The reason behind the reasons of the crisis

Ever since the subprime crisis spilled over into other segments of the financial markets – and quickly spread across the broader economy – many opinions have been offered about what went wrong and who is to blame.

The finger pointing went in all directions and covered all the major agents in the economy: bankers, central bankers, rating and government agencies, media, real estate investors, corporations, consumers, politicians, risk managers, regulators, board members, asset managers, speculators, accountants; yes, even consumers and borrowers were accused of reckless spending and borrowing.

It seems that the only group who escaped the blaming were the so-called NINJAs: persons with No Income, No Jobs and No Assets.

The typical factors that caused the economic malaise, it was soon agreed, include excessive bonuses, poor governance, moral hazard, greed, poor regulation and supervision, easy and cheap money, too much leverage, weak accounting rules and bad macroeconomic policies.

Take what was said by Dr. Nout Wellink, the President of the Dutch Central Bank in a recent interview in Het Financieele Dagblad of 27 March, where he was questioned about his responsibilities in the mess we are now in and particularly regarding the sudden financial support ING needed due to the Alt-A mortgages on the books of ING Direct:

 ”Here you see the entire problem in a nutshell: an accounting problem, the non-functioning of the markets, and insufficient supervision over the US mortgage market. There are many factors which played a role and the interaction between all these factors we have not seen before. I think it is very risky that people tend to accuse John, Peter or Gerard of everything. And if you focus on one specific group, you might take the wrong measures“.

Thus single minded thinking does not help much when it comes to finding ways to improve next time.

Some time ago I visited the historic Museum of London where part of the exhibition covered the Great Fire of London of 1666, in which thousands of people died and a large part of the medieval city inside the old Roman walls was destroyed.

 Soon after the fire ended, the question was heavily debated about who had caused this deathly fire, and after a couple of days it turned into a spiral of witch hunting. First a baker was accused but he said he could not be the cause because the fire started on a Saturday, on a day he does not use the oven since no bread is sold on Sunday.

Then the finger pointing turned to the French and Dutch, given that they were at war with the English, shortly to be followed by the Catholics accusing the Calvinists and vice versa.

After six months of quarrelling and fighting King Charles the Second asked everyone to stop the finger pointing and added the wise words that none of the above should be seen as the reasons of the deadly damage caused by the fire. According to him the real reason behind the reason was that various factors caused the fire to spill over in such damaging way, including the dry weather, strong unfavourable wind, the poor housing construction, too many houses too close to each other without proper fire protection, and all this at the same time! This created a toxic process which hardly anybody could have foreseen. Today we sometimes refer to such an environment as “the Perfect Storm.”

Similarly, one can question whether agents like bankers, regulators, government officials or factors like bonuses, greed and lack of governance were the real reasons behind the financial and economic fire of today. Even if they all played an important role, were there more fundamental reasons why these reasons (related to people and things) played out as they did? Or was it the toxic combination of the known known’s and unknown unknown’s?

If there is one thing about which most of the blaming parties have agreed upon then it is that things have become too complex. Interestingly, this collectively admission of having created too much complexity was not heard in the booming years. As one could read in annual reports and other publications produced by many of the above agents, after making some observations that they were coping with increased complexities, the final verdict by almost any party blamed today was that they were in control and that they understood very well or at least better the risks which that they had taken on.

The general mindset was that risks were there to be taken to grow the economy, to increase shareholder value or enlarge value to society and that risk perception was rightly low and could be priced at record low yields because of very good risk models and enhanced control and governance measures taken. Adding, of course, that further improvements were needed.

Or, in other words, we were managing the place well and we all could sleep well at night.

“It is the psychology, stupid!”

Perhaps most people did indeed genuinely believe that this was indeed the case. Yet in a booming period when the collective belief is that “everything goes up”, it obscures almost any weak point in our thinking and (not) acting as human beings.

Yet if some of the blacks swans arrive – as so insightfully described in Nassim Nicholas Taleb’s popular book “Black swans” – and our collective belief turns subsequently into fear, fuelled by the collective belief that ‘everything goes down’ then the asset value destruction seems to fall like a stone. Acceleration takes place, because people tend to exaggerate on the upside as well on the downside. It seems only to stop falling when our collective belief turns into a mood that things are going up, stopping the fire which is destroying what we have built and accumulated.

The real reason behind the reasons

Might it be that the real reason behind the aforementioned reasons is that we, as various people already argued that we, collectively, have made our world so complex that we have to conclude that we do not have enough brainpower to understand properly all the complexities we have created? This includes corporate, regulatory, behavioural, financial, societal, political complexities in all forms and have been created by all stakeholders, more “us” and less by “them”.

More and more people have now started admitting that they just did not know and even that they just did not know what they did not know.

The ‘unknown unknowns’ have landed us in a vicious cycle that we collectively believe that everything will continue to go down, causing the massive asset value devaluations we have so far seen happening, which not only makes many assets on the balance sheets of financial agents like banks, shadow banks, pension funds and corporations ‘toxic’ and of low value, but also devalues our own personal wealth position in a very harsh way.

