now more devices with internet capability than there are human beings on the planet. Next year there will be twice as many. The rate of change in our world is no longer arithmetic, it is logarithmic.

My colleague and business mentor Martin Stillman-Jones pointed me towards this little you tube gem. http://www.youtube.com/watch?v=YmwwrGV_aiE&list=FL3Z6gLy1vNd6QGliVPtN7iQ&feature=mh_lolz. When I watch it I think about my little boy’s future, and I both envy him and fear for him. We live in exponential times…

 

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Notes from a weary business traveller

In your 20′s, business travel is an exotic, exciting luxury. Now that I am in my 40′s, its just a little tiresome. I left the corporate world three years ago for a number of reasons, but partly to avoid all the travelling. Ironically, since running my own business I’ve never travelled more (largely thanks to the benevolence of one particular client). The locations have been pretty exotic too; New York, Washington, Hong Kong, Stockport. OK, maybe not Stockport, but the hotel was fantastic. Which brings me to my point.

I’ve seen the inside of a lot of hotels in the last few years. The afore mentioned Mottram Hall in Stockport and the rather special Renaissance Habour Bay in central Hong Kong were particular highlights. My criteria for business hotel perfection, developed over numerous stays, are quite simple:

  • Next door to the railway station / bus station / ferry terminal (but not the airport..)
  • A hard, clean mattress
  • A shower / bath system that you don’t need a PhD to operate
  • An ironing board and iron (and in ideal circumstances a trouser press) IN THE ROOM
  • The ability to go ‘off menu’ and order beans on toast sitting at the bar (because I just can’t take any more medleys of beef sitting on a bed of spinach and fava beans, etc, etc..)
  • Finally, and most rare of all, a toast machine in the breakfast buffet that does your toast RIGHT FIRST TIME without (a) incinerating it or (b) requiring multiple passes to even warm the bread up…

Not a tricky list you would think. But to date on my travels I have found only one hotel that passes all of the tests above. So well done to the Holiday Inn Liverpool Lime Street! (they do a pretty decent house red as well..)

PS, the moral, if there is one, is as follows. Note to hotel companies: Forget the multi-channel in-room entertainment system and world class dining. Just sweat the small stuff..

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