Have a cake, eat a cake (how to)

The UK government and BoE is in trouble. The growth is lumpy, and the government is hoping that the -0.5% Q4 result was due to the snow (I liked the snow! Few more years like this, and Brits may finally start to recognize that there’s something to having some insulation in the house… )

At the same time, the inflation is high. Not sky-high, but uncomfortably high. It’s been over the official target for 23 months now, and Mr. King probably now has a template for the letter he has to send every quarter or so.

Yet, rates are still in the ZIRP territory, to offset the financial tightening (a.k.a cuts) and make sure the millions of Brits who believed that property prices can go only up don’t go down (the drain).

The problem is, that with the high inflation (and especially the price increases in energy, food and similar, which makes for a significant part of spending – more so for the poorer) and stagnant wages, the spending power is being eroded faster than the ZIRP policy can help. After all, the interest cost of a mortgage is a fixed cost in your budget – but the inflation is a compounding cost (I’ve done some numbers on it, and it can look pretty bad. Maybe material for some future post).

Rising the rates shoots mortgage owners (and then banks, and then small businesses, etc. etc.). Not rising it shoots BoE credibility, and more importantly, all households that don’t manage to get a rise. More slowly, but result is the same.

Damned if you do, damned if you don’t. Quandary if I ever saw one.

Yet there’s something that can help all the parties. It’s actually pretty simple. It’s Keynesian (for purists – not really Keynesian, but Keynesian in how the word is mostly interpereted now) and austere at the same time (depending on your definition of time). It lets you to have your cake, and eat your cake.

Hard to believe? Here it is.

First, the good old Keynesian part. Govt should invest heavily. Especially into the infrastructure, which I doubt has seen much investment since the Germans made Brits to do it wholesale. That could keep the construction industry going for a bit, and may even help the other businesses in the UK (note: don’t shovel money into PFIs though, nor indiscriminately spend them on civil services. That would be just a re-run of a bad late-90s movie).

Where’s the austerity I hear you crying? Surely, that is pure unadulterated Keynesianism leading to increased deficit, higher interest rates cost and all that!

So here’s the second part of my proposal.

At the same time, the government legislates that the UK debt issuance will massively switch to inflation-linkers, starting say in five years time. Let’s say (finger in the air numbers warning), that they will increase it by 10% every five years from now until it hits 50% of all the debt (replacing retiring fixed-rate debt with linkers). SALE! Preferential terms to the holders of freshly minted, relatively low-interest fixed coupon instruments issued to finance the infrastructure, and that will automatically switch to linkers 5 years from now!

Talk about tying your own hands! This would surely persuade even the most ardent bond vigilante that the government will care about inflation in not so far future. And if not, well, you have a linker, so it’s not your problem anymore, is it? Pension companies would love this, as they consistently struggle with sourcing enough inflation to pay their liabilities. So it even helps pensioners.

So, eat your cake today, and you still may have one in the future to give to somene else – if you promise to build a bakery.

Posted in economy, macro-economy | Leave a comment

Resurfacing exchanges

One of the solutions proposed to the “derivatives problem” since the crisis was to move them to exchanges. It is still something that surfaces now and then, but less and less often.

I will admit that I disliked this solution from the start, for a number of reasons. The ones that still remain are:

  • some products can change value in jumps – such as the infamous CDS contracts. Margining them becomes very hard;
  • it moves the systemic risk to exchanges; which then become the next Too Big To Fail (TBTF) category – surely, we don’t want more of those?
  • it makes it much more expensive to the commercial users (by that I mean people hedging real exposures). While it removes one risk  (counterparty exposure) – bar the above –  it creates other risk, namely liquidity. Liquidity is something that can kill any company, in any industry, startup as well as hundreds of years old company, well run and badly run (although more likely that one). I don’t believe trading say FX risk for liquidity risk makes much sense.

Now, the noises about moving to exchanges seem to be dying, let unreason rule, and let’s suggest something off the wall:
Move everything to a single exchange!

Doesn’t sound off the wall?

Then how about making the central bank the exchange. Simply mandate that the only counterparty for an OTC contract can be the central bank, and make all other derivatives (which are not traded on other recognized exchanges) illegal.

The requirement would be that the CB has to accept the contract when offset by equal-and-opposite with other party, but also that the CB can set the collateral requirements.
That would immediately produce a couple of results. For a starter, it would remove the single-point of failure problem, and make a failure resolution somewhat easier, without the TBTF problem.

