Sales, Surgeons and Profits
The NYTimes recently published Salesmen in the Surgical Suite, a look at some questionable sales practices in the US surrounding a robotic surgical technology called the da Vinci Surgical System, a product of Intuitive Surgical Inc. The article cites a case of severe damage to a patient due to inadequate training of surgeons, and a variety of documented practices by Intuitive pushing the limits of proper training and supervision.
My point is not to argue the case for or against the company; that’s being done already in a case filed against them. What I do want to touch on is how we should think about issues like this. In other words – just what kind of a problem do we have here?
Profit vs. Patients?
The ultimate issue, I suggest, is the relationship between a for-profit business and the well-being of the end-user customers. Health care is an extreme case, because of the direct link between the two; but in a sense, this is the same issue we face in a capitalist society for any good or service. Healthcare, and surgery in particular, are extreme cases, thus useful for clarifying issues.
There are three commonly heard points of view:
1. There is an innate conflict between the interests of the profit-seeking business sector and the ultimate good of the patients; this conflict must be regulated by a third party of some sort.
2. There is no innate conflict between business and patients, except insofar as business is regulated by governmental and other third parties, who inevitably just distort the ideal workings of pure markets.
3. There is no innate conflict between business and patients, except insofar as business misreads its own long-term self interest by being addicted to short-term fixes, leading to regulation – a self-inflicted shooting in the foot.
The first two arguments are endlessly hashed over, with much heat and little light, in all the various venues of the day: from Congress to HuffPost to talk radio to coffee shops. (I suspect this debate is largely a US debate, as most other developed economies have tilted toward the first viewpoint, far away from the second). I’m not going to change anyone’s mind about the relative merits of one and two.
But number three is interesting: it suggests that the business-society conflict is unnecessary, and that the solution lies largely within the hands of business itself. All that right vs. left, redneck vs. socialist shouting is nothing more than noise.
Is this a utopian, pollyana-ish view? Or is it very real?
The Best Interests of Business
We can reframe the issue as simply, “Is there or is there not a long-term fit between the interests of business and consumers?” Karl Marx answered in the negative, and claimed that the tension would ultimately result in revolution. I suggest that any right-thinking capitalist must answer in the affirmative – there must be a commonality of interest, else the doctrine of capitalism is of little use or interest.
But if that’s the case in the long run – why then isn’t it in the short run? Why do we see salespeople play with endangering people’s lives in order to get the order in before the end of the quarter? Why do companies fight for less regulation, commit economically foolish acts in order to smooth quarterly earnings, and prefer the net present monetized value of almost anything, rather than the longer-term asset that comes from brand, history and culture?
We live in a very imperfect business world, I suggest. We do not do a good job of assessing economic good, or even of assessing business value. We rely on definitions of value which are narrow, solely financial in nature, and short-term. The tyranny of the discount rate leads us to forego thinking about the next generation – it’s just un-economic to worry about something 40 years out, there’s not enough present value in it to justify it. The Chinese have a history of looking at hundred-year timeframes; the US struggles to get past quarterly, and three years might as well be a lifetime.
The poverty of our financial calculus can be described several ways. Economists would say we do not take into account externalities, so we delude ourselves about the costs of degrading the environment. Social scientists describe it as resulting in a poverty of the spirit (a tone we hear echoed by those who preach ‘the final days of the empire’).
This poverty of calculus is supported by impoverished thinking. Adam Smith was brilliant; the caricatures of him that came down through Ayn Rand and the Chamber of Commerce retain nothing of his focus on the good of society, much less his work on the moral sentiments. Even business theory is impoverished – NPS and Five Forces just don’t have the sweep that we saw from Peter Drucker or even Sun Tsu.
What I’m suggesting is that business needs to radically re-think itself, across the board, into a long-term partnership with the rest of society. The commercial instinct of mankind ought to be a driver of value and wealth creation for all of society, and not hostage to an ongoing battle between haves and have-nots. Whether we need more or less government, more or less regulation, should not be the issue. The issue should be how can business and society line up on the same team?
We really should be able to do better.
Great Post and one that I view as spot on. There has been a number of research projects that have demonstrated that viewing all the stakeholders and their costs and benefits (as opposed to just shareholders) leads to better profitability, sustainability and good will. Two projects that come to mind are Barbara Kimmel’s Trust Across
America and the Book Firms of Endearment.
The market as in Stock Market works against society. The average tenure for a senior manager is less than 8 years. They are concerned about what can be done quarter to quarter.
I don’t believe that they set out to harm the customer or in
your case the patient. They do set out to optimize profits. The idea that the purpose of a business is to generate a profit has been damaging. Business needs profits just like I need to eat. But if I see my purpose as only to eat …well I would not be very healthy.
