Dial Down The Endless Surveys And Really Listen To Customers

Business leaders’ concern about customer opinions is a good thing. But the way many companies collect data does more harm than good. Keep two principles in mind: bad data does not foster good decisions, and customers want you to listen.

Businesses of all size seem to be obsessed with surveying their customers. For example, every time I fly on United, and every time I log out of my Bank of America HSA, I am asked to complete a web survey. A lot of Amazon vendors (usually small businesses) send a survey after every purchase, too.

I think this is this is driven partly by the popularity of Net Promoter Score (NPS). NPS has become a phenomenon. Companies can easily compare their NPS score to leading brands such as Apple. Consultants argue NPS correlates with revenue growth. Tracking NPS requires frequent customer surveys.

My portfolio companies all measure NPS now and put the data in their board of directors materials and investor pitches. Simple and useful ideas like NPS often wash through the business world, doing a lot of good, but also some harm, because the devil lurks in the details.

There’s no way a typical customer can respond to all the surveys to which s/he is subjected currently. They take too much time and they interrupt the user’s flow. I expect that the typical response rate is low, perhaps single digits. And, many of these surveys are not mobile-friendly.

Who is responding? No doubt a typical customer occasionally responds when s/he is not busy. Probably a high proportion of responders are outlier customers: older people with more free time, or customers with an agenda such as frustration with a recent service experience. Millennials and other mobile-centric groups are probably under-represented.

Data as described above is tricky. If you gather and track this data regularly and see a spike in complaints, you should look for a problem in your product or service. But, this data probably does not tell you what your core customers are thinking or how loyal they are to your brand. Non-representative response is a big problem: core customers’ voices can be drowned out by the outliers who are over-represented in the response. Statistical tools can mitigate this problem, but they require significant background data on each survey respondent, which is usually not part of the survey. Big companies probably have this data and may be able to connect it to the survey response and use it to improve the data. Small companies often lack the skills to perform this level of analysis.

And, there is no “average” customer, because everyone is unique in some way, and the customers who make up the core of your franchise can fall into two or more distinct groups. One of my portfolio companies performed customer research for a high-fiber cereal brand. They learned quickly that this brand has two very different core customer groups: young, mostly-female adults who care about controlling weight, and older adults concerned about intestinal health. The average customer for this brand, a forty-something androgynous person, is not a helpful construct.

Companies that want to survey their customers after every touch point often don’t want to listen to customers. Suppose you are a typical and good-value customer for United Airlines or Bank of America, something goes badly wrong, and you want to call them up, talk to a person with a reasonable level of knowledge and authority, and discuss the problem. I searched the United web site for the word “complaint”, hoping to find a way to discuss a complaint with a United staffer. The best thing I could find was a web form to fill out for customer service, amidst many documents declaring United’s operational policies. If you call Bank of America, you will spend a long time keying in identifying numbers and listening to recordings that steer you to a robotic response, through two or three tiers of menus, before you get the opportunity to wait on hold to talk with a junior customer service rep. That does not feel like “listening to customers” to me. Small businesses are often better at this, because they lack the technology to fend off customer calls. And if you are a very high status (“1K” or “global service”) United customer, you can call a passenger service desk staffed by old pros who do a good job with flight and reservation issues.

When a customer is unhappy, they usually want to talk with someone who can make them feel heard and respected and help with the problem to some degree. I recently heard a friend call housekeeping at a resort about a problem. The person at the other end listened politely and offered a step to mitigate the problem. After a few minutes, my friend said: “That [the mitigation] will be fine. I appreciate the chance to tell you how I feel about this. That’s all I need.” My friend felt fairly treated and will be back.

Web surveys are appealing because they are “scalable”: they are done with software that collects data and boils it down to a dataset executives can analyze. This produces good PowerPoint backed by “real data”. The data may be real, but if it is unrepresentative, the results are suspect: “Garbage In –> Garbage Out”.

Keep these two things in mind as you work on better rapport with your customers. Pay close attention to the quality of the data you collect and analyze. There are many pitfalls in customer survey data. Both professional help and caution interpreting data are often warranted. And still there can be surprises, as happened to the best pollsters with the 2016 election.

Listen to customers the old-fashioned way. This is expensive, non-scalable, and often tedious, as there will always be cranks and bullies. However, in business, as in most other parts of life, if you want to have strong relationships, there is no substitute for listening.

First posted @ blogs.forbes.com/toddhixon on March 17, 2017.

Dial Down The Endless Surveys And Really Listen To Customers was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Small Businesses Must Be Both Cautions And Creative In Today’s Choatic Health Benefit Market

There will be no Republican healthcare bill this year, but much will change. What health benefit strategy makes sense for small businesses until the direction of the new administration becomes clear?

The challenge that healthcare creates for small businesses continues to grow. The cost of employer healthcare benefits is rising about twice as fast as general inflation. The chronic disease epidemic rolls on. The obesity rate for U.S. adults supersizes about 0.5% per year. Obesity is a primary driver of several major chronic diseases: e.g., diabetes and heart disease, and chronic diseases drive about 80% of healthcare spending. And small companies continue to pay more for equivalent health insurance compared to large companies.

Healthcare impacts the morale and effectiveness of your staff. Employees cannot perform their duties well if they or their loved ones are seriously ill. And the cost of healthcare is often financially painful or prohibitive, especially for lower-paid employees.

Speaker Paul Ryan says the ObamaCare (the ACA) is the law of the land for the foreseeable future. And, serious observers such as the CBO say the insurance exchanges are stable. Following the embarrassing defeat of its healthcare proposals, the Republican party needs a victory badly and will likely turn its attention to areas where it thinks it has a good chance of putting points on the board before the mid-term election. Right now, they are talking about tax reform. They may move on to other, easier challenges. It’s not likely they will come back to healthcare soon.

But that does not mean that the future of the ACA is assured. Secretary of Health and Human Services Tom Price observes that there are over 1,000 passages in the ACA that empower him to define or elaborate what the law really does. Within the ACA, the Republicans object most strongly to the expansion of Medicaid, the “individual mandate” which coerces Americans to buy insurance, and the subsidy and coverage-requirement aspects of the insurance exchanges.