It would provide a central repository of all contracts, letting the CB see what’s happening – should it wish to use the knowledge. It would let them see even the funny and complicated contracts – and guess what, if they don’t understand it, they could (if they dare), require a very high collateral from the cpty (I can see BoE doing it, I doubt Fed would as it is at the moment). I can hear the screaming even now.
In effect, the collateral requirements would mean that

  1. the CB would be the calculation agent (no more different values of the same contract for different parties…)
  2. they could regulate the markets dynamically,  as they wish using more or less collateral – and to a large extent know what’s going to happen.

Now, if the transaction is between two financial (i.e. not commercial ) entities, I would expect that the side with negative value of the contract would be posting collateral to the CB, but the one with positive value would not – simply because the CB can make good on the contract, always – although it may be not in the currency of the contract but in CB’s currency (in an ideal world, all CBs would act as exchanges for the derivatives in their own currency. Still leaves out cross-currency ones, but let’s not go too much into details now).

The problem occurs when the party with negative value is a commercial party (i.e. a real hedger – and I’d be happy to leave the decision on that to the CB). As I said earlier, we don’t want them to post collateral (or at least not for the full value).

Well, that may mean the intermediation in this case would add a clause between the CB and a financial institution. When the contract between FI and the CB would be terminated on a commercial party default, the FI would receive any collateral the CB collected (if it decided to collect any) and rights to the remaining debt in bankruptcy proceedings. This could be done on a netting basis rather than per-deal, which would simplify things further (possibly not ideal from bankruptcy proceedings, but that’s how it often works now anyway). Any suggestions to improve on this would be of course welcome.

One thing I’d also like to see if this ever went live would be that after a contract is executed, each and every one is published (with the identyfying information removed). That’s trivial for vanillas, and would encourage slightly more sane structured contracts than we can see now.

Now, one large objection to this could be that they could regulate as much  – or as little as they wish. Yep, that’s a feature, not a bug. It would make it their problem very explicitly, with no out. They would find it very hard to say “but we didn’t know/understand what was going on…”. If the information would be also published as I suggest (remember, normal exchanges quite routinely publish volumes, aggregate position sizes and the like), bloggers and economists would have a field day and could keep pretty close tab on the CB’s doing as well.

It could still ultimately fail ala Greenspan and equity markets, but I will point out that that bust was  – comparatively speaking – minor, and no regulation ever will stop human stupidity.

Note: This idea is still in its infancy, and I may edit the post or even discard the idea. But then, it does say “unreasonable” in the title – you have been warned.

Posted in innovation, Uncategorized | 4 Comments

Housing benefits – helping the poor or the rich?

What would people do if the politics was really boring? Maybe something useful. Like playing rugby, sailing, or farming (New Zealand has an exceedingly boring politics).

No such luck here in the UK. About a month ago, one of the hot themes was Coalition government cutting the housing allowances. That is, some people get a benefit from state to support them in the place they rent. This is going to be (if Dave Cameron has his way) cut down to max 400 per week (for five bed house). The new maximum for 2 bed – 290 per week doesn’t get you much in London.

On one hand we have here our Daily Mail readers, brandishing the examples of unemployed who live in 2,000 per week Kensington flats, courtesy of hard pressed UK taxpayers.

On the other hand, we have a variety of people, including the inestimable Boris Johnson, who suspect that what Dave would really like to do is to give Daily Mail readers Kalashnikovs, send them for quick field trip to Kosovo to learn about ethnic cleansing and then let them check Kensington flats for any unemployed on housing benefits.

As per usual, both sides are a bit right, and use it to push their entirely wrong agendas.

For a start, we can say that there are few groups of people here. First, we have genuine social cases, such as a pensioner with no family living in an area that got (recently, from his/her perspective) gentrified. Or people who have a temporary problem and HA just lets them bridge it. I think most people would have no problems to pay them a bit more in cases like these. The term is limited, and we think they “deserve” the help.

On the other extreme are another group who are “structurally” unemployed. Not employed, and have not much interest in being employed. As for myself, I struggle to find a good reason why, if we are going to support them, we should support them in London as opposed to say Orkneys.

In between is probably a very large group that can’t make ends meet with their (low) income and (very high) housing/living costs in London. As usual, I have an Unreasonable Response to their situation.

