Book Review, Corporate Strategy

On Planning

Everyone has a plan until they get punched in the mouth.

Mike Tyson

Turn of the 20th-century United States. The Gilded Age is in full swing, and Americans are showing their economic might on the world stage. From a backwater frontier of less than 20 million people, the population has boomed in the aftermath of the Civil War to over 70 million. Through cunning, ingenuity (and intellectual property theft), the United States – fresh off a victory in the Spanish-American War – is emerging as a new imperial power.

But off the Western coast of the Gold Rush state, beyond the outskirts of newly won Pacific Island military bases, a strange adversary is flexing its might and threatening war. American generals, motivated by fear, glory, and a healthy dose of racism, realize it’s only time before an outbreak of all-out naval War in the Pacific brings the majestic, ancient Japanese Army into conflict with a newly emergent United States Navy.

What should they do?

In Edward Miller’s War Plan Orange, we are shown the development and ultimate rejection of “War Plan Orange” – a set of formal and informal logistical, battle, and diplomatic-related plans for the coming U.S. vs. Japan showdown in the Pacific. A part of the “Color-Coded War Plans” (the United States is Blue, Japan is Orange), it is ultimately scrapped on the eve of World War II for “Rainbow Plan Five”, a strategy that spelled out the ultimate defeat of the Axis Powers. Far from replaying the elementary school tale of “a surprise at Pearl Harbor” – Miller’s book lays out how the United States had anticipated the looming Japanese threat and began preparations for a war of attrition that would lead to a “final showdown” for Pacific (and ultimately, global) supremacy.

While Edward Miller does a masterful job in evaluating all the ins and outs of planning, his narrative is completely non-chronological. Instead of tackling a forward timeline, he establishes “themes” that he visits and revisits, ultimately working toward a final few chapters on how Plan Orange itself influenced Rainbow Plan Five and the prosecution of World War II’s Pacific Theater. Here, I’d like to do the same, and dive into the major themes of the book.

Planning, or What’s in a Name? Anyone who is familiar with the works of Shakespeare may understand that a rose by any other name would smell as sweet. So, if you’re a member of the Army (or a corporation or a non-profit or a …), it can be hard to understand what someone means when they come up to you and say, “I think we are doing good work here, but we are missing a coherent plan for how we will accomplish our goals. We need to think more strategically! What are they even talking about?!? Edward Miller spells it out:

American war policy was determined in a varied and often informal manner. The plan was elaborated in such studies as “Estimates of the Situation Blue-Orange” and in correspondence of officials that preceded or interpreted the official versions. The plan was a matter of common understanding more than a set of documents… They must have been topics of lively discussions in wardrooms and field headquarters. Plan Orange was one of those historical credos that are said to be “noted and filed in the Navy’s corporate memory” and “genetically encoded in naval officers.” It had been absorbed by the high commanders of World War II as the descriptor of the mission that had shaped their lives and institutions… They did not usually pull the old documents from the safe to reread as manuals.

The emphasis above is mine, and even though it comes early on in the book, this was the most illuminating passage for me. Often in business we talk as if there are a set of templates, or a “Magic Powerpoint” that we can create to achieve a better, more standardized set of outcomes. But, when we get into this mindset, we should remember, the Allies won World War II with a largely informal plan for mobilizing millions of men in a foreign ocean! It is a truly awe-inspiring level of commitment to an unspoken mission.

Cautionaries vs. Thrusters – Ultimately, it is not clear why the Navy embarked on War Plan Orange. Miller notes that, since Commodore Perry had landed The Susquehanna in Tokyo and forced open the intercontinental tradelines, Americans actually had fairly cordial relations with the Japanese. There are various thoughts around how growing racism in the Western United States due to an influx of Asian immigration around 1900 bubbled its way up through American institutions, or that Japanese dominance in the Russo-Japanese War stoked fear in the hearts of American military commanders. Regardless, war planners got to work.

At the outset, naval commanders were in agreement: Japan would provoke the United States into a war through a simple, tactical assault somewhere on a Pacific military base, Alaska or the outer coast of California. Once at war, Japan would seek to entrench its land forces on islands along the Pacific to grow it’s physical footprint and prevent U.S. entry into the Orient. Therefore, if the United States were to accomplish a total victory, it would have to defeat Japanese army forces with its own naval forces. It would be a battle of land versus sea.

Despite the massive overestimation of the United States Navy – which around 1900 could hardly defeated the Pirates of Penzance – if this is accepted as the U.S. Strategy, it begs the question of detail. If the goal of the U.S. was complete victory through naval domination, how should planners effect this strategy? Here, the US Navy broke into two camps that would last until after World War II had broken out! The first camp was composed of what Miller terms “Cautionaries”. These military leaders wanted the United States to slowly prosecute the War in the Pacific island by island, moving from Pearl Harbor in the eastern Pacific, constructing mobile bases at Wake Island and the Marshalls, then onto the Marianas south of Japan, and finally using the Philippines and/or Ryukyu Islands as a stronghold for a complete economic blockade of Honshu. The second camp is labeled by Miller as “Thrusters”. These alpha males wanted to strike while the iron was hot, lurching westward all the way to Guam or Eniwetok, then the Philippines, to show the United States’ might and subjugate the Japanese quickly, avoiding a prolonged war of attrition that would sap the United States’ citizens morale for a war they could not understand.

These camps were well represented at the top levels of leadership (Admiral Robert Coontz and General Douglas MacArthur among the Thrusters, and CinCUSAF Admiral Clarence S. Williams), so the forty-year fight for ideological supremacy was even-handed. But color me surprised that even in as buttoned-down an environment as the United States Military, politics and infighting happens just like in any other organization.

