Blockchain will change everything…wait…Blockchain 2.0 will change everything…wait…

Much has been said about Blockchain and how it will, literally, change the entire world. Blockchain is the hip and relatively new technology that has been described as the second coming of the internet. Most people are familiar with it based on the cryptocurrency, bitcoin, a pseduo-anonymous, distributed, public distributed ledger of currency. Depending on how you use the vocabulary, bitcoin/blockchain could refer to a variety of things ranging from the algorithm, the protocol or the currency. It’s been claimed that the  blockchain can be applied to “all human endeavors”–as has been foretold since bitcoin came into the public view. It’s important to remember that blockchain technology is part of a cryptocurrency but a cryptocurrency is focused on payments while blockchain technology can be used for more than payments.

Regardless of the risk, legal or moral issues surrounding blockchain as a currency, bitcoin technology allows parties with various trust levels  to  transact together. Blockchain 1.0 really viewed the world through a  currency and financial lens–financial transactions between two or more parties. Blockchain 2.0 is based on the idea that “all human endeavors” can be coded (you pick your programming language) into little programs that are baked into the blockchain and “run” based on triggers or other criteria i.e. smart contracts. These little blockchain programs allow you to execute conditional logic e.g. if it rains on Tuesday, pay party “A” 2 bitcoins. Obviously, as soon as a “program” is executing, you run into a large variety of issues such as the ability of that program to run a “trusted” fashion or who gets access to what and whether access can be limited (talk about risk mangement!). Blockchain 2.0 technology also has additional features to serve diverse needs of their users e.g. blockchain tokens/coins for use in  representing physical (or even non-physical) assets.

Newer projects such as Ethereum, Hyperledger and others have been created to deliver the Blockchain 2.0 vision. They add the ability to run these programs, control access, create trusted execution environments, etc. I will state for the record that all of these things are needed to create a Blockchain that is useful to business interests e.g. B2B type activities where additional privacy, control and capabilities are needed–governance in general. You could easily imagine taking Blockchain 1.0 and using it carefully to create Blockchain 2.0 capabilities, but Blockchain 2.0 is a bit more a rewrite than a tweak.

This is all very good, but the questions you should start asking yourself is “who gets to cash the check–who really benefits?” The person “cashing the check” really determine how fast things will move and whether they will share the benefits with others.

Blockchain promises to reduce the cost of transactions and make it easier for parties that do not trust each other, to conduct transactions. Does that mean that banks are not needed and the cost of a transaction becomes minuscule unlike today? I’ll mention that the concept of “transaction” related to banks may or may not mean exchanging payments, it could also mean “asset management.”

If so, the consumer benefits, the banks do not. Or does it mean that banks are still needed, maybe they are not called banks anymore, but a middleman is still needed. If so, then the “new middleman” benefits at the loss of the old middleman (ala Platform Scale). Consumers may lose for awhile due to an increase in choices/confusion.

The technology can deliver benefits. However, it is interesting to consider:

  • You will still need alot of computer servers and people to feed and care them.
    • The actual blockchain can be viewed as a database that talks to other databases to sync up and update itself. Sometimes the algorithms require alot of computational power.
  • You’ll still need to administer the process e.g. in Blockchain 2.0, someone has to give “permission” to transact.
  • There are legacy assets that need to be retired over time and sometimes this takes a really long time–as in decades.
  • There will probably be multiple, maybe thousands, smaller transaction networks setup for specialized interests and uses. This means that all the above issues are multiplied by “n.”
  • It is hard to get people to agree to use the same standards across the entire stack of an application unless it gives them an advantage.
  • New technology and its applications that enable new scenarios can create challenges to managing risk—not transaction risk but overall risk of the activities the transactions support.
  • Perhaps most importantly, if you transact with Bitcoin 2.0, you have to trust the platform to execute, which means you have to trust the people running the platform, which is exactly the issue we have today, “who do you trust?”

Bitcoin 2.0 thinking is designed to be more business friendly e.g. less computational power needed and more access controls. As Bitcoin 1.0 becomes Bitcoin 2.0, the types of issues present in today’s systems crept in and imposed an overhead and burden similar to the way the same requirements burden today’s environments. The key issue though is that IF companies can agree to use these new technologies together, then their total cost of ownership CAN go down. In other words, if companies collaborate smartly to transact, then yes, costs can go down and benefits can increase. This was true 30 years ago as well–standardization can benefit the entire ecosystem.

