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You want innovation? Think outside the box. The org chart box.

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In my mastermind group, an HR consultant happily announced she just concluded a project standardizing job descriptions across a multi-thousand-person company. In that moment, she named herself my nemesis. For my job is helping people rise to their own strengths, and step outside the neat little boxes that give such comfort to the Standardizers of the World.

Everyone is forever asking how to motivate people. You can’t. All you can do is get out of their way. You want them to innovate? Break the mold and do something truly awesome? Standardized job descriptions aren’t the answer. Helping each person bring their unique strengths to bear is much more likely to produce great things. (Imagine if Patent Office clerk Albert Einstein had limited himself to his job description.)

The job market for CEOs and, indeed, executives places great stock in the notion that every Leader is a unique gem, whole clear sight and bold touch will transform an organization to greatness. We believe so deeply that we grant multi-million-dollar salaries in recognition of Executive Uniqueness.

Yet these very people diligently reduce everyone else to standardized job descriptions, salary bands, hours and schedules people work, and often even the clothes people wear. Then they complain that people show too little initiative, don’t think outside the [standardized] box they’ve so graciously been given, and won’t create a culture of innovation. No one seems to ponder that maybe we’re reaping exactly, precisely what we sow: the least common denominator. It’s easy to administer people if we treat them as interchangeable widgets, but then that’s all we get–the parts that are interchangeable.

It’s very easy to say that it makes things easier to manage to standardize job descriptions. And it does. It also sets up expectations, development plans, hiring processes, and a culture that values the standard, not the unique. In this age of “disruptive innovation” and “outsourcing” and yet the latest fad-of-the-month management concept, we’ve pretty much forgotten the basics.

Companies are built of people. No matter how many systems you put in place, it’s the people who endure and make those systems run smoothly. Most importantly, it’s the people who adapt those systems to changing circumstances. And when you treat people as interchangeable, standardized parts, you get people who like to have a known, predictable place in the world. It’s simple selection. People who are mavericks, who push the envelope, who are greatly creative likely won’t love working for a place where those qualities aren’t valued by the systems.

As the business world reaches an absurdly frantic pace, businesses–indeed, whole economies–claim they will thrive on innovation. But innovation comes from people who can move beyond the everyday assumptions into whole news realms. For example, people who step outside the notion that job descriptions must be standardized. You know “Gore Corporation,” the makers of Gore-Tex? They don’t have a hierarchy or job descriptions. Their facilities are self-organizing. They limit themselves to about 140 people (sociologists say that’s the largest group that can self-organize) and things run smoothly. They’ve realized that our notions of hierarchy and standardization aren’t natural laws, they’re just beliefs we’ve adopted and never questioned.

Look around you. Look at your leaders. Look at your peers. Look at your family, your children, and those around you. Where are they playing roles that don’t suit them? Where are they squashing their own strengths, or wasting endless energy trying to be something they aren’t? Is there any way you can help them? Find opportunities where their strengths can produce the most value. Give them chances to shine where they’re good. And where they’re not, rather than expecting excellence, rearrange things so they can refocus on the places they can real shine.

First, Break All the Rules by the Gallup organization studied millions to discover that success comes from a focus strengths, not weaknesses. Weaknesses are best handled with alliances and systems. You’ know a great idea person, who sucks at details? No sweat. Pair them with a details-oriented implementor and their team will be unbeatable. The energy that could move a weakness from “poor” to “average” can just as easily move a strength from “good” to “superb.”

Oh, and by the way, you’re a people too. Look in the mirror and do the same for yourself. Create a life and career where you can hone your strengths and let others do what you don’t do well. When you’ve organized your life around your excellence, not only do you get more done (the Holy Grail of the 21st century), but you’ll also become the Architecht of a fun, exciting, fulfilling life. And that’s a worthwhile job description.

Why gas prices are so high and oil companies enjoy record profits

On “The Daily Show” the other night, John Stewart hosted an oil industry expert talking a bit about current oil prices. She was a very happy woman, and her engaging, bubbly personality was just charming enough that she could repeatedly evade John’s questions without being too obvious. I thought I’d step in and answer her questions for her.

Why are gas prices so high?

John asked why gas is so expensive. She replied, “supply and demand. When demand goes up, prices go up.”

So far, so good. She’s quoting basic economics. John was ready for her: “Yes, but why do profits go up? If oil is more expensive, wouldn’t that offset the higher prices resulting in the same profits?”

