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Failing Trust Has Led to Failing Markets

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Trust has taken a leap to the foreground given the implosion of financial markets. And rightly so.

Irish economist and market researcher Gerard O’Neill writes:

"…the essence of the present financial crisis is a collapse in trust: including trust between banks and other banks; between banks and their customers; and indeed between banks and governments."

O’Neill cites a BBC program that asks the question, “Is trust evaporating in contemporary society? Does more monitoring of people and politicians increase trust, or encourage paranoia?”

Robert Reich, former US Labor Secretary turned academic, has also been waxing eloquent on the subject, on TV Talk Shows and on the radio:

…why are the free marketeers in the Bush Administration rushing to Wall Street’s aid? The answer goes deeper than the subprime mess. The Street has suffered a serious decline in trust…Yet trust is its most important asset. Financial markets trade in promises — that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting those promises, Wall Street can’t function.

…It worked great as long as everyone kept trusting and the market kept roaring. But all it took was a few broken promises for the whole system to break down.

There are two debates going on now. One is political, built on pent up resentment and schadenfreude—the Main Street vs. Wall Street argument. The other is ideological—free markets vs. regulation. Both are somewhat bogus, but I’ll stick to the second.

Pure free markets exist only in economists’ imaginations—thank god. Competition is inherently instable. The goal of every competitor is not to maintain a state of competiton, but to obliterate that state—often by colluding, sometimes by winning. Imagine a football game without referees. Every functioning market needs some regulation to avoid imploding into a black hole of monopoly.

But neither is “more” regulation the right answer. Regulation by bureaucrats, cronies, incompetents or the venal is not much better than anarchy.

“Who” and “how” are critical regulatory questions. And there are some basic principles. You’d think they’d be obvious, but they are frighteningly easy to lose track of.

One is transparency. Nothing cuts out envy, suspicion, and temptation better than sunlight. Yet the SEC and Congress allowed an entire set of financial products and markets to be invented—out of sight. Opponents of mark-to-market accounting—please explain to me how politicians can make valuations more transparent than accountants plus a market can do?

Another is time. The more fragmented and transactional the business model, the more is needed some timeframe over which society can see relationships and consequences between those transactions. If the industry manages itself solely through zero-sum one-off deals, then regulators must provide that longer-than-a-nanosecond view.

A third is the connection of the parts to the whole. The mortgage industry is a perfect example: it used to be that mortgage agents, lenders, home-owners and mortgage-holders interests’ were all aligned. A year ago I wrote about a 1995 economists’ view of the industry as it looked then, vs. the disaster-in-the-making it had become. The difference was all disconnected parts with no one minding the holistic store—no one in industry, no one in regulation.

I usually write about personal trust; that’s the “pure” version of the stuff. But make no mistake, trust is critical socially. Some industries can self-regulate, based on the three principles above. Though just now, offhand, I can’t think of any examples.

 

What Happens in the Global Financial Crisis Stays in the Globe

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What’s the global financial crisis got to do with a fluff Hollywood summer date movie? A lot, it turns out.

In “What Happens in Vegas”  Cameron Diaz and Ashton Kutcher separately go to Vegas on a whim, party hearty, and wake up together—to their mutual chagrin—married. Then they hit a slots jackpot.

Problem: how to split the money. They rapidly end up in court, where the judge sentences them to several months of—marriage. Cue the fights, which get nasty. But once they’ve had to get along together, they fall in love. Cue the violins.

Hold that thought. Flip the metaphor to Wall Street. From the Financial Times:

David Gergen, who heads the Center for Public Leadership at the Harvard Kennedy School, said Monday’s vote marked a high-water mark of public distrust in US leadership.

His centre shows that, of the five least trusted institutions in the US, four were involved in the financial crisis – Congress, business, the presidency and the media. In 2005, 65 per cent of the US public said there was a crisis in the leadership, a figure that has now risen to 77 per cent.

