THE HALO EFFECT

A Book Review


A BRIEF BACKGROUND

Consulting firms have their place in the business world. These organizations abound with brainpower armed with advanced academic degrees. That's wonderful. Most of the time, these firms do a great job of providing insightful answers to problems that bedevil management. When management is too close to the trees to be able to objectively evaluate the challenges confronting them, consultants can be a big help.

What's the connection? Two fairly recent prominent business management books, "Good to Great" and its companion follow-up best-seller, "Built to Last,” were written by consultants.

Mr. Jim Collins, a former McKinsey consultant, authored the first singlehandedly and, for the second, co-authored it with Mr. Porras.

NOW THAT YOU KNOW…

In "The Halo Effect" it’s author, Professor Phil Rosenzweig held "Good to Great" and "Built to Last" as the primary subjects of his argument about the "halo effect."

The good professor points out that both tomes used hindsight to unearth the success factors that made the companies in their respective lists such standouts. The problem with that approach, Rosenzweig points out, is that hindsight—as the saying goes—is 20/20.

Take two boys who grow up in the same village. One becomes the company president while the other never rises beyond the rank of junior manager. From the vantage point of the villagers, could they have foreseen who was going to become what? Maybe but probably not. On the other hand, if that question was tackled by starting from the present and then having their careers retraced back to their youth, the factors that made them into what they are can be easily discovered.

That's the fallacy inherent in basing analysis on hindsight. You'll always come up with answers.

Are they the correct answers? Not necessarily. Assume, for example, that the president rose through the financial ranks of the company. Does the fact that he graduated with an accounting degree constitute a valid success factor? Of course not. If that accounting degree was present in the biographies of 99 other company presidents, does that now make it a valid success factor? I still think not. And yet that's how the authors of both books presented their case. They used an expanded sample population and retraced the path of each company that made it to each book's list. They then isolated the factors that appeared in every company's path. Aha!, they said. These are the common factors that propelled these companies into our list. Now, they stated, we know what works. From that, the authors proceeded to make broad extrapolations about how the reader might use these factors to make their own companies successful.

I did what the professor did. I checked the standing of many of the companies in the first book, “Good to Great.” I came up with a review of mixed results. Using the same measure that the book used, some companies were doing well, most had become average, and a few were lagging.

Take CIRCUIT CITY, for instance.

Back in March 2007, less than five and a half years after it became “great,” Circuit City was in doo-doo. Here’s a quote from The Motley Fool:

Nice going, Circuit City (NYSE: CC). You may have just axed some of your top store associates—and deflated the aspirations of the rest.

The consumer-electronics superstore's move to fire some of its pricier employees makes sense on the surface. The company announced that it was letting go 3,400 unit-level associates who were earning salaries well above the market average. They will be replaced by more nominally salaried hires.

So make a note to call your slacker nephew and let him know that Circuit City is hiring. But am I the only one worried about the implications here? Nobody gets their pay bumped higher because they're incompetent. Whether they're seasoned associates who know the stores inside out, or employees whose hard work has helped them get aggressively promoted, they're paid well for a reason. How many high-def DVD players will you be able to sell with that green associate who doesn't know the difference between Blu-ray and HD-DVD?

If I can make the obvious joke, you're a real firedog, Circuit City. It's not just that you're letting go what may be some of your productive associates. What kind of message does this send to your remaining hires? Don't overachieve. Lay low. Do just enough to stay with the pack.

I'm already dreading my next trip to Circuit City, when I ask for help and everyone runs the other way, as if I just pulled the pin on a grenade.

To be fair, Circuit City isn't just whittling away on the front line. It's also eliminating about 130 corporate jobs by outsourcing its IT infrastructure needs to IBM (NYSE: IBM). Last month, it announced a regional-level realignment that also trimmed some fat.

I get it, C.C. Consumer electronics isn't always a cakewalk. Best Buy (NYSE: BBY) is eating your lunch, and now companies like Wal-Mart (NYSE: WMT) and even Home Depot (NYSE: HD) are making an aggressive push in this niche. You have to keep your cost structure in line.

But do you really know what you're doing? You just handed over 3,401 pink slips at the store level. Yes, I said 3,401. You're canning 3,400 store associates, but you're also handing morale its walking papers.

