Sean Park Portrait
Quote of The Day Title
I say profound things
Einstein

One (more) reason big finance is broken.

Every executive committee member of a large bank, exchange or insurance company should read Kirk Wylie’s latest post to understand why their cultures are broken and why they so regularly find their organisations blithely running off the edge of a cliff, comfortable in the knowledge that, “well, hey at least we’re all doing it so it must be ok” and safe in the knowledge that their is a big taxpayer airbag (or trampoline?) at the bottom protecting them from any nasty consequences. Of course they are unlikely to – except in the unlikely event that it gets published in one of the traditional echo chamber publications like the FT or the WSJ.*

I’ll resist the temptation to copy/paste the whole post here but please go read it as this excerpt doesn’t give it justice:

Independent, entrepreneurial techies can actually make the biggest impact in the organizations that fight against them the most: they’re the ones that need them the most. Use them as agents for change, challenging assumptions, challenging entrenched attitudes, challenging technical group-think. Otherwise, your worst employees (the ones who can’t really get a better job elsewhere) win, and you as an organization fail.

Kirk is speaking of technologists, but the same thing applies across the organization. But big organizations kill entrepreneurship, actually it’s in their DNA. It’s not news, tall poppies and all that. As I was leaving 16 years of working – mostly happily – in big organizations I spent a lot of time thinking about why this was (and also why I hadn’t noticed it earlier in my career.) The answer to the second question was really because of luck. For 90% of my investment banking career I had the good fortune to be right in the heart of building three new and transformational markets: first the Ecu/Euro market, then the European credit markets and finally the move to ‘electronic’ capital markets. Throughout this part of my career, innovation, entrepreneuralism and independence actually helped me succeed because there was no pre-existing status quo to upset. This only became apparent to me in hindsight.

The answer to the first question is now obvious to me, but it wasn’t always so and really only revealed itself when I left and was able to step back and look at the machine from the outside. The expression ‘well-oiled’ machine says it all. This is the ultimate compliment used to describe a successfully managed organization. So where does non-linear innovation, disruption, questioning fit in a well-oiled machine? It doesn’t. In fact the more ‘well-oiled’ the machine, the less tolerant it is of exceptions. (Which also explains why I operated happily for so long at DrKW!) Switching metaphors, entrepreneurship is seen as a virus in these companies and they produce potent ‘corporate antibodies’ to seek out and subdue any such viral outbreak and they do everything (pace Kirk) to innoculate themselves against them in the first place.

But what is a CEO to do? The ‘well-oiled’ bit is equally important. I am sympathetic to this. (I mean if I was in charge I wouldn’t want too many of me’s running around, that would be chaos.) It’s not an easy question to answer and is made even harder (especially if you are running a public company) by the fact that the visible benefits of the entrepreneurial genes are only realized over time – I’d guess at least 4-5 years at a minimum and sometimes it might take as long as a full business cycle. And yet the average leadership tenure in these organizations is at best at the short end of that, and the compensation and stock market cycles are much shorter. I’ll be frank and say up front, I don’t have an answer but I’ve got a couple ideas I think are worth trying.

The first is to set – from the top – a deliberate human resource policy of seeking to “doping” the organization with a limited and controlled number of people like Kirk. (Doping is the process of adding controlled impurities to a material – for instance a semiconductor, or metallic alloy – to improve it’s useful properties.) This needs to be managed very deliberately, like a program – put a senior HR person in charge of this and manage it: these people will likely have a higher turnover, complain more often, get into trouble, want to change projects and/or departments and so need their own career track. I’m not sure what the correct ratio is, but I would guess it’s on the order of 1-2% of total staff, not necessarily evenly distributed throughout the company. (I knew my Materials Science degree would come in handy one day!)