Each of these programs can be degraded by executive action. The administration can grant waivers to states to “experiment” with alternative Medicaid programs which, if launched in red states, might amount to less funding or tighter eligibility requirements similar to the Medicaid proposals in the Republican health care bill. It can make enforcement of the individual mandate looser, allowing healthier people to opt out of insurance, driving up premiums for those that remain. (The IRS is now accepting “silent” 2016 individual tax returns that omit information about health insurance coverage.) And it can degrade the exchanges in many ways: by failing to provide usability upgrades to the website or advertising to bring in users; by fostering uncertainty and failing to address technical problems, causing insurers to withdraw from the market; by watering down the benefits that must be provided by exchange health plans; and most powerfully by ceasing to defend against a court challenge to the program that provides financial assistance with deductibles and co-insurance to the lowest-income exchange customers. The loss of this program would cause many lower-income customers to withdraw from the exchanges.

Hence, the exchanges have no upside and plenty of downside with the Trump administration in office. And Medicaid may get trimmed as well. The two programs that have increased coverage for lower income people are at risk of shrinking. This puts more burden on employers, and particularly on small employers whose employees typically earn less.

What strategy makes sense in this very uncertain environment?

Use commercial group insurance if possible. This part of the healthcare system is strong and will be least affected by the administration. If your company is big enough to self-insure you can escape a great deal of regulation, and new offerings are bringing self-insurance to smaller companies. A strategy based on sending employees to the public exchanges with a stipend, which made sense for some companies when the exchanges had the government’s full support, will be risky until we know how the new administration will implement the ACA.

Explore offering a health savings account (HSA) in combination with high-deductible insurance. Trump has said he favors HSAs and wants to expand their use. He can make regulatory changes that will make HSAs more broadly available and more attractive. High deductible health plans produce savings, but studies have shown that the savings often come from avoidance of needed care. Adding an HSA, which the employer can fund, makes money available for necessary care that falls into the deductible, and it gives employees incentives to spend wisely because they are spending “their own” money.

Get creative by investing in new approaches to wellness that are showing strong results. This includes comprehensive programs targeted at chronic diseases like Omada Health and digital tools that help people adopt healthier lifestyles and eating habits. There is a lot of noise in the latter space, however, some of the products are producing strong documented results. These programs attack the root cause of the chronic disease epidemic that drives the bulk of our healthcare bill.

The next few years are likely to be difficult for health benefit sponsors: when the gods are at war mortals need to stay out of their way. In such periods it makes sense to stick with the things that are working and watch the change carefully, looking for the opportunities that emerge and well as the threats.

First posted @ blogs.forbes.com/toddhixon on March 30, 2017.

Small Businesses Must Be Both Cautions And Creative In Today’s Choatic Health Benefit Market was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

We Can All Learn From Travis Kalanick’s Troubles And Willingness To Change

I hear a rising wave of criticism against Uber CEO Travis Kalanick in the media, for example, this week’s Marketplace “Make Me Smart” podcast (3/1/2017). The tension is remarkable: the founder/CEO of the world’s most successful start-up faces questions about his ability to lead and manage. In the podcast, Kai Ryssdal and Molly Wood question whether he can, and will, continue to lead Uber as it becomes a public company. Two days ago Kalanick made a very public apology, owned up to errors, and promised to “grow up” and seek help with his management style.

The Uber situation is an ultra-high-profile example of a common problem. Successful growth companies often start with a tight team of talented and driven people led by a strong personality. The kernel of the team often has a common history. Their mission is disruptive: to show the world a better way and topple established competitors. The external challenge is huge: to make the product work, overcome obstacles, change minds, acquire customers, raise money, and achieve cash flow before investors’ faith runs out. At the start, the company often has one principal competitive advantage which it exploits relentlessly to grow. Results are (almost) everything. It’s not unusual at this stage for the culture to be aggressive, one-dimensional (little diversity), and inflexible: “numbers talk and no whining”.

I was at Boston Consulting Group (BCG) in its early years, when it had many of these characteristics. The staff was almost all brainy, driven white males. Its value proposition aimed to disrupt the established competitors, like McKinsey. The consultants received a monthly quantitative score card to which their pay was linked by formula. BCG’s founder was brilliantly innovative and driven, but also a difficult personality and a one-dimensional manager.

As companies grow and become important in their market, the management dynamic needs to change. Part of this is internal: the company’s products and go-to-market strategies become multi-faceted, causing need for a more diverse set of skills to operate. More talent must be recruited, which drives hiring a more diverse group of employees, many of whom turn out to be quite valuable but don’t fit the original culture. The original value proposition loses lustre, requiring continued innovation, which a rigid culture and homogeneous management team obstruct. Roughshod management builds up anger and stress in the organization that causes big problems, particularly when success reduces the external threat and allows employees to consider how they feel about life at work.

External pressure drives part of the change. The company now has an ecosystem and needs to manage and nurture relationships with customers, opinion leaders, distributors, employees/contractors, suppliers, and investors. And the company will have come to the attention of the public and media at some level. It may have impacted some markets. Journalists, industry luminaries, and even politicians start to judge the company’s behavior.

BCG and a couple of its competitors drew fire from leading business schools for their aggressive MBA recruiting tactics in the 1980s. They eventually worked out a set of ground rules and give-backs to the ecosystem that led to a positive relationship. Three decades on, BCG is at the top of the consulting industry and is considered both a well-managed firm and a great place to work.

Small businesses face similar challenges. Founders usually have strong personalities that dominate the company culture. As the business becomes established, it needs to become more diverse and manage its external relationships. The proprietor of a specialty food store in my town was a great cook and merchant and built a nice business, until he became known for abusing and harassing his female staff. Word got around and people stayed away. The entrepreneur is now “retired”.

Investors almost always want founders to stay at the top and build their companies to greatness. They note that a large fraction of the great start-up success stories feature a founder who went the distance with some coaching along the way: Andy Grove, Bill Gates, Steve Jobs, Jeff Bezos, Larry Page, and most recently Mark Zuckerberg. And investors want the next great entrepreneur to seek them out. But they know that going the distance requires a large degree of growth and change in the founder’s skill sets, management style, and leadership of company culture. Not every founder of a juggernaut start-up can make this transition, and those that do not need to step aside. Travis Kalanick took a brave step when he stated publicly that he needs to change. That makes me hopeful that he can meet the challenge and continue to lead the remarkable business that he has built.