“Over the last few years the trust between the public and the elites has completely collapsed,” said Mr Gergen. “The failure of the bail-out package is a direct result of this leadership vacuum – the failure of any of the players, not just President Bush, to explain to the public why this package was necessary.”

Trust is a multi-faceted thing (see Trust in Business, the Core Concepts). One of those things is the simple fact that trust can only exist in a relationship. Robinson Crusoe had no need of trust; and a competitive “relationship” is an oxymoron.

The business world—particularly the US, and particularly finance—has increasingly been defined by short time frames, expressed in transactions, with an absence of long term relationships, holistic perspectives, and commonality of interests, buoyed up by an increasingly tortured interpretation of Adam Smiths’ Invisible Hand.

Nobody was vested in the big picture. Nobody had an interest in the long term. Everybody was valuable to everyone else only insofar as they could be hustled and turned over to the next sucker before the music stopped.

Kind of like Ashton and Cameron in Vegas, whose lives also became petty, selfish and fear-based.

The dominant fact of today’s world is that we cannot afford any longer to pretend we live separately. The financial world is far more intertwined than the masters of the universe want to pretend. Worse, finance links to economics. We can still run, but we can no longer hide—from each other. Butterfly wings may not drive hurricanes, but the metaphor is actually understated in the business world.

Trust isn’t an outdated idea; it’s ever-more timely and critical. We cannot afford the childish self-infatuation that comes with ideologies of “competitive advantage,” wars-on-the-enemy-du jour metaphors, and the "courage of his conviction" of dumb-asses. While Southern California Republicans channel Ayn Rand and Democratic unionists re-fight the battles of the 60s in the US Congress, banks are failing in Europe.

And so on.

We all need to learn to play nicely in the sandbox, or we will all foul it together. Which of course is just what the judge (played by the deliciously-cast Dennis Miller) ordered Ashton and Cameron to do.

In the movies, it worked.

Where’s our real-world Dennis Miller? (Barney Frank’s trying hard to audition, but…).

We will not regain trust in our institutions, our selling, or our business relationships until we come to grips with the fact that we are flat-out stuck with each other. We all just need to get along. Because what happens on planet Earth stays on planet Earth.

What Con Men Can Teach Us About Trust

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Regular Trust Matters readers know I speak positively about trust. But there is no trust without risk. Trust can be misplaced, or abused. Bad consequences ensue.

Thanks to prodding from regular reader Martin Dalgleish, I think it’s time to explore the dark side of trust. Trust can be violated at a personal level; at an institutional and societal level; and, of particular interest to this blog, in the realms of advice-giving and sales.

Let’s start with the personal level in this post.

“Clark Rockefeller” was in the news this summer for kidnapping his own daughter. Turns out his real name wasn’t Rockefeller. In fact, very little that people thought about him turned out to be real.

Rockefeller is one version of a con man. The Boston Globe’s Boston.com does a nice job of explaining how it is that he fooled so many people—two wives, the social elites of Greenwich and San Marino, California, brokerage firms—into believing that he was a wealthy heir of the Rockefeller fortune.

But how?

From the article:

We size up someone’s trustworthiness within milliseconds of meeting them…it’s the first thing we decide about a person, and once decided, we do all kind of elaborate gymnastics to believe in people….As in other cognitive shorthands, we make these judgments quickly and unconsciously.

Yet human society would not exist without trust…The art of the con is based on a variation of this idea: that trust is more reflexive than skepticism. Once people form an initial impression of someone or something, they seem to have a hard time convincing themselves that what they once believed is actually untrue.

More bad news: research suggests our “trust" is based on things like cheekbone shape and eyebrow arc.

You can fake trust. It’s not easy, but it can be done. There are plenty of slicksters slinging get-rich-quick schemes—the same names appear in boiler-room stock sales, then in death annuities, then in condos, then in no-doc loans. These con men are talented cynics.

Hollywood romanticizes the con man in movies like The Sting and Paper Moon; like the whore with a heart of gold (Pretty Woman), it’s a Hollywood fairytale feel-good staple.

