Tuesday, March 26, 2013

What did Yahoo Buy? Problems and Opportunities in Learning from Others

Wall Street Journal reports that Nick D'Aloisio, who is 17 years old, has sold his company to Yahoo Inc. for an undisclosed price that is rumored to be above 10 million dollar. Nick D'Aloisio started work on the free newsreader app Summly when he was 15, and it became a successful tool to quickly read news summaries. Yahoo has now closed down Summly. Puzzling, you might say, because Yahoo might have continued to operate it instead. So did they just buy a competitor in order to kill it? Are they taking a pause in order to re-launch it?

What we have heard so far is different, and interesting. Yahoo will be using the Summly technology in other products. Nick D'Aloisio also plans to work for Yahoo for a while. So the purpose of the acquisition is to transfer existing (and very novel) technology to work groups that make and maintain a variety of Yahoo products, and continue to benefit from Nick D'Aloisio's innovations for as long as he works for Yahoo.

OK, but will this work? How good are companies at transferring technologies internally? There is a lot of debate on this issue, and much of it has been on the barriers against such transfer. NIH means “Not Invented Here” and refers to how firms and work groups can be very slow in accepting superior ways of doing things, if they were made by others. Unsuccessful transfer is also common, with firms trying to transfer technologies but not understanding them well enough to get the same performance everywhere. The “copy exact” rule, supposedly from Intel, is a way to try to get the same performance in each transfer by copying not just what engineers think is the essence of the technology, but also a host of superficial features that might actually have some unknown effect.

Now Henrik Bresman has published an article in Academy of Management Journal suggesting that internal transfer processes are richer than people have imagined, and that we may have underestimated how frequent and beneficial it is. His point is that we usually see a transfer as occurring when one technology or practice is moved from one place to another, and produces a similar (good) result there. That's too simple. An important step in transferring is translation: the work group who receives the practice has to understand it, with the help of the unit that gives it, and often the translation step means that both groups come to understand the practice more generally. The receiving unit can then do something different than the original practice, but based on it, and will benefit from that. If we look narrowly at technology transfer, no transfer has happened. In fact, transfer has happened. That transfer may even help the giving unit understand the practice better and use it better next time around. What is transferred can be the actual technology, it can be a modification of the technology, it can be knowledge on when not to use the technology, or it can be the principles behind the technology. What are the chances that some of the research reporting NIH effects has missed these transfers? I would guess they are high.

How relevant is this research to Yahoo? It should be very relevant because Henrik Bresman studied in-licensing work groups in a pharmaceutical firm, and they transfer technology in a very similar way as the technology transfer that Yahoo is now preparing for. If I were a Yahoo manager I would look closely at Bresman’s article. I am guessing that Yahoo is already expecting to learn from the Summly technology in multiple ways, not just by copying exact. The acquisition price will be justified if they manage that.

Efrati, Amir. 2013.  At 17, App Builder Rockets to Riches From Yahoo Deal. Wall Street Journal Asia, March 26 2013.

Thursday, March 14, 2013

Who Regulates the Markets? Price Fixing in Interest Rates, and now also Gold?

Wall Street Journal is reporting that The Commodity Futures Trading Commission (CFTC) is investigating whether five banks have been manipulating the price setting in the London Gold market. If it does find evidence of market manipulation, the CFTC can take a big bite out of the banks. It was the CFTC that forced banks Barclays, Royal Bank of Scotland, and UBS to settle for fines that totaled more than $1.2 billion after finding evidence of manipulation of the Libor (London interbank offered rate, an interest rate), with additional payouts to other regulating agencies. It is not yet clear that there was manipulation of the gold price too, but having another such case has brought the issue of market regulation back into the news.

When there is illegal activity in a market, clearly someone profits. That is the whole point of breaking the law. But who are the losers? In the Libor manipulation, the answer is complicated because it was used as a benchmark interest rate in many kinds of contracts. For example, a high Libor rate over a period of time will make ordinary consumers lose money because house mortgages are indexed to the Libor rate, but deposits are generally not. And in any case, most people owe more money on their house than they deposit in the bank, so any increase in the mortgage interest rate is bad for them.