So its clear there can be a benefit. Most likely companies will benefit first as they will incur the initial investments and most companies will not fully transfer everything over to the new platform. Eventually, consumers will benefit as existing goods and services can operate under cheaper transactions. Cryptocurrencies are where people can obtain a benefit fairly quickly if you can become comfortable with the use of non-fiat currency. Government regulations will eventually catch up.

So back to the title, Blockchain can definitely change everything. Companies could benefit the most first, incrementally. There can clearly be a shift in the players and there are opportunities for startups to disrupt if they can get out far enough ahead using Christensen‘s definition of disruption.

But I am not convinced that it is a tidal wave about to hit me this year or next (2019 looks like a strong blockchain year with 2018 being a ramp) especially since large corporations most likely hold the keys to deployment speed and deployment functionality. For example, today, there are only a few firms that really hold the “ledgers” (custodians) for financial accounts. These players are enormously powerful and “trusted” for good reason. That’s not going to change. They are the only ones that will really lead the charge in the financial sector because they own the “transactions.”

They are not going to go away quietly or at all. They will probably create a bitcoin-based system that benefits them–the new market makers. Whether good or bad, they will deploy blockchain first and reap the benefits of the investments and they are the ones who will create a system beneficial to them. It is doubtful if they will ever pass along the benefits since they must still maintain legacy systems, they’ll have two systems to maintain. More importantly, why should they pass along the benefits to others? A smart person, with morals not strictly aligned with public benefit, will seek to make money and enhance their position. It is known that this is exactly what they are doing, right now.

Sure, there are other types of “custodians” who hold the ledger today. But due to a variety of factors, once you back away from a “single, transparent system that untrusted parties can transaction with” which is what bitcoin 1.0 is today with its “proof-of-work”, the collaboration and standards benefits start bouncing up against creeping costs to “use.”

Today, there are over 100 cryptocurrencies. Beyond payments, will the future hold tens of thousands of “bitcoin 2.0” ledgers? Fragmentation, even using the same technology, also seems like the bogeyman of the benefits story. In order to try and gain control from current owners, disruptors will try to “own” the bitcoin 2.0 ledger platforms to run smart “contracts.” In the in process the “ledgers” will fragment.

Also, since its doubtful that there will really be any disruption quickly (but it is coming), the limited set of players who deploy these capabilities will reap the reward in the short and near-term. There will be benefits from Bitcoin 2.0 but maybe we (the public) will need to wait…until Bitcoin 3.0, wait, until Bitcoin 4.0, wait, …

Disclaimer: I own a few bitcoins.

 

Drink the Kool-Aid? Yes, But Pick When You Drink It

In the business world, drinking the kool-aid refers to an employee’s willingness to commit fully, without hesitation and without cynicism, to their organization’s and boss’s objectives–to be a fully engaged team member.

I was thinking about a friend who recently changed jobs. He is a smart guy and always has two or things running in parallel–backup plans in case the primary activity fails. I had suggested that for the moment, he needs to drink the Kool-Aid on his primary activity. He needed to stop keeping options actively in play once he made his primary choice as maintaining options sometimes has its price. The idea was to stop thinking that the current gig was temporary. Was I wrong to recommend this?

HBR recently had a short article that suggested there is a real cost to making backup plans. The fundamental question goes something like this:

“When we think about what we’ll do if we fail to achieve our goals, are we less likely to succeed?”

The answer, according to Jihae Shin the principal investigator, is mostly a “yes.” His research concluded that people who made back-up plans achieved their goals less often than others who did not have back-up plans. But his findings did not say *not* to make back-up plans. Instead, you should be more thoughtful about the timing and level of effort you put into your backup planning.

That makes sense. Different people operate differently. For example, we want a backup plan for our son, who is focusing on a music career in college. But we do not want him spending a lot of time on the backup plan *now*. We do not want our son to be distracted from his focus on music *now*, in order to prepare later for a different career later which he may never pursue. We encourage him to think of options but to the point that at the expense of his current focus.

