Innovation or change in Federal regulations? Not yet President Obama

by | Jun 18, 2009 | Uncategorized

Yesterday we heard announcements about reforming the federal regulators and the systems they use to manage money and banking, and now the Treasury Secretary is out selling the program to Congress "Geithner Fields Revamp Queries" Marketwatch.com.  It's touched off a big debate, as some people think the project has gone too far – and others think it hasn't gone far enough.  That's interesting, because most people think something needs to be done so the events of last summer — a near melt-down in the banking system and a near collapse of the monetary system — are not repeated.  So we might want to think about what was announced through the lens of The Phoenix Principle to see if we can expect much change.

Bruce Nussbaum is billed as "the innovation guru" on Businessweek.com.  He reports "President Obama Failed At Redesigning the Financial System."  Interestingly, his biggest complaint is that the President "didn't do what FDR did in the 1930s" and then attributes FDR with significantly Disrupting the government apparatus at the time.

I would agree with that assessment.  FDR attacked a bevy of Lock-ins currently then in place.  His attacks caused people to reconsider the approach then being used, which had remarkably high unemployment and long bread lines, and opened White Space to try all kinds of programs broadly referred to as "The New Deal."  Ronald Reagan 50 years later was similar.  He attacked what had become the conventional wisdom of the time, and his Disruption opened White Space which led to the greatest tax code reform ever, as well as significant changes in labor relations and government deregulation of industry.  Both are examples of Presidents that first Disrupted, and then used White Space to develop new solutions. 

President Obama has not Disrupted.  He's definitely whacked the chicken coop a bit, ruffling a lot of feathers, by doing things such as pushing for the firing of GM's Chairman/CEO.  But so far, even though he espouses change, his administration hasn't attacked any old Lock-ins.  He keeps talking about changes "within the system."  As The Phoenix Principle would predict, this sort of approach to change usually aggravates everybody – even your own supporters – and results in little significant change.  Perhaps some marginal adjustments, but since the underlying Success Formula is not attacked all the recommendations lie within it – and the Status Quo is largely preserved.

Mr. Nussbaum, in an interview on BusinessWeek.com entitled "What Should A.G. Lafley Do Next?", recommends the President appoint the former head of Proctor & Gamble to be the nations Chief Innovation Officer.  Although a novel idea, it won't make any difference.  Mr. Nussbaum's consultant-style recommendation is the kind that gets a lot of executives in trouble who end up with lofty goals, but no chance of success.  Such a move would put an embarrassing end on Mr. Lafley's career, and be an embarrassment for the President.

The federal government is a series of silo fiefdoms controlled by individual secretaries.  Mr. Nussbaum would like Mr. Lafley to use "design theory" to cut across fiefdoms in order to innovate.  Mr. Nussbaum gives Mr. Lafley credit for reorganizing P&G this way to success.  But, how exactly is someone who works for the President supposed to re-organize the administrative branch of the federal government?  Fiefdoms with their own individual mandates, leaders, staff and budgets.  Especially without a dramatic Disruption that forces everyone to agree on such a massive reorganization.  No commitment from the President will matter when the silo kings are allowed their silos.  Probably a lot of recommendations – long the domain of Presidential commissions – that say there should be more cross-departmental work.  But without a Disruption, something that rocks the apparatus to its core, there's no hope of this happening.

Despite the President's lofty goals and ambitions, he risks becoming somebody who talks about change – but doesn't accomplish much.  This may upset you, or you may be happy, depending upon your point of view.  But as a practical matter, should we expect that health care reform will be something radical – like social security and medicare were – or something much less dramatic?  The answer is now clear.  Lacking Disruptions, and when we look at the financial services reform proposed yesterday, we should expect something that will be an extension of the current system.  A bit of tweaking to how things are currently done, but largely the same.  Financial system reform left 95% of the players and their products untouched – and focused on small changes to a few institutions and a few products that are identified as central to the problems last summer.  We should expect that health care reform would leave 95% of the system and products unchanged as well.  Despite whatever rhetoric is extolled from politicians and pundits of either party.

This is not to say that the federal government does not adapt.  When attempting to do more of what it has always done better, faster, or cheaper we regularly see that such sustaining innovations are picked up quickly and used effectively.  And this was demonstrated this week when we learned that the State Department and other federal agencies were relying substantially on Twitter to receive information from Iran, and communicate with people in Iran.