Only until we, as economic agents, have enough collective belief that everything goes up, the measures taken will start to become effective.

It is therefore important that people include in their thinking the critical reasons behind the reasons when discussing which measures should or should not be taken and how to prevent the next economic or financial ‘fire’.

The new era

When we have entered a new era where we start believing again that we have created a better world by introducing better and smarter regulations, stricter governance, with higher capital ratios and with even better incentives schemes, we should be mindful that we sooner or later may fall into a similar trap from boom to bust, at least assuming we still are thinking and acting fuelled by the same genes we have carried since the beginning of mankind.

While fixing all the past problems is as such necessary and desirable, we can only avoid laying the seeds for the next downturn if we constantly remind ourselves that for several issues we don’t have enough brains to really understand all the (new) complexities we have by then created and have to work with.

This humbling recognition should encourage us to increase our efforts to reduce complexity. Given that we will likely not succeed in this, we should be more conscious of our severe limitations in whatever we start fixing what went wrong. This could mean more capital and less risky assets and lower ambitious growth rates and not only for banks but for all economic agents.

Recognising this will be a big step forward, and will be of help when building a more stable world.

History of Ideas

Part 1 – Intro

An examination of the world’s most influential ideas from antiquity to modern times can provide us with a framework in which to understand ourselves, the world around us, and how economies and business may advance. Ideas are the fundamental building blocks of civilisation, sometimes empowering nations, and at other times stunting their development. Ideas shape the way we do business and can be the catalyst for dramatic transformations in companies. The most powerful ideas have a permanent impact on society, altering the way we live and view the world around us.

This article will show how different continents have at different times in world history been responsible for advancing humanity’s store of ideas, discuss what is needed to foster ideas and innovation, and explore why it is important for countries and businesses to do so continually. Finally, the article will look at the evidence supporting the view that Asia might be on the verge of taking leadership in technological innovation and scientific advancement once again – after a hiatus of five centuries.

Part 2 – A brief history of ideas

Despite its obvious importance, the history of ideas is a subject rarely given an airing – possibly because it requires committed scholarship in a diverse range of subjects. One historian who took on the daunting task of compiling a history of human intellectual development was Peter Watson, who revealed in his book Ideas how different regions of the world have taken turns to contribute to humanity’s intellectual development from before the dawn of civilisation to modern times.¹

Cave art and carvings found by palaeontologists indicate that a global creative explosion took place between 60,000-40,000 BC, marking the first step in mankind’s intellectual development. By 14,000 BC, people in Asia and the Middle East started domesticating plants and animals, and some three thousand years ago began also to use clay.  By 5,500 BC, writing was born in India according to some scholars, although others believe Mesopotamia – the region occupied by modern Iraq, eastern Syria, southeastern Turkey, and southwest Iran – was its birthplace. Mesopotamia is also credited as the home of the first work of literary fiction, the library, legal code, the alphabet, astronomy and the wheel.

By 585 BC, Europe was embarking on its own course of scientific and philosophical discovery in Greece, where solar eclipses and other astronomical observations were being recorded, and a new system of government was appearing. In the second century BC, paper was invented in China, while the concepts of resurrection, a messiah and Judaism were taking root in Israel. By 170 AD, the four Christian Gospels emerged. Four centuries later Muhammad was born.

Around 500 AD, India became the fountain of world influencing ideas. A Hindu mathematician of that era was credited with calculating pi at 3.1416, discovering the length of the solar year to be 365.358 days and observing the earth to be round, some 1,000 years before Copernicus made the same discoveries. Around 750 AD, China’s knowledge of papermaking finally reached the West.

One of the most fascinating periods in the history of human intellectual development was then about to unfold. During the Middle Ages, China led the world in its technological achievements and intellectual sophistication by such a wide margin, it would in some cases take several centuries for the rest of the world to catch up with some of its ideas. This includes many of the inventions that drove the nation’s extraordinary seafaring exploits. China, for example, had been using rudders on ships since 400 AD but it was not until almost 800 years later that Western shipbuilders would do the same. China had discovered the magnetic compass as early as 80 AD, yet it was not until around 1300 AD that Europeans would make the same discovery.

Part 3 – In what environment can ideas thrive?

One of the questions that have fascinated historians throughout modern times is how China, with its vastly superior scientific knowledge and intellectual sophistication during the Middle Ages, could have been overtaken by Europe. Watson regards this as the most important puzzle historians can solve, given that the dramatic acceleration of intellectual development in Europe that occurred between 1000 AD and 1500 AD gave shape to the Western World’s present economic hegemony and technological leadership.²

As the Middle and Far East fell behind, the West would from 1750 to 1950s become the wellspring of world changing ideas and achievements, including the introduction of the factory and mass production, the invention of the steam engine, the harnessing of electricity, the birth of modern chemistry, the concept of research, and the growth of new areas of academic endeavour, including sociology, geology, statistics and particle physics. The two most profound scientific ideas of the 20th century – the uncovering of the gene, which transformed our understanding of our bodies and the mechanism controlling the creation of life, and the discovery of the quantum, which brought about a new way of looking at matter and the universe – also came from Western scientists.

