Why we have a financial crisis

Radical transparency vs The age of bullsh*t

The exemplary manager: Robert S. McNamara

How?

RUNNING A COMPANY BY “THE NUMBERS”

Through elaborate planning exercises, McNamara and his team of the best and brightest ran companies by “the numbers”. They would decide which businesses to be in, how much capital to allocate to each and what returns they would expect the operating managers to deliver to the company.

McNamara was never happier than when the issues had been reduced to a set of numbers, which he could view on a large table of statistics, with his big ruler, and see the underlying relationships between the numbers, so that he could spot the inconsistencies and zero in on the manager responsible and insist that the issue be fixed.

When I encountered him at the World Bank, which I did on numerous occasions, he showed no interest in the possibility that there might be some issues that the numbers didn’t reveal or in the issues and contradictions which that approach might create for doing the work, or in the possibility that people doing the work might know more about the real issues than the numbers could reveal.

THE QUESTION OF QUALITY VS QUANTITY

One occasion in particular in the late 1970s brought this home to me. McNamara had come to one of our staff meetings in the Western Africa Region of the World Bank, where I was a young manager, and he had said he would be ready to answer any questions.

I felt fairly secure as an up-and-coming division chief and a risk-taking kind of guy. So I decided to ask McNamara the question that was on everyone’s lips in the corridors at the time, namely, whether he perceived any tension between his hard-driving policy of pushing out an ever-increasing volume of development loans and improving the quality of the projects that were being financed by the loans. In effect, was there a tension between quantity and quality?

When the time came for questions, I spoke first at the meeting and posed the question.

His reply to me was chilling.

He said that people who asked that kind of question didn’t understand our obligation to do both—we had to do more loans and we had to have higher quality—there was no tension. People who didn’t see that didn’t belong in the World Bank.

Next question!

And so the meeting went on to other things.

And the World Bank continued to push money out the door. The people who were promoted were those who were able to move the money, albeit in a way that showed that there were no quality problems. And many of the loans that were made were of high quality. But overall, in the rush to push money out the door, quality was deteriorating.

Thus years later, the relevance of the question was confirmed.

• Project audits confirmed the fact that McNamara’s push to rapidly expand lending was accompanied by a declining quality of projects.

• And what is worse, economic studies also revealed that the push for more lending contributed to a ballooning debt problem in the developing countries, a debt crisis that was a precursor of the current global financial meltdown.

• Credit standards were relaxed and countries had been encouraged to borrow more and more, resulting in time in an unsustainable debt problem that is still with us. Unlike individuals, countries never go bankrupt: the debt just accumulates like a dead weight, with rescheduling after rescheduling. It’s a never-ending nightmare.

THE NUMBERS CONCEALED THE ISSUES

Now McNamara has rightly been seen as one of the world’s best managers. His management style was dazzling. Everyone was overwhelmed by his eloquence, his analytic talent, his ability to answer any question. His performances were thrilling. He could think faster than anyone else and had numbers at his fingertips to refute any objection.

But what the incident brought home to me at the time was that this style of management and communication, dazzling as it was, actually prevented discussion of real issues in the workplace.

It was amazing to see how internally contradictory statements could be made to stick by the sheer force of the presentation. It enabled McNamara to stake out positions on both sides of the issue. He stood for quantity but he also stood for quality and if there was a quality problem, it wasn’t his responsibility: someone else must be responsible for it. It was brilliant.

When you have a CEO talking like that, and talking very forcefully and eloquently, it is no longer possible to discuss openly the issue of whether you are pushing too much lending out the door.

THE SOVIET UNION SCHOOL OF COMMUNICATION

Some writers have noted that this particular style of communication is rather similar to the style of communication in the heyday of the Soviet Union.

In the Soviet Union, you couldn’t talk about what was really going on openly, as this would make the whole house of cards fall down. Thus as Matthew Crawford wrote in Shop Class as Soulcraft, the bureaucrats “had to negotiate reality without recourse to language that could capture that reality. Instead you were obliged to use language of which the whole point was cover over reality.” (p.140)

These practices resulted in concealing issues for long periods rather than solving them. Eventually, the issue would become too big to conceal and it would suddenly explode into the open in a massive way.

THE AGE OF BULLSH*T

THE MANAGER AS BULLSH*TTER

I don’t think McNamara was lying when he said that there was no conflict between pushing out more lending and assuring the quality of loans. In his heart of hearts, I suspect that he believed it very deeply. He just wasn’t interested in finding out whether it was true or not. It was a religious doctrine for him. It was an act of will, rather than a statement of fact. He was exhibiting a lack of attentiveness to the truth. He was bullshitting. He was doing it very eloquently and forcefully. But it was bullshit.