I think my suggestion makes sense specific to my friend’s situation. I was not suggesting that he forgo multiple threads running, but that he fully commit to the one in front of him and assume that this choice would be the solution for a very long time.

The idea is to take the opportunity as far as it will go and only then get the backup plans moving along. It was really a suggestion to stop thinking that the current objective would not be achieved and to avoid the distraction of trying to line up alternate plans prematurely.

At the right time, even temporarily, go all in, get the tee-shirt, buy the mug, think that your organization is great even if it has warts, adopt its strategy–drink the Kool-Aid. Pick a time, later, to consider options.

The future of CRM application software – today’s tech can rebaseline the norm

CRM applications used by the frontline have been around for around 20-30 years. My first consulting job was designing a CRM portal for wealth management advisors distributed around the country. Technically, it was web based and was a bit of a reach at the time but it was highly innovate and essentially had all the moving parts you see in CRM applications today. Over time, I went on to design and launch many more CRM applications covering a broad range of areas some of which won awards or were highly placed. CRM apps cover a wide range of touchpoints usages and my focus here are those CRM apps used by the frontline when the engage with the customer.

The world of CRM apps has not changed much. Today’s CRM apps are slicker, more integrated an easier to be program. But overall, they still fundamentally are hard to use, hard to enforce a process with and generally try to force you to enter in structured data all for the explicit purpose of using that data an the backend side.

In other words, the way you interact or want to interact with a customer–a fluid dance of conversations and touchpoints–comes to a jarring halt when you have to type your customer “data” into a relatively fixed, confining CRM application on your screen. Even the marketing automation space has learned that it screwed up as it realized that email campaigns have become old school and the nuances of social media marketing and messaging are the new black. After all, a growing majority of people today use email less than the previous generation, significantly less.

What is the future?

The future is not narrow list of checkboxes, pick lists, small text boxes or small fields to capture one specific concept, like the first name.

Instead the future is fluid and free flowing, much like many of the newer collaboration tools just now gaining prominence in small companies and now larger companies. It’s more about “notes” and small snippets of information versus structured screens. It’s more about searching different locations for data about customers and not requiring that all information be managed in a single tool. It’s about automating the interactions so that the right information is available to personalize a touchpoint.

Evidence for this model abound:

  • CRM applications now have “chatter” or “posts” that capture a stream of unstructured notes and objects like pictures or audio clips.
  • Applications like “slack” show that collaboration and documentation is easier when it’s fluid, in context and completely searchable. Trello is the same way.
  • Many CRM applications capture only a few structured fields and most of the complexity is really around trying to capture additional customer information–which is where the application start becoming unwieldy.
  • Most CRM software tries to tie together a 360 degree view of the customer using various ad-hoc methods of integrating with other applications.  They shoehorn that “app’s” data into the CRM application to get a 360 degree view of a customer. These integration costs are often the largest costs in a CRM project.
  • CRM has started to rely on data mining and machine learning algorithms to help the advisor/rep become more productive about how to spend their time at the same time they personalize communication to the customer.
  • CRM automation is increasing as bots and other automation techniques become more prevalent…for some products and channels, customers prefer automation.

Now CRM is more than just capturing information about customers, it’s also about servicing them and using information, again in context, to order their products, resolve their issues or try to understand their behavior. Getting information from other applications into the context “flow” has proven to be very tricky.

It’s true that some data, like an order, is highly structured and needs to be in sequence properly to support the supply chain, that’s fair. But a lot of CRM data does not need the same amount of structure. When interacting with a company’s rep or a automated systems, the needs are much different. CRM apps do need to digest data of different media types and tell you what’s important. Or, at the very least, sort through the data and summarize it for you.

In other words, the future of CRM is really more like an instant messaging program like Slack or a free-form note taking application OneNote or collaborative management tool like Trello then an application framework like popular CRM platforms today. Think tweets and hashtags and AI driving data record enrichment.