First posted at blogs.forbes.com/toddhixon on March 3, 2017.

We Can All Learn From Travis Kalanick’s Troubles And Willingness To Change was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Trump Care Will Create A New Wave Of Digital Healthcare Opportunities

WASHINGTON, DC — FEBRUARY 10: U.S. Vice President Mike Pence (R) swears in Rep. Tom Price (R-GA)(L) as new the Health and Human Services Secretary. (Photo by Mark Wilson/Getty Images)

The next few years are likely to see a major attempt to use market mechanisms to reduce the cost of U. S. healthcare. Healthcare costs are rising again, and Republican campaign promises will put huge pressure on the federal budget. Republicans prefer market based solutions to problems, and they harshly criticize the parts of Obamacare that expand health insurance participation by means of entitlements and sanctions.

The approaches favored by the Trump administration and the Republican majority in Congress are still evolving. In general, they feature a shift from defined benefit federal health programs like Medicare and Medicaid, which entitle individuals to the care they need mostly at government expense, to defined payment programs that give individuals a fixed payment based on their life status and leave them responsible for buying the care they need. This approach, which gives individuals more “skin in the game”, is meant to motivate them to become better healthcare consumers: shopping energetically for better value healthcare services and pushing back on recommendations to use services that are not truly needed. If successful, it will help to tame the bloated U.S. healthcare system and make the federal healthcare budget go further. In addition, the Republicans propose measures to make healthcare markets more competitive (look here for details).

Since the beginning of the digital health era, entrepreneurs have been interested in creating businesses that enable healthcare consumerism. In other realms of commerce, digital platforms have been highly successful helping consumers buy better: e.g., Kayak.com helps travelers see all of their options for travel from A to B and compare prices; Quickenloans.com provides home buyers new options for finding a mortgage; and Amazon.com allows shoppers to compare dozens of choices and its smartphone app helps them photograph the barcode on an item in a store discover what it costs to buy on Amazon. Healthcare, at $3.4 trillion in 2016, is the biggest industry of them all. Making similar approaches work in healthcare is a exciting opportunity.

The track record of digital health consumerism is not good, however. Research shows that forcing consumers to have skin in the game causes them to cut spending, but the spending cuts do not occur in a smart way: consumers show little evidence of price shopping and often cut back on cost-effective preventive care. This saves money near term but probably leads to much higher cost later. Many start-ups that were launched to offer consumers information they could use to make better healthcare purchase decisions have quietly pivoted to other business models or stalled out. The most prominent example is CastLight Health, a company that originally focused on providing information that members of corporate benefit plans could use to make more cost-effective healthcare provider choices. CastLight has since broadened its focus to become a “health benefits management company”. From the perspective of investors, CastLight has failed to perform as expected: it went public in 2014 at $40 per share and now trades at $3.50.

Healthcare consumerism is very hard to pull off. Price data is still hard to access, understand, and compare. In most cases it is hard for a consumer to judge quality of providers. And, buyers often have a poor bargaining position. I was recently in a serious car crash. When I regained consciousness after the crash my first thoughts were about getting help for my wife, not about getting the best price from competing ambulance services. Many people I have spoken with simply don’t want to make healthcare buying choices: they think they lack necessary knowledge, and they just want to be taken care of.

The digital health investment community has gone through a shakeout now that reality has tempered the original rush of enthusiasm: the “tourist money” has gone on to seemingly greener pastures. Many of those that remain are optimistic about new opportunities created by the policy shift described above, taking advantage of all that has been learned from the first generation of digital health start-ups.

Healthcare consumerism has to be approached with caution and realism, however. I suggest these guiding principles for entrepreneurs seeking to ride the new wave of healthcare consumerism:

  • Choose a sector with favorable characteristics: one in which consumers can judge the value of one offering relative to another and, given choices with different prices, they can choose better value without great risk or inconvenience. Pharmaceuticals are a good example. Product equivalence is clear: branded drugs are well-defined products, generics are technically equivalent because they contain the same active ingredient and are labelled on that basis, and product quality is well-regulated. Consumers are in a good position to judge value. Pricing is byzantine and opaque, but that is a problem that start-ups can attack. Look for successful digital health companies to emerge providing better consumer value in the pharmaceutical sector.
  • Consider business models that give healthcare consumers the benefit of professional buyers acting on their behalf. That is what health plans are supposed to do, but they have become so monopolistic (few choices in most geographies) and so much the agent of employer cost-cutting that their credibility is weak. New-model health plans (e.g., Oscar), intensive primary care providers (e.g., Iora Health), and managed Medicare providers (e.g., Humana) are examples of models that help consumers make sound decisions about provider choice and service utilization. These are mostly high-capital-cost businesses, however, requiring large professional staffs and/or capital for risk-bearing. That creates a challenge for entrepreneurs.
  • And bear in mind that there are many opportunities in digital healthcare beyond business models that enable healthcare consumerism. As discussed in a previous post, businesses focused on making healthcare more efficient by other means, or solving long-standing problems of patient outcomes, comfort, safety, and convenience stand to do well in the Trump Care environment, and most other policy environments that we can realistically expect.

I’ve always been a believer in the power and wisdom of markets. But healthcare is almost not a market. Providers are regionally concentrated and have huge information advantages relative to consumers. Switching costs are often high: i.e., it’s hard to change your health plan frequently. Consumers are often not in a good psychological position to bargain, e.g., when you receive a cancer diagnosis. Government proposals to open markets by allowing health insurers to sell across state lines are constructive, but only a small step.

Entrepreneurs need to choose their points of attack carefully. However, the market is so huge that its niches can be highly rewarding for entrepreneurs. Government will ultimately need a determined, pragmatic, and multifaceted approach to reforming the bloated U.S. healthcare system: hopefully we will get back to this before too long.

First posted at blogs.forbes.com/toddhixon on February 27, 2017.

