Old Lady Suffers From Undue Deference And Group Think

In March I related a story about the unduly deferential meeting protocol at the Old Lady of Threadneedle Street, and hoped it was more welcoming of critical thought than the rule suggested. However, three recent reports have confirmed the worst.

Not only were the terms of reference for those reports criticised for being too narrow and avoiding contentious issues. But, according to the FT, Bill Winters also found a "tendency [among less senior staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable." And David Stockton "criticised the bank for its opacity and a culture that discourages independent thought."

Naturally, I detect a certain lack of enthusiasm in the Governors' response:

“We welcome these three Reviews. The Reviewers have given us an independent perspective on some of the key challenges the Bank has faced in responding to the financial crisis and have given us a great many ideas to consider that could improve the Bank’s performance. We are starting programmes of work to evaluate the recommendations and to plan changes.  We will report regularly to Court." 

At least they aren't alone. The IMF suffered from 'groupthink' for years, and auditors have been struggling to understand the meaning of 'scepticism'.

Come to think of it, Auntie seems to suffer from the same maladies, along with most of Britain's institutions.

In fact "maladies" is strangely apt to describe two ailing institutions called 'Auntie' and the 'Old Lady'. It also sheds new light on the reason for the apostrophe in m'lady…

Does Ownership Structure Matter In The Long Term?

Thanks to The Foundation for another entertaining Forum last night - this time on whether ownership structure is the only thing that matters for long term growth.

The discussion opened with some insights on ownership from Michael Green of Philanthrocapitalism fame, Luke Mayhew, former managing director of John Lewis (who also chairs the remuneration committees of some large corporations), and the inimitable Anthony Hilton, Financial Editor of the Evening Standard. 

And there was plenty of vibrant discussion about the merits of competing forms of business ownership, whether by employees, shareholders, customers, partners, joint venturers and even benevolent dictators. 

But it was clear that how a business is owned has little to do with long term growth.

Anthony Hilton said it all in his answer to my question whether solving the problems of customers or potential customers mattered more in the long term than ownership structure. He said that customers don't matter at all, as the City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.

To the extent that you believe that this demonstrates long term success, then I would only observe that City firms characterise every form of ownership. So ownership structures themselves have played no particular role in the City's exploitation of its customers.

But of course you might share my view that it would be wrong to judge the City has having done 'very well' with this strategy, as it is hardly in the best of health.

So ownership is just one of many dynamics that a business has to manage. 

If you are looking for the most important dynamic, then I believe it is whether a business is focused on solving its customers' problems, rather than solving its own problems at its customers' expense.

In other words, the key to long term growth is to be a facilitator, rather than an institution.

Image from The Philosopher's Magazine.

Facilitators and Institutions Defined

The distinction between 'facilitators' and 'institutions' is a theme that has emerged quite strongly in this blog and is discussed in Chapter 2 of Lipstick On a Pig. In essence, I've defined "facilitators" as organisations that exist to solve their customers' problems; and "institutions" as organisations that exist to solve their own problems at their customers' expense.

To be more specific, I've extracted the following characteristics that I believe mark an organisation as being one or the other. Broadly, these characteristics group into themes of alignment, openness, adaptability, transparency and responsibility.

So, a 'facilitator' is organised to solve its customers’ problems, operates openly, adapts well to changing circumstances, is committed to transparency and takes responsibility for the impact of its activities on the wider community and society.

I update this post from time to time and am interested in any comments you may have.

Facilitators:

 Alignment

• exist to solve problems that their customers encounter day-to-day as part of wider end-to-end activities (i.e. customers don't 'pay' or 'bank', they make a payment as a single step in a much longer purchase process);

• don't presume to 'own' the relationship with people who use their products, and see customers as the controllers of that relationship;

• accurately define real problems, assess their real scale, identify root causes and implement proportionate, efficient solutions;

• view the world through the eyes and experiences of people who use their products;

Openness

• are prepared to work with complimentary businesses to support their users' end-to-end activities (including linking to material produced by others);

• seek feedback, welcome input and criticism;

• interact well with users in open forums;

• are 'free-rider tolerant';

Adaptability

• are highly adaptable and responsive to criticism; 

• allow ideas to develop from staff and users bottom-up, generating passion and connection amongst them;

• see uniqueness, change and adaptability as a source of competitive advantage;

Transparency

• work to simplify their products and users' experience;

• their terms and communications are clear, fair and not misleading;

Responsibility

• seek to make the world a better place in which to live, addressing the impact of their activities on the wider world.