Now I’m not picking on McNamara here as an individual. What I am suggesting that his kind of behavior is not atypical. I imagine that if you had asked any of the other legendary managers like Jack Welch or Bill Gates or Harold Geneen a similar question you would have gotten a similar answer. These managers stayed above the fray by denying that there was an issue, or if there was one, it wasn’t their responsibility.

BULLSH*T IN THE MARKETPLACE

And we see the same phenomenon on a daily basis in the marketplace.

How many times have you heard on the telephone: “Your call is important to us. Please stay on the line.” The company doesn’t really care whether it’s true or not. If they did care, there would be a human being who would already be speaking to us. They are bullshitting us.

How many times have you seen this? “Before downloading our software, please acknowledge that you have read the contents of our (20 page) service agreement and you agree to its terms. CONFIRM or REJECT”. You press CONFIRM. You go along with the bullshit.

If you look around, you will notice what Frankfurt noticed, namely, that we are wallowing in a swamp of institutionalized bullshit.

You might say, “What’s the big deal? That’s the way things are.”

BULLSH*T IS INCOMPATIBLE WITH

HIGH-PERFORMANCE TEAMS

For my current purposes, the big deal is that institutionalized bullshit is incompatible with high-performance teams.

The problem is that bullshit drives out truth.

It’s like Gresham’s law in economics. Gresham’s law in economics states that bad money drives out good. Once you have counterfeit currency circulating, anyone holding real currency is going to hang on to it for dear life. Suddenly you can’t find good money any more. Bad money drives out the good.

In the same way, bullshit drives out truth. When you have the CEO denying that there is any tension between pushing out lending and the quality of the loans, and impugning the integrity of anyone who raises that question, it is very difficult for any team to be raising that question. If they do, their integrity will be put in question. They will be seen as rocking the boat, as not being team players. What generally happens is that most teams go along with the bullshit and cease to have any possibility of becoming a high-performance team. A few courageous teams stand up and address the issue and point out the truth, but those teams are rare, and their life expectancy is typically not long.

INSTITUTIONALIZED BULLSH*T

Note that the issue here is not the individual bullshitter. The individual bullshitter isn’t a big deal.

The big deal is institutionalized bullshit. The problem is that institutionalized bullshit is incompatible with having a lot of high-performance teams.

You have to start draining the swamp.

A firm cannot become more productive, or establish genuine responsibility in the workplace, and have high-performance teams, if a spade is not being called a spade, if everybody is bullshitting each other, if people are telling each other what they want to hear, rather than what they need to know.

THE RULE FOR HIGH-PERFORMANCE TEAMS: NO BULLSH*T

To establish and sustain high-performance teams, the firm needs to be governed by the rule:

Total openness: everyone levels with everyone.

It is total openness within the team.

This is total openness of the team vis-à-vis management.

It is total openness of the management vis-à-vis the team.

HOW DO YOU MAKE THIS HAPPEN?

It isn’t easy.

As I found at the World Bank, you get nowhere by confronting a bullshitter with the fact of his bullshit. As McNamara did several decades ago when I asked him the direct question, he simply bullshitted his way out of the problem. Eloquently, articulately, succinctly, but nevertheless bullshit.

Moreover, when the CEO is constantly doing this kind of thing, everyone else is likely to be doing it too. The mode of communicating becomes institutionalized. If you try calling a spade a spade and insist on the matter, then you risk becoming someone who isn’t a team player, someone who rocks the boat.

Furthermore, when you start calling a spade a spade, and start draining the swamp, all the rocks appear. You start to see all the impediments to making things better. And one common reaction at that point is for the management to say: “Oh my gosh, how horrible! Look at all those rocks! Draining the swamp is causing the rocks to appear! Let’s go back to the way we were communicating before, so that we don’t have to look at all those rocks any more. Let’s get back to normalcy.”

Now of course, draining the swamp didn’t create the rocks. The rocks were there all along. It’s just that no one wanted to know about them. No one was paying attention to them. No one wanted to do anything about them. No one wanted to deal with the impediments. So the problems would accumulate in the background, until suddenly they become too big to be ignored and they would explode, and everyone would get very upset, and a lot of finger-pointing would occur as to how this could have happened.

This is why many of the remedies now being proposed for the financial sector are unlikely to have much impact, unless they are accompanied by a change in managerial behavior, unless there is more honesty and integrity in confronting issues and dealing with them.