That is, the housing benefit is actually hurting them. Why? Well, think about it. You can’t make the ends meet, because you are paid the minimal wage, so you get extra money from the government. Now think, what would happen if they left London?

There are two possible scenarios.

One, their job is actually needed! The fat-cat Londeners would find out that their minimum-wage (or even less) cleaner/nanny/whatever is suddenly not there! Well, maybe if they want to continue using them, they have to pay them well enough to be able to live in London? You don’t pay, you don’t get. At the moment, you can think of the housing benefit to working families as a subsidy so that rich Londoners can have cheap cleaning.

Or, their job is not needed – in London. Chances are, that the job is needed somewhere else – and almost by definition, if you are on a minimum wage, your money will got further anywhere outside London (there not being many more expensive places in the UK). So you will be – at least financially – better off.

But that is not the only benefit. The flat you had can now be rented by someone who is not subsidized, which by definition means they have higher salary. Before they could not work in London (by definition – you paid market rents, which means someone else was after your flat). Chances are that they had lower salary before they moved to London – moving to London just to be able to spend more is a bit perverse, unless you are a Russian oligarch.

So, you’re at least no worse off (financially), possibly better off. Someone else is better off, and, importantly, they pay HIGHER taxes (higher salary = higher taxes).

In one go,:
– you have more money to spend (or better place/less commute/etc for the same money)
– government saved money by spending less on the housing benefit
– got more money in taxes (which can be used to say improve your lot again).

Q.E.D. In either case, people on housing benefits are better off (or at least no worse off) than before, even without housing benefit.

Instead, we make it so that their wages don’t go up to a decent living standard, and tie them down to the life of living from hand to mouth.

Of course, the above does not take into account things like “I used to live here, it’s what I know, I want to live here”. True. But people who don’t get housing benefit have the same problem – and does anyone look after them?
Is it fair that a family with a marginally higher income, that doesn’t qualify them for HA, has to move from an area where they lived for years in search of jobs, but their single neighbor, who’s poorer, doesn’t have to?

Posted in micro-economy | Leave a comment

Why education should be elite

We get told how everyone should strive for education, we should educate ourselves, and how going to university is going to change our lives.

Well, yes.. Sort of. Often in unexpected ways (see Karen Owen for most recent example).

There are two points to educations, and they are diametrically different – and should be dealt with differently. Unfortunately, I haven’t met anyone who was able to recognize it yet, so here’s An Unreasonable Response to Education Proposal.

In the first place, education is about knowing more “stuff” that is genuinely useful in one’s life. Reading, writing, ability to do base maths (yes, that includes percents!). Everyone (ok, maybe only 99%) can handle these, and should be taught them. On top of that, there is a bunch of socially or generally useful things – prose, poetry and history to understand our society better, and basic physics, chemistry and biology to understand our world.

And that’s it. Afterwards, build a lot of large libraries with great doors and let them be open 24/7 (although the cynical me says that you could probably do a single normal sized door with opening once a week, unless they stock stuff like DaVinci Code). Let’s call this part schooling, so we can separate the two principles.

Then, there’s the second one – where we get “higher education”. That is notionally required to prepare us for that hard job, give us skills that we will use in making our million or two (just wait for that inflation, it will be there in your lifetime) etc. etc.

We go to university and do our degrees to get it. Then we can happily describe ourselves as MA, MSc, MBA or whatever.

Unreasonable Response to this is that very few of the skills we learn there are actually applicable in real life. Even with professions like doctors, where you would think they do learn real skills, they get taught a lot they never have to use again, and probably the only patients MDs fresh out of medical schools get to see unsupervised, are dead who can’t complain and file medical malpractice suits (or possibly family, especially if we really need that inheritance to pay for the education bill).

Does it mean the time (and money) is wasted? No, there are real benefits – and not only the fringe benefits of university life. Namely, one incurred a non-trivial costs, both in time and money to achieve something. Yes yes, you already said that, but to what use? Simple – to put on your CV.

When you put this on your CV – especially if it’s the only thing you can put there – it shows to your potential employer that you can commit for an extended period of time, that you can learn, and do it all rather rigorously (even if the result is usually irrelevant and not of much use. On the second thought, it could be a plus with majority of the current employers).