A Western Gibraltar – As War Plan Orange develops, Miller provides an excellent example of how, even in the Military, branding is everything. As the Thrusters begin to advance their critique of the Cautionaries’ war strategy, they need a “killer idea” to bolster their argument. As they ascend in prominence in the leadership (most notably with Admiral Coontz’ elevation to Chief of Naval Operations), they coalesce around a simple, yet elegant, description, of how they will prosecute their rapid assault on the Pacific: “A Western Gibraltar”.

A robust plan, [the Chief of Naval Operations] observed, flows best from “plurality of perspective and the resulting competition of ideas…. The process may be somewhat untidy, but it is distinctly American. It works.” – Edward Miller, “War Plan Orange”

To understand this, we have to revisit Gibraltar and what it meant for the British. At the turn of the 18th-century, the Grand Alliance (The Holy Roman Empire, Great Britain, Dutch Republic, and Habsburg Spain) launched a series of interconnected wars to beat back the French’s rapid encroachment on European territories (namely, a monarch-less Spain). In the War of the Spanish Succession (and its related skirmishes in Hungary, India, and North America), two enormously important outcomes happened for the British. First, the Royal Navy became the undisputed global maritime power (a place it would hold for two hundred years until the U.S.’s emergence in World War II). And second, the ensuing Treaty of Utrecht ceded the small rocky landscape of Gibraltar from the Spanish to the British.

The reason that Gibraltar was so vital to the cause of British domination is that the port of Gibraltar allows whichever naval force controls it to utterly dominate global maritime traffic through a single “chokepoint”: the Strait of Gibraltar. For Americans, emulating this strategy in the Pacific caused even the most cautionary of military commanders to salivate. Thus, the idea of “A Western Gibraltar” was born: a single port the United States could control in the Western Pacific to utterly dominate the Japanese’s commercial and military interests.

There was only one problem: there is and never will be such a thing as a “Western Gibraltar”. The atolls of the Pacific vary drastically in their geography and topography, yielding a completely different terrain than in Europe. First of all, there is no single atoll that stands out as a “chokepoint” – a major reason why the United States ultimately pursued something closer to the Cautionaries’ strategy of slow advance and naval encirclement reaching from the Ryukyus south of Honshu to the Aleutians far northeast. Secondly, and more importantly, the candidates that were chosen by the Thrusters to be a “Western Gibraltar” were completely unsuitable to service the large carrier fleets and combination of water-landed and carrier-landed aircraft that would prosecute World War II. As Miller notes, “[In Guam], at best, by excavating to a twenty-foot depth and building simple marine railways for servicing, destroyers and submarines might be accommodated.”

And yet, great marketing helped keep the Thrusters’ doomed strategy alive until the outbreak of War, when General MacArthur was actually stationed in Manila Bay, ready to defend his “Western Gibraltar” and quickly prosecute an unconditional surrender of the Japanese.

Earn Your Stripes First – Thousands of miles away from the nearest base, and with Pearl Harbor in flames, MacArthur and his forces battled heroically to save the Philippines in December 1941. The cause was in vain, as Miller writes, “the Japanese reduced the Philippines with overwhelming sea, land, and air power… MacArthur’s air force was destroyed on the ground. The raw Filipino army disintegrated during rash attempts to hold the beaches.” What then, was the outcome of this disaster? A recognition that MacArthur had been acting recklessly, ignoring high command entreaties for a cautionary strategy and hubristically leading his men into battle when The Washington Treaty of 1922 had kept the nearest backup 3,000 miles away?

Of course not. MacArthur, largely due to his men’s heroic efforts in the Philippines, was forever elevated into deity status in the military. In fact, this was his second great brush with fame, having been a decorated war hero in World War I. Despite later accounts of his cowardice in World War II (earning him the disparaging nickname of “Dugout Doug”), MacArthur’s reckless behavior “earning his stripes” would forever secure his name among the pantheon of great U.S. military leaders.

History is Written By the Victors – And what happens if you have not earned your stripes? For that we need only look at the story of Admiral Husband E. Kimmel. Born in 1882, Husband E. Kimmel was an Annapolis graduate who served with distinction in both the Battle of Veracruz and World War I. Through diligent work, he rose through the ranks of the U.S. Navy to the post of Commander in Chief of the United States Fleet (ironically shortened to CINCUS – “sink us”) on the eve of World War II.

With War Plan Orange fully developed, then rejected, and finally replaced with the Rainbow Plans, Admiral Kimmel was put in charge of the Pacific Fleet with a simple mission: prolong survival. Rather than the valiant Thruster strategy earlier developed by Coontz and championed by MacArthur, Kimmel was left with a Rainbow Plan (at that point, Rainbow Plan Three) that called for a drastically reduced Western Fleet and an ultra-slow stalling tactic in the Pacific so that Germany could be completely defeated first. This “Europe-first” strategy, as scholars have noted, was a result of George Marshall’s realization that Hitler would have to be defeated first so as to avoid British subjugation and a denial of US footing on the European mainland. In addition, the infamous “Plan Dog” memorandum from Admiral Harold Stark lent support to Marshall’s strategic elevation of the European Theater across all military branches.

The one great element in continuing the success of an offensive is maintaining the momentum.