It’s not about checkboxes anymore. Sales people do not really like check checkboxes. Text mining, or unstructured analysis–whatever you want to call it–is mature enough to sort through the data and fined postal addresses, email addresses, phone numbers and linkage information to connect all the dots and prepare the data for analytical use. Network analysis is mature enough to create a graph of contacts, with context, from your email and notes. This crystal ball thinking is true for both B2C and B2B although B2B has regulatory issues that suggest that it does require some additional “structure.” In fact, these techniques are in play in extremely advanced CRM scenarios such as Know Your Customer in the AML/BSA space.

A lot of what passes today for CRM software is just a jumble of straight jackets that are unneeded and run counter to how people communicate, create information and collaborate today.

Branding, advertising and social media

There were two articles this week/month on social media advertising that did not seem to overlap per se but are related.

The first is in HBR, March 2016 issue titled “Branding in the Age of Social Media.” (here) This article suggests that companies have spent billions on trying to build out their brands using social media but most of the money and effort has been a waste. The basic idea idea is that branded content and sponsorships in the past used to work because there were limited channels of distribution for the content and therefore most consumers had limited choices and had to watch what was shoved into those channels.

Today, it’s a bit different. The mulitude of channels means that consumers can filter out ads, shape their own customized content flows and create their own flow of entertainment content–much of it created by their friends. Rather suddenly, brands no longer could command the audience. The article mentions that most heavily branded companies such as Coca-Cola command less viewership than two guys sitting on a couch narrating video games (“e-sports”). Now, brand must fit into the flow of either “amplified subcultures” (groups of people with more narrow interests) or “art worlds” where new creative breakthroughs occur. Either way, you have to fit in via cultural branding where you align the brand around the culture of people in those two areas. So the brand can be there but only in the context of say, for example, the subculture of people who do not like smelly socks that come from running 10 miles a day. You have to create a story about smelly socks and positioning your laundry detergent as part of addressing the smelly socks problem (I made up the smelly socks example).

You essentially align the product/brand around a more specific theme that resonates with the target audience. Because the specific themes are more narrow, the amount of creative customization increases.

This is not a new concept. The article is really just saying that you have to create content about your brand/product that aligns with you target audience and is delivered to them through the “channels” that they watch.

I was also scanning Bloomberg Businessweek and their article “If You Don’t Know It By Now You’ll Never Make Millions on Snapchat.” (here) It described the “snapchat” phenomena, with its rapid rise, as well the challenge many similar companies have on maintaining their user volumes. The biggest issue is that they need to generate revenue and Snapchat is considered “expensive” advertising with little insights into “returns.”  One of the strategies Snapchat has taken is to focus their sales time on helping customers create stories to fit into their Discover channels and Snapchat’s model of perishable content. Still, a slightly talented musician posting just his daily musings and activities garners more views than all the biggest networks combined, daily. Ouch!

But it is just another lesson in what we already knew.  Find the audience you want to reach, find out where their eyes are especially now that they more choices about how and where they engage, tailor your content with a message and delivery that will engage them to watch, take action or whatever. Segment, segment, segment…

That’s about it. So yes, branding (and really just general advertising) has changed. It has to be more clever/entertaining, more thoughful and more tailored to a smaller group. You cannot rely on a famous name to push your product alone and you cannot count on blanket reach to communicate.

So there is not really a lot of new news here, just a recognition that we as companies and marketers have to be more clever because the easy ways no longer work and it’s possible to get a huge ramp (given the viewing numbers) if we put that cleverness to work.

Perhaps the real news is that some people in their current jobs need to become more clever quickly or find some clever people to help them with their branding/marketing. What is wonderful at least to me, is that the volumes of eyeballs in some of these channels makes them worth paying attention to.

Got it.

Check.

Roll credits.

Platform Scale

Sanjeet Choudary has put out a book about how platforms, not pipes, are the new business model. The book is very inspiring so I recommend reading it. There are not any new ideas in it but they are packaged together very nicely. It’s very much another “explaining things” book and for the lens that it wants you to use, I think it does a good job.

The key thought behind the book is actually fairly simple:

Be a middleman. Reduce your costs as a middleman to gain share. Shift cost and risk out to everyone else, as much as possible. Allow companies to build on your platform. Reducing your middleman costs can gain you share and the best way do that is to be digital. If you only make a small slice of money at every interaction, you need alot of interactions so don’t forget the “make it big” part.