According to Watson, there are several academic theories explaining the rise of the Western intellectual and economic hegemony. These theories provide us with important clues as to how society can be aligned to maximise its potential for generating ideas.

Among some of the more compelling theories, historian Janet Abu-Lughod suggests the rise of the West was facilitated largely by diseases, which swept through the world in the 13th and 14th centuries. These plague epidemics decimated populations in the major trading entrepots of the Middle East and China, but left Europeans relatively unharmed. With trade in the East severely disrupted, Europe stole a march, helped by wealth garnered from new trade routes that European ships had established across the Atlantic.

Another theory advanced by Cambridge-based historian Joseph Needham is that when the Chinese invention of gunpowder reached Europe, it was the catalyst for political change that would benefit scientific endeavours. Needham believes guns brought about the downfall of feudalism in Europe, allowing the forward-looking mercantile class, which was closely associated with scientific advancement, to flourish. China, by contrast, remained under a feudalistic system of rule, upheld by the mandarinate, which had proven effective in keeping the country stable but stifled its potential for generating new ideas.

Other historians believe differences between the scholastic systems of the East and West played a major role. The theory is that mediaeval Chinese and Middle East scholarships discouraged independent thought, because the competence of a scholar was judged by his master. Europe, on the other hand, had adopted a scholastic system from ancient Greek tradition, which emphasised the sharing of knowledge and organised scepticism, thereby stimulating the development of new ideas.

The theory, which has received the most attention however, relates to the unification of European continent by the Christian church. Historians championing this theory believe the rise of a trans-national class of scholars across Europe’s early universities was the source of the continent’s sudden intellectual acceleration. These scholars, spoke the same language (Latin), were trained in the same classical texts, and shared the same approach and values bound by Christianity, which gave them a common framework for collaboration and knowledge sharing.

Part 4 – In what environment can ideas be translated into progress?

While history can teach us much about the complex mixture of economic, governmental, cultural or sociological factors that can give rise to a society capable of producing world influencing ideas, we need to turn to the present day to understand what are the optimal conditions for translating those ideas into progress. INSEAD Business School recently attempted to define what a nation needs to meet today’s challenge of innovation in its Global Innovation Index, a study which attempts to assess and rank countries for their ability to generate and profit from innovation.³

What the index reveals is that to generate progress through ideas, a country needs to be fully committed on many levels. A nation must have a robust and transparent legal and regulatory framework, excellent business schools and science institutes, a sound banking system, and supportive government policies. It must educate an adequate number of science and engineering graduates, build efficient transport infrastructure, and develop advanced communications networks. As the private sector is an important driver of innovation, a nation must also ensure businesses have access to financing and abide by high corporate governance standards. Lastly, the INSEAD study noted a nation must be technologically sophisticated, as indicated by factors such as internet usage.

Part 5 – Where the present and past deviate – acceleration in intellectual development.

Where the dynamics of producing ideas and innovation has changed, especially in the past twenty years, is in the way we communicate. The pervasiveness of cheap and reliable technologies for communication and information dissemination – such as email, websites, search engines, blogs and instant messaging – has created a global platform for knowledge sharing, which functions 24/7.

Since the beginning of this century alone, the number of people using the internet has grown 203%. In China, the number of internet users has expanded at an annual rate of 20% in the past three years to 137 million. The number of mobile phone subscribers around the world has also experienced rapid growth, rising at a rate of 25% per year in the last few years to around 2.6 billion people currently, representing a penetration rate approaching 40%. In China, there are currently an estimated 443 million mobile phone subscribers.

As more people get connected and their use of communications technology becomes more sophisticated, exchanging information has become near instantaneous and unrestricted by geographical boundaries. New models of how people can collaborate on research and work have subsequently sprung up, such as the open source research model, leading to exponential growth in the flow of potentially world changing ideas and innovation.

According to technology commentator Ray Kurzweil, the world achieved more technological advancements in the first 20 years of the 20th century than the whole of the 19th century. Kurzweil argues that through an analysis of the history of technology one can observe that the rate of technological change is not linear but exponential. Kurzweil points to the exponential growth in the power of computer hardware technology as evidence of this trend.⁴

Part 6 – Ideas equals opportunities

The importance of ideas and innovation is well acknowledged by governments these days. Ideas and their effective application – namely innovation – are considered by leading business thinkers as the biggest driver of productivity gains. One US research study claims innovation accounts for as much as 80% of increases in productivity in the US. It has been argued by some scholars that productivity gains, in turn, provide the main thrust of growth for a modern economy.⁵ Indeed, according to the Nobel Prize winning economist Robert Solow, anything that allows an economy to add to its output without requiring more labour and capital will produce sustained economic progress.