General george marshall

Unfortunately, Admiral Kimmel didn’t get the memo. Not a household name, but desiring to be one, Kimmel actually began placing the Pacific Fleet (largely based at Pearl Harbor) in an offensive position! Rear Admiral Charles “Soc” McMorris, an aggressive Thruster now stationed as an operations officer in the Pacific, continually updated plans to reflect boat maneuvering. As Miller writes, “For example, on 6 December 1941 the two operative carriers were delivering marine squadrons to the atolls so if war broke out in the next twenty-four hours the Lexington was to fuel at sea near Midway… Our stories about Pearl Harbor being a complete surprise are not true. Miller even not-so-subtly intimates that Kimmel may have intended to provoke Japanese Admiral Isoroku Yamamoto into striking: “[Kimmel] intended to engage Yamamoto. That stakeout of the [Wake-Midway] battle line makes no sense except as a disposition for that event.”

We see therefore, that War is not merely a political act, but also a real political instrument, a continuation of political commerce, a carrying out of the same by other means. – Carl von Clausewitz, “On War”

Of course, what happens on December 7, 1941 is known to all. On “the day that will live in infamy”, all of Kimmel’s reckless positioning proved disastrous. Having no war hero credentials to fall back on, Kimmel was immediately stripped of his post and had two stars removed from his name. His family fights this decision, attempting to reinstate his legacy still today.

Timing is Everything – At the end of the day, as Miller notes, War Plan Orange in its formal form was little (if ever) used. Largely, it became encoded into the military leaders’ DNA and the intelligence gathered from the process of planning itself became invaluable in the prosecution of the war effort (namely, where to build mobile and which islands to skip entirely).

In preparing for battle, I have always found that plans are useless but planning is indispensable.

Dwight D. Eisenhower

One often-overlooked component of planning is the innovation that it engenders. For example, the slow realization that the Pacific consisted of landmasses far more dispersed than anything the United States had ever encountered led to a massive engineering effort to increase the range of aircraft in the fleet. This effort led to the ability during World War II to skip several once-critical islands and reduce the United States’ casualties by hundreds of thousands. Tales abound of bored Japanese forces staking out atolls on which the U.S. never landed. In addition, the realization that carrier fleets would be battered at sea and forced to dock for refueling every few hundred miles led to a switch from coal-fueled boats to oil-fueled boats that could easily refueled at sea from fast, small supply ships. Miller’s writing confirms that old adage that “necessity is the mother of invention.”

At the end of the day, sadly, it is unclear if the Japanese leadership would have surrendered even to the most aggressive of attrition/starvation-based war executions. Recently revealed documents show that US leaders expected 1.2 million casualties, including more than 250,000 deaths, from Operation Coronet, the plan to invade Honshu. With the U.S. having invented the Atomic Bomb “Just in Time”, President Truman made the fateful decision to use nuclear arsenal, and the rest, as they say, is history.

Next time: we learn about rich people! Boy, this was a doozy. I recently got through “What it Takes”, Stephen Schwarzman’s new biography about his life “living above the radar”. Must be nice!

Schwarzman Dancing at His 70th Birthday Party

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Corporate Strategy, Healthcare, Software Development

Governing AI and Us

Heart of the Buddha, hand of the demon.

– David Lee Roth

Artificial Intelligence has come a long way in the past decade.  When I first started in comp sci, my AI professor started off every semester with the same story

Imagine an AI-powered bomb-squad robot.  This is the latest and greatest equipment.  The robot goes into a shed to defuse a suspicious package that we know will blow up in T-MINUS 10 MINUTES.  The task is simple: drive through the open door, find the package, and encapsulate it so the explosion is contained.  The robot rolls forward through the doorway and stops to re-plan the detonation.  By the time the robot figures out that the walls in the shed are blue, the bomb blows up.

A decade ago, path planning was slow, object recognition largely manual, and AI as a whole much much further behind than our sci-fi dreams would hope.

Then came cloud computing and deep learning.  By throwing pattern matching algorithms against massive web-scale datasets, we could begin to tackle previously intractable problems.  Want to identify cats? Sure, just show a computer a billion cat photos and boom, cats found.  Want to understand the English language? No problem, just send in billions of hours of voice data and computers will find out when you want to jam out to “Britney Spears”.

AI Can Bluff, But Smiling is Still Hard

And then, the room got dimmer.  AI was scary and not understandable, with many famous folks warning of a coming AI apocalypse.  The end was nigh, and Elon Musk and Sam Altman wanted us to know that everything was not okay (for a fee).  I believe the truth is this: much of what humans do boils down to simple pattern recognition and the early applications of AI are low-hanging fruit that will be over soon enough.  Driving is about recognizing the patterns of the lines on the road, the patterns of street signs out there, etc.[1]  Chess is about making strategic moves within the rules of the game.  Pattern recognition is fundamental to how humans operate in the natural world, and with enough data and advanced statistical algorithms, computers can start to mimic humans in an interesting way.

When I sent an article about AI algorithms being able to bluff in Poker to a colleague, he started to panic.  Oh no! They’re acting human.  Once I gave him my opinion that most poker players actually bluff predictably and this is just another form of pattern recognition, his mind was put at ease and turned elsewhere: if AI is just advanced pattern recognition, and a lot of humans’ interactions with the natural world revolves around pattern recognition, how do we govern the interaction between AI and humans in the natural world? Should an AI behave differently if it’s screening a mortgage application versus recommending shows on Netflix?  If you (like me), think that a lot of the AI fear is overblown and we are just seeing more of routine human behavior being classically disrupted by cheap computing power, then you should want to develop rules around how this technology can be harnessed without causing societal damage.