Bubbly oil company rep: “Oh, but John, when demand goes up, prices go up.”

… and this exchange was repeated about four times.

Should gas prices go up while oil profits don’t?

At first glance, it seems like John’s logic is sound. Let’s say oil costs $1/gallon. Let’s assume it costs an oil company 50 cents to refine, transport, and sell the gasoline. They sell it at the pump for $2.00. Their profit:

Original
Revenue $2.00
Cost of oil ($1.00)
Cost of processing ($0.50)
Profit $0.50

If oil goes up 50 cents to $1.50/gallon, the oil companies should pass that cost through to the consumer, sell the gas at $2.50, producing:

Higher prices
Revenue $2.50
Cost of oil ($1.50)
Cost of processing ($0.50)
Profit $0.50

Same profit. So if they’re enjoying record profits, they must be price-gouging, right? Wrong.

 

The problem is Wall Street or, more accurately, how we all treat money.

Oil companies just don’t pass costs through to consumers. We as investors and Wall Street don’t look at the actual dollar amount of profits. We care about profit as a percentage of sales. We don’t say “My investments made $3,000 for me last year,” we say “My investments made an 8% return last year.” That’s the profit margin. Profit margin is a company’s bottom line profits divided by top-line sales.

Let’s look at the above scenarios again, but this time we’ll look at profit margin, not profit dollars:

Original
Revenue $2.00
Cost of oil ($1.00)
Cost of processing ($0.50)
Profit $0.50
Profit margin 25%
Higher prices
Revenue $2.50
Cost of oil ($1.50)
Cost of processing ($0.50)
Profit $0.50
Profit margin 20%

When oil prices go up, if oil companies simply passed through the cost without an additional markup, their profit margin would fall. In the world of investors who care about percentage profits, this is a strict No-No.

So when oil companies raise their prices to keep their profit margin constant, they have to raise their prices from $2.00/gallon to $2.67/gallon even though the oil price change was only 50 cents:

Higher prices
(constant profit margin)
Revenue $2.67
Cost of oil ($1.50)
Cost of processing ($0.50)
Profit $0.67
Profit margin 25%

Instead of gas going up 50 cents when oil prices go up 50 cents, keeping profit margin constant means gas prices will raise 67 cents when oil prices go up 50 cents. That extra 17 cents flows straight to the bottom line. In dollar terms, profits formerly at $.50 are now at $.67.

(So that is a 34% increase in the actual dollar amount of profits! Even though the profit margin (percentage) stayed the same, the media will likely be reporting it as “a 34% increase in profits.” And it’s quite a large increase for the company doing nothing but marking up their product using a standard business markup practices.)

Now we can ask whether oil companies are using the tight supply to mark up their oil even more. If so, that’s where the unethical behavior and price gouging is coming in. But sadly for the rest of us, unless we want to let oil companies report lower percentage profits without penalty, every increase in oil prices will be offset by a much greater increase at the pump.

By the way, oil CEOs shouldn’t be paid for huge profits from supply price increases. That just rewards them for tightening supply and not investing in new energy sources!

Now that you know the rational side of the argument, visit my rants blog to learn why we’re getting exactly, precisely what we have said we wanted for the last thirty years.

Kids on Planes, how nice. Please, leave them at home.

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It was worse than a Stephen King Novel. Eight hours from Milan to Boston. A newborn in the seat to my right. His 2-year old sister two seats to the right. One in the seat in front of me. Two other children (same family, apparently) in the row behind. One more, two rows behind me. All age 3 or under.

For Goodness sake, if you’re gonig to have kids, don’t travel with them until they’re old enough to handle the experience. The kids are miserable. The little girl sat in her seat before takeoff crying sadly, “I’m scared. I’m scared.” My heart almost broke. Airplanes are also notorious breeding grounds for germs. People bring viruses and bacteria from the world over and happily share recycled air for half a day. Kids–already prone to sickness as they build their immune systems–are innocent victims of our cosmopolitan lifestyle.

Leave the kids home. It’s a mercy for the kids!

(Have I mentioned that it’s also a mercy for the rest of us? This morning, I loved kids. Now I’m rapidly becoming an advocate for population control. As much as I advocate community, I’m trying really, really hard not to point out how much nicer it is for the other passengers as well. Kids are cute, but, well, they yell. And cry. And poop. And vomit. And extrude. And spit. And lots of other things. And when they do it in an enclosed metal tube for eight hours, the charm wears off for those of us not genetically related to the adorable little people.)