Institutions:

Alignment

• Exist to solve their own problems at the expense of 'their customers';

• View the world through the lens of their own products (whether goods or services), rather than the activities in which users are engaged when acquiring or using those products;

• Regard themselves as controlling the relationship with users. 

 Openness

• Resist criticism and change – believing that their own processes, judgement and publicity should prevail;

• Impose their own views on staff and 'their' customers, top-down;

• Interact poorly with users (if at all) in open forums, experiencing 'vicious cycles' of adverse publicity; 

•  Are 'free-rider resistant';

• Mandate the use of their own add-on services, even where these are inferior those available from third parties; 

 Adaptability

• See running with the herd, or 'fast-following' as a source of competitive advantage;

• Demand that 'their' customers must become more capable if their products or experiences are to improve; 

Transparency

• Deliberately adopt complex pricing, conditions and 'pressure' techniques in their sales and marketing activities;

• Rely on cross-subsidies to distort the attractiveness of new products;

• Their terms and communications tend to be unduly complex and legalistic;

Responsibility

• Avoid addressing the impact of their activities on the wider world.

Inverting The Institutional Narrative

Fascinating to see big charities accuse big business leaders of putting their own interests first in objecting to Labour's planned increase in National Insurance. The charities insist that their own constituents - older people, lone parents and environmental groups - are all capable of great influence on the electoral outcome and we should be focusing the debate on them.

Either way, it's ironic that NIC changes - which will affect all taxpaying individuals - are being subverted by institutions seeking to draw the electoral battle lines around their own 'vested interests', rather than the needs of individual voters.

Another example centres on the rise of Google as a force in the consumer advertising market. Newscorp claims that Google is getting a 'free ride' on Newscorp's content. Local newspapers also claim to be victims. And Europe's big Telcos recently leapt onto the bandwagon, claiming that Google is getting a 'free ride' on their networks. I guess TV and other device manufacturers and electricity companies will be the next to climb aboard.

The problem with such narratives is they ignore the 'elephant in the room' - that individuals are ultimately responsible for each wave of service provider overtaking the last. You decide what to pay and to whom, and whether to pay at all. The real complaint for Newscorp, big telecos and the like, is an internal one. They've lost sight of their role in solving consumers' problems in favour of solving their own. They have ceased to be - and ceased to be rewarded as - facilitators. Unless they can regain their role as facilitators of people's actual and desired activities, they will die the lingering death of the spurned institution.

The institutional narrative dominates in our society, yet research shows faith in our institutions has plunged over the past few decades, and we have turned to direct action and single issue campaigns as an alternative to formal politics. A Eurobarometer poll also found that only "50% of EU citizens trust their local and regional authorities, a level slightly higher than for the European Union (47%). This level of trust in the local and regional authorities is considerably higher than the level of trust in national governments or parliaments (34%)."

So, while it is dominant, the institutional narrative is also misleading. To properly understand our motives at the ballot box or in favouring the rise of email over posted letters, or internet shopping over some high street retailers, or Google over Newscorp, and where that may lead, the narratives of history and current affairs - and of the future - need to be told from the bottom up, not the top down.

Not Travelling Light? That's Your Problem.

With its plans to redefine the expression 'travelling light' with coin-operated toilets on its flights and higher baggage charges during the peak holiday season, Ryanair's finally done it. Not content with the vicious spiral after its "idiot blogger" incident, and the piss-taking after the last time it suggested charging for Nature's call, the airline has crossed the line from facilitator to institution - from service provider that exists to solve it's customers' problems (how to cut the cost of air travel) to one that is primarily motivated to solve it's own (how to increase profitability).