In other words, in game theory terms you are CREDIBLY SIGNALING these skills to your potential employers. I say CREDIBLY, because it’s one thing to write on CV “I’m diligent, determined quick learner”, and other to actually show so – and at a cost to oneself.

Of course, in the employment market this signal means money. You’re showing that you really are better than other candidates who can only write that they are good – and so employer should pay you more (you’re less likely to be fired for not having these skills, thus less likely incur sunk costs, and they can share part of that with you).

That in turn means that people who are not committed, rigorous etc. etc. should be willing to pay up to the difference between your salary and a salary they would get with a signal-less CV. And Lo!, student loans were created, so everyone could get the signal on their CV. And on the second day, schools raised their fees, reasoning that when students have more money via loans, they can pay more. Oh, and also we don’t want to fail them now, since it would harm our stream of income. And on the third day, someone thought why schools – all that matters is the bit of paper and I can sell that on eBay? And it went downhill from there.

Or, in other words, the signal can get polluted. But when the signal gets strongly polluted, the employers will, quite reasonably, start ignoring it and we end up with a population of no more employable people with degrees. Worse yet, the dilution will mean that even people who do have the skills that the degree should signal will lose, and thus they will lose any reason to get a title in the first place.

What this means is that the push for more people getting university education as a gateway to better jobs is self-defeating. The evidence is out there for all who want to see it – the more people have certain degree, the less attention it gets from employers (unless it’s a negative signal, that if you can’t bother to do even easy and cheap title, you’re probably no good in the first place). At best, certain institutions may still be counted as having some signaling power, but even that goes down – because they want their income stream, so they don’t fail students as they should.

So what can we do? Well, I’m not in business of suggesting reasonable responses, so here is an Unreasonable one:

REQUIRE universities to have ability-based entry tests – and restrict them to be able to take on only people who pass the tests.Restrict them in how many students they can take on even with these tests (for example, they can take at most only top 10%, but also with some minimal absolute score). The tests of course should be something that assumes only knowledge normally achievable in schooling part available to all – but should build on skills like problem solving, analytical thinking, ability to formulate ideas etc. Ideally, they should be run by an external organization incentivised on a) how hard the tests are b) that you don’t need special schooling to pass them.

ALLOW anyone to take this test. ANONYMISE the results for selection purposes. SUBSIDIZE anyone who gets accepted but cannot afford it.

Make all examinations and marking EXTERNAL to the university – turn every exam into Cambridge/Oxford boat race.

If there are genuine skills that most of the population could profit from having, move them to the SCHOOLING part.

In other words, make the education elite again. But strongly meritocratically elite.

I’m pretty sure that alumni of this system will be much more employable than of the current one – and that goes even for the infamous liberal art types.

Posted in micro-economy | Leave a comment


I’m pissed off. Fed is taking MY role. I do Unreasonable Responses here, not Ben! Maybe I’d charge them for the IP.
Although, on second thought, Fed is doing what it has been doing for quite a while now, so maybe it’s not so unreasonable from its perspective. Maybe I can find a more unreasonable response – let’s try.

First, why is Fed’s QE unreasonable? It relies on too many transmission mechanisms, all of them working exactly as Fed wants.

Think of the current situation as a drought, where Fed can create water out of thin air – and downstream there are plenty of farms that sprung in desert few years back, when trucking water to them was cheap. Fed operates the biggest dam in the country, feeding pretty much every river.

Now, Fed believes that if it dumps more water into the dam, it will trickle down via the rivers and canals to all the farmers who need it downriver, who will use it to irrigate, which will mean some evaporation, and then eventually we will get rain again which will solve everyone’s problems.

The only problem is, the people who own the canals and smaller dams downriver don’t really believe that the drought is over and rain is over the horizon – and it has been scorching for the last few years, with only a few small clouds on the horizon now and then.

Instead of sending any water Fed puts into the dam downriver, they want to keep it, and build bigger reservoars themselves. Even the farmers water only the minimum they need, and build reservoars and stock the water instead. Letting water evaporate is wasting valuable resources.

Give it a few years, and we end up in Dune-like situation – no evaporation, no rain, more drought, people take even more careful approach to water, even less evaporation etc. etc. Manufacturing still-suits is going to be a big business!

Fed may try to solve this by putting more and more water into the dam. The problem is, that the canals and rivers may not be able to transmit all that is being put into them (regardless of how big they are to start with). At the same time, no-one is entirely sure what the system can cope with – too much water, and at one stage it may break, flooding everything downriver, carrying away the soil it’s meant to irrigate.

