Geoff Colvin is a “Senior Editor
at Large” at Fortune and
a fairly prolific author. I greatly enjoyed his 2008 Talent
Is Overrated, which combined the distilled results of hundreds of
research studies with lively profiles of such superstars as Tiger Woods, Mozart,
Michael Phelps, Jerry Rice, Benjamin Franklin, and Warren Buffett, as well
as chess prodigies and concert violinists.
His
thesis? Essentially, that it takes ten years, or about 10,000 hours,
of “deliberate practice” to achieve great things. And “deliberate
practice” means pushing yourself and continuously getting past what you’re
comfortable doing. It’s not batting the tennis ball against the backstop,
it’s facing the ball machine set to “stun.” “Deliberate practice”
represents hard hard work.
The good news that I took away from that book is that great performance is
available to almost anyone with a baseline modicum of ability and the willingness
to put their shoulder to the wheel long enough and hard enough. The bad
news is how long and hard that may be. Colvin ends by posing this existential
question to the reader:
“What would cause you to do the enormous work necessary to be a top-performing
CEO, Wall Street trader, jazz, pianist, courtroom lawyer, or anything else?
Would anything? The answer depends on your answers to two basic questions:
What do you really want? And what do you really believe? What you want –
really want – is fundamental because deliberate practice is a heavy investment.”
In other words, we know why everyone who wants to be Tiger Woods, or Arthur
Liman or David Boies, isn’t.
But this isn’t about that book.
It’s about his latest, The
Upside of the Downturn (June 2009), a quick 171-page read (small
pages to boot!), which could hardly be more timely. Or, to this inveterate
optimist, more welcome. Hence it merits a quick review:
Colvin begins by setting the stage. The “opportunity” presented by this
downturn is unprecedented because:
- The downturn is worldwide, so your “canvas” is “huge.”
- It’s severe and painful, so the gods of consulting have granted you what
every consultant on leading change knows is a prerequisite–a “burning
platform.” - Ir’s deep, profoundly affecting decades of financial and economic habits
and challenging deep-rooted assumptions about such things as the value of
home ownership, investing in equities for the long run, and saving vs. borrowing. - It’s already long and promises to be much longer, which means many companies
won’t survive it. - It’s novel, so no one has an advantage in knowing how to manage for it.
- And most importantly, it will test leaders personally in ways they have
never faced before.
Second, he talks about how we arrived at this “new normal.” It
actually traces its origins, he suggests, to the fall of the Berlin Wall and
the subsequent unleashing on the world of hundreds of millions of new capitalists
in Eastern Europe, Russia, and China, which led to a global glut of capital. Together
with the US Fed keeping interest rates historically low following the 2001
recessions, the economies of the entire world seemed to explode together into
prosperity from 2002 through 2007. Excessive capital (yes, there is such
a thing) chased once-scarce assets such as modern art, junk bonds, Mayfair
townhouses, and Miami condos to such a degree that Jeremy Grantham calculated
in 2006 that the risk/return ration had actually turned upside down: “The
first negative-sloping risk-return line we have ever seen.” And,
of course, US consumer spending rose to an astonishing 71% of GDP, the highest
since 1939.
Colvin pinpoints the day this all changed as June 13, 2007, when the yield
on the 10-year T-bill was 5.3% and that on junk bonds was 7.7%, a historically
narrow spread. But on June 14 the spread began widening and continued
to do so for the next 18 months. Welcome to the new normal:
- The US will become less consumer-driven and consumer-focused (from the
1950’s to the 1980’s consumption as a share of GDP was about 61–63%). - Attitudes towards debt and thrift are deeply cultural, and they are shifting
back towards thrift as a virtue and debt addiction as a plague. Shifts
such as this typically last for decades and decades. - The US’ share of the global economy will of course continue to shrink.
- Investors may, as is their periodic wont, over-react to a decade of underpricing
risk by overpricing it for a long time to come. - Governments’ economic role will grow.
Swell, right?
So what are you supposed to do?
Here’s the heart of the book: Colvin’s ten suggested principles, one
chapter per, on “the upside of the downturn.”
First, reset priorities. As Jack Welch used to say, “Confront reality not
as you wish it were, and not as it used to be, but as it is.” Or,
as Jamie Dimon of JP Morgan Chase–one of the few bank execs to emerge
from this with a burnished and not a tarnished reputation–put it:
“Act. A lot of the actions you take in the middle of a crisis
like this are admissions of your own failure–we bought X, we’re gonna
sell it, we’re gonna take a loss, we have to tell the shareholders…[But] people don’t want to admit they’re wrong, so they sit there–and these
problems don’t age well.”
Specifically, be very clear-eyed about your firm’s financial strength, its
competitive standing, the state of your clients, your reputation, and what
risks you’re facing.
Second, protect “your most valuable asset”–your people. Recognize
that, despite the millions of jobs lost worldwide, “the global supply of ingenuity,
passino, inspiration, and human energy is at least as great as it ever was. That’s
a major reason why this is recession is a massive opportunity for wise companies
to increase the value of their human capital.”
