The world’s poor
(Source:McKinsey & Financial Access Institute: Half the world’s poor are unbanked)
The report notes that tons of the world’s poor don’t have access to formal credit, and that the regulatory climate for microfinance firms is mixed. This is part of the “double goal” of providing social services to the poor.

Quality of the report: There are many poor people without access to formal financial services – are you surprised? What is perhaps surprising is that the poor are already sophisticated borrowers and lenders. As Daryl Collins et al.’s new book, Portfolios of the Poor, explains, most poor people have uneven incomes, but need to be ready for emergencies, save for big expenditures (weddings, school fees), so they turn to credit and savings out of necessity. Most lending is done with a neighbor or a savings club (a neighborhood group) although microfinance is becoming more prevalent.

Business Opportunity: Storing cash with neighbors is risky and not useful over long periods of time (5-10 years) for instruments like term life insurance. There’s an opportunity for microfinance firms to start profitable, and helpful, businesses if they can provide a reliable service, flexible repayment schedules and logistical support to get to poor neighborhoods.

At the same time, the poor are poor, and while there’s a huge volume of people demanding financial services, and the potential to charge high interest rates, the margins per customer served are small. Furthermore there’s bound to be excessive rent-seeking from people and firms who aren’t worried too much about profits.

Iraq
(Source: McKinsey Quarterly, interview with Paul Brinkley of the Department of Defense)
Paul is charged with managing and growing business in Iraq. I like Brinkley because he’s a realist, and willing to embrace things that have worked in Iraq, instead of staying beholden to an ideology. For example, state controlled enterprise has worked better in the short term than free market “shock therapy.” Paul says:

“I honestly believe Iraq is one of the last great “ground floors” we will ever have in the world. China in the late 1980s and early 1990s was a ground floor—if you got in at that time, you did very well. India followed. Iraq today is a ground floor. It doesn’t have the population of China or India, but it has a huge amount of mineral wealth, oil wealth, and agricultural wealth. Geographically, it is positioned to become one of the most prosperous countries in the world. And I don’t think that ground floor is going to stay open for too much longer. I think we have a few more months, and then the acceleration of investment in Iraq will take place. I expect that to happen during 2010.”

Quality of the report: It’s clear that Brinkley has his head screwed on straight but it’s difficult to evaluate the opportunity, because I know zero about the current state of Iraq. How has Vietnam done after the war? Afghanistan? Former British colonies have done remarkably well, but that was a completely different situation than we are in today. Many countries that are rich in resources use them to become rich and don’t invest in other parts of their economy (Venezuela, Uganda, Iran). Dubai has tried but that’s still being worked out.

Cutting energy costs.
Boston Consulting Group and MIT Sloan,
The Business of Sustainability. Industry leaders are going green, and by going green I mean reducing their energy use, not engaging in wasteful signaling. However, the managers that do look into the issue are often surprised by the large amount of possible savings.

Quality of the report: As a survey of people actually involved in the industry, I’m likely to trust the included findings.

Business opportunity: This one’s actually pretty strong. Because the IPCC’s estimates of oil reserves are too high world oil supply may start to decrease sooner than most people estimate, and world demand for energy will only increase, potentially leading to higher prices (certainly high demand for energy-reducing devices).

There’s lots of politics surrounding the issue and many managers don’t think there’s much profit there. Because of the politics, it’s difficult for managers to evaluate the actual opportunity; if managers aren’t strong believers in global warming then they won’t be stirred by the global warming argument. However the stronger argument is that firms can save a ton of money by going green.

Words like “sustainability” are not helping. “Sustainability” implies lots of beliefs about global warming and a rather strict interpretation about how much energy you should be using. They discourage managers from approaching the issue as they would any other relevant cost-saving opportunity.

• GDP and good management practices are highly correlated (R^2 of 0.81). That is, countries with high GDP are also likely to have firms with good management practices. Greece scores even worse than India and Brazil on firm management. Portugal is just slightly ahead of India and Brazil. Their low scores can be attributed in part to government intervention in the labor market.
• Improved reallocation accounts for a large percentage of the difference. That is, the market identifies more efficient firms and allows them to grow more rapidly in countries like the USA. Competition is highly important for this process, and also to weed out inefficient firms. It’s more important to look at the bottom of the distribution than the top to determine which countries have the best management; countries that allow inefficient firms to hang around score poorly.
• Higher management scores are correlated with better performance at the firm level. A one standard-deviation increase in management correlates with a 38 percent increase in sales per employee.
• Larger firms have better management. On the surface this may refute the Peter Principle, but it tends to suggest that smaller firms with better management out-grow other small firms with bad management. Over time, if a firm stays the same size perhaps management falls.
• At the firm level, better management is associated with improved health care outcomes, employee satisfaction, and energy efficiency. Note to shareholder activists: Promote better management!
• Labor market regulation hinders incentives management. At least half of incentives management is the ability to remove/improve low-performing workers, pay for performance and change the workstaff’s hours.
• In terms of classes of ownership, private equity companies have the best management, followed by dispersed shareholder ownership. Government has the worst management, followed closely by family firms with a in-family CEO, firms still owned by the founders, and firms owned by private individuals. I was surprised to see that firms owned by the founder (in 100-5000 person companies) perform so poorly. The authors suggest that necessary management skills for a start-up don’t transfer well to necessary skills for a 100-5000 person firm.
• Management practices diffuse slowly over time. Managers are not well informed about how good their own management practices are and which areas need improvement (ha! Maybe there’s a role for consultants after all.