For years the government apparatus relied on journalists for lots of two-way international communications.  This often created a somewhat cozy relationship between very large newspapers with feet on the street in remote and unfriendly locations with people in government.  This coziness had the really bad side effect of causing America's enemies to think most journalists were American spies working for the CIA, etc.  So what worked for journalists all too often got them jailed and sometimes killed.  But this system completely broke down the last 2 years as traditional journalism, and the newspapers, started going broke.  The journalists were laid off in droves, and the government lost its primary info feed from offshore.

What's replaced journalists for readers has been a market shift to the internet.  People have turned to bloggers, media sites and social networking for information.  This dramatic shift has wiped out the profits at newspapers, and shut down a lot of properties.  For media companies this represents wholesale change. 

But government users quickly adapted.  In their effort to Defend & Extend their roles, they became quick users of these sites as well.  And when Iran refused to allow traditional journalists outdoors – or even to report on uprisings – the government officials turned to Twitter.  And, just like the government used to ask the newspapers for help, they had no trouble asking Twitter – as reported in "U.S. asks Twitter to stay on line because of Iran vote" on MSN.com.  And, much like how The Washington Post or The New York Times responded in the past, Twitter obliged.  It was a remarkable example of "business as usual" for the government agencies – just done a little faster, better and probably cheaper.  And this, of course, reinforced to international leaders their claims that Twitter and social media sites are "tools of the U.S. governement."  In what appears "the more things change the more they stay the same" we see how easily the status quo can be reinforced, even amidst a dramatic change for the participants.

There can be reform in any government.  There even can be innovation.  But obtaining that reform requires

  1. Someone develop very clear scenarios about the future that describe the need for change
  2. A recognition that competitors will do better and we'll do worse if we don't change
  3. A Disruption – an attack on Lock-ins that support the Status Quo
  4. Using White Space to test new solutions toward which the organization can migrate as pieces are demonstrated successful.

It works.  We see it work for individuals, work teams, functional groups, businesses, industries and even for governments – like exemplified by Franklin Roosevelt and Ronald Reagan.  FDR did a marvelous job of describing a future at risk if America didn't start working again, otherwise international competitors would take over the country.  And Ronald Reagan similarly described a future that would be entirely different (free of inflation and stagnation) if changes were made – and one at risk of its long-term enemy the USSR if changes weren't made.  But if you try to shortcut these steps you get only marginal change. 

What’s wrong with bailouts – B of A, Citibank, Wells Fargo,

by | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in

Good public policy and good management don't always align.  And the banking crisis is a good example.  We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy.  This is after all the billions already loaned to keep them afloat the last year. 

But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive.  And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.

So regulators are feeling better.  They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over.  And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under.  Generally, this is all considered good news.  Especially for those worried about how a soft economy was teetering on the brink of getting even worse.

But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices.  The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values.  A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes.  It would have been a calamity.

But this all happened because of bad practices on the part of most of these financial institutions.  They pushed their Success Formulas beyond their capabilities, causing failure.  Only because of the bailout were these organizations, and their unhealthy Success Formulas saved.  And that sows the seeds of the next problem.  In evolution, when your Success Formula fails due to an environomental shift you are wiped out.  To be replaced by a stronger, more adaptable and better suited competitor.  Thus, evolution allows those who are best suited to thrive while weeding out the less well suited.  But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.

These bailed out banks will continue forward mostly as they behaved in the past.  And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth.  These banks that led the economic plunge are now repositioned to be ongoing leaders.  Which almost assures a continuing weak economy.  Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.

Free market economists have long discussed how markets have no "brakes".  They move to excess before violently reacting.  Like a swing that goes all one direction until violently turning the opposite direction.  Leaving those at the top and bottom with very upset stomachs and dramatic vertigo.  The only way to avert the excessive tops is market intervention – which is what the government bail-out was.  It intervened in a process that would have wiped out most of the largest U.S. banks.  But, in the wake of that intervention we're left with, well, those same U.S. banks.  And mostly the same leaders.

What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO.  But it takes more than changing one man, and more than one bank.  It takes Disruption across the industry which will force it to change.  Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.

And that is now going to be up to the regulators.  The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices.  I'm sure he'd love to stand back and avoid more controversy.  But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks.  We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining.  And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.

So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate.  If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.