In the US, the Department of Commerce states leadership in science and technology as one of the keys to maintaining US global competitiveness. The European Council of Ministers last year approved the Competitiveness and Innovation Framework Programme, a €3.2 billion scheme to promote innovation and boost the competitiveness of European businesses. The European Union is targeting, albeit unsuccessfully, to raise its research and development spending to 3% of GDP. Meanwhile, China is looking to raise its research funding to 2.5% of GDP by 2020.

China is not the only developing country to recognise the key role that productive research and technology capabilities can play in developing a modern economy. Brazil last year released US$200 million in funds for scientific research and passed laws to encourage innovation. In Eastern Europe, Estonia laid the foundations to build a knowledge-based economy through one of the continent’s most advanced telecommunications networks, low internet connectivity costs and high rates of computer literacy, and has started to reap the rewards through an explosion in enterprise software innovations.⁶

Part 7 – Driving innovation in business

More than most, business leaders understand the power of ideas and innovation to drive growth or affect much needed business change amid the globalisation of markets. The 21st century enterprise faces competition from both domestic and foreign rivals, and must be prepared to innovate in order to differentiate itself in a globally integrated marketplace. It must also be prepared to quickly adapt to change or to reinvent itself, as the exponential growth in ideas may lead to the introduction of new business models that render its established businesses obsolete.

We also think it is important to understand the dynamics of working with ideas. Greg Stevens and James Burley’s research on product development is enlightening on this issue, showing that out of 3,000 raw ideas, only 300 would actually be submitted as a proposal, only 9 would make it to the development phase and just 1.7 would make it to a launch. Ultimately, only one out of 3,000 raw ideas would actually become a commercial success.⁷ The authors said that understanding these odds, managing the expectations of those involved, and calculating the future benefits from spending on innovation held the key to success.

But as the history of business shows, for every one good idea, there are numerous failed ones. Possibly the most infamous was Coca-Cola’s decision in 1985 to change the formula of its prized beverage. The subsequent outrage expressed by Coke drinkers forced the company to reinstate the old formula almost as fast as it had dropped it. The lesson for all of us may be that the road to innovation is fraught with risk, although businesses and nations must still walk it in order to survive and stay competitive.

An Example To encourage innovation at ING Insurance Asia/Pacific (ING), we emphasise the need to think independently, experiment with new concepts and share ideas and thoughts.  To put some of these principles into practice ING established an “idea factory”. The unit provides a platform for people to identify and work together creatively on new ideas either generated by themselves or colleagues to keep the company on a path of continuous improvement and excellence. One of the successes of the idea factory was to develop a corporate blogging site through which ING can now engage with stakeholders, including clients, distributors and employees.  It is becoming another major source of ideas to keep improving our business.

Part 8 – Is China’s star on the ascendancy

As we progress in the 21st century, it is interesting to see the possible beginning of an epoch in which Asia – and China in particular – can compete with or even outdo the West in scientific advancements and technological innovation. President Hu Jintao has predicted that “by the end of 2020…China will achieve more scientific and technological breakthroughs of great world influence, qualifying it to join the ranks of the world’s most innovative countries’.

Far from empty rhetoric, the president’s words are backed by an astonishing level of investment into research and development programs around the Mainland. Since 1999, China’s spending on research and development (R&D) has been increasing at rate of more than 20% per year and is targeted to reach 2.5% GDP by 2020. China has already overtaken Japan as the second largest R&D investor, behind only the US, according to a recent science and technology study released by the Organisation for Economic Co-operation and Development.⁸ China’s research drive is, according to United Kingdom-based think-tank Demos, “the most ambitious programme of research investment since John F. Kennedy embarked on the moon race”.⁹

Another important source of funding for China’s scientists and engineers is foreign direct investment. With private enterprise taking their R&D needs down the same route as their manufacturing requirements – out into the global market – China and other Asian countries such as India and Korea, are benefiting from an increasing share of the international flow of enterprise research dollars at the expense of the traditional hubs of research – Europe, Japan and the US. Foreign direct investment in China in 2006 topped US$63 billion, up 5% over 2005.

This inflow of capital into China is driven by improving infrastructure and regulations, farsighted policies, such as attractive tax breaks for foreign investors, and a growing pool of talent. According to the OECD technology study, the number of researchers in China surged 77% between 1995 and 2004 to a total of 926,000, again second only to the US with 1.3 million researchers.

In a recent report compiled by 15 US enterprise and industry associations, prominent US business leaders warned their country’s policy makers that with Asian education systems creating science and engineering graduates far faster than the US – four times as fast in the case of China – US competitive advantages in technology and innovation could quickly slip.¹⁰ While the US does attract a significant number of talented researchers from abroad, a Harvard Business School report noted that policies are in place in China to attract back these people and draw on the knowledge, practices and mindset they have absorbed from working abroad.¹¹

As with many Western countries, China is also negotiating scientific cooperation and exchange agreements with other countries, including the US, countries of the European Union, and many Asian states, in which knowledge would be shared.

