According to these authors, not much, at least not single-handedly:
Nor is there much a CEO could do to offset the effects of a deep recession, he adds, other than respect the study’s unhappy conclusion: Barring surprises, deep recessions are likely to be followed by torturously slow recoveries. “If we’ve had a very bad initial shock, [that can lead to] a long recession.”
A counsel of, if not despair, little comfort.
As I’m constitutionally incapable of taking that for a final answer, let me offer another bit of Wharton learning with the somewhat more promising title, “How to Solve the Jobs Dilemma: Attract and Retain More Entrepreneurs.”
Loyal readers will immediately recognize that if I’m proposing that lawyers suddenly embrace their inner entrepreneur, I’ve written with conviction that there is no such thing: “Entrepreneurial?” Really? My point was that individuals working in the safe and sheltered confines of a profitable and successful ongoing business, whose income-not to mention their homes and 401(k)’s-doesn’t turn on the success of the venture they’re proposing, cannot seriously be called “entrepreneurs.”
No, I’m trying to suggest something a bit different.
The Wharton article I cited talks about employees (think: lawyers) within the firm who are thinking about other ways of doing things. People, that is, who have ideas. And if your lawyers constitute an idea-free wasteland, you have other problems.
Studies show that entrepreneurs within companies are significantly more likely to be on the lookout for new growth opportunities than managers, making them more likely to recognize opportunities. If growth and innovation are an important part of your corporate strategy, you want to attract and retain these employees with entrepreneurial mindsets.
If you are to have any hope of encouraging these aspirations and capturing some part of the value within your own firm, the first decision you have to make is not to judge their proposals on the traditional management metrics, which our Wharton friends summarize as whether the skunkworks:
- Makes measurable financial gains
- Makes the company more cost efficient
- Improves the company’s status as an industry leader.
But industry-shaping ideas rarely show signs of being able to meet these measures early on. Innovative plans are usually ripe with option-value. They are moves that “buy” you an option to potentially do something valuable in the future, but whose value cannot be accurately predicted in their early stages.
One trick that successful large-company entrepreneurs use is to focus their business cases on elements of an idea that address immediate threats. [emphasis supplied]
You need to recognize that new ventures always begin in a phase of uncertainty, when the effort put in far exceeds the results coming out. Give it room to breathe: See how it’s doing first on market adoption, only then on revenue, and only finally, after time, on profits.
Ask yourself these things:
- Is the “growth” environment flat? (Check)
- Are we unwilling to commit to conventional growth/investment initiatives so long as nobody else is doing so? (95% odds of “check.”)
- Are we facing threats that didn’t exist before? (If you don’t answer “check” here, you may as well stop reading right now.)
- Is it possible people at the front lines, interacting with clients and markets all day long, might have given some creative thought to these realities? (I certainly hope so, for you and your firm’s sake.)
Then your course is straightforward:
- Support them; let them know their ideas matter to you.
- Give them sufficient freedom to pursue their ideas, even while not abandoning everyday business exigencies.
- Don’t commit infanticide by imposing the wrong (mature-business) metrics.
I told you I can’t take a counsel of paralysis as the end of the story.
Neither, I pray, should you.
The use of the mathematical symbols in the example or concerns that you don’t know what the R programing language is or why anyone would care should not deflect people from thinking and making decisions in a “Bayesian” manner.
Your firm has an “opportunity” to hire two new lateral partners, call them X and Y. You have a body of information about each of them through your due diligence. What should be your hiring position? The Bayesian analysis is to take advantage of what your firm’s prior history is with lateral transfers whose credentials are similar to those of X and y. On a frequentist basis let’s suppose that 3 of your last 6 lateral transfers have met their criteria for success at the time of hiring within a period of A years. Whatever you thought when you hired them, the posterior probability of success for lateral transfers is 0.5. That now is your best guess (the new prior probability) for success at your next hiring opportunity. So if you want to do better than toss darts, you need to mine the information on X and Y to see whether their cases looks more like the successful transfers (within the context of the next A years) or more like the unsuccessful ones. If X looks more like the successful pool and Y looks more like the unsuccessful, then your probability for success with X is > 0.5 (and maybe you can infer how much better at least semi-quantitatively), but the probability for success with Y is < 0.5.
If one has the (successful) experience needed to be making important decisions, my experience is that it should always be possible to make and defend an initial estimate of probability of success – even if that estimate is 0.5. This is not guessing or intuition, it is empirical analysis. Then in almost all cases is possible to adduce some relevant, additional information, and to use the “Bayesian” process for updating your estimates. As I am sure ASE will agree, this is exactly what is done with decision-making in other businesses – everybody makes decisions under uncertainty. Thinking as logically and quantitatively as possible not only clarifies and strengthens your risk (or opportunity) management, but it also allows the development of databases that can be used again for future decision-making. And so builds for the future and establishes a useful legacy.
Mark L.
Mark (and all):
As always, a cogent and thought-provoking comment which greatly extends and enriches the original subject I broached on ASE.
By displaying an excerpt of the actual published paper of our good Wharton friends – as opposed to merely excerpting the narrative executive summary published on “Knowledge@Wharton” – my intent was to vividly emphasize the hard theoretical constructs underlying their assertions which are deceptively commonsensical; casting doubt or ridiculing their rigorous approach could not have been further from my mind.
Truth be told, Thomas Bayes, father of Bayesian analysis (London/1702 – Tunbridge Wells, Kent/1761), and a Presbyterian minister to boot, has long been a hero here at ASE, if for no other reason than the enduring power of his insights.
In the famous Thinking Fast and Slow, Nobel economist Daniel Kahneman summarized Bayesian theory as helping define “the logic of how people should change their mind in the light of evidence.” Bayes’s rule specifies how prior beliefs or “base rates” (Mark’s 50% success here, for lateral partners) should be combined with new evidence (traits of X and of Y) to determine whether to favor the hypothesis over the alternative.
And indeed, every business makes decisions under uncertainty. That it makes lawyers squirm is all the more reason to employ every tool in the book to help optimize your outcomes.
Supporting those with ideas is the very least that should be done.
To do more would be to recognise the merit of the third of Professor Sargent’s lessons: “Other people have more information about their abilities, their efforts, and their preferences than you do.”
That demands of law firm (and other) leaders that they should actively seek out what is known beyond the C-suite and use that information to make better sense of what might work for the future.