That’s really about it. There’s not alot of examples with deep insight in the book and he avoids most levels of strategic thinking entirely. The book also fails to connect what has been going on today to the massive “platforms” built in the past few decades but which are not necessarily fully digital as in the examples reused in the book. The book spends most of its pages explaining that if you can reduce transactions costs and get scale, the wold is your oyster. Of course, this is only just one model of succeeding in business and actually not always the most interesting or sustainable.

But that’s OK. Go find your “unit,” reduce that friction and make a billion. It’s a good read.

Enjoy!

Do sanctions work? Not sure, but they will keep getting more complex

After Russia and Ukraine ran into some issues a few months back, the US gathered international support and imposed sanctions.

Most people think that sanctions sound like a good idea. But do they work?

Whether sanctions work is a deeply controversial topic. You can view sanctions through many different lenses. I will not be able to answer that question in this blog. It is interesting to note that the sanctions against Russia over the Ukraine situation are some of the most complex in history. I think the trend will continue. Here’s why.

Previously, sanctions would be imposed on a country that is doing things the sanctioning entity does not want to happen. Country-wide sanctions are fairly easy to understand and implement. For example, sanctions against Iran for nuclear enrichment. Sanctions in the past could be levelled at an entire country or a category of trade e.g. steel or high performance computers. But they have to be balanced. In the case of Russian and Ukraine, the EU obtains significant amounts of energy from Russia.  Sanctions against the energy sector would hurt both the EU and Russia.

Sanctions today often go against individuals. The central idea is to target individuals who have money at stake. OFAC publishes a list of sanctioned individuals and updates in regularly. If you are on the list, you are not allowed to do business with those sanctioned individuals, that is, you should not conduct financial transactions of any type with that individual (or company).

The new Russian sanctions target certain individuals, a few Russian banks (not all of them), and allows certain forms of transactions. For example, you cannot transact with a loan or debenture longer than 90 days maturity or new issues. Instead of blanket sanctions, its a combination of attributes that apply as to whether a financial transaction can be made.

Why are the Russian sanctions not a blanket “no business” set of sanctions?

By carefully targeting (think targeted marketing) the influences of national policy, the sanctions would hurt the average citizen a bit less, perhaps biting them, but no so much that the average citizen turns against the sanctioning entity. Biting into the influencers and others at the top is part of a newer model of making individuals feel the pain. This approach is being used the anti-money laundering (AML) and regulatory space in the US in order to drive change in the financial services industry e.g. hold a chief compliance officer accountable if a bad AML situation develops.

So given the philosophical change as well as the new information-based tools that allow governments to be more targeted they will keep getting more complex.

Oso Mudslides and BigData

There was much todo about google’s bigdata bad flu forecasts recently in the news. google had tried to forecast flu rates in the US based on search data. That’s a hard issue  to forecast well but doing better will have public benefits by giving public officials and others information to identify pro-active actions.

Lets also think about other places where bigdata, in a non-corporate, non-figure-out-what-customers-will-buy-next way, could also help.

Let’s think about Oso, Washington (Oso landslide area on google maps)

Given my background in geophysics (and a bit of geology), you can look at Oslo, Washington and think…yeah…that was a candidate for a mudslide. Using google earth, its easy to look at the pictures and see the line in the forest where the earth has given way over the years. It looks like the geology of the area is mostly sand and it was mentioned it was glacier related. All this makes sense.

We also know that homeowner’s insurance tries to estimate the risk of a policy before its issued and its safe to assume that the policies either did not cover mudslides or catastrophes of this nature for exactly this reason.

All of this is good hind-sight. How do we do better?

Its pretty clear from the aerial photography that the land across the river was ripe for a slide. The think sandy line, the sparse vegetation and other visual aspects from google earth/maps shows that detail. Its a classic geological situation. I’ll also bet the lithography of the area is sand, alot of sand, and more sand possible on top of hard rock at the base.

So lets propose that bigdata should help give homeowners a risk assessment of their house which they can monitor over time and use to evaluate the potential devastation that could come from a future house purchase. Insurance costs alone should not prevent homeowners from assessing their risks. Even “alerts” from local government officials sometimes fall on deaf ears.