What happened? After all, Publishers Weekly mentioned Circuit City in its editorial review of “Good to Great”:

To find the keys to greatness, Collins's 21-person research team (at his management research firm) read and coded 6,000 articles, generated more than 2,000 pages of interview transcripts and created 384 megabytes of computer data in a five-year project.

That Collins is able to distill the findings into a cogent, well-argued and instructive guide is a testament to his writing skills.

After establishing a definition of a good-to-great transition that involves a 10-year fallow period followed by 15 years of increased profits, Collins's crew combed through every company that has made the Fortune 500 (approximately 1,400) and found 11 that met their criteria, including Walgreens, Kimberly Clark and Circuit City.

At the heart of the findings about these companies' stellar successes is what Collins calls the Hedgehog Concept, a product or service that leads a company to outshine all worldwide competitors, that drives a company's economic engine and that a company is passionate about.

An even easier way to check the validity of these so-called success factors is to compare the list in both books. Surely a company that had transitioned from good to great would stay great enough to ensure that it was built to last. Right?

Wrong.

I have to agree with the professor. There is no success formula embodied in the advice proffered by that book. Those nuggets of advice are misleading. The advice is misleading because their source—the research results—are flawed. The research results are flawed because the research assumption is flawed. What is that assumption? It differs slightly for these two books but it could be roughly stated as such: "Isolate the common factors behind the success of these companies—the ones that made it to our list. Extrapolate the lessons from those few common factors and write a best-seller." Or two.

And that's exactly what he/they did!

So, you might ask, after tearing down those two modern-day bibles of business management, what’s left? What does “The Halo Effect” think of success formulas? What about the objective, that elusive thing called SUCCESS? Well, you have to read that for yourself but the professor did remind me of something that’s overlooked too often and that’s the fact that success is relative.

I've read the two management books (by Collins and Porras) and I'm certain the reader will learn from and enjoy each one. However, after reading "The Halo Effect" (and agreeing with it), I know now that neither "Good to Great" nor "Built to Last" reveal any good, great, or everlasting secrets of business success.

THE SUCCESS CASE METHOD

is the eponymous title of the work that describes a method refined by the author, Robert Brinkerhoff, for quickly finding out what’s working and what’s not.





I was attracted to it while reviewing the different methods for conducting case studies. Case studies attained respectability as a tool for understanding, diagnosing, and solving (or attempting to) real world situations. Harvard University’s graduate-level programs (its MBA, for instance) legitimized its use as a management tool.

"The Case Program at the Kennedy School of Government, Harvard University, is the world’s largest producer and repository of case studies designed for teaching about how government works, how public policy is made, and how nonprofit organizations operate."

Case studies are widely used by management and boutique (niche players) consulting firms. McKinsey & Company, one of the most prestigious ones, employs it not only for client work but also during their hiring process.

"We use case studies to assess your problem-solving skills. They can also give you insight to what we do."

The Success Case Study Method (SCM) is a straightforward method for evaluating a change. The term, “change management,” is a discipline that grew from the need to understand and manage changes. I’m not trying to make you dizzy with circular reasoning here but as management tools go, it couldn’t have been named any better. Change management is about managing change! One practicing change consultant, Fred Nickols defines “change management” as:

1. The task of managing change.
2. An area of professional practice.
3. A body of knowledge.
4. A control mechanism.

SCM focuses on the first definition, the task of managing change. Mr. Nickols expounds on this in a very precise way:

One meaning of “managing change” refers to the making of changes in a planned and managed or systematic fashion. The aim is to more effectively implement new methods and systems in an ongoing organization. The changes to be managed lie within and are controlled by the organization. (Perhaps the most familiar instance of this kind of change is the “change control” aspect of information systems development projects.) However, these internal changes might have been triggered by events originating outside the organization, in what is usually termed “the environment.” Hence, the second meaning of managing change, namely, the response to changes over which the organization exercises little or no control (e.g., legislation, social and political upheaval, the actions of competitors, shifting economic tides and currents, and so on). Researchers and practitioners alike typically distinguish between a knee-jerk or reactive response and an anticipative or proactive response.

