Business within your business

It’s not uncommon for large businesses and non-profits to face situations where one group draws upon the resources of another group in a way that looks more like a business transaction within a business (as opposed to a cross-functional work team). Here are some common situations I’ve come across:

  • IT, accounting, or legal resources are a separate group (or even business) that other parts of the business draw upon.
  • Organizations are set up so they are matrixed, which means a “dotted line” relationship exists with a capability group (like HR, operations, etc).
  • There is a centralized function that cuts across the business and just flat out makes more sense to have as a separate group. On example may be procurement.
  • There is a location-based structure so that you have employees who report into a main site and others who report into local sites, even though they are roughly focusing on the same things.

These types of situations tend have common problems:

  • Unclear ownership: who is making the final decisions? What team is actually responsible for that piece of the business?
  • Accountability becomes difficult, especially when priorities are mismatched. For instance, when my computer isn’t working I think IT should be helping me right now. What I don’t know is that my IT support is helping someone who is working on something more important than me. When I’m asked for feedback I complain because I had to wait for so long.
  • Costs and benefits often disconnected from one another: This often comes in terms of someone or something being viewed as a free resource. To carry my IT example over, if I just can call and get IT support without having to pay for it, I’m likely going to be calling IT a lot (versus trying to figure it out myself or prevent problems).

In MBM, when we encounter a new situation we try to step back and ask what the market does in similar situations and apply the principles to what we do. Let me start with the obvious solution and provide a strong dose of caution.

Internal Markets: Markets solve all of the problems listed above. They thrive on clear ownership, accountability happens automatically and costs and benefits tend to go hand-in-hand. One way these problems have been solved is to by making a market internal. Sometimes this is done by literally charging within the business to use certain resources. This often sounds like a good idea, but can have some serious downsides:

  • You lose some of the benefits gained by being in an organization together. You now have to have people who administer internally (billing, invoice, etc) just as you do with external customers. This will likely increase headcount.
  • Prices aren’t really “prices.” I mean this in the sense that internal markets require someone to set prices within the company, but rarely is there a large enough company or a good enough benchmark for it to reflect the complete reality of what a true market would achieve.
  • Some companies make it impossible for internal groups to feel the market pressure by requiring that you work with the internal group and not seek outside competitors. This almost always creates an unfriendly situation between groups and the internal group starts to lag behind the market.
  • There are all sorts of compliance implications (which I am in no position to brief you on) about how to handle this type of internal set up.

I’m not saying “don’t use internal markets.” I am saying that in my experience internal markets don’t work in as many instances as people would expect and they can create as many problems as they solve. Instead, let’s try to step back and think about the principles of markets that make this work so brilliantly out in free societies and how they might be applied inside the company.

Prices

One key aspect of markets that resolves a lot of the knowledge and accountability problems involves the price-setting mechanism. Of course internal markets can bring a literal price into the organization, but what are some key aspects of prices that we can translate into the organization? Prices direct producers as to where they should put their resources. Measures can serve the same purpose inside the company. Whether it’s a clear expectation on an RR&E Summary Document or a group-wide measure, measures should reflect the where the person/group can put their resources to yield the highest value.

Private Property Rights

Private property rights help individuals know what they own and what they can do with their property and help solve accountability problems. Inside an organization, responsibilities and individual decision rights can serve the same purpose. However, there are some big “ifs” associated with this one:

  • If leaders have the backbone to make these things clear to everyone involved.
  • If leaders have the courage to hold people accountable (both positive and negative).
  • If employees have the backing to say “no” when appropriate.
  • If visions are clear enough to have a good point of view on who should be doing what.

I find most of the time that this type of thing has to go up to a leader who can see the big picture. For instance, if I’m having a disagreement with another MBM person in another location about who has decision rights, it generally has to go to a level where a leader can understand the tradeoffs and implications, which may be several levels above where the disagreement is happening.

Free Speech and Competition

Free speech – the ability to endorse, complain, disagree, and so forth — and choices are key aspects of markets. Think about this in terms of an organization. If a person within your organization is stuck (or feels stuck) with whatever/whomever they have to rely on to get things done, it’s a recipe for disaster. The challenge process has to be alive and well in the culture to overcome this difficulty. If I cannot go my IT support and suggest a different way, lodge a compliant or give a positive feedback about a specific situation, then I’m just at their mercy. Coupled with this, is that generally there has to be some competition. This can be as simple internal recruiting group that knows the organization can use outside recruiters. If the organization starts using the outside groups and gives feedback it can serve much the purpose as free speech and competition do within the market.