The feel-good myth here is that once we uncover everyone’s true motives, the con will be revealed. It was either a real con by a black-hat Evil One; or a pseudo-con by the true white hat who is simply avenging a deeper wrong (Batman, Zorro). Motives determine all in this fairy-tale view of trust.

But here it gets tricky. In truth, the best con cons the con artist as well as the mark.

Most actors try to find a part of themselves that can relate to their character—then act from that deeply-felt affinity. Most salespeople are good at believing in what they’re selling. Most demagogues are true believers.

What we learn from the movies—and from politics, and religion—is that revealing true motives will reveal the con. Ah, so sorry, not true. The best con incorporates sincerity.

A fool who believes he can trust a sincere con is simply a misguided fool. Sincerity may be a necessary condition for trusting someone; it surely is not a sufficient condition. Worse yet, it’s not even a high hurdle to overcome. It ain’t that hard to believe.

The best way to be trusted is still to be trustworthy. And if you’re looking to trust, be careful of using sincerity as a shortcut. As George Burns once said, “The most important thing in life is sincerity; if you can fake that, you’ve got it made.” And the easiest way to fake sincerity is to simply believe your own con.

(Any political parallels the reader chooses to draw are entirely the reader’s own responsibility).

Evaluating Paulson and the Biggest Trust Me Since Iraq

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Economist Paul Krugman , in his NY Times blog, wrote yesterday about The Trust Problem raised by the bailout proposed by US Treasury Secretary Paulson, Fed Chairman Bernanke, and President Bush. Never mind the merits of the case. The point Krugman is raising is about trust:

"The whole premise of the bailout push has been “We’re the grownups, we know what we’re doing, just trust us.” Sorry, but that’s how Colin Powell sold the Iraq war. Fool me once, shame on you, fool me twice … you shouldn’t get fooled. " [revised last line courtesy of GW Bush]

I try not to write about US politics in this blog: but this issue is non-partisan, arguably international—and undeniably huge. It’s an 800 pound gorilla for trust—it can’t be ignored. If trust as a social issue isn’t relevant here, I don’t know where it would be.

So—for someone focusing on trust, these are interesting times. And Krugman’s observation is valid. Let’s evaluate it.

The Trust Equation suggests Trustworthiness is a function of (credibility + reliability + intimacy), all divided by the self-orientation of the one who would be trusted. How does Paulson fare?

As Krugman points out, Paulson’s got a ton of Wall Street cred—less so as a Treasury Secretary. Only months ago he was calling the economy firm, and one gets the strong sense he’s making this up as he goes along—like the rest of us. As evidence, Krugman contrasts Paulson’s plan—which famously and clearly called for no oversight—with his testimony of yesterday, which welcomed oversight. For credibility—maybe a B-minus.

On reliabilty, it’s tough for anyone. Reliability takes repeat experiences. But no one has this issue on their resume. One has to stretch to find comparable experiences, and unfortunately, the line stretches to another Bush cabinet member—Colin Powell and Iraq. Another good man who, it turns out, blew smoke at us. Given that track record, anyone in Paulson’s chair rates a C-minus at best.

The third factor, intimacy, is mainly determined by a willingness to be open and transparent about oneself. Paulson has done nothing to explain the theory behind his plan, which of course leads people to wonder if he has one—or if so, why he’s hiding it. Worse yet, given his mixed credibility and his (and anyone’s) inability to have a track record on this issue, that opacity makes him look even worse. In particular, it calls into question the demand by Paulson (and Bush) for immediate action, and the dire consequences if the demand is not met. Got to give him a D.

Self-orientation, the lone factor in the denominator, is the most powerful of the four. I don’t think anyone doubts Paulson’s commitment, nor his good intentions. Then again, most people this side of psychopaths have good intentions.