Typically, when a change is introduced, some aspects of the change’s consequences will work. Others will fail. Management-speak for introducing a change is a “change initiative.”

Management-speak, by the way, is our generation’s way of getting even with the younger generation’s use of text message phonetics.

@mosFER = atmosphere or l8r = Later

SCM seeks to understand why some aspects worked while others failed. Would that information be useful? It definitely would especially to the decision makers as well as to everyone who has a stake in the success of the change initiative.

Incidentally, the latter are referred to as “stakeholders” in management-speak.

SCM’s usefulness is particularly effective when you apply it to partially successful initiatives or to initiatives that cost a lot of money and time to plan and implement. Why? It’s because SCM, when properly used, can ferret out the facts and present its findings about the initiative’s results. Other case study methods may do so as well but SCM is a structured and proven method of accomplishing this. This is SCM’s niche.

SCM and other case study methods lay in the middle of the fact-finding spectrum. To the left are hunches, guesses, and tidbits from the grapevine.

I trust everyone 12 years and older knows what “grapevine” means.

To the right are formal reviews, audits, and studies. The methods on the left are too casual and leave too much room for error based on incorrect information. The methods on the right are expensive and time-consuming. They also tend to provide too much information and take so long that their results may come too late.

How does the Success Case Method (SCM) work?

First, it uses inquiries (e.g., surveys and interviews) to answer four basic questions:

1. What’s really happening?
2. What results, if any, is the change program producing (in other words, what consequences are occurring)?
3. Are the results of value?
4. Could the change initiative be improved and, if so, how?

Second, it documents the results and presents it.

That’s it!

Why is it called the Success Case Method (SCM)?

It’s called that because it studies the successes (i.e., the success cases). These are the groups or individuals that appear to have reaped the most benefits of the change.

SCM’s first task is to identify the success cases. Its second task is to learn how and why these parties succeeded relative to the rest of the population. Part of the second task is also confirming that the parties initially identified as success cases are indeed successes.

Success, in this context, refers to achieving the results that the parties who planned and introduced the change intended.

How do you conduct the SCM?

Five major steps are involved:

1. Plan the study. Define the purpose and scope of the question that needs to be answered.
2. Create a model of the “ideal,” in other words, what success should look like.
3. Design and conduct the fact-finding process (typically a survey) to search for the best and the worst cases.
4. Learn their reasons for being the best and worst cases. Document your findings.
5. Communicate your findings, conclusions, and recommendations.

You will have to read the book to delve into more detail. The author wrote clearly. He presented it in a way that was interesting enough. That's praise considering that case study methodology is a rather dry and topical subject.

Under what circumstances is SCM best used?

1. When the findings must be discovered quickly, relatively inexpensively, and be supported with verifiable evidence. In short, to dig up enough information to make a decision about the change initiative.
2. To highlight results and accomplishments
3. To provide models and examples that can motivate and guide others.
4. To identify best practices and add to the organization’s knowledge base.

Under what circumstances is SCM not a suitable tool?

1. When the findings rely heavily on quantitative measures. There are many quantitative survey methods that are more effective. SCM, however, can be used to supplement (not supplant) the quantitative results.
2. When all of the participants or subjects must be surveyed. In fact, step 3 of the five major steps, requires you to limit the study to a particular subset of the participants.
3. When the timing for doing the SCM is inappropriate. In many instances, the appropriate timing will depend upon the nature of the change initiative and the manner in which it was deployed. Obviously, some time must pass after an innovation has been introduced before you can expect it to have an impact. On the other hand, it makes no sense to conduct your SCM years after a semi-annual bonus program, for example, was implemented.

What are the cost components of SCM?

1. The interviews. This is typically the most expensive and time-consuming component. It also requires the most skill and professionalism.
2. The actual survey. This is second to the interviews in terms of expense and, frequently, time consumption.
3. The scope of the study.
4. The identification of the subset.
5. The documentation.

My personal experience

I used SCM to evaluate the feasibility, for a struggling residential homebuilder, of using auctions to liquidate his growing, finished inventory. At the time of this writing, the construction industry (residential homebuilders in particular), has been contracting for the past 18 months. At this time, conventional wisdom portends another 12 to 18 months of drought before demand catches up with supply.