Here’s the setup:

  • Use google earth maps to interpret the images along rivers, lakes and ocean fronts
  • Use geological studies. Its little known that universities and the government have conducted extensive studies in most areas of the US and we could, in theory, make that information more accessible and usable
  • Use aerial photography analysis to evaluate vegetation density and surface features
  • Use land data to understand the terrain e.g. gradients and funnels
  • Align the data with fault lines, historical analysis of events and other factors.
  • Calculate risk scores for each home or identify homes in an area of heightened risk.

Do this and repeat monthly for every home in the US at risk and create a report for homeowners to read.

Now that would be bigdata in action!

This is a really hard problem to solve but if the bigdata “industry” wants to prove that its good at data fusion on a really hard problem that mixes an extremely complex and large amount of disparate data and has public benefit, this would be it.

Yanukovych, Money Laundering and a Probe: The Rise of Network Analytics

I have been working in the Anti-Money Laundering (AML) for awhile. Compared to healthcare or the more general Customer Relationship Management (CRM) space, the AML and Bank Secrecy Act (BSA) is really the “shady” side of the customer–or at least it assumes that some customer are a shady and tries to find them or prevent their actions. Some estimates suggest that the aggregate impact of BSA/AML (and Fraud) regulations is only 10-20% of the total amount of dollar flow in the world so we know that while regulators and prosecutors do catch some of the bad guys alot of dollars remain on the table.

Take the recent case of the Ukraine. It’s been reported that the Swiss are launching a money-laundering probe into ousted president Viktor Yanukovich and his son Oleksander. They think the money laundering could amount to tens of billions. All told, over 20 Ukrainians are listed as targets of the Swiss probe.

In BSA/AML, Yanukovichs (father and son) is a clearly a Politically Exposed Person (PEP). And apparently the son had a company established that was doing quite well. That information usually leads to flags that up the risk score of a customer at a bank. So an investigation and PEP indicators are all good things.

Officials estimate that $70 billion disappeared from the government almost overnight. Of course, Yanukovich WAS the president of Ukraine and he was on the run up until last week. But an investigation into money laundering on tens of billions that suddenly just happened?

Recently, I attended an ACAMs event in NYC. Both Benjamin Lawsky (regulator side) and Preet Bharara (prosecution side) spoke. One of their comments was that to have a real impact on money-laundering, you have to create disincentives so that people do not break the law in the future. You can sue companies, people and levy fines. These create disincentives and disincentives are the only scalable way to reduce money-laundering–stop it before it starts. The ACAMs event was US based, but the ideas are valid everywhere. The Swiss have always had issues with shielding bad people’s money but they are playing better than before.

But the real issue is that the conduits, the pathways, were already setup to make this happen. And most likely, there have been many dollars siphoned off with the list $70 billion being the end of the train. So the focus needs to be on active monitoring of the conduits and the pathways, with the BSA/AML components being one part of monitoring those paths. After all, the BSA/AML regulations motivate a relatively narrow view of the “network” with an organization’s boundaries.

If we want to really crack down on the large scale movement of funds, it will not be enough to have the financial institutions–which have limited views into corporations–use traditional BSA/AML and Fraud techniques. A layer of network analysis is needed at the cross-bank level that goes beyond filing a suspicious activity report (SAR) or a currency transaction report (CTR). And this network analytical layer needs to be intensely and actively monitored at all times and not just during periods of prosecution. While the Fed uses the data sent back from a company’s SAR and CTR (and other reports) and in theory acts at the larger network level, it is not clear that such limited sampling can produce a cohesive view. Today, social media companies (like Facebook) and shopping sites (like Amazon) collect an amazing amount of information at a detailed level. NSA tried to collect just phone metadata and was pounced on. So the information available in the commercial world is vast, that which the government receives is tiny.

In other words, the beginnings of an analytical network is clearly present in the current regulations, but the intensity and breadth of the activity needs to match the scale of the problem so that the disincentives dramatically increase. And while it is very difficult to make this happen across borders or even politically within the US, its pretty clear that until the “network analysis” scale either increases its “resolution” or another solution is found, large scale money laundering will continue to thrive and most enforcement efforts will continually lag.

