Archive for category: Improving Employee Relationships

This article was first published in Businessweek.com

What would become known as the Summer of Love was already taking shape in January 1967, in the Human Be-in at Golden Gate Park. The phrase itself—Summer of Love—was bandied about for months that spring by national media, building up demand among students impatiently waiting for the school year to end. The Grateful Dead, the Merry Pranksters, Free Love, Be-ins, Hippies, and Timothy Leary were all part of the mix. At the time, “Love” was a euphemism for various things: music, progressive political policies, psychedelic drugs, sex.

But however the word was used, it eventually became clear that the legacy of that summer was anything but love. As PBS later put it, “by 1968 … an alternative lifestyle had descended into a maelstrom of drug abuse, broken dreams, and occasional violence.” The summer of 1967 was also the Summer of Riots in Newark, Detroit, and 126 other U.S. cities.

You could argue that the level of talk about “love” was inversely proportional to the love that resulted. Which brings us to 2010, and the Summer of Trust.

Distrust, Anger and Discontent

In 2010, “trust” has bloomed in the public’s consciousness the way “love” did back then. I’ve been focusing on trust for 13 years now, and the amount of attention I see focused on the subject is unprecedented.

But—what will be the legacy of the Summer of Trust? Will we look back on all this focus as a time of consciousness-raising, enabling an increase in a crucial element of business and society? Or, like the Summer of Love, will more talk actually signal the reverse—the beginning of even more malfeasance and declining trust?

Trust has certainly gotten the full attention of the measuring and tracking industries. Beginning in January, the Edelman Trust Barometer celebrated its 10th edition at Davos.Gallup hit the headlines with its Confidence in Institutions poll. Both showed new lows for various forms of trust. The Pew Research Center weighed in, showing trust in government down, with distrust, anger, and discontent all on the rise.

Perhaps most obviously, the “T” word got considerable play with current events. Think how quickly we came to connect “trust” (as in “abuse of” or “failure of”) with: BP (BP) (April); Goldman Sachs (GS) (April); Toyota (TM) (February); GlaxoSmithKline (GSK) (July); congressional ethics (August); the press and the White House (July); Tylenol manufacturing (JNJ) (May).

In the press, CNBC hosted a distinguished panel of experts on the subject of restoring trust in business and markets. And Forbes produced a 19-article special on trust.

HBR’s special edition was there a year before, and BusinessWeek declared The Great Trust Offensive to be the new high ground way back in fall ’09).

Tower of Babel

Trying to make sense of all the above is daunting. What other subject matter is eclectic enough to merit press coverage on issues from leadership to economics to psychology to politics to marketing? Some of this is due to the sheer cantankerous mess of the word itself. Our casual use of the word “trust” fails to distinguish between a noun (“trust is down”), a verb (“trust me”), and an adjectival phrase (“politicians are less trusted than lawyers”).

This is not a trivial issue of semantics. We use the same word for long-term social belief systems (e.g. “democracy works”) that we use for feelings that follow economic cycles (e.g. “I trust the President”). Beneath this definitional difficulty lurks real confusion about social policy. If trust in government is down, does that mean that people are less trusting? Or that government is becoming less trustworthy? Ditto for the SEC, the local school system, and the mass media. Is the problem that we trust less, or that people, policies, and institutions have genuinely become less worthy of our trust?

If indeed the bigger issue is trustworthiness, we need to look to codes of conduct, approaches to governance and regulation, and misaligned goals and incentives. If the issue is that as a people we have become less and less inclined to trust, then scholars would tell us the root issues are such things as economic disparity, the perceived inability to better one’s life, and a generalized sense of good or ill will on the part of others. Intelligent policy discussions can’t be held if we don’t cultivate the data, even the language, to make such simple distinctions.

We sometimes forget a simple fact about trust: It’s about relationships. There has been an explosion in the number of relationships we all maintain. Fragmented business models (think outsourcing) have increased the number of relationships we maintain with customers, suppliers, new and old co-workers, and industry contacts. These new relationships are hyper-fueled by the growth in new social media (Twitter, LinkedIn, Facebook, blogs, and e-mail), in turn supported by faster Internet speed and lower costs. Just imagine how many people you interact with daily, as compared with the number 10 years ago.