 

I gave some high level things that I believe can help with internal transactions. What have you seen that works in these circumstances and is consistent with MBM? What are some things you’ve seen that have failed?

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Giving Thanks in the Office – A Cornucopia of Hidden Value

I put this post up several Thanksgivings ago. I thought it was time to dust it off as we celebrate Thanksgiving in the US this week.  

This is a guest post from Mallon Mackenzie. Mallon is an alumna of an MBM training program and works closely with training programs in an operational capacity. She is thankful to be part of advancing economic freedom and to work with so many intelligent and thoughtful people.

Over the last few weeks, I have received various forms of “thank yous” from colleagues. I’d like to think that it’s more than the upcoming holiday season that has prompted these gestures of gratitude, but I don’t mind if it is just the holidays.

At this time of year when thoughts of thankfulness for our country, family, friends, health, and happiness create joy and warmth in our homes and in the world, I’m thinking some thanks could do some great things in the office too. In fact, within this little concept there is a feast of MBM principles and models we can sink our teeth into.

A “thank you” is feedback. It provides a real time signal that you’ve done something of value for someone else. Receiving thanks from our customers is a good, small measure to help us know we’re doing something right. Giving thanks to our customers can also be valuable feedback for them and a smart investment in important relationships. For example, those working in development know that well timed, sincere and simple word of thanks can be the beginning of a prosperous and growing relationship between an organization and a committed donor. Thanks is also recognition and appreciation for a job well done – something employees crave and a valuable message for managers to send. It’s a valuable tool that is available to all of us all the time.

I’ll let you in on a secret: words of thanks can have incredibly long shelf lives. I keep a stash of unexpected thoughtful letters and brief emails from tough-to-impress customers to dip into when I need a little pick me up. No matter how much time goes by, those words of gratitude still connect me to the work I do, make me feel like my job matters and that I made someone else’s day better or easier.

But this time of year we often hear it’s more important to give than to receive. Can giving thanks be just as beneficial to the giver? At its core, I think giving thanks is a gesture of humility. It helps us acknowledge that we need contributions from other team members to get the job done. Giving thanks to others helps us be less focused on ourselves and more connected to team goals and outcomes that we all work towards together.

The exercise of true gratitude helps the giver see situations in a new light. There is a quote from the Roman philosopher Cicero, “gratitude is not only the greatest of the virtues, but the parent of all the others.” Deep and sincere thankfulness can open our hearts and minds to help us be thankful even for the struggles and opportunities to learn important lessons through failure. It gives us a chance for personal growth, to focus on opportunity and be principled employees.

At the end of a day focused on thanks, I don’t think we need a “thank you” for doing our jobs, but receiving thanks when it’s deserved reinvests us in our work. Giving thanks to others helps us build teams that appreciate each other. And isn’t it the darndest thing that giving thanks gives us a fresh perspective as well?

Thanks to Mallon for submitting this excellent Thanksgiving Day post and generally being awesome! How have you seen “thank yous” work for you in the office?

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The problem with sunk costs

Many of you are familiar with the idea of sunk costs — those costs that are unrecoverable. Economics teaches us we should ignore sunk costs if we want to make the best decision going forward. After all, we cannot change the sunk costs so why even think about them for the next decision.

Ignoring sunk costs for future decisions makes perfect sense on paper and in classroom activities. However, it’s easier said than done. Here are some common things I hear when I lead sessions on sunk costs:

  • Sunk costs can inform us if they are representative of recurring costs. For instance, I know after I’ve trained someone that time/money spent is a sunk cost, so I should not add that into my cost/benefit analysis when deciding if someone needs to be moved into a different role or let go. The issue is that I’ll have to spend the same time/money training a new person if I don’t keep this person. It seems like the sunk costs are relevant to deciding what to do.
  • There’s a psychological component to sunk costs. Imagine saying to a customer, “let’s not even talk about last year’s contract because those are sunk costs to you.” That’s just not how most people are wired to think. Instead, we have a psychological tie to what we paid last year or the last time we bought it.
  • There’s an emotional piece of sunk costs. The old joke is to not to come to an economist for relationship advice because if you say something like, “But we’ve had four good years together,” the economist will say, “ehh, just ignore those years, they’re just sunk costs.” (Economics is the dismal science after all.) While the economist is absolutely right, memories and shared experiences are a fundamental human condition. Asking someone to totally ignore that is a tall order.
  • The dollar part of sunk costs are often written down, so they’re in our faces when we’re trying to make decisions. There’s something about seeing a big minus sign in the ledger that is just tough to ignore.

What this all adds up to is that sunk costs are often easy to identify and hard to ignore for decision making. What have some of your experiences with sunk costs been? What are some good ways that we can make sure we’re thinking about and acting appropriately when it comes to sunk costs?