For those who are willing to see the workplace for what it is, and are willing to do something about it, and to start draining the swamp and removing the bullshit, they have the challenge and the potential of kindling the spirit of high-performance teams.

That’s why one of the big new rules of management concerns radical transparency:

Total openness: everyone levels with everyone.

WHAT ARE THE ANTIDOTES TO BULLSH*T?

It is not surprising in retrospect that it is in software development that the antidotes to bullshit have been invented.

That’s because in software development, bullshit doesn’t work. You can say it’s a great piece of code, and praise to the heavens, and talk about its features, but if the code doesn’t compile, and you’re looking at a blank blue screen, you know it’s not great code. The reality of things is unforgiving: when you try bullshit on reality, it kicks back.

In finance, it’s the opposite, you can say it’s a great loan and you may be able to get away with the bullshit for quite a while before people eventually find out that it’s not true. And the problem can be growing in a very significant way without anyone realizing the extent of the problem.

SOLVING THE PROBLEM OF INSTITUTIONALIZED BULLSH*T

What has been learned in the field of software development is that the antidotes to bullshit consist of action both within the team itself and with the management.

For the team itself, instead of relying on reports (which may include a large dose of bullshit), there is reliance on inspecting completed work. Also, to reduce risk, you work in fairly short iterations, and focus on completing work within the iteration, so that there are frequent opportunities to see what progress is actually being made. You also take steps during the iteration (daily standup meetings, highly visible charts showing actual progress of the work) to ensure that everything is open and visible.

For the management, you establish a rule that the management has to specify what it wants done for any particular iteration. It can’t take several sides of the same issue, hedging its bets, so that it can back the winning horse after the race is run. Management has to decide what it wants, and then let the team itself estimate how long that will take, decide how much it can complete during an iteration and then let the team get on with completing that work during the iteration. If management won’t agree to these rules, or won’t live by them after agreeing to them, then you might not have a solution, but at least you know the source of the problem: it’s not the team. It’s the management that is the problem.

RADICAL TRANSPARENCY WITHIN THE TEAM

Radical transparency within the team is what enables you to start draining the swamp.

The work is done in iterative work cycles: The team typically works in an iterative fashion, so that progress, or lack therefore, is visible, early and often. The length of the iteration depends on the amount of change occurring, usually weekly, fortnightly or monthly. You slice the work up into iterations so that progress or lack thereof becomes obvious to everyone.

The team estimates how long work will take: The team itself estimates how long the work will take. The presumption is that the people who know most about how long things will take are the people actually doing the work. When the team itself makes the estimate, they implicitly take responsibility it.

The team itself decides how much work to undertake: From the prioritized list of tasks provided by the product-owner, the team decides how much work it can accomplish within the work cycle. The team commits to deliver a finished piece of work that is of value to a client or stakeholder within that work cycle.

The team knows its focus factor: With the help of the coach, the team establishes what proportion of its time is spent actually doing work that adds value to clients.

The team knows its velocity: With the help of the coach, the team establishes its velocity for each work cycle, i.e. how much work it can accomplish during a given time period. This enables the team itself to understand whether and to what extent it is improving.

The team has daily standup meetings: With the help of the coach, the team has a daily standup meetings—usually brief—in which team members share with each other the answer to questions: What did you do yesterday? What are you going to do today? What impediments are you facing?

The team uses highly visible burndown charts that show progress: The team doesn’t reply on computerized schedules that no one reads. Instead, the team puts charts on the wall that vividly show where things stand in relation to where they ought to stand.

The team conducts retrospective reviews: At the end of each work cycle, the team conducts a review of what has been accomplished, as well as what could have gone better, and plans the next iteration of work.

TRANSPARENCY OF THE TEAM VIS-À-VIS THE MANAGEMENT

Radical transparency of the team vis-à-vis management provides management with timely and reliable information about how the team is doing, as well as information about what impediments may be getting in the way.

The team finishes work at the end of each iteration: At the end of each iteration of work, the team produces not progress reports, but items of finished work—something that is of value to clients or stakeholders. The focus is on completing work at the earliest opportunity, because finished work is more transparent than reports about work.

In the traditional organization, having more work in process was seen as progress. In the high-performance team, as in lean manufacturing, work in process is viewed as a problem. Work in process entails hidden costs that will have to be spent in order to complete the task. The longer the time it takes to do that, the more costly and problematic work in process becomes.

In each iteration of work, the management can see what the team promises, and what the team delivers. By doing work in short iterative cycles, the team cannot go far off track without that becoming visible to everyone. By focusing the team on delivering something of value to clients and stakeholders at the end of each work cycle, the management and stakeholders can see what is happening.