It’s not a good sign that he acquiesced to a political demand to reduce high compensation for masters of the universe who would be rescued. It suggests not only that Paulson is politically tone-deaf, but that his plan was not free of moral hazard. It’s not that Paulson is in it for himself, but it suggests there’s a lot in it for his old buddies. And absent a "theory of the case," or data, this looks pretty self-oriented. Another D, I’d say.

Remember the National Lampoon Magazine cover of the cute dog with a guy pointing a pistol its head? "Buy this magazine or we’ll kill this dog," the tag line said.

It sold a lot of magazines. Will it sell a mega “trust me” for a mega-bailout?

Wall Street and Broken Social Trust

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I’m hardly the first to cast the financial meltdown in terms of broken trust. But usually that means something like "we can’t trust they’ll still give us credit." There is a much deeper, distinctive pattern that leads to broken trust, and it works the same personally as it does socially and economically.

That pattern is the fragmentation of relationships. When relationships are turned into transactions separated by time or space—the predictable result is a lowering of trustworthy behavior, resulting in a lowering of trust.

Here are a few examples:

• Marriage researcher John Gottman says that couples who argue can be quite successful—they remain engaged, in relationship. It’s when the parties disengage, withdraw, refuse to interact, that the marriage is doomed. The relationship is fragmented—trust disappears.

• The airline industry in the 60s (if I recall my corporate finance cases) was funded largely by insurance companies, which lent money to the industry at large, thereby restricting competitive binges of excess capacity. When banks took over the lending, they championed specific carriers. This quickly led to over-capacity, with airlines returning to their customary unprofitable ways. A relationship of industry to industry, fragmented into competitive bank-airline duos, resulted in systemically bad results.

• If you let your teenager stay out at all hours of the night, your teenager will probably get in trouble. A family system fragmented, results in untrustworthy behavior.

• The US regulates banks and stocks. The CDOs which lay at the heart of the mortgage-driven meltdown were not regulated. No one had purview or a common interest across the entire range of financial products. A fragmented relationship, and resultant low trust.

• 30 years ago, the mortgage industry was a system of brokers, banks, and homeowners. All had a common long-term interest in that system, and all had long-term relationships with each other. With the fragmenting advent of specialized brokers, securitized loan packages and the like, no one had to relate to the whole picture, nor to each other for any length of time. Result—abuse and breakdowns of trust.

• The game theory classic Prisoner’s Dilemma pits our fears and aggressions against another player. If you both give in to fear, you both lose. But if you give, and the other person takes, you suffer the worst of all outcomes. The “trick” to successfully playing the game is to increase the number of times it is played—to create a relationship over time.  Which creates trust.

• Another prisoner’s dilemma winning strategy is to make each play more personal—face to face, looking each other in the eye, handshakes. A relationship as opposed to an impersonal connection. Resulting in more trust.

• Pure economic competition is unstable, because all competitors strive for their competitors’ elimination—the absence of relationship. Some form of social interference—rules, regulations, time-outs, referees—is necessary to keep the game going at all.

• Jonathan Knee’s book The Accidental Investment Banker tells of the cynical investment banker acronym IBGYBG—I’ll be gone, you’ll be gone, let’s do the deal. Fragmented transactions, no long-term relationships. And no trust.

• When Marie Antoinette said “let them eat cake,” she articulated a deeply riven society. Which turned out to be untenable, especially for her. No relationship, no trust.

Fragmenting relationships can lead to growth and to scale economies. Teen-agers grow up and learn to handle freedom. Outsourcing business processes can result in larger scale and lower costs. Fragmenting the mortgage industry did result in lower costs and more liquidity. The flip side, of course, is untrustworthy behavior.

Wall Street is just one example of a broader dilemma we face in an increasingly inter-related, interconnected world. How do we balance the scale economies of fragmented business relationships, industries, and business processes, with the trust-creating power of some kind of integrative force?

Regulation is one obvious integrating force. There are also industry associations, and a sense of honor (personal, professional or societal).