Does hard work bring success?

A reader wrote:

So my parents and friends insist I work harder to be more successful. But I can’t concentrate for another hour. I just zone out. Do you have any advice?

Two things jump out at me: first, you may be letting others set your goals. You say your friends and family are telling you how to be successful. Whose definition of success are they using? If they’re talking about their definition of success, be thoughtful. Decide what success means for you, and pursue that in the way you find best. Often, what we want for a happy, fulfilling life is not what others want us to have. At some point, we need to shift from following their dreams to following our own (for many people, this shift takes decades if it ever happens at all).

Even if you agree on the definition of success, however, they may not know the best way for you to get there. Not everyone can simply push themselves harder. For many of us, overwork doesn’t work. The book “The Power of Full Engagement” presents research showing that people aren’t more productive simply by working harder. We need time to rest, recharge, and build our capacity. We work best by alternating hard work and recharge time. If you’re at your work limit, go rest. Then you’ll be able to work harder again later.

One last thing, however. If you can’t concentrate at all, you may have a short attention span or even attention deficit disorder. For short attention spans, I’ve heard that meditation and concentration exercises can help you develop the ability to focus for longer periods. When it comes to ADD, I’m not qualified to discuss it with any authority, but you can contact the Attention Deficit Disorder Association for more information.

Is our addiction to Ownership giving us less all around?

I’m sitting in my Milan hotel room, preparing to pack. I open the safe and take out my laptop, BlackBerry, and iPod. I retrieve my bill, check over the charges, making a note to tell them my morning’s breakfast didn’t appear on the bill. I gather up my wallet and prepare to leave.

Counting.

My world has limits. Limited time. Limited resources. And it’s amazing how much time and resources I waste counting and tracking to make sure all the accounts balance.

My entire morning was spent counting. My laptop is in a safe because someone might steal it. So we forge a safe from metal and energy, and I now use my life time and energy to remember the combination, open, close, pack, and unpack the safe. Every time I enter or leave the room. After all, my Blackberry, iPod, etc. were expensive! Must count and recount them. Otherwise, some evil person might make off with them. And then where would we be? My life might become meaningless.

And the bill! Goodness, now that I’ve been here four days, we use a Manager’s time, computer, printer, paper, toner, and a bellman’s time to deliver the piece of paper insuring we all know how much time I spent and everything is tracked to the last penny. What a grand use of our life, time, paper, and ink: counting things. At least it provides employment (and meaningful employment, at that. Counting things. Our most valuable activity.)

I’ve heard most of the expense of the phone systems isn’t in the physical infrastructure, but in the accounting and billing systems to track who called whom for how long. I can believe it.

We’re addicted to ownership, and to the counting and tracking we do to make sure all the right things are owned by the right people. Some degree of ownership may be hardwired, but that’s no excuse. We’re not hardwired to wear a suit and conform to our job description, yet billions of us do it flawlessly every day for 40+ years. We can overcome our hard-wiring. Instead, we’ve raised it to an artform. The flow of money–nothing more than counting–keeps Bill Gates worth as much as the bottom 175 million Americans, keeps billions in poverty, and distorts our very governance processes from creating nurturing communities. Instead, we nurture the sources of money.

I sometimes wonder how much infrastructure, time, lives, and effort we would save if we simply mellowed out and found a way to share as needed without this frantic need to own own own in unimaginable quantity. I suspect the “chaos” caused by relaxing our controls wouldn’t cost us humans a fraction of the resources currently sucked up by accounting firms, receipt printers and processors, billing systems, transaction processing, etc. What if all those resources that go into the relentless tracking were made available to feed, clothe, and help people be happy. It would certainly be billions (accounting firms alone make billions every year). Maybe it would be trillions. Perhaps enough to finance America’s looming Medicare crisis.

Counting. Things.

When my mother was dying, the day came to take her to hospice. She looked around her room. I asked what we should bring. She waved her hand dismissively and replied, “Stuff? These are only things. They don’t mean anything.” She took nothing. And she left this world with nothing except two children who loved her.

On the drive home after she was gone, I noticed her “Rodney Raindeer” beanie baby on the car dashboard. It’s the only thing of hers I kept. It was soft. It was loved, and she smiled when she saw it. At the end, that’s all that counted.