Trump Care Will Create A New Wave Of Digital Healthcare Opportunities was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Stars To Steer By In Our Current Storm Of Rapid Change

U.S. President Donald Trump, right, shakes hands with Theresa May, U.K. prime minister, in the Oval Office of the White House in Washington, D.C., U.S., on Friday, Jan. 27, 2017. Photographer: Olivier Douliery/Pool via Bloomberg

Today the rules of the game are changing faster than most of us have seen before, with major impact on business. Here’s how entrepreneurs can better survive the uncertainty and prosper from the change.

The modern rules of the business game took shape in the 1950s, when the U.S. emerged from World War II as the world’s dominant economic and military power. It engaged globally, supporting the recovery of Europe and the development of the European Union and forging alliances with Europe and Japan to contain the USSR/Russia. The tax system as we know it took shape, including incentives for entrepreneurship via capital gains preferences. The U.S. and other developed economies shifted the mix of their GDP from manufacturing to services, reducing manufacturing employment. A series of initiatives and institutions (e.g., the WTO) made trade progressively freer, and world trade grew rapidly. Communication and travel became cheaper, easier, and more effective globally. Chinese leaders subordinated political dogma to prosperity and joined the world economy in a big way. English became the global language of business. And a new wave of immigration occurred in the U.S., mainly from Latin America but also bringing significant numbers of Indians, Chinese, Koreans, and people from the Islamic countries.

The post WW II regime created a pattern of business and economic activity often called “Global Capitalism”. Powerhouse global companies emerged. Supply chains became integrated regionally and globally. Rapidly advancing information and bio technology enabled the emergence of a start-up economy, first on the East and West Coast of the U.S., and now globally; it made a few entrepreneurs rich and a lot of software engineers and data scientists prosperous. High-income countries benefitted from immigrants filling bottom-of-the-food-chain jobs, driving entrepreneurship [immigrants provide a high percentage of entrepreneurs in the U.S. and other developed countries], and adding younger workers to their aging workforce. Overall the world is a much better place than it was 70 years ago: average incomes are higher, poverty is much reduced, lives are longer, civil rights are stronger, women are more equal, and political freedom has made significant gains.

But a small elite enjoyed the benefits of this post-WW II golden age much more than the average Western citizen. This produced a surprisingly strong backlash against Global Capitalism. Today we have a populist president of the U.S. who is destroying key pillars of Global Capitalism as fast as he can and a U.K. Prime Minister with a similar mandate. Populist parties are serious contenders in other key parts of Europe, too.

Some of the changes that seem likely are:

  • Restrictions on trade in the form of large economic penalties for importation of products and intermediate goods, effected via tariffs or a corporate tax based on where revenue is realized (exports pay no tax, imports are fully taxed).
  • U. S. withdrawal from leadership in international trade platforms, such as TPP, replaced by a web of bilateral deals which will likely be in flux for many years and result in a more complex set of rules.
  • Tough restrictions on immigration and even visits to the U.S. with large uncertainty as to whether economically-key programs, such as H-1B visas, will continue to be available.
  • Restructuring U.S. healthcare in ways that will probably result in less federal money helping fewer people receive more limited healthcare services.
  • Price pressure on drug companies via the Bully Tweet and other means but no clarity on what the new rules are.
  • Important changes to corporate tax rules: a lower statutory rate, the end of many deductions including perhaps deductibility of interest, and incentives for repatriation of overseas cash.
  • Lower individual tax rates, which can be expected to stimulate the economy, perhaps coupled with other changes such as elimination of preferential treatment of capital gains, carried interest in investment partnerships, and/or qualified small business stock, all of which would reduce the amount of risk capital available for small businesses.
  • Repeal of a host of federal regulations, which directionally would be good for business and might, for example, enable small banks to lend more. But, this will produce a long period of uncertainty while we wait to learn which regulations will be repealed or changed and how the change will affect us, particularly its unintended effects.

How can we manage successfully when so much is changing so fast? First, recognize that no one is an expert at this. We have not had times like these in the U.S. during almost any active manager’s career. So, the first rule is: stay alert and flexible until the new reality becomes more clear, keeping options open and some fallback plans ready.

Second, be wary of forecasts. They are bad in the best of times and mostly worthless now. Focus on knowing where the risks are in your business, and developing scenarios that tell you how much impact different outcomes for key risks will have on your success or survival. This is how leading companies in volatile businesses, like Shell Oil, have long managed.

Think about second-order consequences of changes, which can have large effect. For example, the Trump tax plan speaks of ending deductibility of interest for corporations coupled with a lower corporate tax rate. This will probably benefit businesses on average, but it will kill the market for high-yield debt. Why? High-yield debt (“junk bonds”) became popular in the ’90s specifically because it provides an equity-level return to investors, but it does so by paying a high rate of interest, and the tax deduction for that interest dramatically lowers cost of capital for issuers compared to equity financing. High-yield debt is far less attractive for issuers in the new regime. And they will be under financial pressure when the interest on all their outstanding bonds is no longer offset by tax reduction. If high-yield debt is part of your strategy, start work on a new approach. Bringing a trillion dollars of corporate cash back to the U.S., with much of it going to investors, will feed some new investment pools that you can tap.

Keep your eye on the good in change as well as the bad. Many people seem to be wired to care more about losing something they have than gaining something new that has equal objective value. So, we get up in arms about losing some entitlements and don’t focus enough on new opportunities. Rapid change will bring interesting new opportunities: make sure you give them the attention they deserve.

Look for situations where established leaders are failing to respond to the change. If global supply chains are becoming a disadvantage, then the best domestic suppliers will be valuable. Find them and lock up their capacity. Authentic U.S. brands will probably gain strength on the back of the anti-import movement: position to take advantage. Or if a competitor stumbles, you may be able to acquire him.

Communicate more than ever with your stakeholders — customers, employees, and investors — bringing them along as you learn to prosper in the new regime. There are going to be surprises, some of which will shake stakeholder confidence. The best defense is frequent and transparent communication, including listening to stakeholders well. This works much better if you start before trouble comes.

Finally, keep a good amount of your powder dry. Raise money when you can, even if the terms are not ideal, and put it in a safe place. Opportunities will come your way when others run out of cash. It’s remarkable how much better a period high uncertainty feels if you have plenty of cash on hand.