Revealingly, Ryanair explains both initiatives as it's own attempt to change customers' behaviour, rather than adapt to suit their needs. It explains the baggage charge as 'urging' people to travel light, and it's spokesman is reported to have blatantly justified its pay-for-a-leak strategy as enabling it to pack more people onto each flight:

'By charging for the toilets we are hoping to change passenger behaviour so that they use the bathroom before or after the flight. That will enable us to remove two out of three of the toilets and make way for at least six extra seats.'

Not much comfort in either explanation - especially for those travelling with kids. Maybe they won't?

Bon voyage, Ryanair. It doesn't matter how profitable you say you are. You're doomed to a lingering death.

STOP PRESS: And in breaking news, Ryanair declares its refusal to comply with regulations requiring payment of passengers' expenses incurred while being re-routed during the recent flying restrictions.

Private Sheriffs in Cyberspace, Counter-Regulation

Last night I attended the lecture by Professor Jonathan Zittrain on "The Future of the Internet: Private Sheriffs in Cyberspace", organised by the SCL organised in collaboration with the The Oxford Internet Institute. Jonathan is a Professor at Harvard Law School, Co-Founder and Faculty Director of the Berkman Center for Internet & Society, a great intellect and a fabulous speaker.

As the title suggests, Jonathan was highlighting the role of private rule-makers in the development of Internet-based services. Helpfully, he suggested a quadrant on which you can place rule-making for all scenarios. On the vertical plane, one considers whether rules are decided "top-down" by a dictator or small group of individuals, or evolve bottom-up amongst all interested participants. On the horizontal plane, one considers whether the rules are handed down and enforced via a single hierarchy or via a polyarchy of different people or agencies. I've re-drawn it here for the purposes of discussion, and hope Jonathan doesn't mind:

You can plot various examples on the chart, with a totalitarian regime being in the upper left corner, and Wikipedia being in the lower right.

Interestingly, Jonathan suggests that the likes of Google, Apple and Facebook are top-down rule makers, because their site terms and policies are all decided by the company and not the users of their services, albeit those companies tend to be very responsive to bottom-up pressures. He cites the exclusion of certain lawful, though potentially offensive, applications from the iPhone and Facebook platforms as examples of decisions that might not be consistent with previous decisions, nor deemed constitutional in the public environment. He queries whether, in time, these might result in some alternate form of regulation and considers what that might entail.

My sense is that this scenario is not quite so clear cut, since the evolution of services or platforms provided by those companies (read iPhone apps in the case of Apple) seems primarily based on user participation, feedback and complaint, rather than board or departmental decision-making. I'm not even sure that, when push comes to shove, those companies necessarily triumph. There are significant instances where - to their enduring credit - each of those companies backed down and modified services and terms in the face of widespread user vitriol.

However, it is true that in general terms, at least before push comes to shove, such firms are the 'sheriff' of their own platforms. And it is conceivable that there could be a substantial gap in time, and a significant amount of individual consumer detriment - mild or otherwise - before any arbitrary, inconsistent or harmful exercise of corporate discretion is corrected by some kind of mass user "action". But of course this phenomenon occurs even in the context of highly regulated businesses all the time - e.g. retail financial services, as Financial Ombudsman statistics demonstrate. Offline retailers and distributors also decide not to distribute certain products on their own whim, or due to informal pressure from certain interest groups.

So the responsiveness of a service provider to its users, and the legality of its behaviour, does not seem to be a function of how that service provider or its services are regulated. But is users' trust or faith in the provider a function of the type of regulation that applies to the service?

Jonathan looks at various models for keeping the private sheriffs honest, e.g. vicarious liability for harmful material of which the service provider is on notice (see PanGloss), public law constraints on municipal authorities and 'due process' requirements. But, crucially, he points out that when users start to feel powerless they look to top-down bodies for help - i.e. towards the top left of the quadrant - when perhaps the online world is demonstrating there are more trustworthy solutions to the lower left and right. To the lower left, Jonathan cites the adherence to the robots.txt exclusion standard, whereby researchers effectively agree not to interrogate certain parts of web publisher's domains. To the lower right, he cites the broad editorial body of interested participants in Wikipedia. Either solution might be safer than entrusting control to, say, government institutions that think nothing of bending or breaking the law under the guise of detecting crime, or the vague notion of "national security".

And here's the crux of the problem. When does a trusted service provider suddenly cease to be trusted to make and enforce its own rules?