Part 9 – Summary

Throughout history, new ideas have been closely linked to social and economic progress. As developing and developed countries alike recognise today, it is not only important to generate such ideas, but also to create an environment through policies, education, international cooperation and investment in which those ideas can blossom into successful innovation and ongoing improvements in everything we do.

In an age when all the world’s useable land has been carved up, natural resources have been divided, and goods and services have become commoditised, ideas and innovation are the new currency, which both governments and private sector enterprises must learn to nurture.

¹ Peter Watson, Ideas (London: Phoenix, 2006)

² Ibid. 433-455

³ Soumitra Dutta, INSEAD and Simon Caulkin, “The world’s top innovators”, World Business Review (January-February 2007)

⁴ Ray Kurzweil, “The law of accelerating returns”, KurzweilAI.net (March 2001)

⁵ William Brody, “Compete – or else”, Innovation (November-December 2005)

⁶ Soumitra Dutta, INSEAD and Simon Caulkin, op. cit.

⁷ Greg Stevens and James Burley, “3,000 Raw Ideas = 1 Commercial Success!”, Research Technology Management (May-June 1997)

⁸ Organisation for Economic Co-operation and Development, OECD Science, Technology and Industry Outlook 2006 (London: OECD Publishing, 2006)

⁹ Charles Leadbeater and James Wilsdon, China: The next science superpower? (London: Demos, 2007)

¹⁰ AeA, Business Roundtable, Business-Higher Education Forum, Computer Systems Policy Project, Council on Competitiveness, Information Technology Association of America, Information Technology Industry Council, Minority Business Roundtable, National Association of Manufacturers, National Defense Industrial Association, Semiconductor

Industry Association, Software & Information Industry Association, TechNet, Telecommunications Industry Association, and the U.S. Chamber of Commerce, Tapping America’s Potential: The Education for Innovation Initiative

¹¹ Sean Silverthorne, “Report from China: The new entrepreneurs”, Harvard Business School Working Knowledge (October 2006)

Reconciling Opposing Thoughts

I was recently interviewed for a profile piece and the journalist asked who had had the most influence on me during the early part of my career. Yes, it’s a standard question, but it reminded me that it was not so much an individual who had helped shape my career, but rather my interest in understanding how certain people—in particular great people—think and act.
I’ve always had a great deal of interest in how best to reconcile the “pros and cons” of almost any issue we are coping with on a daily basis, especially when the picture is blurred or incomplete.
When confronted with a problem, many people tend to present a single dimensional solution, which solution frequently plants the seeds for tomorrow’s problems.
This reminds me of a story in which four people are told to go into a darkroom and hold on to whatever they find. They are then asked what it is. One says it is a snake, another says it is a leathery sail, the third person says it is a tree trunk and the last one says it is rope. The answer: it is an elephant.
The moral of the story: truth or the better solution is only observable when we see the complete picture. In today’s ‘foggy’ world with low visibility as regards what are the better questions and answers, fragmented observations by different people should not be the best way to create solid progress.
Of course once you’ve got gained more insight into what the relevant issues are, the challenge is to internalise the knowledge and emulate the thought processes. Roger Martin in his recent book ‘The Opposable Mind: How Successful Leaders Win Through Integrative Thinking’ points out that most people rather than emulating great thinking try to emulate what a leader did in one particular situation. This may lead to inappropriate actions being taken as each set of circumstances is different and best practice is only a guide—not a blueprint for success.
So what is required then? We need to revisit the way that we approach managing a company which requires, at times, creatively integrating and reconciling views that appear to be in opposition. As the American writer F. Scott Fitzgerald so powerfully phrased it: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”
For instance, in a cost-cutting phase, the objectives ‘hiring freeze’ and ‘double-digit growth’ seem as congruent as the targets for CO2 reduction while aiming for high economic growth. Yet it is these seemingly opposing thoughts that have to be reconciled before clear, decisive plans can be articulated. As I wrote in one of my earlier columns, if you have a problem, you need ideas. When managing opposing issues, you also need ideas on how to resolve them. Many people have presented ideas on how to be more cost effective while growing at high speed. An idea that usually works very well is to tap the minds and ideas of those whom you are already paying. By this I mean your staff and partners who work on the issues that need to be fixed on a day-to-day basis. Ask them how they would resolve the tensions, and you will be surprised how many seemingly opposing thoughts can be reconciled, therefore allowing the thinking (and acting) to progress.
In one of our offices, we looked at risk mitigation at the same time as obtaining significant increase in sales and cost efficiency. Again they were perceived as opposing challenges. After proper idea sharing and the creation of solid processes, it emerged that they can be reconciled, resulting in better controls, more efficiency and higher sales.
Yes, there are better ways of leading companies, and these are ideas which are urgently needed given the clearly increasing complexity within organisations. We complain about it and talk about fixing it, but the real challenge is ‘How’ to fix it. (For more on this please refer to a background paper I’ve written on reducing complexities)
Once I have settled down in the Netherlands (after six fantastic years in Asia), I hope to continue to share my views and believes on this topic and others through my blog.
I wish you all the best, especially in reconciling the opposing thoughts around you!