First posted at blogs.forbes.com/toddhixon on February 15, 2017.

Stars To Steer By In Our Current Storm Of Rapid Change was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Before You Bet On A Long Shot, Think About How Often Such Bets Are Foolish

Business is all about taking risk, especially the venture capital business where I work. A successful long shot can bring both riches and glory. But long shots are seductive and often foolish. Read on before you place a big bet.

Our ability to judge risk varies greatly. Studies have shown that race track betters consistently judge chance of winning accurately for “short odds”: horses that are favored to finish near the front.

Studies also show that long odds can be “foolish” bets. By foolish I mean: the return you would expect if you analyzed the situation carefully is far below the cost of the bet. The graph below is based on a large-sample analysis of race track bets in California. It shows that the short odds are modestly profitable (over time the value of winnings exceeds the amount bet), even overcoming the race track’s 15% take. And the long odds are a very bad investment: the average actual payout is less than 50% of cost for bets with the longest odds.

Data source: Ziemba & Hausch, Betting at the Racetrack, Dr. Z Investments Inc., 1986.

Why is this? Economists Rich Thaler and William Ziemba, writing about race track betting, offer several hypotheses:

  1. Bettors are bad at estimating the success probability of long shots.
  2. Bettors place value on a big win that exceeds the rationally calculated value: because they “need” a big win (e.g., they feel a need to get back to break even before leaving the track), or because a big win is exciting or carries bragging rights.
  3. Sometimes people bet for irrational reasons, such as, they like the name of the horse.

In my experience, business bets have similar dynamics, except perhaps for liking the name of the horse. Managers are often good at estimating the odds for situations that are not too complicated, have probabilities between 25% and 75%, and occur frequently. That corresponds to my experience. At NAV, we’re good at judging the probability that a financing in process will close, for example.

Managers can be quite bad at estimating long-shot odds, e.g., whether the chance of a given event is 2%, 5%, or 10%. That’s a small absolute difference but a big ratio: 10% is 5x better than 2%. If you are talking about the chance of landing a $10 million contract, and the chance of winning the contract is 10%, it makes sense to spend $100,000 to try for the contract. If you do that 10 times you’ll spend $1 million total on marketing and most likely (65% probability) win at least one contract. If the probability of a win is 2%, then you would need to chase over 50 contracts to have the same 65% chance of winning at least one, spending $5+ million and a lot time. This would eat up all the potential profit, so chasing the business is a bad bet absent a source of further value.

I’ve seen this tendency to mis-judge the long odds time and again when salesmen come in to talk about their pipelines. They overvalue the early pipeline. Salesmen are optimists by nature and overestimate how likely each piece of business is to close: they think 10% when it should be 2%. And they overvalue the late pipeline because they underestimate how many things can go wrong in the last ten yards. In the middle of the pipeline, where deals are 30%-70% likely to close, judgments are much better because the situation and the main risks are well understood by the salesman and sales management. My rule of thumb for pipeline value is: anything less than 25%-30% should be valued at $0, and nothing is more than 70%-75% likely until the contract is signed. That’s crude, but it works. It focuses attention on closing the deals you understand versus kissing more frogs, and it helps keep the revenue forecast realistic, which, in turn, helps keep spending under control.

The long odds are dangerous for an additional reason: business people bet on them for non-economic reasons, and bid up the cost of the bet in the process. The Unicorn phenomenon (companies with a private valuation >$1 billion), which had a major impact on venture capital markets in 2015–2016 and then fell sharply out of fashion, is a good example. Having unicorns in the portfolio became a key yardstick of investor prowess, and becoming a unicorn CEO was likewise a big status symbol for entrepreneurs, so investors and entrepreneurs both pushed hard to create unicorns. In the last year many unicorn companies have been sold or gone public at values below prior financing values, indicating that their unicorn valuations were often foolish. And entrepreneurs and early investors suffered heavy dilution due to the protective features later round investors built into their unicorn term sheets.

In the American Football Conference play-off this year, I watched Ben Roethlisberger (Steelers QB) loft long passes that were exciting and things of beauty, especially when they connected with a receiver 40 yards downfield and set up a touchdown. Here are some examples from earlier games.


But only a few connected. Tom Brady (Patriots QB) played the shorter odds, throwing mostly 10 yard lightning bolts to receivers who were able to gain substantial yardage after the catch. The Patriots won 36–17. (Disclosure: I live in the Boston area, but I am not a Tom Brady fan.)

(Data via ESPN.com)

Beware of the long odds. The small chance of a big win is highly seductive, and sometimes it’s the only way you have to win. But they are often over-valued. It is usually best to save your dry powder for the bets you truly understand.

First posted at blogs.forbes.com/toddhixon on January 30, 2017.

Before You Bet On A Long Shot, Think About How Often Such Bets Are Foolish was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Tribalism In Business: Why We As Leaders Must, And How We Can, Push It Back

WASHINGTON, DC — JANUARY 20: U.S. President Donald Trump delivers his inaugural address on the West Front of the U.S. Capitol on January 20, 2017 in Washington, DC. (Photo by Chip Somodevilla/Getty Images)

The tumultuous 2016 election, which finally ended with President Trump’s inauguration today, brought home how much American society, and indeed Western society, have become “tribalized”. I rarely heard the word “tribalism” before the last couple of years. Webster defines it to mean: “loyalty to a tribe or other social group especially when combined with strong negative feelings for people outside the group”.

Now tribalism seems to dominate the news. It’s a major force behind the anti-immigrant movement that is shaping politics in the U.S., Britain, Germany, and elsewhere. Trump, Saunders, and Obama stand accused of basing their politics on tribalism. The rise of Facebook, Twitter, etc. splintered media into a channel for every group, with the story in each channel tailored to the beliefs and prejudices of the group, and little fact-checking. Some blame this for the rise of fake news. President Obama in his final address argued this splintering feeds tribalism and divisions in society: “Increasingly, we become so secure in our bubbles that we start accepting only information, whether it’s true or not, that fits our opinions.”