Wells Fargo: Do record profits herald disaster?

I just read an article in the May/June 2006 Harper’s, The New Road to Serfdom, an Illustrated Guide to the Coming Real Estate Collapse by Michael Hudson. In it, he steps through why the current real estate market has the potential to cause widespread economic ruin.

To summarize, banks are writing more and more mortgages on inflated house prices to people who don’t make enough to pay off the loans. People are paying interest-only loans or even partial-interest loans, so they are never building any equity. If prices level out or fall, those people are doomed. They can’t sell the house for enough to repay the loan. So they’re stuck. If interest rates go up, then they can’t make their monthly payments either, and their only recourse is bankruptcy. If this happens enough, the banks are screwed because they lose the money they loaned.

Then I read the story about Wells Fargo: First-quarter profit rose 9 percent, as growth in deposits and fewer loan losses offset weaker results from mortgage banking. It sounds great, since they just had a $2 billion quarter. But look closely!

Here are the facts:

  • They wrote 40% more mortgages than last year—about $31 billion increase.
  • New applications are holding steady.
  • “Nonperforming assets” (that means loans that aren’t being paid) rose 31% to $1.85 billion.
  • They also wrote off $433 of bad loans.
  • They set aside $433 million for bad loans—down 26% from last year.

Here are my inferences:

If they wrote 40% more dollars of mortgages, either their existing customers are taking out mortgages at 40% higher values, or they’re getting new customers. If they’re writing bigger loans, those loans likely on inflated home values. If prices fall, owners will be locked in at best, and go bankrupt at worst. If those are all new customers, it’s hard to imagine they’re all middle-class, creditworthy people who just now have decided to buy. I suspect they’re taking people on shakier and shakier terms (e.g. interest-only loans, less money down, etc.) Ultimately, that endangers them for reasons above.

Since pending applications are steady, it’s hard to imagine where further growth will come from except by more aggressive marketing to lower quality groups or by offering more aggressive/riskier terms (e.g. less down, etc.) to existing borrowers.

Yet they are doing this 40% run-up in writing mortages even as they experience a 31% increase in loans not being repaid. So that implies more and more loans in the future won’t be repaid.

So logic would suggest they hold back more and more money to cover the potential damages of future loan defaults. But they didn’t do that.

They wrote off $433 million of bad loans, and set their reserve to the same amount, probably setting the bad loan cushion on immediate writeoffs, not on projected loan defaults going forward.

So why would they do that? Well, my guess is that executive compensation is based on current profits, not future health of the company. And by lowering their reserve by 26%, they managed to push quarterly profits up over $2Bn for the first time, which sounds great in the press.

So here we have a bank making more loans, with a steadily increasing pool of bad loans, and shrinking reserves to cover the difference. And remember how leveraged banks are–a single $100,000 loan defaulted requires $2MM worth of new loans being successfully paid to recoup the lost money. If hundreds of millions default, it quickly becomes very hard for the bank to dig its way out of the hole.

But for now, things look great. Happy banking!

(Please note that I’m going solely off my understanding of the Harpers article and the Boston Globe article. If there’s something I don’t understand about this situation, please leave me a comment and I’m happy to publish corrections!)

Who creates value in a firm? Is it the CEO? Lee Raymond thinks so.

You’ve probably heard that Lee Raymond, ex-CEO of Exxon, was given a half-billion-dollar retirement package that amounts to about $144,000/day for his great work. You go, Lee.

It always amazes me to deal at lower levels of organizations where, as Leona Helmsley would likely say, “only the Little People get paid for doing work.” For the Little People, pay is roughly tied to performance. If they don’t show up for work, they actually risk getting fired. And–get this–even if they’re doing a good job, they might be “outsourced” for the good of the company.

Size doesn’t matter…

The justification for this bloated pay package? In his 12 years at the helm, Exxon became the biggest oil company in the world.

First, Lee was CEO during the boomest economy the world has ever seen. Oil demand skyrocketed, so even if he’d done nothing, Exxon would likely balloon like a pustulant sore in a rain forest.

And jeez, he got there by buying Mobil. I suppose an acquisition is impressive, if only because the closing documents stretch to the top of the Washington monument. Signatures really cramp up the thumb joint, so when you think of it that way, $144,000/day really makes sense.