Reducing Complexities in Organizations

Most organizations face increasingly complexities, resulting in a growing ‘waste’ in their productivity.  As a result, stock markets now apply ‘corporate discounts’ when valuing large companies, because the costs of these complexities are often higher than the benefits of the economies of scale.

Every day, people in companies implement a lot of new initiatives and, by doing so, create future value but also add to the complexities. In a recent article in the Harvard Business Review, David J. Snowden and Mary E. Boone describe the characteristics of complex systems. According to them, complexities involve a large number of interacting elements, most of which are non-linear and minor changes, which produce disproportionately major consequences.  Since the environment in which we work is dynamic and relatively unpredictable, pre-designed and standard responses or solutions can be inappropriate. Constant adaptability is therefore key, as are local solutions, even for companies operating globally.

Well-designed frameworks however can help reduce complexities.

The three overriding questions in corporations are, the ‘what’, ‘how’ and ‘who’ questions, asked when determining strategy (what), implementation (how) and governance (who).

 At ING Asia/Pacific, we recognized this and as a result designed and implemented a framework for managing these three areas more effectively. We called it the “Towards Performance Excellence” framework or TPE for short. It is designed to align strategy and execution through an aligned organisation, and allowing us to measure results using Key Performance Indicators (KPIs) for each objective set.

The framework requires a three-step implementation approach:

Step 1 – The “what” question: Identify market ‘positions’ which are ‘core’ to our business results and develop opportunities to grow and leverage the ‘core’ based on 5 strategic areas of focus. Decisions are made through an iterative process between the head office, business units and functions and are then translated into a picture.  A 5-legged ‘spider’ framework communicates the growth strategy of expansion through 1) Reach, 2) Lines of Business, 3) Products, 4) Distribution Channels and 5) Customer Segments.

Step 2 – The “how” question: Having set the strategic direction, the process moves on to set the strategic priorities, which in turn categorizes the priorities in a comprehensive and consistent process by listing all the main objectives and then adding KPIs.

This is done by grouping all business objectives into six ‘Drivers of Excellence’. This step ensures that everyone involved understands where they are placed to help execute the strategy. All their business targets, initiatives and personal objectives can also be placed in one of the six drivers.

Each Driver of Excellence consists of a variety of sub-drivers, which unambiguously define all businesses and functions in the same way.

This means, for example, that if an employee moves from a business unit in one country to another country he knows that the TPE framework is also applied in new business unit he moves into. Each of the ‘Level 1 Drivers’ drill deeper into the day-to-day work, while second level drivers define further e.g. operations can be further defined as grouping activities around new business sales processes, claims processing turn-around-time and so on.

Step 3 – The “who” question: The organizational framework allows the entire organization to know who is doing what and who is responsible for which measures and objectives.  All business units and functions apply the same organizational format, indexed in a matrix chart.  This chart clearly distinguishes which unit within a business unit is a business line (with P&L responsibility) and which department has a functional role.  This is different from the typical hierarchal organizational chart which misses the horizontal and vertical lines of the matrix organization, needed to enforce people to work together and avoid silos within a company.

Through these three steps, addressing the “what, how, & who” question in a comprehensive, consistent and cohesive way, the corporation is connecting all the dots.  It also connects the target setting for pay-for-performance schemes and even a knowledge management portal has been designed along the same framework.

A company that is determined to execute their strategy successfully can of course achieve this goal in a number of ways. However, when it comes to replication of a successful strategic execution across a diverse set of businesses in different countries, TPE has worked very well for ING. By unifying diversity, we now benefit from the richness of having that diversity by operating with 24 different business units in thirteen countries while eliminating the costs of the ambiguity it create

Towards Performance Excellence

framework for getting from aligned strategy to aligned execution

Over the past two years, ING Insurance Asia/Pacific has successfully evolved and implemented the Towards Performance Excellence management framework.  This management model, which was developed with input from functional heads, senior management and staff at the business units, is now the operating mantra for all 24 of the region’s business units across everything they do.  Most of ING’s employees in Asia are now familiar with the six drivers of excellences that form the foundation for the Towards Performance Excellence (TPE) model.  However, it is important from time to time to revisit the business reasons that prompted us to create this strategic framework in the first place.  In line with ING’s philosophy of continuous improvement, an updated note on this strategic framework is presented below:

How Towards Performance Excellence fits into daily life

We are all implementing an ever increasing number of initiatives within businesses, including Diversity, Multiple Performance Metrics, Customer Centricity, Procurement, Living the Brand, IT-Security, Shared Services, Cost Reduction, Pensions, Compliance, SOX, IFRS, Basle II etc.  No business can afford to ignore any of these issues.  But do business units have an effective method to ensure that each of these are tackled properly while ensuring that the solution is in-line with the business’s strategic direction?  This situation is comparable to an architect who starts to build a house without first drawing up any plans and blueprints.