Tribalism has advanced to a point where it fundamentally shapes the ability of many people to absorb the information presented to them and think critically. President Trump won to a large extent on the basis of a promise to bring back jobs that [he says] immigrants and low-cost foreign producers have stolen. Most serious analysts believe and have often said that can’t and won’t happen, e.g. the analysis of Erie, Pa that Marketplace broadcast January 19. Voters are simply not listening to credible experts.

Tribalism in business is common. Labor/management discord and the union dynamics that it spawns (unions foster and feed on tribalism) is the classic case. It happens in more subtle ways even if there are no unions and no blue/white collar distinctions. When you hold middle managers accountable for things they can’t control, they eventually lose respect for senior management, cease to care about their work, and focus on avoiding attention until they can find a better job. When you change retail workers’ schedules every day and send them home an hour early when business is light, they cease to care about your business’ success.

Tribalism feeds on failed communication. When people do not understand what is really happening and why, they are susceptible to facile explanations that feel good and appeal to prejudices. The complexity and subtlety of the forces that shape business today make this challenge greater. It’s hard to explain to line workers why being part of a global supply chain, and the job displacement that can cause, is key to the survival of a business.

Dysfunction is normal in politics: after all, democracy is the worst form of government, except for all the others. But businesses need to function smoothly and work as teams. Tribalism poisons this.

To be efficient and competitive while delivering excellence to customers, we need the full effort and commitment of our people, and that means we need to push tribalism back. How you do this is not mysterious; it’s based on effective leadership and treating people well. Key leadership tasks are articulating the company’s goals and strategy, helping people understand what is happening and why, giving them goals and metrics that are as clear as possible, creating conditions for success, and talking honestly about failure: why it happened, what caused it (including senior management’s role), and what should be learned and changed.

It’s also important to make the economics work for everyone. Money is limited, however, paying a little more than competitors, and/or giving employees a profit share or equity, goes a long way to make the company a family rather than feuding tribes. And it helps you hire better people and retain your best people: a good investment.

Healthcare is the economic millstone of our time. While governments pay for healthcare in almost all advanced countries, the U.S. makes it employers’ responsibility, and that can be a huge burden for small businesses in industries with low market wage levels. The more you can do for employees, the better. It’s life-changing when a child or spouse is sick and an employee can’t afford healthcare.

Last but not least, set the right tone. Tone is about showing warmth and respect to all your people, and to customers and outsiders too. It’s about taking time to listen and showing that you understand. It’s about fair dealing when you have the advantage and doing more than you have to do for people who have served your company loyally and well. Most important, it’s about trust: building trust, keeping trust, and trusting your people, even when that involves risk.

Tribalism is the power pill in politics now. We’ll see how that works out. It’s not good for business, of that I am certain. If we push back tribalism in our companies we will do much better, and perhaps the country will heal a bit too.

First posted at blogs.forbes.com/toddhixon on January 20, 2017.

Tribalism In Business: Why We As Leaders Must, And How We Can, Push It Back was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Here Is How Entrepreneurs Can Help Create Real, High-Value Jobs

Every job is valuable to the person who holds it, but just bringing on more people does not make our companies or our economy healthier. Entrepreneurs do best if they create jobs that are both high-value and real.

The conversation on job creation is both energetic and confusing: energetic because job creation is a major challenge of our time and a political hot button. It’s confusing because the language is sloppy, and the underlying dynamics of job creation are not straightforward.

Consider the value of a job on two dimensions. One dimension is the value of a job to the employee. This is usually measured by wage level, benefits, and job security, and perhaps also prestige. Jobs that score well on these dimensions are what politicians and union leaders call “real jobs”.

The value of a job to the economy is measured by productivity: the value of output produced per unit of time by the worker who holds the job. Economic growth is the sum of growth in output per worker (“labor productivity growth”) and growth in the number of workers. In recent years, the U.S. labor productivity growth rate* has dropped sharply to less than 1% per year, well below the ~2% productivity growth rate that prevailed from 1975 to 2007. And productivity growth creates better opportunity for wage growth: if output per worker increases, then worker income can increase while a balance between income to labor and capital is maintained. Hence low productivity growth is a major concern, and creating new high-value jobs (those that produce output per worker high enough to raise the average productivity level of U.S. workers) is valuable to the economy.

Strong economic forces are destroying many jobs and de-valuing others: automation by artificial intelligence and more traditional means, off-shoring of manufacturing to low cost producers, wage pressure created by the need to compete with low cost off-shore producers, etc. As the chart below shows, agriculture and manufacturing employment have declined sharply during the 70 years since World War II. However, Manufacturing output increased about 6x and farm productivity increased about 2.5x during that period. Output was increased or maintained while workers migrated to other sectors.

At the same time both innovation, and the market demand of a society made more affluent by increased productivity, created other jobs. Growth in education, the professions, health, finance, & real estate more than offset the decline in agriculture, manufacturing, and mining (see chart below). These are jobs that cater to the needs of the technology-based affluent: advancing technology requires education and makes health care more complex but more effective. Information technology and globalization help expand financial services. And affluence drives real estate markets and financial services: the biggest consumer loan products are mortgages, student loans, credit card debt, and car loans.

Data via theatlantic.com.

At the level of one business, the productivity growth/job creation dynamic looks like this. An entrepreneur sees an opportunity to improve productivity by streamlining or automating a business process. That either eliminates a job or enables more output with the same workers. If he uses his cost savings to become more competitive in his market, he can grow his volume while offering better prices to customers, often by enough to maintain or increase employment. If the entrepreneur invests his cost savings or some capital into a new product, then he can capture his lost revenue per customer while providing more value (creating higher economic output). Either way his output per worker, i.e. productivity, increases.

So how can we, as entrepreneurs, help create jobs that strengthen our society? Every job counts, but jobs with low compensation usually don’t increase output per worker and hence contribute less to the growth of the economy. And make-work jobs (much loved by some politicians) may pay well and please the few people who get them, but they contribute little to economic growth because the value of their output is dubious, and they often go away when a more business-like administration comes in. The U.S. Bureau of Labor Statistics excludes the government sector from its productivity statistics because, as they put it rather delicately, “it is difficult to draw inferences on productivity”.