We’re running a little low on self-regulation just now (see for example How to Get Your Industry Regulated and Great Moments in Self-Regulation—Financial Planners). And how’s the world doing these days on ethics, public service, and collaboration?

Personally and institutionally, the more we are linked, the more trust flourishes. The more we are disconnected—structurally or personally—the more we distrust.

Turning systems into fragmented markets can increase scale, power and performance—and raise the risk of untrustworthiness. Linking relationships is the countervailing force—the more we view ourselves and our institutions as in relationship, the more we create trust.

As the world gets smaller and more linked, we need to shift more toward the latter.

 

The Guts of Trust

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I’ve written before about trust in business relationships and selling, and I’ve written about models of trust (see Trust: the Core Concepts.

But what about the guts of trust—of trusting, and of being trusted?

I mean what does it feel like in your gut? What is the gut-level stuff that makes it work—or not work? How do you know it in your gut when you’re being trusted—or trusting?

I don’t mean models, and abstractions, and data. I mean being real.

Here’s the guts of what I’ve learned about trust—from the gut.

1. I can’t tell you what works for you; I can only tell you what works for me.

2. You can tell me what you think I should do; but I won’t do it. Unless I feel like it anyway, or unless I really trust you.

3. I can learn this stuff. It helps to be born with it, but I can learn.

4. Rarely, I learn trust by observing someone who does it well. I once saw a newspaper publisher run a 15-person all-day meeting just by listening, by nodding at someone and saying, “I can tell you’ve got something to add to that, Joe, right?” That time, I got it.

5. Generally, though, I learn trust lessons better through failure than through success. Those are “learning opportunities”—though I rarely see them as such at the moment.

6. Whenever I fail to trust, or to be trusted, it is nearly always my fault, and nearly always due to fear. Fear is the mother lode. I am learning to remember to ask myself, “what am I afraid of?” I hate the answers—they are always the same—shame and guilt. What a waste of time!

7. I don’t trust you until I think you understand me. Why should I expect the reverse to be different?

8. I’d rather you go first. But then things rarely happen. So I guess I have to.

9. You can’t hurt me without my permission. Which I don’t have to give. You’re not annoying—I’m annoyed. And I can stop being annoyed anytime I choose to.

10. You’ll trust me most if I don’t ask, beg, or try to force you to trust me. You’ll trust me the most if I’m of service to you—no strings attached.

11. I’m OK, You’re OK. True enough, but a hard place to get trust started. I’m an Idiot, You’re an Idiot—now there’s a place that offers traction.

12. Trust never comes without risk. Having the courage to be vulnerable, and to take small emotional risks now is what creates trust—and mitigates larger business risk later.

13. If I’m transacting, I’m alone. If I’m relating, transactions come along like ripe fruit.

14. After some point, I realized I could trust my gut more than my brain. Later, I realized that had always been true.

15. I get what I want when I stop wanting it. People trust me when I stop demanding trust.

16. Alone on a desert island, I don’t have to trust or be trusted. And I can always create my own trust-free island. It’s safe, but it’s awfully solitary.

Balancing Logic and Emotion in Trust and Politics

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Readers of this blog know that a common theme is the over-valuation of the rational in business. Deductive logic, process definition, behavioral psychology and rational persuasion are often over-emphasized in sales and in the professions, while the power of emotions and intuition are under-appreciated.

But lately in politics, we’ve got the opposite problem.

The trust equation (see the book  The Trusted Advisor) defines trustworthiness as:

Trust Equation

 

In that equation, credibility and reliability are the largely “rational” elements, while intimacy and self-orientation are more emotional or intuitive. 

US Presidential politics are now characterized not by a diminution of discussion about credibility and reliability, but by their near absence.

Maybe it began with Clinton blowing the sax on the Arsenio Hall show. But was that as much of a stretch as McCain on the Rachael Ray show?

The idea behind representative government, as opposed to a pure democracy, is that in a complicated world, you need to entrust decisions to others as a full time job. Issues like qualifications and experience, one would think, are relevant.