My response to my colleague was that as a techie, my inclination is that the fewer rules the better for advancing a disruptive innovation at this early stage.  But, given that AI is beginning to have real impact in tangible sectors like healthcare, real estate, and energy, we should define a governance process based on the following principles:

  1. Reuse of Existing Legislative Precedent.  Existing societal problems have existing (albeit imperfect) solutions.  For example, the Fair Housing Act sets out boundaries outlawing the racist redlining practices that were so prevalent in the pre-Civil Rights Era.  Rather than define our values and implementation at the same time, we should look to existing regulations as a basic set of values, and define 21st-century AI-specific implementations.  This would probably lead to regulations such as “input data must be representative of the broader population or be proven to not have any adverse effects on specific protected groups as laid out by the FHA.”
  2. Tax-Free Innovation.  I am a major believer in having carve-outs for small companies or safe harbor for firms that abide by certain rules.  Although this has proven problematic when scammers set up shop as small “whack-a-mole” entities or big companies exploit loopholes (like YouTube avoiding regulation of explicit content on its platform), putting in place compliance frameworks often weakens investor appetite for startups, thereby curbing innovation.
  3. Be Whitelisted to Specific Industries.  The web is permeating through every avenue of our life.  There is no longer such a thing as a “traditional” firm, all firms invest heavily in technology.  In order to avoid broadly dampening harmless activities (such as Netflix’s machine-learning-based recommendation algorithm), the governance should apply to an explicitly chosen set of industries rather than being the default for any algorithms running on “big data”.

Tech firms are coming around to the idea of regulation and there seems to be plenty of precedent for it.  Microsoft recently called for advanced regulation on facial recognition, though the skeptic in me wonders if this is to cement their position as a cloud market leader via a regulatory moat.  Regardless, tighter governance is a better approach to battling AI’s societal disruptions than trying to put the genie back in the bottle.

[1] In fact, the biggest barrier to wider adoption of fully autonomous vehicles is getting humans (who can be inherently unpredictable) off of the damn road

Corporate Strategy, Entrepreneurship

Greed is (Not?) Good

Capitalism is a great technology and a mediocre philosophy.

– Reid Hoffman

This week I passed by an article in the Wall Street Journal about how pay regulations are back on the table for big banks.  Although the rule was mandated by Dodd-Frank, a decade later the pay restrictions and clawbacks are not in place (seriously?).   At the same time, I started reading Duff McDonald’s epic takedown of MBAs, The Golden Passport.

I haven’t read the full thing yet so don’t want to give a review, but it’s definitely getting my attention. Mainly I’m drawn in by McDonald’s provocative writing and crux-finding.  In the earliest chapters, he lays out the root of all MBA evil: profits.  Telling the story of Frederick Taylor, the founder of Taylorism and an early management science pioneer, McDonald throws down and calls out Taylor as a traitor to workers and glorified bean-counter.  When discussing the “original case study”[1], McDonald criticizes Taylor’s self-aggrandizement and attempts to science-ize management:

Frederick Taylor generalized a step too far.  In arguing that his methods revealed a universal science of management, Taylor engaged in metonymy–confusing just one part of management (that is, quantitative analysis) for the whole.  Efficiency–and its close relative, profitability–is just one possible goal of management.  Others include customer satisfaction, community relations, and quality.  In Taylorism, one could argue, lie the seeds of American industry’s eventual comeuppance at the hands of the Germans and the Japanese…[H]e was implicitly sanctioning the idea that a company can be judged by a single metric.  Today’s even more pernicious version of such: shareholder value.  Writes Stewart: “The modern-day CEOs who sacrifice the long-term viability of their corporations for the sake of short-term boosts in their quarterly earnings reports are direct descendants of the pig-iron managers who undermined their work team’s morale in order to achieve temporary productivity targets.”

McDonald is not subtle, to say the least.  But, ignoring European dissatisfaction with their more socialist system and Japan’s anemic growth over the last decade, McDonald also gets one crucial thing wrong in my opinion: that profits, shareholder value, efficiency, or whatever you want to call it, are the wrong metric.  In my opinion they are the right metric, but the markets that are developing in America are no longer fully free and fair.

Profits represent a very simple metric: revenues minus costs[2].  Revenues are also a very simple metric: the value to the person buying the good or service.  And cost, you guessed it, is a simple metric: the value that was expended in producing the good or service.  So, at its core profits represent the purest definition of value creation, the difference between what value was expended to produce a good or service and what the consumer values that good or service at.

My argument is that Friedman was right and there is no better way for a society to operate than to have corporations attempt to maximize profits.  By only taking into account value created (revenue) and value destroyed (cost), all of the hardest questions are boiled down into “value”.  It’s a nebulous term, but with a free and fair market, it forms the motive that self-interested humans need to participate without relying on political connections, committing fraud, or more.  In a free and fair market, you have to create value, or you go out of business.

But surely, there are problems.  In America today, there is income inequality, monopolization, fraud, Wall Street short-termism, and more.  These are real problems that are infecting our society and becoming more visible with each passing year.  So do they exist because MBAs have tricked the world into sacrificing the common good on the altar of profit-driven capitalism? No.  Increasingly, consumers lack the ability to take their dollars elsewhere.  In repeat transactions, consumers have no choice because America’s markets are getting less free and less fair. Some examples:

  • Transactional in Nature.  When corporations have a one-and-done interaction with you, why bother having good customer relationships, support, or quality?  Examples: car salesmen (who are not linked to service), realtors.
  • Private Equity Leveraged Buyouts.  If you’re definitely going to exit an investment in 7-10 years, does it make sense to plan for longer? Certainly a private equity firm that does will have a lower IRR, and therefore not look as good to future investors. Examples: RJR Nabisco, Toys R’ Us.
  • Monopoly.  When every repeat transaction is guaranteed to go to your platform, why bother doing anything right? Customers can’t switch, so they won’t. Examples: Cable companies, landline phones, employer health insurance.