My client, the homebuilder, was roughly in the $10-million dollar revenue range. As of September 2007, he had 20 unsold finished homes at an average price of $250-thousand each. These homes started accumulating nearly 12 months before I conducted my SCM. When you do the math, it’s plain to see that he was in dire straits. Fifty percent of his previous year’s revenue was stuck in unsold inventory! (20 homes at $250-thousand each equal $5-million!)

It took only three weeks to complete my SCM. The findings pointed to an unambiguous recommendation of yes! Auction the homes. And do it before Thanksgiving!

Unfortunately (for him), he chose not to. As far as I know, he’s holding on to those empty homes and meeting his obligations through a short-term line of credit. Maybe he knows something I don’t. Maybe he withheld some information. Maybe he doesn't realize how risky it is to use short-term capital to fund long-term debt. Oh well...

Regardless, SCM proved itself to me.

Read the book!

In no way am I being compensated by the author, publisher, or any other party. As a matter of fact, neither the author or publisher know that I'm posting this entry. They will, after it's posted.

Speaking as a consultant and change agent of many years, I believe that SCM is a versatile tool that belongs in the toolbox of any management consultant or business analyst.

AN OVERVIEW OF THE PROBLEM-SOLVING METHODOLOGY OF ONE OF THE MOST PRESTIGIOUS MANAGEMENT CONSULTING FIRMS

From their website: McKinsey & Company is a global management consulting firm. We are the trusted advisor to the world’s leading businesses, governments, and institutions. They advise leading companies on issues of strategy, organization, technology, and operations. Their alumni account for a decent proportion of the heads of American industry.

This is an overview of their problem-solving methodology. It is a summary of a series of informal conversation I had with several friends, one of whom is a former "McKinseyite."

When a team of McKinsey (MK) consultants are given an assignment, they begin by creating an Initial Hypothesis with the facts they have on hand. The hypothesis is a result of brainstorming that starts with the problem(s) to be solved and end with one or more hypothetical solutions.

The hypothesis is guided by two rules:

• What are the key drivers or factors that drive the problem?

Knowing these drivers or factors ensures that the hypothetical solution will address the drivers that cause the problem and not the symptom that is the problem.

• What actionable recommendation can be made for each driver or factor?

The proposed solution for each driver must be able to be turned into action to be useful.Second, the MK team rigorously tests their hypothesis. They gather more facts, ask more questions, and then
gather even more data.

Obtaining facts is important to the testing process since facts always trump gut instincts and since their actionable recommendation(s) depend upon factual assumptions.

Next, the team turns its attention back to its hypothesis. During this stage, they follow these guidelines:

• Major issues are continually divided until they reach the level of being separate and distinct. In other words, each issue can be addressed individually and that solution will fix or mitigate that issue and that issue, alone.


• Every aspect of the business problem falls under one and only one issue. This is analogous to the first guideline. The following illustration clarifies this:

The pentagons represent the specific drivers that cause the issue to arise. Note how the three drivers that create the broad issue have been identified into two groups. The upper specific issue was caused by the two pentagons. The lower issue was caused by one pentagon.The deliverable, or end result, of this stage is a conceptual diagram of the different parts of the business problem. It is important to note that these parts do not overlap with any other. These parts are, therefore, clearly distinct from each other. Furthermore, each distinct part will have its specific drivers identified with it. Returning to the previous illustration, the correct solution to the two pentagons will eliminate the upper specific issue. The lower specific issue, on the other hand, will be eliminated if the correct solution to the single pentagon were found and applied to it.

The goal of these guidelines is summarized by a McKinseyite acronymn: MECE.

MECE stands for Mutually Exclusive and Collectively Exhaustive. It means that each problem and solution must be mutually exclusive (no overlapping) and collectively exhaustive (everything, be it problem or solution, has been included).

Our friend, the ex-McKinseyite, surprised us after he claimed that practically all problems—regardless of their complexity and scale—can be distilled into two to five major issues.This is the framework of their methodology.

I can see that it has value. It's a welcome addition to the rest of my tools. It can be applied to anything it seems—even to human relationships!