Yet in this election, the very concept of “experience” is either not defined, badly defined, or defined only to be reversed a day later.

Only four years ago, “flip-flopping” was an epithet. Now it’s barely worth yawning over. The concept of logic has been demoted to a mere nice-to-have, subordinated to the need to match the demographic-du jour.

The idea of someone you could have a beer with is an important aspect of trust. Necessary? I suppose arguably so.  But sufficient?  No way.

Does mankind advance through history? Read the Lincoln-Douglas debates, and then think of Obama on SNL, and McCain on The View. There’s your case for societal regression.

Fear and smear work because they appeal to the more primal, base level needs to the exclusion of higher-order issues. Hunger crowds out freedom of expression. And fear trumps hunger. Focus on fear limits the upside of political dialogue.

As in business, a reduction of all things to the lowest common denominator certainly works. It also dehumanizes, borrows against the future, and limits what people can become.
Can we talk? When it comes to politics, not very well, it seems.
 

Outsourcing Loyalty, and other Oxymorons

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I am on vacation this week, and will be going back to the vault for some ‘oldies but goodies’ posts.  I hope you enjoy them: I’ll be back in a week or so with new material.

Outsourcing loyalty. Think about the absurdity in that phrase.

Oh, we know what it means, all right. There are businesses whose specialty is executing frequent-customer programs. They handle strategy, research, program design, even fulfillment. It’s no different from any other outsourced business process.

But still. Think about the contortion of language implicit in combining those two words. Loyalty—that emotional quality that binds one person to another, to a clan, a country, or a set of ideals—can be mechanically crafted by a third party for hire. And we still call it loyalty.

Googling “outsource loyalty” turns up a few entries, like Ernex, which offers "a complete real-time points management solution for loyalty program or member-based loyalty databases." Cap Gemini, a major global IT firm, has a website that advertises its “loyalty factory.”

Hey, why not? You can outsource confidants (they’re called shrinks). You can outsource sex (the oldest profession). You can outsource phone calls (“your call means a lot to us…please hang on the line”). Why not loyalty?

But in our rush to turn business functions into business processes, then modularize and outsource them, we occasionally overdo it. A major casualty is the faux language of relationships. “Loyalty” programs are but one example.

Another oxymoron is “human capital.” Note which word became the adjective, and which stayed the noun.

“Relationship capital,” its close cousin, goes it one better. It isn’t just people that are financially fungible. Ditto for the relationships between people. Long live love. If it pays, that is.

“Customer focus,” as a practical matter, is often oxymoronic. It amounts to “inspect, dissect and reject” so that you maximize customer profitability per unit of financial investment. Customer profitabilty to the seller, that is; not the customer’s own profitability. Vultures are focused in that sort of way. If you’re a customer, "customer focus" can feel like you’re in the crosshairs of somebody else’s scope.

How about you? Can you add to the list? Got any oxymorons about the human dimension in business? Share them here; enquiring minds want to know!

 

 

Lawyers Overdrawn at the Trust Bank

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To watch TV, you’d think cops and prosecutors are pretty much sworn mortal enemies of criminal defense lawyers. And, according to Scott Greenfield, a distinguished lawyer and author of the blog Simple Justice, you might not be wrong.

But it didn’t used to be that way. In Greenfield’s When the First National Bank of Criminal Law Closed Its Doors, he describes how it used to work, in the Bronx court system of just a few decades ago (described by Tom Wolfe in Bonfire of the Vanities).

…one of the first things you learned was the sanctity of a “contract.” When you sought a favor, you owed it back. If you didn’t pay on demand, your name was mud and no one would ever do you a favor again. In fact, people would go out of their way to burn you. It was a matter of internal honor.