- Redouble your investment in training and development.
- Understand that people will “never forget what you do now.” What
this means is, as we’ve seen proven time and again from past recessions,
when good people see colleagues treated badly, they leave at the first opportunity. - “Pay smart.” Don’t tie compensation to short-term (and
one year is short-term) performance. If pain must be distributed, then
distribute it equitably. - Realize the true cost of layoffs, including the dimensions of lost know-how,
recruiting and training new people when they’ll be needed again, the obssessive
navel-gazing before, during, and after the nastiness, the damage to your
“brand” as an employer, and the damage to morale of the survivors. This
does not mean you can’t or shouldn’t lay anyone off–the arithmetic
of matching revenue with costs is harsh and unyielding–but it does
mean you need to take all the costs of layoffs into account, not
just severance packages.
Third, engage with the outside world and especially your clients. Don’t
become a turtle, or an ostrich. There will be a soundbite which
encapsulates how your firm responded to the crisis, and if you don’t participate
in formulating it, others will be more than happy to do it for you. Consider
Colvin’s own four alternative soundbites for what caused the crisis:
- Free markets ran amok.
- Greenspan did it.
- Clinton and the Democrats twisted the nation’s credit system to benefit
subprime borrowers. - Americans, Britons, Spaniards, Australians, and others lost their self-discipline.
Colvin (and I) believe the actual explanation is a fairly nuanced combination
of these, with an emphasis on #4, but #1 looks like it may be the victor, to
the enduring harm of us all.
These four messages are not apt for your firm’s reputation emerging from this,
of course, but you get the principle.
Fourth, re-examine your strategy (here, Colvin is singing what is music to
my ears). To do so, ask yourself three questions:
- What is our core? In the Great Depression, DuPont decided it was
R&D and came up with nylon, neoprene, and other lasting breakthroughs. At
Intel, it’s its highly automated chip “fabs” (fabrication sites), which it’s
upgrading to the tune of $7-billion in the midst of this downturn. - How is this changing our clients and their behavior? If your firm
isn’t responsive to new behavior patterns, someone else will be. - And the last is my favorite: Will this hasten–or even cause–a
large-scale restructuring of our industry?
Both the newspaper industry and Detroit, to take but two examples, are now
experiencing profound restructuring. More broadly, economic value in
our economy is shifting from manufacturing to services, from atoms to bits,
and from logic and linear thinking (left brain) to intuitive, nonlinear processes
of creativity and imagination (right brain).
Lawyers are among the most resistant creatures on earth to the message of
fundamental change, but the blunt economic fact is that it does not matter
whether we choose to resist. If, for example, the 100-year-old “Cravath
system” of associate career paths is finally going to be recognized as obsolete,
then resistance, to coin a phrase, is futile.
Fifth, manage for value. This is less applicable to law firms, since
it speaks to return on capital, but a moment to explain it: In 2008,
Time Warner and Apple each had total enterprise values almost exactly the same,
at a nice round $100-billion. But investors had put about $5-billion
of capital into Apple, and about $142-billion into Time Warner.
If you’re measuring your firm on the scale of wealth creation, in other words,
you may find yourself surprised. And if you measure specific offices,
practices, clients, or even lawyers, by the same metric, be prepared to watch
the fur really fly. But has the indisputable ring of truth to it.
Sixth, try to create new solutions for clients’ new problems. Sounds
a bit pat? A more palatable way of phrasing it might be to suggest trying
to align what you’re offering with what clients’ needs are today. During
the boom times, a marquee M&A or private equity practice might have been the
ticket; today, government regulatory investigative defense lawyers might be
it. Or if employment litigation is up but clients’ willingness to pay
is down, get serious about re-engineering how you handle it and make sure the
work gets done in the most cost-effective locales.
Seventh, “price with courage.” This is one of my favorites
as well:
- Don’t assume you have to discount–it’s riskier than you may think. Few
management decisions are more commonplace in a recession than cutting prices,
but please, I prithee, consider the lasting repercussions. - Price cuts hardly ever pay for themselves. If you give a client a
10% discount, does that mean they’ll send 11% more work your way? A
20% discount would require 25% more work. Etc. - Discounts can destroy your firm’s “brand equity”–which
you’ve probably spent decades building. Recall the cautionary tale
of what Saks Fifth Avenue here in New York did last Christmas season. Seeing
luxury goods languishing on racks, they cut prices an eye-popping 70%. A
Valentino evening dress that went for $2,950 was now $885. Customers’
reactions? Profound: What is a Valentino dress really worth,
after all? If I can buy it for $885 not at a second-hand or thrift
shop, and not in some godforsaken outlet in farthest Maine, but at one of
midtown’s premier temples of retailing, what was it ever worth? - Discounts train clients to behave badly. When your rate goes from
(say) $600/hour to $500/hour, $500 becomes the new normal with a vengeance. It’s
now the client’s reference point, or “anchor” and they will stoutly resist
your returning to $600. - Clients hate price increases more than they love price cuts. This
follows as the night the day from our asymmetrical risk aversion. Put
in plain English, we are much more sensitive to a loss of $X than to a gain
of $X. Winning $1,000 makes us feel good, but losing $1,000 makes us
feel really, really bad.