To me, this seems to me to be answered by whether the service provider is perceived to be acting in its own interests or that of its users - or when it loses its "human effect", as I think Jonathan put it in answer to a different question. Here, the Wikipedia example is an interesting one. As Jonathan noted there is a constant preoccupation amongst the Wikipedia editorial community about what Wikipedia is and what it means to be a Wikipedian. This has also been touched on in the context of brands striving to be facilitators rather than institutions. Is this human element necessary for rule-makers and service providers to preserve users' trust in them?

As I've mentioned previously in a wider context, the rise of Web 2.0 facilitators that have enabled us to seize control of many of our own retail, political and other personal experiences has been accompanied by a plunge in our faith in our society's institutions. Are they causally related, or inter-related?

In this context, it is interesting to consider a shining example of a service provider and rule-maker that has utterly lost its way, and our respect: the UK's own House of Commons. Weeks of attention on MPs' excessive expense claims - widely viewed as a proxy for their attitude to the taxpayer generally - has forced the nation's legislators to reconsider how they themselves should be governed. And it's worth noting that much of that attention has been brought to bear via the Internet. Ironically, and in line with Jonathan's observation about where we look to when we feel powerless, the MPs are looking to the upper left quadrant in suggesting yet another Quango as an external regulator of their activities - a so-called "Parliamentary Standards Authority". That such a body needs to exist raises huge questions about the ethics of the body it is supposed to supervise.

But who on earth should comprise the members of such an authority? How could it bring about a positive change in the attitude of MPs to us, their constituents?

Which brings us to the notion that the private sheriffs of cyberspace may have a lot to teach their 'real world' counterparts about what it means to act in the interests of their users in order to retain their trust. This is a notion that I explored in an article for the SCL in May 2006, entitled "Counter-regulation" - a term I used to describe when the law requires offline businesses to implement the benefits of successful online business models. So, to borrow from Jonathan, perhaps MPs should be looking to the lower left and right of the rule-making quadrant for an alternative regulatory solution that could begin to restore a human element and raise the level of our faith in Parliament. And maybe our suspicion of Quangos as merely a means to reward government supporters with a nice cushy job would also be eased if the Quango in question comprised a very large, active group of UK taxpayers.

Desperate Politics, Financial Greed and Spin

Quote of the day has to come from the Lex column.

Describing the Northern Rock situation, Lex asserts that "The muddy confluence of desperate politics, financial greed and spin has obliterated transparency."

Government Hog-tied by its Own Red Tape

How nicely ironic to see the institutions responsible for our soaring regulatory burdens find their own compliance such a struggle.

The Future of Money

Thanks to Blackbeltjones I recently had the privilege of discussing the Future of Money as part of a programme at the Royal College of Art in London.

Based on what I consider to be the relevant drivers of change, the need to solve significant consumer problems from the consumers' point of view and likely sources of resistance to change, I suggested that the innovative retail financial services of the future would tend to share the following characteristics:

1. The service is unlikely to be offered or facilitated by an entity that consumers perceive to be an “institution”;

2. The service solves the root cause of consumers’ critical need in the course of actual or desired activities, linking with trusted third parties to provide a comprehensive consumer experience;

3. The service leverages a shock amongst consumers who subsequently accept that the world has changed, yet helps them to embrace that change;

4. The service leaves day-to-day control of the management of money with the consumer;

5. The service improves rapidly with user collaboration, giving value beyond the facilitator;

6. The service will remain successful so long as the facilitator continues to invest in enhancing the service and meeting related consumer needs rather than seeking merely to enrich itself (i.e. preferring to meet the needs of stakeholders other than consumers);

7. The service is safe, easy to use, and involves communications that are fair, transparent (enabling ready comparison) and neither misleading nor patronising;

8. The service and its operator plays well with the regulators and public policy/opinion-formers.

More soon.

How we view and use money

Simon Gleeson of Clifford Chance has written a very concerning overview of the shortcomings in the Financial Services Authority’s review of how the retail financial services that it regulates are distributed to consumers.

He suggests that the proposed three tiers of advice, coupled with EU-driven changes to the test of what is appropriate, will increase the cost of products, leaving the “mass market” with only the Sunday newspapers to help them invest. Which means they won’t.