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“Rules”

I’ve started to realize how powerful “rules” can be. “Rules” are the artificial constraints individuals put on themselves even when there isn’t anything really in the way. Here are some common examples of how “rules” creep into the day-to-day activities:

  • “I thought about sending this proposal to Jane, but proposals have to have a 12% return rate for her to even think about approving them.”
  • “We’re having trouble filling this role because have to hire someone with 10 years of industry experience and knowledge about this niche area.”
  • “I really think that Joe deserves an extraordinary raise this year, but I know that type of thing will go under heavy scrutiny and get widdled away to a more typical level.”
  • “I can’t ask to work from home tomorrow – no one does that in our group right now.”

“Rules” can arise from many different places — a leader who has a pattern of behavior that is not intended to be a rule but becomes one, a past job/experience that had an explicit rule that you can’t let go of, an offhanded comment that gets turned into a detailed rule or an example that turns into the “rule”.

I think MBM organizations are particularly susceptible to “rules” because we tend to use general principles to guide our behavior, which leads to ambiguity. Yet, most people crave clarity, so they start making “rules” to help them guide their behavior. It doesn’t take long for a best practice to turn into a “rule.” What are some of the risks we run with “rules”?

  • “Rules” suffer from some of the same downsides as explicit rules, except you have the added problem of they aren’t written down anywhere. So the clarity you get in the short run degrades over the long haul.
  • “Rules” can quickly become part of the culture and it’s much harder to change culture than it is to change a written rule.
  • “Rules” can be unconscious. This means that individuals may not be aware they are following the “rules.” This can also lead to people not seeing opportunities because they don’t even realize they have the blinders on.

I know there’s more to this “rules” thing than I can write in a few hundred words, but hopefully this gives you a flavor for what I’m thinking about. Now I turn it over to you. What can we do to help people break away from the “rules”? What aspects of MBM help us to prevent “rules” from becoming major constraints to what we do?

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Interesting Articles

Over the past several weeks, I’ve come across or been sent some interesting articles. Some of these explicitly connect with MBM and some of them are more interesting management or economics articles that may spark some good conversation.

  • California’s Water Shortage” gives a prime lesson on what can happen when you start interfering with prices. We associate prices with our Knowledge Process Dimension because they convey the knowledge people need to make good decisions as individuals, which often adds up to better overall societal outcomes.
  • How to Validate Your Business Idea So you Don’t Lose $82,000 Like Noah Kagan” gives one example (not the example) of how doing some low cost experimentation of your value proposition can help avoid making a major mistake. Thanks to Gary for sending along this story. As Gary pointed out in his message to me, “The thought behind it lines up very well with several of our Guiding Principles, including Value Creation, Principled Entrepreneurship, Customer Focus, Knowledge and Change.”
  • Jimmy John’s Serves Up Lessons on Terrible Management” is an article about a fast food chain who has required every employee to sign a rigid non-compete. The author of the article isn’t fundamentally anti-non-compete. Instead, she points that just because something is legal it doesn’t mean it creates value and when management is done in order to exert power for power’s sake, it almost always comes off as mean and wasteful.
  • A key mental model in MBM is the economic means versus the political means. “Rent Seeking: America’s New Past Time” gives one example of a form the political means of profiting can take (note: economics often use the term rent seeking to describe political profit that comes through the use/abuse of government powers).
  • While I cannot vouch for these programs (I haven’t been through them), here are 33 online economics courses. Many of them are through reputable universities and can be taken on your own timeline.

Have you come across any interesting MBM-related articles lately? Leave us a link or two in the comments.

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2014 Economic Freedom of the World Report

The 2014 Economic Freedom of the World Report was released earlier this month. As many of you know, this annual report includes some of the research that grounds very foundations of MBM. One of our key mental models is that economic freedom unleashes individuals’ productivity and it’s productivity that brings prosperity. As in all the years past, we continue to see that countries with more economic freedom tend to have more prosperity.

According to the authors of the report, “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasion by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.” When a person enjoys economic freedom she lives in a country where she has reasonable control over her time, talent, and resources.

Here are some things of note from this year’s Economic Freedom of the World Report:

  • Hong Kong and Singapore remain the in the top two positions for economic freedom.
  • Venezuela remains as the least free country they studied. Note: countries like Syria, Somalia, North Korea and others are not measured because of lack of data or mistrust of data.
  • The U.S. jumped from 17th to tied for 12th. This was a result of a combination of factors — including some positive increases for the US and some countries near the US losing economic freedom, which makes the relative position go up.
  • The US had increases in 4/5 categories in the Index, including size of government (remember, this a relative measure of size of government versus the economy. This does not mean the government has actually decreased in size), legal system and property rights, sound money, and regulation. Only freedom to trade internationally dropped.
  • China’s economic freedom increased, but it still in the bottom quartile (least free) of the 152 countries ranked.