Given the growth in our interactivity, we are in many ways far more trusting than we were just 10 years ago—in the amount of information we share online and the number of people we share it with. A higher number of untrustworthy interactions is compatible with a lower rate of untrustworthy interactions. So is trust up or down? Perhaps both.

Where the Weak Links Lie

Nonetheless, surveys saying “trust is down” are almost certainly saying something meaningful. And three sectors are most at risk of becoming the Newark and Detroit of this Summer of Trust. They are government, business, and the press.

The Shirley Sherrod case was a frightening example of trust breakdown for government and media. Just as with the recent financial meltdown, it became apparent that an infection in one part of the system was immediately reflected in another. Everyone—from mainstream news to bloggers to politicians—immediately bought a story that was presented horribly out of context.

The CNBC panel discussion showed the dysfunction at the junction of media and business. A panel of distinguished experts, summoned to talk about “restoring trust in business, the markets, and government,” found they couldn’t agree on much other than the need for tax cuts, a politician-like response to a critical social question stated, yet unenforced, by the media.

All three sectors—politics, business, media—are suffering from a rapid replacement of relationships by transactions. When time is short, feedback is instant, and attention spans are measured in nanoseconds, we get daily sound bites expressed at high decibel levels around issues that cry our for longer, thoughtful, collaborative discussion.

As the world of business becomes more and more interdependent and tightly connected, the implications for trust are twofold. On the one hand, the need to interact smoothly may be the major force driving us to increased trust relationships.

On the other hand, if those relationships are made up solely of low-trust, short-term, market-based transactions, the same need for interdependence will put us at greater risk of Black Swan events, thus threatening systemwide trust. We need to figure out how to integrate long-term relationships and shared goals with business models that link multiple organizations.

This article was first published in Raintoday.com

Dear Mr. or Ms. Client:

You may be tempted to reject this letter because the author is a seller of services rather than a buyer and therefore might be biased.

In a nutshell, that’s what’s wrong with RFPs (Requests for Proposals). They reject the upside benefits of experience in order to avoid the downside risk of undue influence. That’s a bad deal for the client, but there are things both client and provider can do to improve it.

When to Use RFPs

RFPs in their simplest mode are formal invitations from a buyer company to a limited number of sellers to propose on a project. They describe what the buying company is looking for in terms of approach, credentials, models, project management, evaluative criteria, and pricing. They typically come with a due date and generally offer very minimal contact with the seller in advance of that date. What contact is offered is carefully made available to all sellers.

Let’s acknowledge that there are situations in which RFPs are appropriate and desirable. First and foremost are government contracts. Unlike private companies, governmental entities are “owned” by all citizens. And the appearance of improper influence is per se destructive of our faith in government. Most citizens don’t begrudge the use of RFPs as a blunt instrument way to ensure transparency, lack of favoritism, and corruption.

In the private sector RFPs are also occasionally desirable, such as if there’s a history of purchasing abuse by the buying firm or a concern about undue exposure to an oligopolistic supplier industry.

The virtues of RFPs in these cases are clear: they proscribe “unfair” behaviors like access to internal managers, pre-existing personal relationships, or excessively subjective decisions. In such cases, the RFP performs an important role of guaranteeing some transparency and consistency of approach. As one buyer put it, “It allows us to compare everyone on an apples-to-apples basis.”

Fair enough. But then there are the other cases—cases where RFPs are used for other reasons entirely to the detriment of the buying organization. Let’s turn to those.

When not to Use RFPs

Here are some of the other reasons buying organizations often resort to RFPs:

• “The people in finance are comfortable with a Big 4 firm in here, but marketing wants a firm with serious marketing capabilities. An RFP will let us compare the pros and cons independently.”
• “The suppliers out there all know way more than we do, and we’ll get taken to the cleaners if we’re not careful.”
• “The people we have managing the buying process are not experienced at buying. They are vulnerable, and can easily be swayed by experienced sellers who can put one past them.”
• “We have people whose job it is to make purchase decisions, and we want to make sure they do a thorough, objective job.”
• “We want to send a message loud and clear about what it is we want and don’t want. We will define the problem, and we don’t want vendors telling us they need to do massive studies starting at the CEO’s office to fix it.”