As a result, management can adjust in time if the team is going off track, and can also shift priorities in an orderly fashion, as new issues emerge, without disrupting the work of the team.

Because the people doing the work are getting continuous feedback as to what is—or is not—delighting the client, they are able to align their activities with the true goal of the firm—to continuously delight clients.

The team systematically identifies impediments: Impediments to improved effectiveness are also ruthlessly exposed by the team to the management. In the traditional organization, people who brought bad news to the attention of the management tended to be punished unless they also brought solutions. By contrast, in the new way of managing work, people who bring bad news to the management’s attention are celebrated, even if they have no immediate and obvious solutions for the problem. A well-known example is the way that workers on the production line in Toyota are congratulated if they spot a quality problem on the line: the line pauses and if necessary stops until the problem is understood and fixed—something that is almost inconceivable in the traditional firm.

The team identifies “impediments” not “problems”: The shift in language from “what are the problems?” to “what are impediments?” is significant. “Problems” may arise from unhappiness for any number of reasons. “Impediments” relate to goals. “What is preventing us from reaching our goals?” As a result, goals have to be specified, before that discussion can effectively begin. A discussion of “problems” can degenerate into the all the causes why I might unhappy. An airing of impediments focuses the discussion is what is getting in the way of our reaching our common goal—a much more productive discussion.

TRANSPARENCY OF MANAGEMENT VIS-À-VIS THE TEAM

The management sets clear priorities for each iteration of work: For its part, management is also transparent vis-à-vis the team by providing a unified and fully reconciled list of requirements at the start of every work iteration, and then refraining from making any changes in priorities until the next cycle. This makes it totally transparent to the team what is expected of it, while leaving the team free to decide how much of it can be accomplished and how it should be accomplished.

The management doesn’t interrupt a team during an iteration: The management lets the team get on with the work. This in fact is one of the biggest hurdles to high-performance teams. The management cannot resist interrupting the team during an iteration, taking team members away for some new priority, or changing the priorities already agreed on. It’s a big, big problem.

The management acts to remove impediments: The management doesn’t just look at the impediments or deny that they exist; it acknowledges their existence and systematically sets about removing them.

When management does set priorities and stick to them for the duration of an iteration, and does start removing impediments, it makes a massive difference to productivity: typically two- to four times improvement.

That’s because work is focused on items of highest priority, and no time is wasted on items of low priority that they happen to have been included in the original specifications, and impediments to improvement are being removed.

WHY RADICAL TRANSPARENCY IS ESSENTIAL

Radical transparency is needed for four reasons.

First, it enables the self-organizing team to understand its own productivity and so progress of its own accord towards high-performance without the necessity of managerial carrots and sticks.

Second, it enables the management to contain the inherent risks of self-organizing teams. With radical transparency, everyone knows whether things are working, improving or breaking down.

Third, by requiring the identification and removal of impediments at all levels, key obstacles to high-performance can be systematically removed.

Fourth, once you have radical transparency, then the team itself knows what is going on. The team itself can see how it’s doing.

The clarity creates an environment where relentless self-improvement becomes possible.

RELENTLESS SELF-IMPROVEMENT

Then the work is animated by pleasure in doing the work itself and delighting clients as a result. It is these intrinsic goods that come from the work itself—and the client delight—that make people want to do it well.

There is pride of accomplishment in the performance of whole tasks that can be held in the mind all at once and contemplated as a whole once finished.

Here doing work and loving what you are doing take their bearings from something basically human: this is about rational activity in association with others and activity that is focused on delighting others.

In work that entails skilled and active engagement, our attention is more focused on doing a good job for its own sake, than the external results, such money or recognition.

LIVING THE GOOD LIFE

What we’re talking about here is the possibility of easing the tension between earning a living and doing what you love doing. It’s easing that tension in the direction of a more coherent life. It’s doing work in a way that is more productive for the employer and the worker and more satisfying to the client.

It creating work for people who are interested in delighting clients by the particular form of work offered there and then giving those doing the work a clear line of sight to the clients and so that the people doing the work can see whether the goal of delighting clients is achieved and can go on finding ways to get better at it.

There is something fundamentally human about doing work and loving what you are doing: this is about rational activity in association with others and focused on delighting others.

To place oneself at the service of others is to enter into a community and to open oneself to be schooled by one’s elders, one’s equals, one’s juniors, one’s clients, by Reality itself. It’s about doing something worthwhile and learning how to do it better.

This is about working with others, for something you believe in, and steadily getting better at doing it. I believe that this is not just some kind of management device. This is what it means to live a good life.