Now, what is an Unreasonable Response to this? Rename Ben B. to Ben “Rainmaker” B.If Fed can create water, bypass the transmission mechanisms and just go out and make rain directly. There’s nothing that will make people believe in rain as much as raining. He could even book some helicopters to drop it – how cool would be that? Of course, the next generation may think that it’s not clouds that make rain, but helicopters, but it may be worth trying. Steve Waldman of Interfluidity has a good post on this (and, thanks to Steve for comments on a draft of this post!)

A slightly less Unreasonable Response (am I allowed to do it?) takes me away from my metaphor. One of the goals of QE is to support (nominal) asset values. The asset values tend to be supported by flows the assets can generate, either directly, or as a future appreciation of the asset.

Like it or not, currently most assets are bought with debt. Thus, the debt used to buy the asset has to be sustainable (or at least believed to be sustainable). In the current situation, where the asset appreciation is more or less ruled out (I’m on purpose ignoring nominal rises induced by significant inflation here), it means that the debt burden has to be less than the income generated by the asset. A simple example is that your mortgage payments have to be comparable to the rent you’d pay for a similar house + any value you put on the emotional attachment and security of having your own place (or rather an illusion of. Until you discharge the mortgage, you’re effectively renting from the bank, albeit the tenant obligations are only financial, so it can be seen as less restrictive).

Low interest rates help, as they make the debt more affordable. Of course, the problem is that what is affordable on low interest rates become unaffordable when the rates go up. In addition to that, if QE leads to the dollar depreciation, most of the commodities go up, which immediately means that cost-of-living goes up and affordability of the debt goes down.

The ONLY way how to ensure affordability of the debt is to raise income (at least notional, preferably real). As I wrote earlier, QE attempts this, but with way too many transmission channels.
Rain rises the income, although if the only rain can be produced by Fed, then Fed will have to take on a permament role of a rain god.
Best way to guarantee the rain is to make the intermediaries to uncover their reservoars and let them evaporate. In a non-metaphor world, it means making the companies stop accumulating cash reserves and raise the wages they pay.

This in itself is not without its problems. First, even assuming the companies understand that it’s better when wages rise, they would like everyone else to do it, rather than themselves. And we have a free-rider problem. Second, uncovering only one reservoir will not get enough moisture into the air to get us rain. And lo, we have a coordination problem.
Now, if you ask a game theorist why we have governments, they say that it is to solve exactly these problems (and also break prisoner dilemmas). You need an external agency to solve them, the participants themselves cannot solve it.

Given that US companies are flush with cash, the right response of the administration would be to induce them to rise the amount of money they pay out in wages (which means either rising the wages to existing employees, or hiring new ones).
How? For example by legislating that amount of total compensation (including fringe benefits) paid to corporate officers cannot be more than x% of the total wages paid in the corporate. The x could be even set by the board. Or cap corporate officers pay rises to the lowest pay rise (percentually) in the workforce. Whatever. I’m sure people can come up with some interesting suggestions.

Posted in macro-economy | Leave a comment

Politics & innovation

One of the major places where internal innovators fail is company politics. I lost count of how many things never got to see light of the world because they didn’t fit with someone’s career goals. On the other hand, I sometimes wonder whether it’s really that big a problem, as frustration with inability to get one’s idea forward is what often drives entrepreneurs to go out and “do it properly”. But out there it’s a different world, and it may be harder to execute on even a good idea – so net net it’s probably still a loss.

Innovation is a subject that will be threatening to someone in the organization. After all, it shows how things can be done better, faster, make more profit or even make people happier. Someone’s bound to ask unpleasant questions why hasn’t it been done before?
Whatever people tell you, most of us dislikes change, and innovation is about change. We’d like tomorrow to be more or less to be same as today. Maybe yesterday at the outside (especially if today’s a Monday). Off topic – it’s funny how we dislike change yet when we finally get to it, it easier to commit to a large ones than small.

You as a innovator of course don’t want to be bothered with all this – the advantages of what you suggest are clear. They MUST be clear to everyone, and anyone who doesn’t see it is an idiot! Look, here are the numbers, it’s CLEAR!

And that’s where it gets killed. Been there, done it, got depressed.