The link above will take you to the full report. The authors make transparency a priority. Anyone can download the data, use it in their own studies and have access to the report online free of change. The same website includes a country-by-country data snapshot if you just want to check out a country or two.

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Authentic Change

During a recent conversation with a colleague who is attempting to apply MBM in an organization of about 600 people the topic of authentic change came up. The reality is that many clever people can take the language of MBM, slap it onto the things they are doing and sound really proficient. But how do you get authentic change? Here are a few things I’ve found about organization who honestly embrace MBM over the long haul:

  • It takes time. Of course there are certain things an organization may already be doing that are very consistent with MBM — finding ways to keep those, using the appropriate language and tweaking where necessary is a big, but often doable job. Changing the big things that are inconsistent with MBM is like changing a personal habit, like trying to exercise everyday or quit smoking. Except that it’s even harder because you’re trying to get hundreds of people to change the habit all at once. Authentic change doesn’t happen in the burst of energy right after making a New Year’s Resolution. It’s the day-in and day-out stuff over months or years that make it part of an organization’s DNA.
  • It takes all three conditions of human action — but for some reason people are really focus on discomfort instead of a vision of a better state. The three conditions of human actions (the things that have to be there for a human to take action) are a sense of discomfort, a vision of a better state and a belief that one can accomplish that vision. For many of us, the default setting is the discomfort. We want someone to change, we try to make that sense of unease real. My experience is that most people who want to change already feel the discomfort. It’s not all that unusual for me to hear people say, “But I don’t even know what applying MBM looks like!” or “Before I worked here for awhile, I didn’t understand why it was important.” This makes me think that there are a lot of folks out there who don’t have a vision of the better state.
  • Leaders make the difference. Having an outside person (like an MBM consultant) can only do so much. Unless leaders hold people accountable for change, it’s a waste of time.
  • Taking the long term view means treating honest mistakes appropriately. If we want people to try new things, mistakes will happen. ”Appropriate” will look different depending on the circumstances. If the organization starts to believe that any mistake will result in severe punishment, why would they try a new method of doing things?

These are just some high level things I’ve noticed when organizations start asking employees to apply MBM. What have you learned about authentic change?

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Individuals Versus Groups: “The Millennials”

One of the most deeply embedded mental models in MBM is the idea of individuals versus groups. The vast majority of MBM starts with the individual. This is in sharp contrast to thinking about groups (here are some examples – mentoring, career development, and RR&Es).

Recently, I’ve been leading many sessions about career development and it seems to be a place where letting go of the group mentality is difficult. Often, the hot topic is around “Millennials.” I put “Millennials” in quotes because I don’t exactly know who is even in the group we broadly describe as “Millennials.” Just a quick internet search will tell you that even the people who use this term don’t always agree.

I think it’s easy to default to thinking about “Millennials” for many of the reasons in this article. There are certain things that people who are new to the workforce have a tendency to struggle with because they’ve never done it before. It’s certainly not a new thing only today’s recent college graduates experience. In fact, if we are intellectually honest with ourselves, each and every one of us could probably think of something our past selves did that falls into the common complaints about newly minted employees.

The article linked above makes a good business case about why we shouldn’t group employees as “Mellennials.” From an MBM standpoint, it’s even more important that we shouldn’t group people. Ultimately, if we make it a practice of grouping people to make decisions, we erode the MBM culture. Here are some ways we risk eroding our culture when we start grouping folks, instead of thinking about each person as an individual:

  • We miss out on a chance to optimize RR&Es, decision rights, and compensation. These are key components of MBM that we enable us to create more value. Imagine the potential missed opportunities if we get it in our heads that everyone with a certain amount of experience would prefer vacation over a bonus. Or what could happen if we decided someone needs to be of a certain group to do certain types of work? (See next bullet points).
  • We don’t live up to the Guiding Principle of Respect. It’s disrespectful to group people based on any arbitrary factory (like race, age, etc.) instead of treating them as individuals. It’s like when I tell people I’m a football fan and live in Atlanta, they assume I’m a Georgia Bulldog. Little do they know I’m more of a pro-football fan, and the Cincinnati Bengals are my team! That was a superficial example, but imagine the number of times grouping people can turn disrespectful. Stereotyping is a natural outcropping of grouping people. Many of us are wise enough to know the fundamental problems that can happen when we stereotype others.
  • In this particular instance, we could run into discrimination laws (note: this is outside my expertise, so I’m going to keep it general). The idea of the “Mellennial” generation is based on age. Building employment strategies (intended or subconscious) based on age is a bad idea. Actions are directly contrary to MBM when they do not comply with all laws and regulations.