The second is to create – and then protect institutionally, not personally – a specific department dedicated to exploring ‘white space’. When I say protect institutionally, I mean frame it like a trust so it cannot be undone or hacked by successive waves of management and is insulated from the quarter on quarter, year on year vagaries of the economy and/or the companies results. If you don’t do this, you will inevitably fall victim to the problems Azeem enumerates in his great post on why corporate venture capital (almost always) doesn’t work. Before all the serious, “pragmatic” people out there roll your eyes all at once (if indeed any such types would consider wasting time reading a blog) this doesn’t and shouldn’t need to be a big ask. Again probably on the order of 1-2% (even less for the biggest companies), of resources. The best example in practice I can think of is Xerox PARC, although the irony there is that Xerox didn’t really figure out how to plug PARC’s non-linear thinking and brilliant innovation back into the company (or at least not very well.) But perhaps that is not a bad thing (in proving my point) because I would posit that all other things being equal, Xerox’s share price has been higher (than it otherwise would have been) because they owned this asset. This cheap, deep out-of-the-money call option on the future. As far I as can tell, this is also what BT is trying to do with BT Design led by my friend JP and it is heartening to see that – at least so far – he is being allowed to continue to pursue this vision despite (and hopefully even because of?) the very poor results of the past couple years. I don’t know of any truly analogous initiatives in big finance.

And indeed that is (one of the reasons) we decided to set up Nauiokas Park. Clearly we’re not the whole solution, but we think we can play a key role for big financial institutions: a way to have (some of) their cake and eat it too: by entrusting a relatively small amount of financial capital to us, we think we can create just such a verdant ‘garden of innovation’, allowing them to harvest the fruits of some of the most dynamic entrepreneurs active in their industry, while protecting and nuturing them, away from the noxious antibodies of the corporate organism. Indeed, taking a page out of John Seely Brown, I guess you could describe our mission as seeking to create a vibrant knowledge ecology for finance and markets, and help our stakeholders profit from it:

There’s a fundamental change from finding ways to innovate inside a corporation to leveraging the knowledge ecologies of many little companies in places like Silicon Valley. You find that the shift turns much of the classical R&D into A&D – that is, acquisition and development. Larger companies can buy the research they need and instantly acquire a diverse portfolio of research groups.

I’ll be honest though, it’s not an easy sell. Even for the corporate leaders who ‘get it’ the reflex instinct is to think (sometimes aloud) “makes sense, but we can do that ourselves”. Well, you can’t prove a negative, but we’ve spent a long time inside these same big financial institutions, and our many years of experience led us to conclude that it is bloody hard to do (for all the reasons above and more.) On the bright side, being challenged makes you think harder and forces you to refine and adapt your ideas, ultimately making them better. Hearts and minds. Hearts and minds. Wish us luck.

* Just to be clear, I have nothing against the FT or the WSJ per se, I read them regularly (well WSJ not so much) and think they are solid publications. I’m not suggesting they aren’t important sources of information and opinion – you’d be stupid not to read them if you are in finance – just that, and this is the wonderful thing about the world in 2009 – I think you need to read much more widely and in particular embrace at least a diversity of viewpoints, if not views.

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Comments
  1. At 2:36 pm on 04 Aug 09 dmarti said:

    Make sure you're in on hiring the right-hand person for each of your direct reports, and make that person as different from his or her boss as possible. Somehow the worst examples of Corporate Controlled Flight Into Terrain are when every VP has a Mini-Me.

    Sean, do you read Sacha Chua's blog? She's doing the whole startup/networking/open source thing inside a big company.

  2. At 2:58 pm on 04 Aug 09 cpswan said:

    I really enjoyed Kirk's post when I read it over the weekend (I may be the friend he refers to at the start of 'Embrace The Uncomfortable'), and this is a great follow up.

    First – a clarification – when I said that FS IT people were compensated for putting up with boring work (which is more like what I did say) I was speaking about back office staff. The people I came across in front office roles usually had more exciting work to do (like building algo trading systems) and were also much more likely to be good at what they do (thus justifying some premium over IT people working in other industries). It's a sweeping (and probably somewhat unfair) generalisation, but it fitted well with what I saw around me. Don't get me started about the clueless VBA jockeys who considered themselves front office 'developers'.