Innovators quite often get stuck with their idea and see the world only through it. That’s fine when you’re a one (wo)man company, but even if you are a small company the next step for the innovation to get out is to persuade others that it’s worth doing/buying your product/services – seeing the world a bit more like you do.

Most innovators try to persuade their audience on merits, in a very rational way. This may or may not work – depends on the company and people you work with. You may be surprised how often it doesn’t work, even though you should know better – after all, we select our politicians on rational basis, right? We like to think of ourselves as rational, and that we make our decisions in rational ways. Well, as much as I’d like it to be true, I know I don’t decide like that (and realizing it about myself was not cheaply bought), and I doubt you do either, unless you happen to be Mr. Spock

Most efficient ways of persuading people are not rational. It’s a sad truth, but if you disbelieve you’re only proving my point.

This is where politics comes into innovation. Most of us try to avoid it – for lots of reasons, some good, some dubious. Yet, it is the most efficient way of us getting what we want to achieve – for others as well for ourselves. Being a manipulative bastard really helps in getting your innovation across (been there… whatever).

Now, I don’t want to turn this post into a treatise on politics (there’s a plenty of good books on it, if you want more), but here’s one tip. Decide early whether you want the glory of an innovator or to get the result. Giving up ego (or seeming to do so) makes getting your idea across much much easier – for example, by persuading someone (or even better more than one someone) important that it was really their idea and letting them to do the political legwork. The more glory you want to keep for yourself (or want to seem to be), the harder your task is going to be. You should leave a seemingly honorable escape route even for your enemies, lest they have no option but to fight to death.

Of course, if you really want the glory, money and the girl (or boy, YMMV), go out and become an entrepreneur. If you think it means no politics…

Posted in innovation | Leave a comment


Now that I rubbished the revolutionary approach, is there anything I can offer?
I hope there is. Take small steps and see whether they work. Innovation in small steps? How can that work? Isn’t it entirely against what innovation is about?

I guess that depends on whether you consider mankind (or some form of life, at least) a pinnacle of nature’s innovation or not. Because we got here by evolving, not by being planned.

I will claim that most, if not all, of the successful innovative ideas are results of evolution rather than revolution. What often happens is that when we see the idea, we’re presented with it as THE revolutionary one, but in reality there’s a long story behind it of trial and error, with end result quite different from what the author had in mind originally. Oh, and by the way – you can still change the world. Except likely in a different way you thought you would.

Revolution is large, and people who start it tend to have a specific goal in their mind. They plan, and tend to stick to it. Randomness, chance, errors, problems – all of those are anathema, something to be avoided.
Evolution, on the other hand, thrives with randomness. It IS randomness, it drives it, uses it and laughs making nasty gestures to bystanders. It gets you to places you never dreamed of going (well, revolution can get you there too – except it can be the last place you get to see, very briefly).

That sounds dangerous, especially within corporate context obsessed with control. But let me ask you – what can you control better – a small outcome that happens tomorrow, or a large outcome due in a year’s time? Revolution is an attempt to jump over the gap – without thinking whether you can get back, what is on the other side, and the danger of not making it over. Evolution is a string of small steps, taken one at a time.

Small steps are small and you have to take a lot of them – but they have a number of advantages of large jumps. You can see where you are going. If you don’t like where you got, you can (almost) always take a step backwards. You can change direction easily – something impossible to do in a jump. Fixing mistakes is cheap. When you jump, you try not to admit mistake even when you land in a cesspit – it somehow lacks the style one would expect from a revolutionary.

Going back to military (I know, I know, I’m at it again – I think one of my future posts will be why I think looking at military history is a useful analog), it uses the evolutionary, iterative approach quite a bit.
Take for example an OODA loop. That’s Observe, Orient, Decide and Act – and repeat. The acronym was invented for fighter-pilot tactics in later 20th century, but it is something which one could trace as far back in history as 16th century Italian fencing masters, if not further. It’s really simple, and nothing but common sense. You look at something, at the context, figure what next small things to do and act on it. That creates new situation – hopefully what you wanted, but maybe not – in either case you repeat the loop until you get what you want. Or, in this case, until you’re dead. Admittedly, that sharpens one’s mind a bit.