TPE effectively organizes (i.e. lists and catalogues) all these concepts and initiatives in a more coherent manner according to six ‘Drivers of Excellence’ – the Portfolio, Marketing, Organizational, Financial, Reputation and Operational excellences – and then into logical sub-drivers.  This process provides a checklist of sub-drivers under the top-line excellences and thereby a strong tool for implementation of action plans and follow-through.  In addition, TPE aligns all the Drivers to the Mission/Strategy, Knowledge Management function and corporate audit services of a company, while supporting managerial discussions and action plans.

The below diagram describes the strategic areas/markets/products in which Insurance Asia/pacific is active as well as the areas for future growth opportunities.

Having an Aligned Strategic Direction under the following framework will bring us to Aligned Execution:

Some businesses have operational excellence as one of their strategic objectives.  Yet we can not achieve overall excellence in performance, if we don’t have excellence in all the key drivers of our business activities.

What the “hundreds” of initiatives or plans have in common is that they all are (or should be) “Drivers for Performance Excellence”.  Yet, they can only achieve this goal if managed in a consistent and cohesive way, with clear and simple objectives and measures set-out.  An example below breaks-out the drivers/sub-drivers for Sales & Distribution within the Marketing function.

What Towards Performance Excellence brings

TPE provides us with the road map for strategic development, implementation, and more importantly a visual manifestation of that process with a clear list of next steps.  Employees should say: “This is my ’living organization‘, its components, how we get to our goals and how I fit in.”  We all aim to create more than just an organization chart – instead we create an identifiable, flexible and adaptable structure, which is unambiguous, easy to understand, and can fit on one page!

The TPE model also provides commonality to the initiatives that we tackle every day and shows their purpose and how they fit into the ultimate objective of Performance Excellence. The model also provides a form of cohesion, so that themes such as Branding, Living the Brand or Finance initiatives such as Economic Value, Embedded Value, Risk-based capital etc., can be organized in a way so that we do not lose sight of our overarching objectives and are able to unambiguously explain what they intend and mean.

TPE is an initiative to create more order in an otherwise unplanned world, which can quickly cause staff to conclude that we don’t have a clear strategy and do not know what to achieve first or how to execute any plans.

TPE can then be used to share knowledge and boost use of the intranet as the main form of communicating and sharing best practices.  If somebody wants to know how to get to the lowest cost of claim handling, the best branding campaign or IT security, this can be found easily on the intranet through the relevant drivers.  It also forms the basis of the medium-term planning process, country management discussions, communications and management reporting and is well aligned with AO scans and input from corporate audit services.

All management layers are involved

The impact of TPE is that all management layers and all functional columns adopt the same approach, and the same objectives and measures in an integrated and simple manner.  The matrix organization becomes much more effective, as well as the role of a regional office in is efforts to “lead, support and control in a balanced way”.

Everyone has a “bird’s eye” view of what is taking place in other parts of the organization, how their activities fit into the greater scheme of things and how other parts of the organization are working.

TPE also compels managers to pay attention to the six drivers, and the relevant objectives that have been set.  All too often managers find themselves pre-occupied with reorganization, internal or external events, special projects etc., and while they wish to be more involved in other parts of the organization, find they are unable to do so.  TPE offers a way to update managers instantly on the progress in each of the six drivers and where the company stands in terms of the set targets.  Applying the TPE Framework allows them to be more focused on all issues relevant to drive performance and not just on issues such as sales, cost management and operational excellence.

TPE driven Performance Appraisal and Compensation

Parts of Senior Managers’ personal objectives are also set along the lines of TPE, using a scorecard as illustrated below. Consequently, appraisals weigh the importance of each of six TPE drivers in relation to the management function and indicate to what extent the objectives in each of the drivers have been realized.

Finally TPE is used to structure our meetings and reports in order to better align our communications .

Conclusion

Over 2005, we progressed from a diversified group of businesses/countries with a variety of different strategies, approaches and business-languages to leverage a much more unified and aligned approach to define, manage and communicate our businesses. While respecting the differences in our businesses, we have unified what we have in common.  I call this “Unifying Diversity”.  We added clear objectives and measures to the ‘hundreds’ of (sub) drivers, needed to manage our businesses, allowing us to drive more effectively the overall region to Performance Excellence.

Learning from the Best Managed Company — GE !

(classic article – earlier published)

For more than 10 years I have been closely following the progress General Electric/GE, called the “The World’s Most Respected Company”, and especially the way it is managed, and its capability to build from strength to strength.

Their achievements are even more impressive if one realizes that they are operating in some of the most difficult sectors of the economy.  As a large and widely diversified conglomerate, GE should be more handicapped than other smaller, more focused companies due to the fact that it is so complex.