Its a balancing act. Too much ongoing monitoring is both political anathema to some in the US and it can be very costly. Too little and the level of disincentives may not deter future crimes.

Pop!…another $70 billion just disappeared.

Should companies organize themselves like consultancies? If they do, they need to hire like them as well.

A recent HBR article (October 2013)  mentioned that P&G and other companies are rethinking how they organize themselves. The basic idea is that instead of having fixed organizations, companies should organize themselves like consultancies–everything is a project and you assemble/disassemble teams as needed to solve problems. There will be some ongoing operations that do require “flat” jobs–jobs that more repetitive but still require knowledge workers?

The article begs the question of whether organizing into projects and flexible staff (like consultancies) is a good thing for companies that are heavily knowledge worker based. Part of the proof that knowledge work is becoming more dominant is by looking at the decreasing COGS and increasing SG&A lines on financial statements. COGS indicates decreasing amounts of “blue-collar” work over time while SG&A is a good proxy for white-collar, knowledge worker type jobs.

So is it?

My view is that it is not so cut and dry. Consultancies create large labor pools at the practice area level that generally have a specific industry expertise. Generally, there are horizontal practices for people who specialize in skills that cut across industries. Typically, these practice areas are large enough that the random noise (!) of projects starting and stopping creates a consistent utilization curve over time. And a management structure, for performing reviews, connecting with people, is still needed to ensure consultants feel like they have a home.

Another important aspect quoted in the article is the creation of repeatable methodologies that consultants are trained on so that knowledge can be codified instead of horded.

Consultancies are good, but not super great, at knowledge management and sharing deliverables so that practices that have proven themselves to work can be re-used in other projects or contexts.

Let’s look at companies:

  • Companies have people, often fairly substantial groups, that are focused on a horizontal area e.g. finance, marketing, IT, customer service. Companies are often organized by product which also forces it to be organized by industry, but there are many variations to this model.
  • Companies try to organize activities into projects. Not everything can be a project e.g. ongoing operational support of different kinds. But companies do try to kick-off efforts, set deadlines, integrate teams from different groups, etc.
  • Companies share deliverables from one project to another. Unlike consultancies, the pool of deliverables is often narrower because of the corporate boundaries and sharing within an industry are often not as robust as in a consultancy. Companies that hire talent from the outside frequently can bring these elements in, however.
  • Groups share resources, although not as robustly as consultancies, across projects and groups. Companies are less robust at true sharing because inside of companies, people count is often a measure of power. At consultancies, revenue and margin usually are the primary metric, but of course, these are only achieved through resources.

Companies today are already employing many elements of what this model calls out. Most companies are not as robust as consultancies at some aspects. But are these differences the primary reason why consultancies have shown good resilience to execution in different circumstances?

There is probably another aspect. Consultancies typically seek out and retain a large amount of quality talent. Companies, to varying degrees, do not always hire highly talented individuals. Their pay, performance management approach and culture do not attract the best talent in the marketplace.

While companies could improve certain areas of their capabilities, there was an entire part of the story that was missing in the HBR article–a focus on top talent across the entire company and not just for a few key roles.

ACO and HMO: HMO redo or something new?

I have covered this topic before but I came across an article that stimulated by thinking again.

It has been said that ACOs are really the new HMOs. HMOs in the 1990 were an experiment to put ‘risk and reward in the same bucket.” Much like integrated capitation, the idea is to let those that save money, while still delivering great quality care, benefit from their innovations.

This was the thinking behind the Affordable Care Act, which seeks to re-align risk and reward. It also, possibly unfortunately, makes Provider power even more concentrated. Maybe that’s good, maybe that’s bad.

A recent analysis of healthcare costs as a % of GDP came out in the New England Journal of Medicine. One of the questions we want to answer is where the healthcare costs will be a decade from now based on changes today. Typical projections run that in a decade or so, that 20% of the US GDP will be spent on healthcare (all private and public expenditures). This is based on projects from the last 2 years worth of data, which have shown lower health care growth rates than the past 20. The past 2 years of healthcare growth rates have been thoughtfully reviewed and it has been determined that these growth rates in the past 2 years are not representative of growth rates that we are likely to see in the next decade or two.