These motivations boil down to five uses of RFPs: to resolve political conflicts, to mitigate low product expertise, to substitute for purchasing expertise, to leverage existing purchasing expertise, and to prevent escalation of the original problem statement.

All, however, have two things in common. They prevent dialogue between buyer and seller, and they predefine not only the problem but much of the solution as well.

It’s hard to imagine a worse way to buy something complex. Would you tell your family doctor just what medical condition you had and how to treat it? Would you instruct your accountant in the tax code and how to deal with the IRS? Would you buy a first house and tell your broker, banker, and home inspector just what they had to do?

The simple truth is we give up a lot when we refuse on principle to listen to the expertise possessed by the sellers of complex services. The question is do we get enough in return to make it worthwhile to remain willfully ignorant?

What You Gain, and Lose, with an RFP

What you gain with an RFP is simple: a reduction in the risk that a seller will talk you into something you don’t think you want. Let’s examine that.

At the root, this is a fear-based concern. Fear that “those vendors” have bad motives, that we as clients are not clever enough to outsmart them, that our ignorance is a weakness to be defended against. And most of all, fear that we will somehow be persuaded to change our mind against our will (as if the act of buying makes our will either disappear or become itself suspect).

Put more simply, RFPs are a natural outgrowth of an inability to trust not just a buyer but buyers in general. We don’t have to claim that all sellers are trustworthy to see that this inability to trust comes at a great cost to buyers.

When buyers refuse to trust and resort to an RFP, they shut themselves off from information only the sellers have. More important, they shut themselves off from the perspective that sellers have gained from long experience with other buyers.

RFP buyers also believe (falsely) that their diagnosis has been confirmed because they interpret a bid as validating their problem statement. Yet, as David Maister, author of Managing the Professional Services Firm, once wrote, “The problem is almost never what the client said it was in the first meeting.” That’s not a claim that clients are dumb and consultants are smart; it’s an observation about how talking solely to oneself rarely results in insights as good as those that come from talking with others.

Most of all, clients who resort to RFPs deprive themselves of the best kind of advice at a time when they can most use it and can even get some of it for free. Any good professional will bring to the sales process some level of insight, perspective, and information that the client didn’t have, if only to demonstrate their competence. (If a consultant doesn’t sell that way, the client is justified in rejecting them because it reflects a stingy self-orientation that will probably manifest itself again in the engagement.)

Finally, the use of an RFP is the ultimate indication that the client fears insight and information from the outside world. This closed view of the world doesn’t just hurt buying decisions; it hurts in viewing competition, customers, and trends that affect the firm in general. The belief that one can have one’s will hijacked by another is a form of victimhood that doesn’t play out well in the medium run, never mind the long run. The ostrich “head in the sand” strategy is not a good one.

What’s a Client to Do?

Here are four key steps a client can take to gain from the proposal process without having to resort to RFPs:

1. Invite several firms in, one at a time, to talk on a casual basis about your general issue of concern. “We don’t think we’re getting enough productivity out of our workforce, and suspect employee engagement might help,” or “We’re not sure how to use social media in our marketing” are the kinds of statements that are sufficient as an agenda.
2. Tell them you don’t want a long presentation; you want an informal discussion about those issues, and you want them to help you think about your options in approaching the issue. Tell them you have no pre-determined outcome of the meeting.
3. In the meeting, be open to their suggestions—if they make sense to you. If they want to talk to others in your organization, ask why, and if the answer makes sense to you, make others available. If it doesn’t, say no. Feel free to say you’re talking to others. You have nothing to hide. Your objective in the meeting is to improve your decision about how to address your issue.
4. Trust your gut feeling. Did they talk about you and your issues, or did they talk about themselves? Did you feel “sold” to or listened to? Did they seem street-smart or just book-smart—or not smart at all? Were they willing to take some risks with you, or were they overly cautious? Could you see working with these people for an extended period of time? Do you trust their motives? Do their plans make sense?If you can’t answer “yes” to enough of those questions, then you’ve gotten more risk-protection than you would have from an RFP—and all it cost you was a few meetings. And you probably learned quite a bit along the way.More than likely, though, you’ll hire one of the firms you met this way. And if you do, you’re already well along the way of getting to know each other—which improves the odds of doing the right work, and doing it well.