But surely, if it was really that great, everyone would be doing it? I’d say that when people whose life depends on getting result use it, it should be good enough. But business is not military (despite managers reading Sun Tzu), and while everyone in business says that they care about results, I have my doubts. People care about results, but predominantly about results that affect them, not necessarily the business as an abstract entity. Yes, I’m a cynical bastard – get used to it.

Taking evolutionary approach in environment where you have a boss is not easy. Evolution has one very large drawback over revolution. It slow, and very easily overlooked. It tends to involve a number of people, not just one heroic figure. The result is more likely to be success, but you don’t necessarily know what the result is going to be in the first place, and when it will show up – so how do you sell it? It takes a long time to succeed – and can (and very likely will be) be preceded by a number of small mistakes. It’s a political suicide in environment where everyone wants very visible results NOW.

So, revolution doesn’t work, and evolution can’t be implemented. Or can it?

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Innovation and revolutions

Innovation, especially innovation in larger companies, has been on my mind for quite a while.
It’s like true love, everyone talks about it, but only few have really seen it. It maybe so in more than one aspect, as those who did experience it, say it’s lifechanging.
Some companies are better at this than others, but as far as I know no-one has ever come up with a formula that works for everyone. I doubt there’s a decisive winning formula, but what I have seen quite often are factors that almost always make innovation (and not only that) fail.

One of the largest factors that often lead to failure is treating innovation projects as a revolution. We like revolutions (well, the young people do, and we all are still young, right?), it has a certain… dash to it.
We want our innovation to be revolutionary, to change the world or at least the company. Hey, it’s going to be different, it’s going to be better, it’s going to take over the world! Che Guevara t-shirts are still selling well (albeit the irony seems to be lost on those who buy it), and don’t even start about Steve Jobs…

Revolutions are always large, and full of vision. In companies it means big budget, sponsored by big names, with large teams. It looks great on your CV, you achieved something! Even better, it can be good for one’s ego – you DID SOMETHING THAT MATTERED!

But there’s a fatal problem with revolutions. They are impossible to control. It’s one of the defining points of revolutions – you unleash something that is pretty uncontrollable – whatever you think about it. In company terms, it doesn’t sound that impressive anymore, does it? You could, quite correctly, say that that’s why people plan, and the larger project, the bigger and more detailed plan there is. True, true. I just hope that your toolbox for the planning includes well working crystal ball. Mine tends to get a bit hazy more than 30 seconds into the future.

The organization that has the most experience with planning in the history of mankind is military. And one thing they learned through the millennia, is that few if any plans survive the first shot fired. Some of the turning battles of the history hinged on a chance that no-one could plan for. Pearl Harbor was as perfectly planned and executed as you could wish for, yet it ultimately failed. But Lady Luck intervened, and the big prize – carriers – were away. It cost Japanese the war.

Plans are not bad – they make you think of at least some aspects of the problem, but at the same time they can very easily lead you down a wrong path and remove the flexibility.
Of the top of my head, I can’t think of a revolution that would end up the way its instigators wanted to. If you think you know about one, I invite you to share – but expect some detailed questions about the motivations of people who started it. I’d also point out, that with revolutions (less so with revolutionaries) we have a pretty strong survivor bias, and our history books tend to talk most about the “successful” ones.

But let’s go back to the corporate world. As I wrote, the revolutions there are almost synonymous with large projects (but not each large project is a revolution). Large projects in my experience tend to be closely associated with phrases like “budget overrun”, “late delivery”, “failure”. At least, for incoming management team, as admitting mistakes, or even problems tends to be costly to one’s career. Welcome to the world of unreasonable commitment. Of course, the winners (and there are some, laws of probability will see to that), are feted, promoted and remembered. The reward is huge; the downside, limited. One can always leave the failing project before it turns into custard entirely, retaining the positive effect of large project on one’s CV and avoiding the failure. And it keeps consultants in gainful employment.

By now you’ve probably noticed that my attitude to revolutions is not very friendly. If I criticize, I’d better have some solution though, as being an armchair consultant/manager is easy, every bloke on the train can do it for a prime minister’s office, so why not something simpler?
I will leave the better way for the next post, but I want to finish this one on a more positive note. Revolutions can be good, and, indeed, in some cases are even necessary.

But not because of their stated objectives at the start. Revolutions are good when you entered a dead end, and need to destroy before you can build. It is a very efficient way of cleaning up the plate – just be aware that sometimes the plate will get broken in the process, and often you end up with a plate looking quite different than you thought you would.

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