This NJEM article, published May 22, 2013, The Gross Domestic Product and Health Care Spending (Victor Fuchs, PhD), suggests that the growth rate that should be used is probably the long term growth rate, that recent changes in the growth rate are one-time events and that using 2 year growth rates is typically a bad idea anyway. The articles also describes how the growth rates were greatly reduced, cut in 1/2, when HMOs came out. HMOs rationed care. It is generally thought that most people want “all you can drink” healthcare for their “buffer” prices and this is the reason that HMOs were given the boot by consumers. Victor thinks that if you use historical growth rates, then the share of GDP for healthcare grows to 30%. That’s huge.

So if ACOs are really HMOs reborn, wouldn’t that be a good thing? Its probably a good thing to think it through a bit to see if such a top-level thought holds water. First we’ll recognize that the ACOs and concentration of power into Proivders (the Act gives enormous emphasis on hospitals) which possibly leads to verticalization is not necessarily bad, at least in business circles. And combining risk and reward to get incentives right, is also probably not a bad thing.

But there are other factors. We will also assume that that Americans will not engage in more healthy lifestyles since changing people’s behaviors towards the healthy has not really worked nor probably will ever work without significant economic rewards. And we will assume that Americans want choice and do not like being told where to get their healthcare services (especially since care is so uneven).

If normal competition were at work, then we would expect that verticalization and centralizing risk & reward should all be good. We should expect to see declining prices and improving outcomes.

But when we look at the healthcare spectrum, we see some of the largest improvements in outcomes results from drugs and medical devices. We do not see large improvements in care based on “processes” inside of hospitals. While some hospitals do indeed work on Six-Sigma type continuous process improvements and show great results, they are inconsistently used and are not a source of large-scale productivity increases.

So we have not seen that hospitals are capable of being managed to reduce their costs and improve outcomes to any significant degree. In fact, most innovation in the hospital community is around centralization, getting big to have the scale. But we need to ask ourselves if whether hospitals becoming large lowers cost and improves outcomes, or does it just allow more fixed cost (beds) to be spread out over a large surface area threrby reducing per unit costs but not reducing costs? The ACOs models of having a minimum of a few thousand patients to be efficient is probably way off. Some estimates suggest you need a million patients. Hospital systems are responding to this scale need and scaling up. As we have seen though, a larger company is not the most efficient when it comes to innovation or lowering cost without significant forms of competition.

And that’s where the ACO model is probably not like the HMO model. The ACO model is encouraging super-regional entities to be formed that will reduce competition in a given service area versus increase it. Unlike national Payers that look a bit more like Walmart, super-regional ACOs will be large, but not super large. They willl not have competition in the area. And improving their productivity is a bit suspect (I hope they do improve their productivity by the way). And hospital systems are fighting changes to allow clinics to become more prevalent as well as allowing non-physicians to write prescriptions because that draws power away from them.

It has been widely studied and reported that HMOs reduced choice as a trade-off to obtain the benefit of reduced costs. This reduced choice is not directly present in the ACO model although both Payers and Providers want patients to stay in network of course and have been forming “lean” or “focused” networks just for this reason. So there are no large forces in the Act to strongly motivate that ACOs will help manage and control consumer choice.

So on the surface, ACOs look like a good model but they become questionable fairly quickly. You can place your bets on what will happen or wait it out. It is clear that will take years to demonstrate  if ACOs are working just like it did for HMOs–way after they were killed off.

There are actually ways to fix many of these issues by addressing the underlying problems directly. For example, creating more uniform outcomes by standardizing processes and the quality of practicing physicians may reduce the need to have the ultimate “go anywhere” flexibility driven by a patient’s need to find quality care. We need to promote competition on a very broad scale across multiple geographies by changing laws. Reduce Provider power around Rx writing and get people into clinics and alternative care delivery centers. We can also modify the reimbursement policies and centralize risk & reward so that investors (a term I used broadly here)  receive a reward for taking risk and succeeding unlike today where they are penalized with lower payments–essentially creating a disincentive to invest.

All of these ideas would have create a dramatic change in the cost curve over time without fundamentally altering the landscape. It would be a good start.