Eighth, “get fitter faster.” This means operational discipline.
“Operational discipline” need not be dry and green-eye-shade stuff.
Do you remember the American Express offer several months ago to many of its
card members to send them a $300 prepaid gift certificate if they’d pay off
their accounts in full and close them down? I do. I could not for
the life of me figure it out.
Here’s the story: AmEx identified its customers with high outstanding
balances and little payment or spending activity and, in an environment of
rising credit card delinquencies, decided it was better to offer an incentive
to those folks to clear their debts rather than let them go bad later, even
if it meant making a very unorthodox offer.
This is called operational
discipline: Re-evaluating the economic value of clients.
An application from law-firm land. Have you certain partners that never
saw a dollar of revenue they didn’t like? Time for some operational discipline.
Specifically, get realistic, and get strategic about client intake. How
can you be “strategic” about client intake, you may be asking yourself? Isn’t
it just a credit check and a conflicts check and we’re done?
Guess again. New client intake is your future pipeline of demand. What
could possibly be more strategic than that? Want to move your firm up-market? Control
your client intake. Want to move your firm down-market (capitalizing
on economies of scale)? Control your client intake. Want to provide
more opportunities for associate training? Control your client intake.
Finally, this may be one of the few opportunities you have to get your partners
to agree on what the “key performance indicators” for your firm are. With
apologies for the MBA-speak, “KPI’s” are those few measures–there
shouldn’t be more than about five–that really cover what would define
success. For a manufacturing company, they might be things such as EBITDA,
revenue from products less than three years old, market share for key products,
year-on-year sales growth in strategic segments, and on-time delivery rates.
For a law firm, KPI’s might be: Diversification of revenues across practice
areas, percentage of revenue derived from cross-office and cross-practice-group
collaboration, absolute level and growth of “share of wallet” from key clients,
(low) partner and associate attrition rates, realization rates, etc.
Ninth, understand all your risks. What might go wrong? Take
a broader view.
Here’s a cautionary tale. Immediately before the subprime crisis exploded,
a “risk consulting” firm called Protiviti (note to self: never
ever do business with them) published the results of a survey questioning 150
top-level executives in the US asking, among other things, “how effectively
does your company manage significant risks?” The results were sorted
by industry. Financial services and real estate gave themselves, at the
astonishingly high rate of 72%, the best possible score. No other industry
came remotely near this level of confidence.
It gets better.
Financial services and real estate also ranked themselves relatively low in
“appetite for risk;” life sciences and health care were far higher. The
Protiviti conclusion was inevitable: Financial services and real estate
“not only possess a reduced risk appetite, but also a very high level of effectiveness
at identifying and managing all potentially significant risks.” Yes,
and “stocks have reached a permanently high plateau” (Irving Fisher, October
1929).
So what to do? A few thoughts:
- Build scenarios. Scenarios are only as good as the people building
them, but they can be thought-provoking. Will we enter an era of continued
free trade or protectionism? Ethnic violence and terrorism or calming? Etc. - Think in probabilities. What, for example, is the probability of
your losing a few critical rainmakers? Of a major competitor failing? Of
a major client failing?
Tenth and last: Don’t forget to grow, yourself.
All of us have faced situations worse than we anticipated, sometimes by an
order of magnitude or by an order beyond belief and, it may seem at the time,
beyond bearing. They leave some of us weaker and diminished and some
of us stronger and more courageous. This may be such a time for you. There’s
no magic wand to wave, but here are a few lodestones:
- Be calm and in control. FDR famously did this; hold your figurative
cigarette holder jauntily upward. - Be decisive. Make decisions. Partners who at other times might
cavil ’til the cows come home will, secretly, welcome it. - Stand up and be seen. In times of doubt and uncertainty, people want
the sense that there’s a leader on the job, on scene, dealing with it. - Show no fear. When Robert the Bruce, leading the Scots against the
English at the Battle of Bannockburn, literally led the Scots in to battle,
riding his horse out in front of his men, an English knight lowered his lance
and chared on his mount. Bruce stopped and didn’t move as the knight
thundered toward him, then at the last moment, stood and turned sideways
in his stirrups, swinging his battle-ax to split the passing knights helmet
and head in two. The troops roared into battle and won the Scottish
nation’s greatest victory in their history. - Put the crisis in context. If you portray this as a “bad, abnormal,
and inescapable” event, people become depressed and tend to suffer severely. But
if people see it as a more normal, and even interesting, episode in life
from which they can learn and to which they can respond, they rise to the
occasion.
Never underestimate your people’s ability to rise to the occasion.
In my opinion, this is one of the most critical, least tapped, assets firms
have going for them.
Here endeth The Upside of the Downturn.
For your firm, will it be an Upside, or will it be a Downturn? That,
I submit, is entirely up to you.