When interest manipulation is involved, it is easy to think about consequences like this, and the Libor manipulations have been described as the banks defrauding consumers. Actually it is more complicated. The manipulation was not always done to increase the Libor; sometimes it was to decrease it. And, the Libor is also what it says: it does influence the interbank lending rate (at least for the banks who do not know that it has been manipulated), meaning that there are banks both as winners and losers when transactions happen at a Libor rate set to a different level than a free-market rate would have been. The Libor scandal was not about "the banks" gaining while everyone else lost; it was a small set of banks gaining advantages over all other banks.

If a few banks had tried to grab money from the customers through collusion, one might have expected a free market to break this collusion through other banks offering better rates. That is the argument for self-regulation: competition will take care of things. The reason the regulators intervened in the Libor case is that competition could not take care of things. The colluding banks were the only ones with a chance to influence the interest rate because only they had a seat at the rent calls.

All of this should not have been a surprise, because self-regulation fails whenever there is a small and powerful clique with strong motives to cheat. Indeed, it should be especially well known in banking. One reminder of this is the recent article on the New York Clearing House Association (NYCHA) by Lori Quingyuan Yue, Jiao Luo, and Paul Ingram in Administrative Science Quarterly. A clearing house is a mechanism for executing money transfers, but it also took on roles of market self-regulation and prevention of failures during bank panics. This was very useful in the period before the government started supporting banks during panics, but there was a problem: The NYCHA did not play fair. Just as in the market manipulation cases, a few elite banks got disproportional advantages. Indeed, not all banks were even allowed into the NYCHA, and those left outside of its umbrella had greater risk of failure. This is natural; when a powerful group uses its control to the disadvantage of others, the others suffer. But bank panics get worse when some banks fail, so Yue and coauthors were also able to show that the NYCHA hurt its own members as well. So, self-regulation has two problems. Elites may take over, to the disadvantage of others; and the same elites may not be astute enough to even protect themselves. (On the latter point, an article by Don Palmer, Jo-Ellen Pozner, and me has looked at the processes leading to misconduct -- they are not always rational.)

Moving to our own recent case, the fines in the Libor case clearly hurt the banks that were caught manipulating rates. The ease by which the CFTC could show that market manipulation had occurred through email records suggests that these banks were very optimistic about their chances of getting away with it. After seeing that they even had difficulty taking care of their own interests, maybe we should be careful about trusting these same banks to be good guardians of the entire financial system.

Burne, Katy, Matt Day, and Tatyana Shumsky. 2013. U.S. Probes Gold Pricing. Wall Street Journal, March 13 2013.

Saturday, March 9, 2013

Lean in or Shake Hands? How Women (and Men) Meet Corporations

Jody Greenstone Miller, founder and CEO of Business Talent Group has written a response to the “Lean in” argument by Facebook COO Shery Sandberg in Wall Street Journal. To recap the argument and the response, Sanderg’s new book argues that women's careers are held back by unfair assessments at work and time demands at home, but also by their own behaviors. They do not take risks, take leadership, and assert themselves in the workplace, especially when they are starting a family. They pull back, she says, at exactly the time that they instead need to “lean in” and take charge of their workplace and family.

Miller thinks that the “lean in” argument is a diversion. Women do fail to live up to the expectations of time commitment to top-level managerial work, but these time commitments do not make sense to begin with. Ingrained habits and managerial laziness has led to a culture of trying to find stars and then piling work on them until they can take no more. Guess what? That game is best played by men with housewives and single women. But, Miller argues based on her own experience building the Business Talent Group, a project-based organization that scales work to fit each person can get star performance from people without ruining their private lives. And it can do this for both men and women.

The debate on time is interesting, and I think Miller’s arguments are based on two premises that we know to be true both from research and everyday experience. People do in fact work better when they do the right amount of work; but managers still try to categorize people into stars and the rest, and will overload the stars instead of designing the work more rationally. It is not clear that it is the right response for everyone to lean into such a situation.