[talking to young lawyers recently]…not one of them knew what a contract was, or how you banked one or how you made a withdrawal…They couldn’t believe…those of us who worked in criminal law were actually able to cooperate with each other. They couldn’t fathom the existence of an unwritten honor code where we trusted each other to return the favor, or conceive of a virtual bank where our contracts were held, awaiting the day we needed a favor in return.

 

“Competition” used to mean the healthy thing you learned to do on the ballfield that carried through somehow into business. It made for an efficient systemic approach to commerce. Then, sometime, the approach became the goal.

The adversarial legal system presumably used to serve the higher goal of justice. Now, apparently, the legal equivalent of the invisible hand needs no help from its mortal agents to arrive at justice. Or—more likely—justice is not quite the goal it used to be.

The day Tiger Woods denies a competitor a gimme putt in a casual game we’ll know it’s all over.

Until then, make a few deposits in others’ trust banks. And honor the deposits made in your own.

Re-Engineering Michael Hammer’s Legacy

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Michael Hammer died last week, at the sadly young age of 60. He made Time Magazine’s Top 25 Most Influential people in the mid-90s.

His name will (rightly) always be associated with the concept of business re-engineering. For me, it was one of those brilliant insights that you instantly “got” when you heard it, along with the spreadsheet, competitive strategy and the Byrds’ Mr. Tambourine Man.

There will be many articles written eulogizing Hammer, and he deserves every one. I’d like to touch on one small point: how a great idea can be misused by those who come later.

His insight was simple, yet profound. The Industrial Revolution worked by specialized division of labor. But at scale, specialization creates massive vertical bureaucracies. Re-engineering looked at processes, not tasks. Shift focus from marketing and production to order fulfillment and supply chain management. Hammer took a vertically organized world and saw a need for the horizontal. The impact of that simple insight has been enormous.

Then came the perversions.

Stage 1. Re-engineering became associated with downsizing. Redesign the company to get rid of workers and enhance shareholder value. Hammer’s work was used to justify the Gordon Gekko era of excesses. As the Wall Street Journal put it:

“It is astonishing to me the extent to which the term re-engineering has been hijacked, misappropriated and misunderstood,” Hammer told Time, saying that ideally, re-engineering should promote greater production and create more jobs.

Hammer may have originally been a bit naïve about the difficulty of getting people to change, though not for long; he became quite articulate about it.

Re-engineering survived the era far better than some dot-coms and i-bankers. But today, it faces another misuse—and again, it’s a misuse that dehumanizes business. It’s the belief that viewing the world through process lenses is an end, not a means.

The process revolution has been massively successful. Originally applied to manufacturing, we now see it in HR, in non-profits, and in education. I would argue we saw it at scale in the recent financial markets’ breakdown (see my post on the view 12 years before the subprime mortgage meltdown )

The process view has been used to maximize efficiency by expanding scale. The more you can break things out into modules by redefining out-sourceable processes, the more you can achieve scale by specializing modular components and outsourcing them at larger scale. That lowers costs, makes markets bigger and more fluid, and in theory makes for less risk.

But it seems to come at one big cost—the cost of integration. Ironically, this is similar to the flaw Hammer saw in the vertical organization—the left vertical silo didn’t know what the right vertical silo was doing. And didn’t much care.

In the mortgage debacle, the mortgage sales origination process didn’t know what the asset securitization process was doing with the mortgages. And didn’t much care.

There is risk in fragmentation. When no one has a stake in the entirety of a system—no owner, no customer, no regulator—things can go a little crazy, whether you’ve organized vertically or by processes. One answer is, “the market’s invisible hand takes care of that.” But we’re not buying that answer anymore. Markets don’t look omnipotent when Fannie Mae and Freddie Mac are getting taxpayer bailouts.

I didn’t know Hammer, so I welcome comments from those who did. Me, I like to think he was perfectly aware of this issue, and was in his own way working back to rescue the humanistic intent of his original insight—to make organizations work better for the sake of all constituencies, thereby transforming human relations.

Not just more efficient businesses. Not just means, but ends.

I hope that ends up being Hammer’s legacy.