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.
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.
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.
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.
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.
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.
Bettors are bad at estimating the success probability of long shots.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Millennials are voicing strong dissatisfaction with the state of our society and the leadership of the older generations. They have some fair points, but they don’t have all the answers. How can we go forward together?
A Millennial in my family wrote to me after the election: “I personally find both the presidential candidates regressive … two candidates born in the 40’s fighting so hard to have power. It is pretty representative of what I would like to see change.” Also consider a recent Forbes post: How Millennials Will Save The World, Part I. The message I hear is: “Let’s get those old fogies out of the way, they have made a mess of things. Millennials have the right values, motivation, and ideas. When we are in charge, we will save the world.”
The 2016 political campaigns crystallized these thoughts and feelings, and the controversial election of Donald Trump energized them further. The details of his policy positions and prospective actions are murky, and as his approach to governing rolls out, we see that it is quite different from what we have known before: Trump provides a surprise or dramatic event nearly every day. This keeps the pot boiling.
The Millennials’ message is challenging. They reject the current generation of leaders, and they are very important to entrepreneurs and business leaders: as high-value, trend-setting customers; as today’s employees and tomorrow’s executives; and as family members. But I don’t feel we can just hand them the tiller and go along for the ride.
Such inter-generational angst is far from new. In his book The Greatest Generation, Tom Brokaw writes about the clash in lifestyle and values between veterans from the Greatest Generation, who were often heads-down, pursuing the career opportunities and wanting to make up for time lost to the depression and the war, and their Boomer children who wanted an easier life*. My father, born in 1924, child of the depression, U.S. Marine in World War II, and hard-charging advertising man (think Don Draper) in the 1950s-1980s, is a good example of the Greatest Generation. I’m a Boomer. As a college sophomore, I approached my father to try out some ideas about a more just society that I had acquired from fellow students. He quickly became very angry and told me to shut up if I wanted him to keep paying for my fancy education. I dropped the subject and never came back to it. I don’t recommend this approach to building a relationship with Millennials.
Neil Howe and William Strauss have studied and written about the way in which successive generations interact and are different. Their work is widely considered insightful and influential. Their key premise is: generations do not evolve in a smooth, linear way from one to the next. Instead, successive generations develop distinctly different outlooks and behaviors as a result of the conditions in which they mature and the character of preceding generations. Howe and Strauss see this pattern going back to the Civil War and characterize each of the generations born since 1900 quite differently: the GI or “Greatest” Generation (born 1905–1925) that endured the depression and won World War II, the Silent Generation (1925–1945), Baby Boomers (1945–1965), Gen X (1965–1985), Millennials (1985–2005), and Adaptives (2005+).
Rising adults of each generation feel deep concern about the problems of the world, see exciting ways to make things better, and feel frustration and impatience with the outlook and actions of their elders. Older people with their experience and tempered idealism see the risks of dramatic change more clearly, they know better how to get things done, and they appreciate the inherent messiness of economies and governments. As Churchill put it, “Democracy is the worst form of government, except for all the others.”
Will Millennials save the world? Of course they will: they are the future, and soon there will be no one else to do the job. We need their intellect, energy, impatience, and new perspectives: Silicon Valley was not built by old folks, and Albert Einstein did his best work in his 20s. But older leaders are essential due to the knowledge, experience, and relationships they have built through their careers. And the world is on most dimensions a much better place than it was when I was a rising adult forty years ago. The preceding generations have accomplished a great deal.
As business leaders, our job is to listen (better than my father did, and better than I did as well), avoid easy stereotypes, give the rising Millennials opportunities to lead and try out their ideas, teach when there is receptivity to learn, work together, and effect the transfer of power that will inevitably occur over the next few decades. The Millennials in my life sometimes show impatience, lofty thinking, and high expectations. But they are sincere, aspire to do both well and good, and respect accomplishment. The oldest Millennials, born in early January, 1985, will be old enough to be inaugurated President in 2021. Perhaps one of them will stand for office and win. That could be every bit as exciting as the election we just finished.
*Tom Brokaw, The Greatest Generation, Kindle location 1611.
Donald Trump’s election combined with continued Republican control of Congress creates uncertainty for the U.S. health care economy that has no recent parallel. Digital health companies and digital health investors are undeterred. Many push forward by focusing on long-standing patient needs and efficiency challenges that any administration will need to tackle.