What’s your take on grouping people based on generation? Do you see other common ways that we often fall into the trap of looking at groups instead of individuals?

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I Don’t Like to Read — How Can I Learn More about the Foundations of MBM?

If you ask a typical MBM Team member what you can do to learn more about the foundations of MBM, there’s usually a few things that come up over and over. One of those is reading a book, essay or article. I believe reading is one of the core answers because in the past that was one of the few ways a person could learn about three key topics: economics, government, and philosophy.

First, I don’t think you can get completely away from reading. Part of the job of the MBM Team is to articulate key aspects of MBM through writing and talking. By writing things down we can get challenge, share it more easily, and preserve things for the future. However, once you get the basics of MBM, I do think you can do quite a bit to learn some of the foundational material without reading big tomes.

Here are a few thoughts about how you can learn more:

  • Free and open online courses: I’m currently watching a Yale Open Course about Political Philosophy. There’s no sweet graphics. It’s basically a professor just teaching a class. Since I’m more of an audio learner than and I a visual learner, this appeals to my style. Plus, I don’t have to read all of Plato’s Republic in order to know about it.
  • Videos on the basics: Some of the mental models in MBM are pulled directly from other disciplines. For instance, opportunity cost is a mental model pulled directly from economics. If you search for videos about opportunity cost and find someone reputable (economics professors, MBA programs, etc), chances are you’ve got the gist of the mental model. [Please note: this is not true of all mental models. For instance, if you search for CPV Triangle, I bet you get little/nothing. Our ABC Process is different than say Jack Welch's ABC stuff. One way you can tell is to cross-reference with the Science of Success. If the basics seem on track, chances are you've got something worth watching.]
  • Seek out someone in the organization that studied these things and ask them to teach you. It doesn’t have to be anything fancy. An added bonus to this is that most people learn even more by teaching.
  • Feed your intellectual curiosity: don’t study the things you hate (at least not at first). Out of the foundational topics, philosophy is my least favorite. I’ve learned that if I study things that bump up against philosophy (like some political science topics), I’m more likely to absorb. Like any discipline — dieting, working out, you name it — you have to do things that make it fun enough to keep doing it over the long-haul.

Before you take advantage of the alternative learning methods out there, I think you need to have some of the following skills:

  • Critical thinking skills to recognize that even topics and people that are very consistent with MBM may have aspects that aren’t exactly on target. In other words, don’t believe everything you hear or see. Even when you’re reading MBM Team generated material, put your critical thinking skills to use. We need employees who are thinking and challenging us about the ideas.
  • Have a sense of if something seems to fit with MBM or not. There’s no way one person is going to catch every nuance of a lecture or recording. However, having a high level sense of if something is generally consistent or not is key to learning more, whether it’s reading a book or watching a video.
  • Find a learning partner who you feel assured you can have safe conversations with. By safe, I mean that person you can ask the “dumb questions” to — even if they don’t have the answers, sometimes asking the questions can be just as useful as trying to answering them.

Have you found ways to learn more about the foundations of MBM that don’t involve reading? What’s worked for you in the past?

 

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Working the land

Today in the US, we are celebrating Labor Day. Labor Day is a holiday intended to be a tribute to the workers who have contributed to making the US a prosperous country. (Note: I say intended because I think most people just enjoy a day off with a cook-out.) While I agree that it is people who do the work that result in prosperity, it’s not people working alone. I hate the idea of toiling for no reward.

Yet, there’s been a picture from outer space that has been circulating lately that paints a stark picture of what laboring in one set of circumstances looks like compared to another. Click here to see “Where China and Kazakhstan Meet.” The difference from space is astounding.

I’ve had the pleasure of knowing people from both countries. From what I can tell of my friends, both countries have people who are willing to work hard to improve their lives and want to do the right thing. Yet, when you just take a glance (from outer space), something doesn’t seem to be going well in Kazakhstan. If you read the article attached to the picture, it states that this area of Kazakhstan still seems to run like it did during Soviet times.

So today if you’re thinking about the laborers who worked hard to build whatever country it is you live in, don’t forget about other things that mattered too: economic freedom, rule of law, capital, risk-taking entrepreneurs, and a culture that looks a lot like our Guiding Principles.

For those of you celebrating Labor Day, have a safe and happy day off! 

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