    Meet customers where their tastes are

Compare that with some of the best examples of customer satisfaction, quality, and community relations.

  • Amazon.  Online retail is cut-throat, single-digit margin business with insanely low switching costs.  Bezos knew from the outset that good customer service could be a huge competitive advantage.  People value convenience and purchase consumer-packaged goods every few days, so by having the best customer service Amazon keeps its customers wanting more.
  • Rolex. When your good is a commodity, how can you stand out from the crowd? Make your watch impeccable quality, ornately adorned, and a status symbol.  The business model here makes sense from a profit perspective: don’t compromise on quality, and your customers will more than make up in the difference of your costs.
  • Mom-and-Pop Shops.  When your reputation is on display daily because all of your clients are neighbors, you often behave with community relations in mind.  According to a recent study[3], small businesses donate 250% more than larger businesses to non-profits and community causes.

So how to address the problems of our day if not by throwing out the concept of shareholder value?

  • Executive Compensation Periods.  Deferring the compensation for longer than the current 5-year standard and enabling clawbacks is absolutely crucial to ensuring that, say, 10 years into a toxic mortgage the executives are not retired and fully vested while the rest of the economy melts. The WSJ article is a salient reminder of the urgency of this.
  • Expansion of Small Business Loans and Incentives.  If Amazon can get billions of dollars in incentives for building HQ2, why can’t other businesses? To New York’s credit, the majority of what Amazon was leveraging were programs that already existed for other businesses.  For some municipalities though this is not the case.  We should be encouraging small upstarts to take on incumbents and build in the communities they serve.
  • Incorporation of Full Cost into the Production of Goods.  Coal-powered energy brought almost 1 billion people out of poverty in China at the turn of the 21st Century.  There is real evidence that the climate is changing, but at what benefit? Let’s assign a dollar value to carbon, modify it frequently, and levy it on large industrial companies.  This will help address externalities within the framework of the profit-seeking motive.
  • Aggressive Monopoly-Busting. I am firmly on the side of more vigorous antitrust enforcement.  Modern business has gotten basically a free pass to vertically integrate thanks to Bork’s precedents and a focus on an actually bad single metric (HHI).  Makan Delrahim took a step in the right direction, but the courts need to break precedent and change with the times.

Culture is important.  Greed is not always good.  But show me a better technology than profit-based incentives for capitalism before you say we should throw the baby out with the bathwater.

[1] The original case study was, not surprisingly, about steel and railroads.  In 1899, the Bethlehem steel company found themselves in possession of a surplus of two million pounds of pig-iron bars.  They needed to figure out the most efficient way to load them into railcars for transport, and Taylor stepped in.  Whether counting, efficiency, or science, McDonald considers this the original sin of HBS.

[2] What type of profits? Economic profits.  There are adjustments, tax considerations, etc. etc. in the real world I understand, but I am simply using the most basic definition of profit available.  This might even be part of McDonald’s argument: that such an analysis is too simplistic.  But I would argue there’s nothing wrong with establishing that gravity is 9.8 m/s^2 of acceleration, even if there’s always air resistance on Earth. As is often said, “the difference between theory and practice is, in theory small, but in practice much larger.”

[3] Seattle Good Business Network

Corporate Strategy, Healthcare

No Customization Without Differentiation

No one wants to hear Odysseus go to the corner store.

– Alex Blumberg

Recently, I was sent an interesting article about how “Cowboy(/girl)” doctors are driving up healthcare costs in medicine.  The authors cite a study that argues that, when it comes to dying, certain doctors “reject ‘evidence-based professional guidelines for appropriate care’ and… order invasive and costly procedures despite little chance their efforts would delay the inevitable”.  These “Cowboy” doctors, as they are labeled, contribute up to 35% of end-of-life fee-for-service Medicare expenditures, and up to 12% of overall Medicare expenditures.  To give you an eye-popping dollar figure, that would amount to $84.5 billion[1].

Beyond questions of morality and what constitutes “little chance” in the study, this raises another interesting question for patients and providers: should we drive toward standardization of care plans?

On the one hand, the word standardization itself implies, at the very least, a reduction in inequality for all.  But furthermore, recent studies of standardization of care across patient populations shows it cuts costs and raises quality, two front and center goals of the IHI’s Triple Aim.  In business school, we had a saying in strategy: “No customization without differentiation”.  Basically, I took this to mean that unless you could prove beyond a doubt that your special snowflake was far superior to the rest, you should not customize the product/company/service you were offering.  Bundled payments programs like CMS’s Comprehensive Care for Joint Replacement (CJR) aim to use standardization to drive improved outcomes and cost, perhaps implying that they believe current customizations between providers are not differentiated.

However, standardization of care (often through the specter of “socialized medicine”) is a common boogeyman evoking images of “death panels”, rationing, and the removal of physician judgment from the medical process[2].  Obviously, depending on how the problem is framed public opinion shifts, and there are different care delivery models that can make these problems better or worst.