Healthcare is highly regulated, the federal government pays for half of it, and were are in the midst of a major reform launched by President Obama and a Democrat-controlled Congress in 2010. Now new hands are on the tiller, and they promise a sharp turn to starboard, but as of yet they not have plotted a comprehensive and coherent course. The Kaiser Family Foundation, IMHO one of the best resources for understanding U.S. healthcare, posted a distillation of President-elect Trump’s declared positions on healthcare after the election. What does he intend to do beyond repealing the ACA and replacing it with something “much better”? KFF distills Trump’s declared intentions into six points, summarized below:
• Health insurance: Trump would completely repeal the ACA including the mandate for individuals to have insurance coverage and for insurers to cover them regardless of pre-existing conditions. Instead, he would create high risk pools for individuals with expensive pre-existing conditions, and, in lieu of premium tax credits, Trump would provide a tax deduction for the purchase of individual health insurance. He would seek to keep individuals’ costs down by allowing insurers to sell plans across state lines, increasing competition which should reduce premiums, and by increasing use of tax-advantaged Health Savings Accounts (HSAs) which incent consumers to shop for the best prices for healthcare.
• Medicaid: Trump and the Republican House leadership would repeal the Medicaid expansion created by the ACA and replace it with block grants to the states for subsidized healthcare for low-income people, which the states could spend as they determined best.
• Medicare: Trump has proposed few specifics beyond repealing the ACA, which has many provisions affecting Medicare including improved prescription drug benefits and cost-saving initiatives, and “modernizing Medicare”. KFF notes that, in policy-speak, this term often refers to increasing the age of Medicare eligibility and/or re-structuring premiums.
• Prescription drugs: Trump supports importation of drugs from overseas that are safe and reliable but priced lower than in the U.S., presumably as a means to create savings for consumers with unaffordable prescriptions and generally hold prices down. He also supports greater price transparency from all health providers.
The last two points in the KFF summary address Trumps positions on the Opioid Epidemic and Reproductive Health, which primarily affect standards of care and social policy rather than the economics of the healthcare industry.
Looking at this through the eyes of the digital health entrepreneurs that I know, I see a couple of takeaways. First, Trump is likely to take some federal money out of the healthcare system by, e.g., by abolishing exchange subsidy tax credits and replacing them with tax deductions. This will reduce the volumes and revenues of providers, particularly hospitals, which will make selling to these markets tougher in the near term. Longer term, it will drive continued initiatives for cost reduction via consolidation and other means, which will create opportunities for startups.
Second, Trump wants to foster more competition in health care markets. This creates opportunities for entrepreneurs to create platforms that enable this competition, e.g., a marketplace to purchase drugs from Canada or Europe. However, the rules and timing for this will not be known for some time.
Third, Trump wants to change the rules for how a lot of health care money is distributed, which will move it from one marketplace, payment channel, or recipient to another: e.g., from Medicaid expansion in 32 participating states to block grants to all or most states. This will create uncertainty for businesses that work in these payment streams.
Finally, although Trump has said little about this, it makes sense (and many experts agree) that the cost saving initiatives that have gained momentum in the last decade, boosted significantly by the ACA, will mostly continue. This includes payment tied to value versus volume, bundled payments, managed care in the Medicaid and Medicare arenas, Medicare star ratings, quality and price transparency, population health management, and extracting value from healthcare data. The Trump administration will face acute budgetary pressure, given its intent to cut taxes and raise infrastructure spending plus the great difficulty of taking back existing entitlements, and Trump’s interest in making drug and insurance markets more competitive indicates he wants to make the system more efficient.
Despite this uncertainty, I’m impressed by how bravely and successfully many digital health startups are pushing forward. These startups are often focused on making healthcare more efficient, or solving long-standing problems of patient comfort, safety, and convenience. Here are a few examples from recent investor meetings:
• American Well provides a “white label” (i.e., generic) software platform for telehealth providers, enabling hundreds of providers to efficiently offer telehealth services. Providers are learning that telehealth is a natural extension of conventional medical plans and practices that can greatly improve both patient engagement and provider efficiency.
• GNS Healthcare is using machine learning technology plus access to bigger and more diverse data sets to make precision medicine real: to discover which patients are likely to benefit from which interventions and treatments.
• Seventh Sense Biosystems has developed a simple device that replaces the person who sticks the big needle in your elbow to draw blood. The device uses micro-needles and suction to painlessly draw the correct amount of blood and package it for transport to the lab.
• Natural Cycles, a Swedish company founded by a female nuclear physicist who helped find the Higgs boson, offers an app that uses modern statistics (the term physicists use for “big data”) to make the rhythm method of birth control more reliable than the pill. This benefits people who want birth control but are concerned about the health risks birth control pills create, or who have philosophical objections to artificial birth control.
Businesses tied to the specific structures created by the ACA, like the exchanges, may struggle in the Trump healthcare markets. Businesses that help perfect markets for healthcare products and services will likely get a boost. And businesses that improve efficiency and patient value, comfort, and convenience will find continued opportunity. While policies may be restructured, the imperatives are much the same: use digital tools and business models to generate efficiencies and improve the value of healthcare.
Originally published at blogs.forbes.com/toddhixon on December 5, 2016.