What else did he do? Begin pioneering alternative energy … uh, no. That was BP. Bring down prices? Uh, no, prices are twice what they are when he took over. … Well, I guess he kept them really good at doing what they’ve always done anyway. And keeping the Status Quo is also really hard work. Just ask the 16,000 folks he laid off at Christmas 19991; they’ll tell you just how hard it is to keep the status quo!

But note well the framing

But at the end of the day, it’s our beliefs that cause the disconnect. When we talk about CEOs, we totally give them credit for everything. If someone wins the lottery on their watch, we should pay the CEO.

Give me break! There’s already given you a much, much better way of thinking about it. Read carefully the word “Helm.” A CEO doesn’t do the work; the CEO decides where to go and spins the wheel. Kind of like being the guy2 when driving to Disneyworld: you drive with no map, never ever admit you’re lost, but when you accidentally drive down Main Street USA and turn Mickey into rodent road kill, you proudly proclaim your great success. (Should the woman2 actually participate in the navigation or steering, she graciously gives the guy the credit.)

Navigating and steering is so, so important. In ships, if you don’t navigate, you end up on land. Then the ship stops and everyone gets mad. But if you do navigate, no one believes for an instant that you’re somehow responsible for moving the ship. Essential? Yes. So’s the crew. So’s the ship itself (Exxon was built long before Lee took over). Giving Raymond all the credit (and a half-billion dollars) is just silly.

Can’t we turn back time, outsource the CEO job to a really capable housewife, and see what happens? Maybe she could do even better. Housewife Katharine Graham took over the Washington Post and made it one of the most respected papers in the world. Surely there’s a housewife out there who could make a dent in Exxon.

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1 Let’s assume an average salary of $30,000 for the layoffs. 16,000 of them is $480 million. And Raymond’s compensation package was … nah. It’s just coincidence. But if I were those 16,000 peeps, I’d find the coincidence more than a little disturbing.

2 I am using the traditional gender designations in this example. Your relationship may vary. In my case, for example, I’m definitely the one who remains silent, nods, and smiles. A lot.

Do ‘open loops’ push multi-tasking into overwhelm?

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I have several important projects on my “to do” list. Instead, I’m typing on my BLOG. I’m making phone calls for my business school reunion. Everything except what I “should” be doing. Just the thought of the projects leaves me dizzy. But why?

When I have a hundred tiny, no-thought things to do, I can just stick ’em on a list and blast my way through them. When a project requires thought, Life Slows Down.
I was never a very fast problem solver. Pondering, reflecting, and going deep work best. My brain latches onto something and follows it and follows it … and follows it. The problem is that my brain’s not terribly good at following too many things at once. With four high-thought projects in the midst, the brain stalls, and none of them get any progress. But gee, does my BLOG get updated 🙂

Maybe there’s an important distinction here. Maybe overload is sometimes “detail overload,” where there are just too many things to keep track of. But maybe there’s also a form of “depth overload,” where there may not be high quantity, but the amount of thought needed for the few items is so great that progress is tough to make.

That suggests a simple solution: defer one or more of the high-thought projects until others are done. First, gotta figure out what the Deep Thought limit is. I fear in my case, it just may be One…

(Also see my more thoughtful articles at https://www.steverrobbins.com/overcomingoverload/index.htm)

The Fortune 500: Blessed are those who Waste on a Spectacular Scale

I just received my copy of Fortune. It’s Fortune 500 time once again. I often hear businesspeople speak of landing the Fortune 500 as clients. Browsing the list, I suddenly realize why.

The Fortune 500, culturally, simply have so much money that they’ve lost all perspective on value. In startups—the world I’m from—every penny counts. You don’t spend a boatload of money on something without at least some idea what the return is.

In my work with the Fortune 500, even so-called cost-cutting would qualify as abundant extravagence in any other world. I’ve seen companies fly three vendors across the country and put them up in a hotel for a one-hour meeting to decide whether or not to meet again the following month to proceed with a contract. They spent as much deciding whether to spend money as I would spend on the entire initiative.

So for those of us who are in the Fortune-below-2000, let us say a word of thanks for Exxon Mobile (still hasn’t paid the Valdez penalty), Wal-Mart, GM, Chevron, Ford, ConocoPhillips, GE, Citigroup, and all the rest. If it weren’t for them, the rest of us wouldn’t have access to the free flowing coffers that comes from overabundance.