    I like your suggestion about doping. Large organisations like banks have been trying to do this under the banner of 'diversity' for some time, but along the wrong axes – those defined by political correctness – gender, ethnicity, race etc. Entrepreneurial geeks aren't a recognised minority (despite the bullying they put up with at high school – http://www.paulgraham.com/nerds.html), and so HR has no interest (or targets) in intellectual diversity.

    It's a shame too that HR seems to be stuck in the job for life model when we all know there's no such thing any more. One of the most successful projects I ever worked on was where I did the technical interviews (I had almost no direct contribution to the project). We got a crack team of top people to build a new system. They were hired as permanent staff as contractors were out of favour at the time. They were all gone a year later, but that didn't matter as the system was working and handed over to the ongoing maintenance folk by then.

    Having a group to explore white space is something that I've seen working – it's where I spent most of the last 4 years of my life. Fighting through the corporate immune system is soul destroying work though, and it takes strong leadership. We never had institutional protection, and I'm not even sure how that would have been achieved – can you get a CEO (or CIO) to sign a covenant that must be honoured by their successors? When the personal protection we'd got from one senior exec disappeared things fall apart pretty quickly – the group went from 25 people this time last year to 4 today. I'm just glad that I'd already made my decision to leave before the train wreck happened.

  3. At 4:51 pm on 04 Aug 09 parkparadigm said:

    Totally agree. I was most effective in my old job when my COO was a traditional corporate warrior. Kept me honest and helped me navigate the bureaucracy more effectively. Haven't come across Sacha before.

  4. At 5:02 pm on 04 Aug 09 parkparadigm said:

    Soul destroying: check. Wears you down. One of the main reasons I threw in the towel. Re institutional protection, that's exactly what I'm talking about – when my 'sponsor' left DrKW it was all over but the crying. (Although this was clearer in hindsight.) One way – and clearly I am talking my new book – is to partner/invest with people like us. You are locked in – well at least for 7-12 years, plus more importantly you can 'write off' the investment psychologically – it doesn't show up in budgets and headcounts and territorial wars. Out of sight, out of mind (in the good sense.) Otherwise / additionally – and don't get me wrong this is not perfect in terms of avoiding 'restructuring' waves – I think you need to set up a separate entity – legally, physically, culturally – fund it, and get out of the way. Set up the corporate governance so there are real independent outside directors. Let it develop its own identity. Sort of like PARC. Make it a big deal to close it down or absorb it. Doesn't make it impossible but would probably insulate it from the usual management and business cycle vagaries, much more at least than when it is 'just' a department or division that can be disassembled with a few clicks of a mouse in a spreadsheet at a budget or planning meeting.

  5. At 10:01 am on 05 Aug 09 KirkWylie said:

    Chris, indeed you were the source of the statement, with which I intentionally took liberties for artistic reasons. And you're right in that the people working on Real Systems are definitely above average, which is why I worked in finance for as long as I did: it was where in London I could find the best people to work with. But even there, I think you're also compensating them for the work culture around them that they have to endure: dress codes, horrible Canary Wharf soulless buildings, proxy servers that filter out everything you might ever want to look at on t'interwebs. That's why I think there's still a premium paid for the people who are good enough that they can do that level of work, and are willing to endure that level of stupid.

  6. At 10:06 am on 05 Aug 09 KirkWylie said:

    Hi, Sean, thanks for the link and good to see the discussion is continuing!

    One thing that I think you're completely wrong about is the use of HR in the process. In fact, I think “Human Resources” is the exact problem with the situation.

    Anecdote The Third: when I was looking to leave the hedge fund I worked at on arrival in London, I interviewed with a Massive Helvetican Bank. Hiring Manager liked me, his boss liked me, all the techies liked me, looked like an ideal fit. HR didn't: they said (and I am not joking here) that I had too few years of Financial Services experience for the pay scale that everybody agreed on, and too many years of technology experience for any other pay scale. Computer Says No.