As we enter HIMSS19 this week, and we start to see more intelligent offerings that aim to bring standardized, evidence-based practices to global healthcare delivery, I can’t help but hearken back to when the human genome was first sequenced.  The attitude back then, growing up in a family of physicians, was that from that day on every single treatment would be individualized and targeted.  No longer would your Advil bottle say “Adults over 12 take two pills per day”, and gone were the days of treating every infection with Amoxicillin.  But now, we have done a complete U-turn.  HIMSS vendors and attendees are focused on treating populations of thousands or millions of patients with reduced variation, reduced cost, and greater predictability.  Not greater customization.

In fact, I was in a conversation at Cerner last week where we began to touch on some of our advanced genomics offerings.  One business leader remarked that there were well-set standards in pharmacogenomics, but fewer in oncological genomic medicine.  This focus on standards led me to think that there may be a new two-tiered approach emerging in medicine.  First, advanced medical practices are studied and honed at leading specialty centers (for example, MD Anderson for cancer).  Then, they are formulated into practices that are proven to scale to thousands or millions of patients in a repeatable manner.

Dr. Bluth Adopting New Methodologies

It’s a far cry from the precision offered by gene sequencing and individualized treatment, and more akin to the University -> Industry pipeline that has existed in the tech industry for years (think Stanford PageRank -> Google Search).  I don’t know what to make of this yet, but I think there are implications that we need to think through:

  • Will the drive toward standardization compound the problem of ignoring rare illnesses, which the U.S. had to combat with special Orphan Drug regulations?
  • Will the rise in standardization cause a loss of provider autonomy and worsen the problems of burnout and disengagement U.S. clinicians face?
  • Is the human body and its millions of variations even “standardize-able” in such a way that allows this approach to work?

Either way, technology has a role to play.  But I always worry about pendulum swings, and my take is that competing approaches should be balanced to find an optimal path.

[1] See the HHS 2018 budget in brief for more details.

[2] I’m looking for a comprehensive article or journal paper discussing the systemic effects of rationing in single-payer, integrated delivery systems, and different competitive models but I can’t find anything good.  Let me know of any good links.

Corporate Strategy, Healthcare

Price Transparency – Healthcare’s Silver Bullet?

Trust is the coin of the realm.

– George Shultz

This week, most people are talking about all the news coming out of JP Morgan’s Annual Healthcare extravaganza, and rightfully so.  However, I don’t think there’s much I can add to the discussion, so I want to talk about another big event that happened in the past couple of weeks: CMS’s implementation of the much-anticipated Price Transparency rule for hospitals.

Unfortunately, over the break I was in a hospital for a family-related medical event for which I would be financially responsible.  Once I knew the issue would be resolved without any major harm or loss of life, my next question turned to: would I be able to afford this? Cerner starts its new plan year along with the calendar year, so being in the hospital in early January means incurring medical expenses without the added benefit of having time to fill your HRA/HSA.

Having knowledge of the new price transparency rule, I turned to Google and looked for the hospital’s chargemaster.  The first hiccup: it wasn’t there.  Being a determined consumer, I politely called the billing department to note that they had not released their prices and therefore were non-compliant with CMS’s new regulation.  To this organization’s great credit, they told me they were working on it and within a week got back to me with the link.

Next, once I downloaded the chargemaster as an Excel spreadsheet, I started to comb through it on my phone.  This was the second hiccup: although the pricing information was machine-readable, it was not human-readable.  Searching through abbrevations like INF, HOSP, etc. was time-consuming and not straightforward, especially as a non-medical professional.

So, lastly I decided to buzz my friend (who happens to be an RN at the hospital, convenient!) and asked her to explain to me what a typical set of codes/services might be for the stay that occurred.  Her response: no clue man.  And that is fair, because she is a healthcare provider and knows nothing about billing.

My Excitement Looking at a Chargemaster

Looking at Administrator Verma’s take on the new rule, I think she is absolutely right: this is a first step.  It is a great first step and I applaud it, but the major issue I take with the data is not inaccuracy for those with insurance.  Healthcare stakeholders need to understand that data is only as good as the tools that use them.  So, I would propose several next steps for those implementing and administrating price transparency rules:

  1. Campaign for Awareness – I was only aware of this new data source because I happen to work in Digital Health.  99.9% of Americans don’t even know this data exists.  Well-placed TV or radio dollars could help get the word out, increasing patient utilization.
  2. Encourage Sophisticated Tooling – By the time I got to the chargemaster it was in Excel format and highly complex medical jargon.  There are some great Price Transparency experiments that CMS is running to help modernize federally-run insurance programs, but private enterprise should be encouraged to build direct-to-consumer tools on top of the new information.
  3. Integrate Pricing with Workflows – The fact that my friend, who is an RN at the health system, could not tell me how specific clinical procedures mapped back to billing is troublesome.   Better integration between the EHR and revenue cycle solutions will help clinicians guide consumers as healthcare becomes more and more consumer-driven.
  4. Create Consumer-Friendly Price Hotlines –  Many major health systems are moving toward employing in-house billing and coding specialists to maximize revenues and improve cost efficiencies across their facilities and networks.  As this happens, health systems should also create “consumer helplines” that answer simple questions about pricing and services ahead of time.  Lots of startups like ZenDesk, LiveChat, and Intercom provide a front-door chat interface that integrates natively with websites and could solve this issue elegantly.

All-in-all, I was not able to get a sense of what the cost for my visit would be and had to wait for the bill to arrive.  This begs a question though: if I had been able to find out what the visit cost, would it have changed my behavior? The answer is almost certainly no.  My main concern was making sure that my family was healthy.  What amount of price savings would I trade off for that? That thinking alone is probably more likely to continue driving healthcare costs upward faster than any downward pressure this Price Transparency effort could provide.