As entrepreneurs, we drive the growth engine when we increase efficiency (i.e., productivity), which is the fundamental enabler of economic growth. If we up-skill our workforce as part of the productivity improvement and pay higher wages as a result, we increase employee purchasing power, which contributes to growth. We drive growth more when we take our savings from efficiency improvement and invest it in growing our volume, maintaining or growing our employment and (if we pass some efficiency savings to customers) giving customers savings they can spend on new things. We do better still if we invest some of the dividend from efficiency in new products that increase the value of our production by addressing emerging customer needs (like adding GPS navigation to cars). And we do that best if we use the efficiency dividend to accomplish the difficult feat of innovating in a new market driven by emerging technologies and demographic trends, which is probably a big step beyond the market on which our company was built. That’s a tall order, but it’s what the best entrepreneurs have done: think of Steve Jobs taking Apple from PCs to smart phones, or Jeff Bezos birthing the world’s leading cloud services company out of his retail business, leaving HP, IBM, and Google in his digital dust.

Don’t focus on creating “real jobs” as the politicians define them. Create “high value” jobs as economists would view them. The good news is that those usually turn out to be real jobs too.


  • This is the labor productivity growth rate for U.S. non-farm business, which is the broadest measure reported by the U.S. government, representing about 75% of GDP.

First posted at blogs.forbes.com/toddhixon on January 16, 2017.

Here Is How Entrepreneurs Can Help Create Real, High-Value Jobs was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Entrepreneurs, Prepare For A Rough Ride In 2017

At the start of every year I write a post that attempts to predict what the new year will bring. I’m never 100% right, but thinking it through and laying out the assumptions is useful. 2017 has more moving pieces than any year I remember. The U.S. economy is near the top of its cycle, social discontent is strong, economic change is accelerating, and a new administration is taking charge with radically populist philosophies whose specifics are not yet clear. I see more downside risk than upside opportunity.

The forces driving globalization and the “winner-take-all” economy power ahead. A new IT revolution based on practical artificial intelligence will accelerate job displacement, and the Internet of Things will accelerate re-organization of work: software has gone from eating the world to devouring it. Medical technology is giving birth to personalized medicine, which is beginning to deliver magical cures, for those who can pay the stunning price.

Data via investing.com

Our connected world is proving to be a growth medium for bad actors. Privacy is passé. Cybercrime, often launched from abroad, is a rising pandemic. Terrorism is increasingly frequent and ISIS now recruits fanatics on the internet. Fake news spread on social media and/or Russian government hackers feeding WikiLeaks may have tipped the balance in the U.S. election.

Economic confidence in the U.S is positive right now, naively so. The stock market is flirting with Dow 20,000, a new high water mark. Consumer confidence is near a 13-year high. Small business confidence is rising, too, and surged after the election. The economy is doing well: growth has been respectable, unemployment is near its lower limit, and debt is cheap.

The U.S. is about to inaugurate a populist president whose party controls Congress. He was elected on the basis of expansive but vague promises to improve the lot of people left behind by the globalized information economy, and roll back much of the liberal agenda advanced by President Obama. He promises dramatic changes to the U.S. economy, its healthcare system, its trade and security relationships abroad, and many other things.

From a business perspective, many Trump administration proposals would be beneficial. Lower corporate tax rates and lighter regulation will help. Infrastructure spending and lower personal taxes will boost demand, if Congress supports these deficit-expanding measures. Repealing Obamacare removes the penalties many employers face if they do not offer health benefits.

However, the new president and most of his top team, while very accomplished, lack government experience. And they promise to quickly re-engineer the U.S. health care system, taxation, trade policy, and business regulation, among other things. What could go wrong?

Policies that appeal to the electorate can prove difficult to implement and make successful. Britain is an early indicator of this, having voted to exit the European Union in June, 2016, a populist trade policy similar to Trump’s proposals to renegotiate or terminate NAFTA, not ratify the Trans Pacific Pact, and aggressively negotiate new bilateral trade deals. Brexit, as it is called, was a popular concept, but it is proving very complex and difficult to execute, as evidenced by the resignation this week of a frustrated British ambassador to the E.U. And currency markets now value Britain’s currency (by implication its economy) 20% lower than a year ago.

I don’t mean to be cynical. Donald Trump will be our president, and I want him to be successful, for the sake of all of us. A fresh perspective often produces positive change. However, he has promised a great deal to his deeply discontented political base. The problems he will tackle are very difficult and complex, and he will need to fight massive inertia. The economy and markets are doing well already: it will be hard to improve the numbers. A misstep by the Trump administration could produce social discontent (if his base feels betrayed again), a trade war hurting key globally integrated U.S. employers like Boeing or Caterpillar that leads to job losses, fewer people with health coverage (more social discontent), a general loss of business confidence (more job losses), and in the worst case another war or even a nuclear exchange if his hard-knuckle approach to negotiation lands a blow in the wrong place. The downside looks very real to me.

What can entrepreneurs do? Build stability into your business, and cut back on financial risk. Now, when the economy is doing well and sentiment is positive, is a good time to push aggressively for cash flow stability. Offer discounts for longer commitments, or bid aggressively for longer term contracts. Make investments that will pay back quickly in favor of those that might offer a greater return over a longer time frame. Build up a liquidity cushion and park it in safe place. Negotiate a line of credit before the banks pull in their horns. Streamline your structure, sell marginal businesses and assets for what you can get today, and set the money aside. If not done already, lock in your health care plan for the next benefit year so you know what you have while we see what the new government brings forward.

Reduce risk by postponing investments you can live without and keeping your commitments shorter in term. Minimize hiring and use contractors in favor of employees. Shift some resources from developing entirely new products to improving current products, particularly improving margins. Focus acquisitions on accretive product line tuck-ins, not bold new initiatives. If you are heavily dependent on a foreign supplier, look for a back-up or a domestic alternative, as a hedge against trade disruption. If part of your business makes money because it is protected by regulation, get ready for change: find a new source of advantage or prepare for margin squeeze. If you do this well, you could catch competitors by surprise, disrupt the business, and end up with a much larger position. And, don’t build that shiny new headquarters this year. It’s amazing how often they turn into white elephants.

I hope the next few years will turn out well, but I can’t ignore the risk. As they say in Maine, “There is no such thing as weather that’s too cold; the problem is people who are not prepared.” This is a year to bundle up for Winter and hope for an early Spring.