To be fair, the FSA says it has an open mind on the proposals, and the initial consultation doesn’t end until December.

But the most troubling aspect of the review is that it proceeds from the perspective of whom and what the FSA regulates, and not in terms of how consumers want to use money. As consumers, we don’t think about who is regulating the different ways we use our money. We just expect it to be able to use it as we wish, without complex, artificial or costly barriers being placed in our way.

There is already very little focus on providing more usable, transparent and cost-effective financial services from the consumer's standpoint, because that would seriously impact bank profitability that is already under pressure. For example, according to Uswitch, figures for RBS Group, as at March 2007, showed that retail profits rose 1.5% (about 25% of group profits) against a rise of 14% in retail write-offs (69% of all write-offs).

Witness also how UK banks have actually gone to court to defend fees that consumers and regulators have long complained are too high; and their grudging agreement to speed up electronic payments, only in the face of competition inquiries.

Of course, over the past decade consumers have seized upon usable Internet technology to disrupt traditional supplier-determined experiences in travel, music, retailing, betting/bookmaking, games, telephony, TV and so on. Social lending and micro-finance are established elements of this rapidly evolving trend, which will surely reshape banking, insurance, asset management and pensions in due course - provided that regulation does not get in the way.

For a further catalyst, look no further than the current credit crisis. The inability of banks to understand who owes what to whom so that they can confidently lend to each other again is illustrative of how badly transparency is lacking. The savers' run on Northern Rock shows that consumer feel it too, and are prepared to act when they consider that someone is less than transparent about what is being done with their money.

So it is now more critical than ever that the FSA views the financial services market not from the perspective of the institutions and products that it regulates, but in terms of how consumers want to use their money transparently and cost-effectively, and what is needed to help them do just that.

Why "Pragmatist"?

A pragmatist is simply someone who acts in an informed way to control his or her personal environment, using a combination of theory and practice. Or as John Dewey put it, "intelligent practice versus uninformed, stupid practice". As a lawyer working on innovative solutions to consumer problems, I see plenty of examples of both types of practice.

A pragmatist does not slavishly follow rules, or political dogma, or "positive thinking" or the herd. To do so would assume a world that is somehow ordered, whereas almost all significant events in history are Black Swans - surprise events that have a huge impact and which we rationalise by hindsight. Rules and dogma can turn out to be badly wrong. The herd is eventually caught out. So it's dangerous to follow. Instead, we must rely on experience and critcial thought to minimise our exposure to the downside of these surprise events, and maximise our exposure to the upside.

The combination of theory and practice that qualifies as "intelligent practice" involves trial and failure. It involves being sceptical and "contrarian". It encompasses the aggressive "tinkering" of entrepreneurs - facilitators - who have helped us wrest control of our own life experiences from the one-size-fits-all experience offered by the established music labels, book publishers, retailers, package holiday operators, banks and political parties. These facilitators make the difference between us 'raging against the machine' in a lone, fragmented way and acting together as individuals in a highly concentrated fashion. And this giant, boundaryless online community of practising individuals and facilitators characterises the "architecture of participation" that lies at the heart of "Web 2.0".

It's perhaps no surprise that the rise of Web 2.0 has coincided with a decline and low levels of trust in our institutions, and findings that "the level of alienation felt towards politicians, the main political parties and the key institutions of the political system is extremely high and widespread [yet...] very large numbers of citizens are engaged in community and charity work outside of politics. There is also clear evidence that involvement in pressure politics – such as signing petitions, supporting consumer boycotts, joining campaign groups – has been growing significantly for many years".

In other words, it may be that institutions are being marginalised by people pragmatically engaging with each other in their own digital communities, not only for retail purposes but also political, environmental, health, and economic reasons.

Big questions arise.

How do the institutions get it so wrong? How do facilitators succeed where institutions fail? How can we bridge the gap between what institutions say is right for us, and what is actually right for us personally? Could today's successful facilitators become tomorrow's institutions? Are today's institutions doomed? Or can they respond, re-organise and align themselves with how "we" individual citizens and consumers behave?

I explore these questions here, and look forward to discussing any thoughts or comments you have along the way.