Corporate Strategy, Personal

Why Every Business School Should Have Improv Classes

Happiness is a choice.

– Tito Beveridge

This week I came across an awesome article in the Wall Street Journal talking about how improv classes can help you run a more effective business meeting (paywall).

Business #Winning

It threw me back to that time at Booth when, the first week of school, we went on a Leadership Orientation Retreat (LOR) and were thrown into an improv class.  I’m not going to lie.  It was certainly awkward.  Thankfully for all of the class’s participants I don’t actually remember what we improv’ed.  But the experience left me with the one critical lesson that improv teaches:

Yes, and…

I find myself often in meetings where we are discussing a new proposal for some solution, service, etc. and we come to the meat of it.  The conversation goes like this:

Participant 1: I was thinking that we might lay out A on top of B and embed that in C.  Doing so would probably be the best solution.

Me: Well, the probably with embedding A on B in C is…

And I start to go on and on about some little nit that is kind of an issue, but if I’m being honest with myself not really a major issue at all.  And frankly, although I will admit to my mistakes, I am not the only one.  How often have you found yourself in a situation like this where coworkers are shooting down a perfectly good idea for reasons that are esoteric and seemingly unimportant?

For the longest time, I thought that this was probably because it was easy.  How hard is it to find just one thing wrong with any proposal? We get in our two cents, are “right”, and are able to have massive influence (a supposed “veto”) without having done much effort.

Some other people have proposed to me that it’s really a form of insurance.  People are incredibly resistant to change, and perhaps our natural state is a “Default No”.  It protected us in predator times against all of the things that were typically “change = bad”.

However, I heard a great explanation from one of my co-workers the other day: negativity as a bonding mechanism.   He’s not the first one to propose this.  Over a decade ago, researchers from University of Oklahoma and UT Austin proposed that negativity serves as a better mechanism for bonding than positivity.  Specifically, the authors posited that

…sharing negative attitudes is alluring because it establishes in-group/out-group boundaries, boosts self-esteem, and conveys highly diagnostic information about attitude holders.

Which brings me to the improv wisdom:

Yes, and…

It’s so simple, and yet so effective.  By not allowing yourself to begin with a “Default No”, the entire tenor of your suggestion becomes positive and constructive.  This has the benefit of allowing the entire team to feel supported.  I’m not the best at this.  But I am actively trying.  The article in the journal reminded me of just how effective this technique can be, and highly recommend it for anyone looking for team wins.

Corporate Strategy, Healthcare

The Willie Sutton Rule

“Why do you rob banks?”

“Because that’s where the money is.”

– Conversation with Willie Sutton

Last month I posted about joining Cerner in their executive development program.  Since then, I have spent six weeks immersing myself in all things healthcare.  I think it’s fair to say that I’m now an expert.

Me Talking Healthcare

Actually, as you might expect, after spending six weeks reading every possible news source or book I could find, the only thing I know now is how much I really do not know.  It will come as no shock to anyone that healthcare is highly regulated, very complex, blah blah blah.

But one potential cause of this chaos that I wanted to write about today is what I am starting to call the client/user dichotomy.  The reason healthcare is different is because the clients doing the paying are not the people using the products.

Let’s take, by comparison, a simple retail transaction.  In a simple retail transaction I walk into a store to buy some candy.  The cashier (who represents the owners of the company) takes my money and hands me the candy.  I both buy and eat the candy.  The cashier collects my money and provides me the goods.

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A Typical Retail Transaction

Healthcare is different.  When you or I go to the doctor to get healthcare services (like vaccines or antibiotics), we are not paying them for their service.  Analogous to most insurance companies, we are submitting a “claim” against the service we got.  So if we got an antibiotic, we are saying to our insurance company, “Hey my body was broken so I had to go fix it, can you pay for this?”

The major thing that’s different here is that usually in an insurance setting, the claimant is responsible for collecting the reimbursement.  When you get into an accident in a car wreck, you pay for the repair before submitting a claim.

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What Normal Insurance Looks Like

In healthcare, you receive the service and the provider (doctor, nurse, etc.) has to go through your insurance to get paid[1].  In this sense healthcare insurance is a bit of a misnomer.  It’s more like a proxy paying service.

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Health Insurance is Really Proxy Paying

But this odd situation is compounded by another complication: the healthcare providers are not tied to the payment from their hospital services and systems[2].  In the retail example we gave above, the cashier is paid by the owner of the store to handle transactions.  But there are preset prices for all goods, the cashier does not make this up on the fly.  With healthcare, the amount that the provider and health system is actually able to collect from a patient will depend on their health insurance, which is not known ahead of time.  In addition, payee models are changing from a fee-for-service modality (similar to paying for the candy you buy) to value-based care.  Each of these specific topics deserves its own post to dive into, but for the sake of explaining the dichotomy, this simply means that the provider is essentially no longer an agent acting on behalf of the person collecting the money, but an independent operator whose work is leveraged by the health system to collect revenue at a later date.

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The Users and Providers of Healthcare Are Not Where the Money Is

So we get the resultant flow above.  Which means that there are six potential interactions between the key players in the space[3].  For those building businesses in and around the healthcare industry this leads to interesting questions:

  1. Who is really your client: the agent that is paying (insurance), the agent that is being paid (health systems), the provider and/or the patient?
  2. How can you improve the provider/patient relationship with the presence of these middlemen?
  3. Are there ways to completely disrupt the middle layers to bring efficiency?
  4. How can this landscape be navigated in a highly regulated environment?
  5. How does the fact that 37% of all dollars in this system are controlled by the government shape innovation and delivery?