All in all these suggest that one of the best things we can do for development is try to transfer good management practices to developing nations, either in the form of FDI or through education. There was a great speaker at the Ath last year whose firm provided business guidance to small companies in Mexico and helped them grow.

Another experiment by the same group took a random group of textile firms in India and provided them with free management consulting. Not only did performance grow in the firms provided the consulting, but they also said the reason that they didn’t implement the changes sooner was because they were not aware of good management practices.

Data collection is an underrated skill – this analysis was only possible because these guys arranged surveys of thousands of firms in 40 different countries. The impressiveness is in the dataset, not in the analysis; same goes for Ken Rogoff and Carmen Reinhart’s This Time is Different, which I’m currently reading. It’s usually lumped in with science or statistics but it’s something people should know how to do (and analyze)

Put this way, evidence-based management sounds like something every company says it does. Yet the truth is that few companies pursue this approach, and many managers use alternatives to evidence-based management, like relying on intuition about the best way to go forward, making guesses about the future, or assuming that the current setup is optimal.

The problem is larger than it should be because many business gurus, consultants and business schools peddle misinformation and outright falsehoods. There’s a consistent business in selling hot new trends to companies, even though the best strategies may be really old. No one likes being told they have to execute better; they’d rather grasp at some new thing that’s going to give them an advantage. The evidence about which strategies work often runs contrary to what the conventional wisdom says. For example, one law firm held a big meeting to reveal its new “secret” strategy, developed by a consulting firm; Sutton guessed the whole strategy without looking, which mainly involved getting rid of unprofitable partners and developing more profitable business. It was old advice that every law firm knew, and the trouble was in the execution.

Debunking myths is the subject of Bob Sutton and Jeffrey Pfeffer’s book Hard Facts. The authors use evidence, and numerous case studies, to explain that financial incentive plans often don’t work, developing a comprehensive long-term strategy isn’t that important, most mergers only work under certain specific circumstances, and company culture can be more important than hiring the best workers. In each of these cases, studies have shown that the conventional wisdom is often wrong, and companies, schools or hospitals that implement evidence-based programs do better than those who don’t. Yet given the choice between the CW and the data, most managers and firms choose conventional wisdom. This leads to worse outcomes and helps explain why profit levels and efficiency levels can be so different in firms competing in the same industries.

I used to believe that, all else being equal, firms and industries were pretty efficient and there wasn’t much to be gained from entering a crowded industry, or in stooping to pick up a $20 bill. I don’t believe that anymore. The absence of evidence based management at most firms is strong evidence that there are tons of bills on the ground, and that people aren’t looking for them.    

Asked how he thinks Geren has handled him, Fuentes said, “Pretty poorly.” How much communication does he have with the manager? “Zero.”

Fuentes believes he’s not the only player who has issues with Geren.

“I get up in the seventh inning,” Fuentes said. “I have no idea. I didn’t stretch. If there was some sort of communication beforehand, I’d be ready, which I was. I was heated up. I was ready.

“But there’s just a lack of communication. I don’t think anybody knows what direction (Geren) is headed.”

And former A’s closer Huston Street:

“For me personally, he was my least favorite person I have ever encountered in sports from age 6 to 27. I am very thankful to be in a place where I can trust my manager.”

So we have someone that’s probably disliked by most of the players in the club, and is underperforming. How did he last five years as manager of the A’s? Because he had a close relationship with his boss, Billy Beane, the general manager of the A’s. The two played against each other in high school, and became close friends shortly after. Geren was the best man at Beane’s wedding. After an unsuccessful stint at a single A franchise in Boston, Beane made Geren the manager of the triple-A Sacramento Rivercats, and then later the manager of the A’s.

All this goes to show that close personal relationships with people who have power can excuse lots of subpar performance. Geren stayed as manager despite a lack of success on the field or any relationships with players on the team. The converse is also true; performing well will not save you if you are not on good terms with your managers.

The A’s fired Bob Geren today after losing nine straight games. This is a good move for the club, and for me as a fan, and bad news for Geren and Beane’s friendship. What can we take away from Geren’s time at the helm? The extraordinary power of being on good terms with your boss.

Jeffrey Pfeffer’s excellent new book Power: Why Some People Have It and Others Don’t, discusses why individuals gain power and why others don’t. One of the points that surprised me most was that your job performance has zero effect on whether or not you ultimately get promoted or fired. In fact, performing too well can lead your bosses to try and hide you or fire you for outshining them. Instead, Pfeffer says, the most important factor in your career is having a good relationship with your boss. If you’re interested, check out Pfeffer’s book, as well as Robert Greene’s The 48 Laws of Power.

I’ve been a big fan of Robert Sutton and Jeffrey Pfeffer’s books for a while now. Their books are the best books about business, management, and leadership I’ve ever read, because they focus exclusively on the evidence, instead of telling stories or anecdotes. If you’re new, check out Hard Facts,
their book on evidence based management, first.