Don’t be afraid to talk. Without risk, there is no opportunity for gain, and no one can force you to make a decision you don’t want.

This article was first published in Businessweek.com

“Much has been written about the foolishness of the risks that the financial sector undertook, the devastation that its institutions have brought to the economy, and the fiscal deficits that have resulted. Too little has been written about the underlying moral deficit that has been exposed—a deficit that is larger, and harder to correct.”

—Joseph Stiglitz

“‘Is not commercial credit based primarily upon money or property?’ the committee’s counsel asked. ‘No, sir,’ [J.P.] Morgan replied. ‘The first thing is character …. Because a man I do not trust could not get money from me on all the bonds in Christendom.'”

—J.Pierpont Morgan

Trust is the bedrock of financial institutions, according to authorities including, but hardly limited to, the two cited above. Yet trust in the financial sector lags even trust in government, itself now at a 50-year low, according to recent survey data from Pew, Edelman, and Harris. This is not merely an economic issue, or even a legal issue. It is also a social and moral issue.

That raises a vexing public policy question: How do we go about rebuilding trust? Trust goes well beyond the narrow realm of statistical dependability. It raises issues of character, of the ability to accept the word of those with whom we do business. At the simple level of accepting a piece of paper as “legal tender” because a government says it is, all financial institutions and transactions ultimately rest on personal, emotional, and social trust. Yet our usual approaches to rebuilding trust fail on all these counts.

Most solutions to rebuilding trust in the financial industry boil down to four generic approaches: structural, regulatory, compliance, and incentives. They are all rooted in either economic or legal perspectives.

Breaking Up the Big Banks?

None of them deal with trust—both a social and a moral issue—in either social or moral terms. That failure suggests why all four customary approaches are themselves inadequate. Here’s how and why we need another approach.

• Structural Structural change in the industry includes solutions such as reviving the Glass Steagall Act or breaking up too-big-to-fail institutions. But the dominant trend in financial services since 1990 has been consolidation, not breakup. Switching directions might not be easy and doing so calls for judgments about what size financial institutions makes sense since some experts—for instance, Larry Summers—argue that we need fewer, not more, small financial institutions.

Would breaking up work? Note that Canada’s banking system is far more concentrated than that of the U.S., yet performed far more safely in the recent crisis. The U.S. has done breakups successfully in the entertainment, telecom, and oil industries. However, breakup in the accounting industry came coupled with massive paperwork. Can it be done more cleanly in the financial sector than in accounting? A breakup policy is a massive and expensive bet to place in the face of conflicting data.

The structural solution has one major problem: It tries to solve an issue of social trust via the law.

• Regulatory. Some suggest greater regulation, either by giving discretionary power to regulators (e.g., capital requirements) or by more aggressive enforcement, as in the recent Securities & Exchange Commission suit against Goldman Sachs (GS). A look at the last eight years suggests, however, that ineffective regulation has been part of the problem.

Not only the SEC, but the Federal Emergency Management Agency, the Environmental Protection Agency, the Federal Aviation Authority, and the Food & Drug Administration have been criticized for ineffectiveness in recent years.

Some of the regulatory problems lie in the unequal power of governmental institutions vs. the comparatively wealthy industries they regulate. The gaps are particularly apparent in the securities and pharmaceutical industries. To the extent that money implies sophisticated operations, it is economically and politically problematic—if not impossible—for a regulator to achieve parity. One could even argue that the regulated always end up in control of the regulators.

The regulatory solution has one major problem: It tries to solve an issue of social trust with politics.