    I think the solution really lies as you and Chris have indicated with having senior executive support: they're the only people who can face down the middle managers who exist to perpetuate the status quo that they're comfortable with, and they're the only people who can tell HR “quit being morons.” Yes, when they go, so does the cover, but then The Organization really HAS won.

  7. At 2:21 pm on 05 Aug 09 parkparadigm said:

    Well that (including HR in my possible solution set) was me just trying to “be practical.” I'm always being told I need to be more “practical.” (Well come to think of it not so much anymore, but still…) Now I'm not exactly sure what being more practical actually means, I have my suspicions that it is really just code for shut up and do what you are told / like everybody else, but assuming I'm wrong I've invented my own interpretation which is that it means try to work within the grain of the system. Since HR is there anyway (pick your battles), my thinking was that you need to infiltrate and create a champion within HR who has a stake in this happening. You need to 'dope' HR too is I guess what I was saying.

    Your third anecdote actually is a great proof of what I was trying to get at. I'm not sure if you would agree or not with this, but my premise is that – despite the ridiculously bad outcome / decision at the micro level – giant organizations have no choice but to operate algorithmically, like a well-oiled machine because the alternative just doesn't scale. Now you might be deleting me from your feeds as you read this thinking, omg “you're defending them???” Well sort of. My main point is these organisations are too big. Moving on 'cause that ain't gonna change tomorrow, my next main point is the least bad way of running mega-corp means you have to make many 'least-worst' compromises which means lots of bad decisions. My follow-on point is that better to accept and acknowledge this and look for solutions that mitigate the stupidness, rather than (a) fail to acknowledge the problem exists and carry-on irrespective, or (b) acknowledge the problem exists but vainly seek to 'fix it' when it is unfixable, an unavoidable consequence of the other choices you have made.

    Basically to dredge up my viral metaphor, big companies cannot avoid catching corporate herpes: it resides deep in the brainstem and genetic engines of the company. It can not be cured. But you can treat the symptoms and you can do a lot to avoid the worst effects and mitigate the common effects. Starting of course by investing in a genetically immune structure like Nauiokas Park! LOL

  8. At 2:24 pm on 05 Aug 09 parkparadigm said:

    Great post from J.D. here that adds another plank to the manifesto organically emerging on this topic!

    (btw JD why didn't you tell me you were blogging, great stuff…can't believe I hadn't seen it before…)

  9. At 4:02 pm on 05 Aug 09 KirkWylie said:

    I've been thinking for a while about this very subject, mostly while doing my time at a Big Bank recently, but I'm not 100% convinced that the alternative doesn't scale. I think it CAN scale, but only with super-enlightened senior executives who are committed to running the business in a way that is less like a single organism and more like a collective.

    Consider this Big Bank I was at. They had a program called “One Big Bank” designed to try to convince everybody that they were really all just One Happy Family, even though quite honestly there were whole swathes of the bank that had nothing to do with each other. Consider Lehman Brothers. They had policies trying to tell everybody they were all Lehman and had a single corporate culture and practices and everything else. And yet the dismemberment into BarCap and Nomura happened shockingly quickly and effectively, establishing that it is in fact quite easy to take big corporations and view them as collectives of individual units.

    The problem is that when you get to a certain size, your senior executives start to look for ways that they can impact the Whole Company, because that justifies their salary and positions. CEOs and COOs and CTOs attempt to justify their C*O role by treating the firm as One Entity. It's inevitable, because it's part of the psyche of someone who ends up being successful in those roles.

    So while I think that big companies CAN avoid catching corporate herpes, I think that big companies inevitably attract the senior executives who seek out behavior that is inevitably going to lead to an infection.

    Also, you can't “dope” HR. It's an area that should really just stick with what it's good at, which is ensuring that employment law is handled efficiently and effectively.

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