There is a broader issue at stake too. By asking people to “lean in,” Sandberg is asking them to present themselves at work differently than they would naturally do. She is asking them to adapt to the organization, instead of being authentic as individuals. This process of people adapting to the organization is known as socialization, and there has been much research on it. Socialization helps communication and action by giving those who work together a common set of beliefs, common language, and common goals.

A recent article by Daniel Cable, Francesca Gino, and Bradley Staats in Administrative Science Quarterly shows that socialization based on shaping new employees to the organization has pitfalls as well. Compared with socialization that encourages them to express themselves, it led to worse employee retention and individual performance. Why can the organization do better by asking employees to behave more as authentic individuals? The key mechanism is that socialization that encourages employees to be authentic lets them contribute in ways that play to their strengths, increasing performance. Higher retention is easy because it comes naturally from the satisfaction of not having to fake it at work.

Going a little beyond what this research showed, having individuals contribute in ways that play to their own strength can be leveraged if the organizational supervisors learn to use these strengths. Because individuals have different strengths, they can be matched to different tasks and work group roles, creating even higher performance. To realize these additional performance benefits, we come back to the issue raised by Miller: good management practices, like knowing the strengths of your employees, are needed for a more effective and happy workplace. And, there is nothing specifically female about these improvements: men and women would benefit.

A final note. Yes, I know that I missed Women’s Day when posting this. You see, my organization was keeping me really busy with some urgent tasks.

Saturday, March 2, 2013

Ups and Downs: Communities and Corporate Giving following Events and Disasters

With the Ski World Championship about to end in Schladming, I am reminded of my trip to Hakuba, Japan, last year. It is a great place for alpine skiing that has ski runs and other facilities made for the 1998 Nagano Olympics. I plan to go back there this year. But it also has some facilities that are not used much anymore, and its location in an isolated valley makes me wonder how it handled such a large event as the Olympics. The same could be said for Nagano prefecture, which is far from Japan's center in population and economy.

How does such a mega-event affect a small community? Indeed, how does a big event affect any size community, such as when Los Angeles hosted the Olympics? In recent research in Administrative Science Quarterly, András Tilcsik and Christopher Marquis looked at how mega-events affected corporate philanthropy. They showed that mega-events opened corporate wallets, with firms giving more money overall, including after the event. The continuation of giving after the event matters because it shows that the giving is not just for that event, and that there could be a longer lasting effect on the community. Unfortunately, as they show, the effect seems to peter out into nothing after a few years.

Hosting the Olympics is fun. But there are also negative mega-events, like a hurricane or other natural disaster, and these unwanted events create a need for corporate giving in order to rebuild the community. But they also reduce the resources available to firms. What is the net effect? Tilcik and Marquis found that corporate giving does increase after a disaster but, sadly, only if the disaster is small. For major disasters, corporate giving decreases. It is easy to see why, because the firms that might have given are themselves affected and have fewer resources to spare. This is bad news because it is major disasters (like the recent huge hurricanes in the US) that really call for corporate giving in addition to government and individual efforts.

What about the long-term effects? Tilcik and Marquis did not find any effects on corporate giving. However, in research that I have previously discussed in my blog post Community Imprinting, communities do experience long-term effects of some events. My collaborator Hayagreeva Rao published an article in American Journal of Sociology on how communities become better at founding community organizations after they had done so earlier. However, we also found that a major disaster, the Spanish Flu, had a negative effect on the ability to form community organizations long time after.

That finding is worrying when compared with what Tilcik and Marquis found. If a community devastated by a major disaster is less able to form community organizations for a long time after, and its corporate giving is reduced rather than increased (even if it is only in the short run), it is hard to see how it can recover fully. How disasters affect individuals, communities, and corporations is an important topic for research because learning more about how a community can make a natural recovery corporate giving and collective action can help us better understand the effects of a world that may be increasingly affected by extreme weather events. If there is no natural recovery, it is time to start a discussion about how to help communities overcome the long-term effects of disasters, and whether to start thinking differently about communities that are at risk of disasters in the future.