• Compliance. A further approach to restoring trust is to define a set of observable processes and activities and to presume that if companies’ actions are in compliance with them, that their resulting behaviors will be trustworthy.

The compliance approach suffers two defects. First, it requires the inference that good input generally results in trustworthy output—often true, but hardly a slam dunk. Second, it substitutes mechanical behaviors and processes for intentions and values. Not only do behaviors not imply specific motivations, but the act of substituting behaviors for ethical motivations tends to decrease the role of motivations in the first place.

Compliance requires a far lower threshold of behavior than following trustworthy motives. It’s no accident that so much of the financial industry prefers compliance-based standards to fiduciary standards. Compliance is a much lower standard that doesn’t require client-focus.

The compliance solution thus has one major problem: It tries to solve an issue of social trust with business processes and data observations.

• Incentives It’s common for financiers, lawyers, business students, and politicians to say that the issue boils down to preventing perverse incentives in the economic system. So common, in fact, that it’s easy to overlook two huge flaws in this argument.

First, to say that the problem is a need for incentives must raise the question: Who shall design the incentives? The “free market” has proven inept at it; worse, it’s hard to point to a superior centralized-design model.

Second, this view of companies and leaders makes them indistinguishable from rats in a maze being led one way or another by bells, lights, and cheese. It makes management an exercise in mechanics and pretty much gets rid of the notions of personal trust and ethics.

The incentives solution thus has one major problem: It tries to solve an ethical issue by reducing it to a matter of neoclassical and behavioral economics.

There is one remaining solution. It is fairly obvious, yet it usually gets rejected out of hand in a business culture that has come to pride itself on being scientific, logical, and metrics-driven. That solution is for society to demand personal trustworthiness from the leaders of its institutions.

Before exploring just how to do this, let’s examine the proposition itself. Here’s what Warren Buffett had to say: “Avoid business involving moral risk; no matter what the rate, you can’t write good contracts with bad people.”

Here’s what Alan Greenspan said in testimony in July 2002: “”Our market system depends critically on trust—trust in the word of our colleagues and trust in the word of those with whom we do business.”

Those are highly credentialed capitalists. Yet, despite the support for social trust from economists and corporate leaders, the idea of improving personal trustworthiness has little presence in most proposals to improve trust.

Corporate Defence: “It’s not Illegal”

Not one of the four traditional solutions to increasing trustworthiness in the financial industry aims at raising personal trustworthiness on the part of leaders.

If anything, they are absolved of personal responsibility to any stakeholder constituency—particularly customers. Even the Sarbanes-Oxley Act’s requirement that chief executive officers personally sign off on accounting statements has had the perverse effect of making CEOs far less candid, as I found in an interview I did with L.J. Rittenhouse.

The dominant belief in business today is that a company’s sole social purpose is to make profits. This regrettable belief led to the spectacle last summer of three insurance companies testifying in Congress that they would not drop their policy of pursuing extraordinary rescission because it wasn’t illegal.

When companies are charged with immoral and unethical behavior and the corporate response is “it’s not illegal,” we have lost something more—our ethical anchor.

We need to look elsewhere for serious improvements in personal trustworthiness. There are three particular sources:

1. 1. Business Schools. This means not only MBA programs, but executive-education programs as well. Universities should be urged to undertake large-scale programs to reexamine the fundamental role of personal ethics and character and to teach it in a variety of ways.
2. 2. Boards of Directors. Ben Heineman has written eloquently for this Web site about the governance needs in this area. Here’s what Warren Buffet wrote in Berkshire Hathaway’s 2009 Shareholder Letter: “The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed.”
3. 3. Industry Associations. Directors of industry associations need to recognize that short-term selfish behavior is harmful to their constituencies in anything beyond the short run, then focus on broader agendas that improve the long-term health of their members’ industries.

As for the rest of us: If the language of ethics and morality sounds stuffy, stilted, and decidedly unhip, we need to get over it—quickly. The problem goes far beyond Goldman, subprime mortgages, and government. This is what a crisis in public trust looks like. We can’t look solely to economists and lawyers to lead us out of it.