I am encouraged by the shift in view that I see taking
place.
Have a Great Day
I am also encouraged by this shift in view and sent a note to Charlie earlier congratulating him on this great blog post. I believe that there are a number of forces in play, including the esteemed Michael Porter, http://www.greenbiz.com/blog/2013/03/26/why-disruptive-sustainability-new-leadership-framework who are urging companies to be more stakeholder focused.
As usual Charlie, I largely agree with you, but I think that there are some assumptions in this post that ought to be challenged.
One is about Net Present Value. However it is used in practice, I think the theory behind it is much more compatible with your world view than you give it credit for. My business professors urged it upon us as the best available method for properly valuing the future. They were very clear that making decisions on payback times grossly undervalued the future. If we could somehow attach numerical values to all the intangibles such as reputation, litigation risk and regulation risk, Net Present Value likely would be almost satisfactory to you. (I am well aware that you rightly distrust attaching numerical values to intangibles, but I would hope we can develop techniques to do these things more wisely.) The bigger problem is that all too often these kinds of analyses are done foolishly. The analyses are almost always delegated to junior staff and all too frequently the staff are told what the desired results are before they start the work. Other times the staff don’t have adequate access to more senior management to even know potential issues of liability and customer relations, and then their work is trusted without adequate examination or challenge.
Myopic focus on quarterly earnings is clearly antithetical to net present value analysis. Screwing ones customer is antithetical to the long term health of the business, and if one could actually get a business doing that to do a NPV, it would give it a negative value.
The other challenge I would make is that you risk overvaluing the future. If the last 100 years of technological development have taught us anything, it is that the future will be much different from the present. Things we rightly saw as major challenges in the past have been made trivial with technological advance, while other issues that we did not even think about have become very important. A hundred year plan will squander resources as much as a six month plan.
John, Barbara, thanks for your elaborations on the theme. Franklin, fascinating thoughts. I guess you’re almost certainly right about NPV calculations, if as you say we actually assigned values to some of the less calculable benefits in the future. That is similar to the economic notion of externalities.
You’re certainly right about the bias of payback analyses; and in my experience (yours too?) the use of payback analyses is given way too much weight. It gets used as a rough proxy for personal risk, and ends up making poor decisions.
I think you’re dead right too about viewing NPV analyses as trivial things to be done by junior staff. I remember vividly a junior consultant being tasked with evaluating the return on several proposed administrative changes in the firm; their analysis made absolutely no distinction between laying off three long-time admin people and cutting back on an expensive outing, or a fancier phone system.
Anthony Iannarino has written a blogpost on the same NYT article Salesmen in the Surgical Suite – the title is Win But Not At Any Price. http://thesalesblog.com/blog/2013/03/28/win-but-not-at-any-price/.
While his focus is almost entirely from the point of view of sales and sales management, it is interesting to note that his point parallels that of Franklin. Anthony points to short-term, myopic thinking about profits and value on the part of salespeople as being the source of unethical bad behavior.
We’re all pointing to ways in which unethical behavior is driven by bad analysis; and ethical behavior is aligned with greater value-added. This is a fixable problem.
Take that, Marx.
The beauty of a capitalist system is that it is self-correcting. The short-term decision making (particularly of the unethical type) gets corrected by other competitors who have stronger long-term value propositions and/or ethical frameworks for doing business. I have personally been part of numerous winbacks with ethically challenged competitors who have won initial deals only to get thrown out when their corner-cutting ethics come to light as it eventually always does. Occasionally, you have an unethical client who reinforces that behavior in their business partners, but my experience says those clients are also short-termers as well.
We are in the Uk continually having this debate about market forces and how the open market drives quality because customers (patients are called customers by the proponents of market forces) will avoid failing service in the future. The trouble is with looking at health issues like that is that failure can mean dead. Customers don’t come back and spend more because they are dead! So in some ways the model is correct.
But you know what – society is none to welcoming to that way of working because is reacts against the ‘dead’ bit of the equation. Ok you might not be dead but missing a limb, or lung – but you get my drift.
The whole of Europe, that’s at least doublebthe population of the USA runs ‘free’ health care with private options should you so wish. Although it has to be said that pretty much all major surgery is done in the public sector with the private sector picking off the less risky, more profitable stuff.
You seem to be stuck with a very difficult ethical and philosophical issue in the USA fraught with commercial and social conflicts. For those supportting the commercialisation of health care – be careful of what you wish for.
Chris,
I couldn’t agree with you more. The lessons for us from Europe regarding health care seem obvious, but you’re right – we are “stuck in an…ethical and philosophical issue.” And it’s being very badly debated.
The same precisely could be said of gun control over here.