Entrepreneurs, Prepare For A Rough Ride In 2017 was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

Rising Adults, Ask These Questions As You Start Pursuing A Real Career

Holiday gatherings this year produced several conversations about careers. The rising adults in our family are thinking about a “real career”: work that provides income, status, and satisfaction sufficient to create a foundation-stone for life. Since I’ve had one or two of those, they ask me for advice. I like to give advice by asking questions. The following seven questions can help young adults get started on the right path.

Ask yourself both 1) “What do I like to do?” and & 2) “What do I do better than most people?” Teachers and parents tell young adults that they should discover what their passion is, and go after it. The problem is, about half (in my personal sample) want to be artists of some kind or pro athletes, or study language and culture, and nature just does not make that many real-wage jobs for artists, athletes, and ambassadors. Most of us have to do something more practical for a living; we can create art, play sports, or travel in our personal time. We spend most of our waking hours at work until retirement, so obviously it’s vital that we enjoy what we do. But a job is not a vacation or a hobby. There will be parts that are not fun.

A job is a relationship that has to work for both sides. Employers hire people mainly because they have a job they need to get done. When employers promise an exciting experience, they do that mostly because they think it will help them hire the most able person for the job. So do some market analysis: ask yourself which employers will value you most, and where your skills and talents give you the most competitive advantage. That will be the place where you have the best chance to be hired and promoted and enjoy high earnings and job security. That will also be the place where you can negotiate the job design that fits your preferences: do you prefer detailed design work, more conceptual and managerial systems engineering, or sales engineering that gets you out on the road with customers? Do you want to work in San Francisco, the tech Mecca, or Pittsburgh, a great place to raise a family? If your prospective employer sees your talents as highly valuable and scarce, you can negotiate these things and more, both before and after you are hired.

3) What skills are likely to be in demand 20–30 years from now? Labor economists tell us that up to 45% of jobs will be eliminated by artificial intelligence (“AI”) and automation over the next few decades. These jobs are not easily categorized: they include both factory and office jobs, and both low-wage jobs (like call center operators) and radiology, once the highest paid medical specialty. Labor economists also reassure, and economic theory and history teach, that each wave of job destruction creates an even larger wave of new job creation, but that often does not help the people whose careers have been destroyed. So young people need to think about which fields are vulnerable to AI and automation.

We are at an early stage of understanding this wave of change, however, the Economist has has covered it extensively: search its archive for “jobs vulnerable to automation”. Routine jobs and those that consist mainly of mastering and using a body of knowledge, including very complex bodies of knowledge like some medical specialties, seem most vulnerable. Jobs that center on personal care for others, and jobs that combine a requirement for knowledge and analysis with management of complex human interactions seem to be more secure. The law firm of the future might have many fewer junior lawyers and paralegals combing documents to discover relevant evidence, researching precedents, or preparing routine documents, but still a small group of highly paid partners helping clients wrestle with difficult decisions and advocating in front of judges and juries. The matrix below sums up this simple analysis of the impact of AI/Automation on different categories of jobs.

The other term in the equation, however, is the volume of jobs available in each category. Engineering jobs probably fit in the upper-left quadrant: they are subject to competition from AI-based engineering tools. At the same time, however, AI vastly increases the scope of needs that engineers can address. So the net effect on engineering jobs is probably positive: there will be more of them, and they will be higher quality (more custom/original) than before.

The upper-right quadrant is most attractive place to be [this is how 2x2 charts always work]. But it will also be the most competitive. The few who do well here will be highly rewarded [a familiar theme].

4) How much do you care about your role relative to your industry? If the role is pragmatic, but the industry is exciting, the resulting career can be both rewarding and rich. Google is admired for its innovative human resource management team, which it calls “people operations”. Logistics, a rather prosaic field, is a big driver of success in the sexy tech industry. Michael Dell built his company on a logistical strategy, and Tim Cook rose through operations to be CEO of Apple. Likewise there are sexy roles in mundane industries.

5) Should you go to business school? Lacking a good idea of where to look for a real career, many twenty-somethings apply to business school. [That describes me in my twenties.] Business school offers some great advantages: it creates a valuable lifelong network and a hiring market when employers come to meet new graduates, it’s a de facto requirement for certain jobs (e.g., financial analyst) and certain prestige employers (top consulting firms), and of course you learn useful things. But there is a huge supply of MBA graduates: MBA is the most-awarded graduate degree in the U.S. Salary and opportunity for new MBA graduates is a strong function of the reputation of the school they attend. Studies show that the ROI on the six-figure investment an MBA requires is questionable below the top-rated schools.

6) Or, is it better to take an entry level job and start building experience? Engineering is a hot field today and offers many entry level opportunities. For people who like dealing with people, I suggest sales jobs. Salespeople learn their business where the rubber meets the road: winning and satisfying customers. Good salespeople are always in demand and make good money. And many higher level business jobs (marketing, product management) are more global and conceptual versions of salesmanship: a large percentage of CEOs started out in sales jobs. Plus you can always go for an MBA down the road: with more experience you can get into a better school.

7) Can business really be a fulfilling career? Business does not capture the popular imagination: there are few TV shows that celebrate the glory of business compared to the legion of police, medical, and legal dramas. Business can be tawdry, as many who have been on the receiving end of an acquisition know. But business can also be very satisfying. Launching a product line and business model that is new to the world is a creative act. Serving a customer or client well and earning his or her loyalty is satisfying. Great companies have family feeling and esprit do corps like elite military units. Building a great company can be the achievement of a lifetime and lead to a philanthropic career in later years. And it’s fun to make some money. I tell young people to consider a business career seriously, even though it does not offer the clear structure and off-the-shelf prestige of a profession.

The rising adult generation is setting sail on a turbulent sea. But turbulence creates opportunity: in the next 20 years AI will restructure work and create many openings for smart, aggressive up-and-comers. I think this is a great time for people with talent and drive to succeed. Patience, hard work, risk taking, and self-sacrifice will be required. But that’s nothing new.

Rising Adults, Ask These Questions As You Start Pursuing A Real Career was originally published in NAV Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Todd Hixon

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