 Recently I actually studied their 2003-Annual Report.  Again a very inspiring exercise!  But what did I learn?  In their letter to their stakeholders the CEO, Jeffrey R. Immelt, clearly describes which ‘drivers’ helped GE again to enjoy excellent performance (his words).  As he frequently used words like ‘excel’, ‘excellence’ and ‘excellent performance’, I thought, let’s ‘frame’ GE’s drivers using our TPE Framework of six Drivers for Excellence.

I will start with summarizing GE’s ‘vision’ (“The environment we see”) where he describes, among others, some global trends like globalization, creating excess capacity and resulting price pressures, global competitiveness from places like China and India, and new technologies which will contribute to further margin erosion.  Winning companies will sustain long term growth by betting on high-growth markets to which they can bring unique technical and management capabilities (one of GE’s key strengths).  He then mentions that GE can outperform by executing their ‘strategic imperatives’ to sustain our strong business model; strengthen our portfolio and drive our growth initiatives.  Their business model has two dimensions : ‘broad-based financial contribution of our businesses’, measured by double-digit earning-growth of the BUs’ and ‘continuous improvement in execution’, measured by cash flow growth and balance sheet strength. 

 The ‘Drivers’ he refers to, I have ‘grouped’ in our TPE format: 

Portfolio Excellence ‘Strong organic growth’. M&A : ‘Committed $30b to portfolio moves to create further growth’. ‘Fix or Exit’: Refers to “GE Doghouse” & how subsidiaries have been ‘fixed’ and others exited.	Marketing Excellence Customers : ‘Pass on your excellence to      your customers, so that they also win, building enduring relationships’. Products : ‘Launched dozens of leading-edge products, filed many patents and developed new technologies for future products. Distribution : ‘Winning companies have strong direct sales force’.  90% of GE’s revenues is through direct customer contact.
Operational Excellence Operations: ‘Continuous improvement through six sigma’. Technology: ‘Spent $4b on technology’. ‘2000 researchers in global Research Centres around the world (India, China). Leverage global capabilities to local markets.	Organizational Excellence People/HR: ‘Give staff the technology and the training that make them competitive’. ‘We recruit, we train, we develop and we improve’. ‘Want to raise ‘growth leaders’, people with market depth, customer focus and technical understanding’.
Reputation Excellence Corp. Communications: From Core Values to Core Actions: ‘Imagine, Solve, Build, Lead’. Strong governance. Mention four ‘Believes’ and one ‘Worry’ when ‘GE wins’.	Financial Excellence Increase operating cash flow by higher      turnover of inventory, receivables’ (‘Bonus-linked’). AAA-rating and ‘leverage this strength’. ‘Dynamic control and procedures’. High quality financial reporting. Key performance metrics.

Although I do not intend to list all the reported issues, it is interesting to note that compared to our TPE Drivers for Performance Excellence, that some of our key TPE-Drivers are not referred to, such as: ‘Partnerships’ (Portfolio), ‘Branding’ (Reputation) and ‘Risk Management’ (Financial).  However, they might be addressed in their Operational Plan.

As you may know, one of GE’s biggest and most profitable Business Units is GE Capital.  Its Consumer Finance Unit made US$2.1b profit, while the Commercial Finance Unit reported a US$3.8b profit in 2003 and the Insurance unit US$2.1b.  Equally interesting is that the sources of profits were derived from market segments not typically found within more traditional financial holdings.

GE remains one of the most inspiring companies from which to learn in our attempts to ‘outperform the competition’ and to achieve ‘continuous improvement’.

Keep Thinking, don’t just do it ……..

(earlier published – classic article)

2004:  Keep Thinking, don’t just do it ……..

At the start of the year, I would like to share some of my thoughts with you.  There are various ways of looking at what to do or not to do which might result in a more successful year for you, both professionally and personally.

My new year’s resolution is that we should ‘keep thinking’ more to help us to be more effective in all we do or don’t do. Everyday there are a lot of things that come straight at us that we just action without thinking (especially through email or other media).  But if we take some time to carefully consider the various pros and cons before drawing conclusions, we might improve the quality of our ‘output’.  After going through a solid thinking process, we may ‘just-do-it’ anyway, but even more importantly, we may sometimes ‘just-NOT-do-it’.  Of course the ‘do-it’ might be more constructive and more positive.  Yet, since we do not always have the skills to make the right decisions, saying ‘yes’ to every request or opportunity might soon prove to be the wrong decision as well.  Therefore, the ‘just-not-do-it’ option might be also quite constructive.  Indeed it might help us to simplify the way we work, help reduce time or cost and make us better workers.

See this article from The Financial Times, because sometimes ‘just-NOT-doing it” is the right thing to do…

Finally, on a global level, we were delighted to see Moody’s reaffirm ING’s rating, reaffirming our status as one of the world’s most well-run financial institutions.

More details can be found on their [press release].