If you have an analogous industry that would provide color on business models or potential improvements I would love to hear them.  I still have found this model unparalleled, for better and worse.

[1] This does not even cover co-pays and deductibles which are their own strange things.  This is just about the rates that providers get directly from insurance companies as reimbursements for their goods and services.

[2] This is a little different in private practice because the doctor owns the practice and therefore has “skin in the game”.  But recent trends show a major decline in private practice from 62% in 2008 to 35% in 2014 and a massive consolidation of major healthcare systems.  Both of these trends exacerbate the payee/provider dichotomy.

[3] Patient to Insurance, Patient to Health System, Patient to Provider, Insurance to Health System, Insurance to Provider, and Health System to Provider

Credit to John Gallemore for introducing me to the “Willie Sutton Rule” in cost accounting.

Corporate Strategy, Personal

My Next Chapter at Cerner

If you are more fortunate than others, it is better to build a longer table than a higher fence.

– Unknown

Due to graduation and my recent move, I haven’t had much time to think about the topics I usually like to post about.  Entrepreneurship is hard to do when you’re trying to move all of your family’s stuff, then realize that your new place looks totally empty.  I guess that’s the joy of going from 700 square feet to a human-family-sized home.

Me In a Normal-Sized Living Space

For those who follow me (thanks for reading!) you know that I have written about how proud I am of my wife for getting into medical school.  That medical school is specifically the University of Kansas (Rock Chalk) and we were on our way to relocating in Kansas City.  After Booth, I was intent on pursuing my startup… until I made the painful decision to learn hard lessons instead of waste other people’s money.  So, looking to my next thing I tried to ask myself: how can I do that but be supportive of my family?

So, to avoid burying the lead: I took a job at Cerner.  Cerner has this incredible program (modeled after the famed GE “Green Beret” training) that allows recent MBA graduates to flex their skills (or improve their lack thereof) across multiple business areas.  I felt that this was the perfect mix of “intrapreneurship” and stability.  In these types of experiences, at the same time that you get to be around amazing, creative people, you get to grow your family and continue learning day-to-day.

Cerner offered me an interesting opportunity at a crazy fast-growing company in an industry totally different than I had ever done before.  Healthcare IT would seem like software, but given the intricacies of healthcare, the payer model, physician satisfaction, and much much more, there is a ton to ramp up on.

So I’ll keep this short and sweet: I’m obviously super excited! If you are in healthcare, IT, Kansas City, or just want to reconnect you know how to find me.  I am doing my best to learn fast, but always can use a helping hand.

After Reading This Post You Be Like…

Corporate Strategy, Entrepreneurship


Your margin is my opportunity.

– Jeff Bezos

A recent business article from the Wall Street Journal caught my eye, detailing the intense battle for talent in the self-driving car industry.  A few years ago the idea of self-driving cars seemed incredibly futuristic and unattainable.  Now, it is basically inevitable.  Every company from traditional carmakers like GM, to ridesharing companies like Uber, to tech titans like Google has an autonomous-vehicles strategy.

What we discussed a lot when I worked in venture capital were the knock-on effects of self-driving cars.  Yes, self-driving cars will create billions (or maybe trillions depending on who you believe) in value for the companies that successfully implement and deploy this technology. That is why the talent war is so fierce, with salaries often exceeding $1 million for skilled engineers.  The future potential market looks to be unlimited.  However, several times that in value will be created in knock-on effects.  For example, if travelers or truckers no longer need to stop on cross-country trips, who will stay in motels? Will there be drone-to-car deliveries to allow cars to fuel up (themselves and their passengers) without needing to stop at predefined gas stations? What if a network of high-speed charging stations are created? What will they look like? All of these ideas and more will help reshape the transportation economy in a future of autonomy.  For venture capitalists, that presents a real opportunity to invest 10 years ahead of schedule and reap a massive payout.

Along these lines, Peter Johnson and Prashant Shukla (at my former employer Jump Capital) wrote up a great piece about the future of insurance.  One of the things they hinted at was that the explosion of data from semi and fully-autonomous vehicles will completely remake the insurance value proposition.  I highly recommend going and reading that piece.

But my target for today is a different knock-on industry I love discussing: rental cars.  For anyone who has rented a car, you will have invariably had the same experience.  After landing at an airport, you go to the rental car counter (or take a shuttle to the rental car counter), and… wait.  There is a line, and once you get to the front of it a kindly attendant takes your name and information and clacks away at a keyboard.  After some awkward silence, your car options are announced (“I have a Kia Optima or a Hyundai Elantra for you, does either work?”) and you get a set of keys.  You also get a bill (printed on paper at most locations) that includes a bunch of hidden fees and services (liability, collision insurance, etc.) and some other unintelligible information.  You sign in four different spots, drag your luggage to the car, and you’re good to go! And that whole experience does not even cover booking a rental car which happens through hundreds of on and off-brand channels[1].

My proposal is simple: build the next brand in rental cars.  I would argue that today’s consumer favors speed and simplicity over choice and cost-optimization.  Instead of focusing on offering every car under the sun and massive channel discounting, this new rental car company would focus on the experience, and meet the need of the “extended-stay-rider”.  Imagine this: your plane lands at the airport.  Using publicly available flight tracking information, an app sends you a notification, “Hey, we just saw you landed at O’Hare, are you still interested in renting your Hyundai Elantra?”  If you say yes, you walk to arrivals where (similar to how ridesharing currently operates), an autonomous vehicle (or gig-economy driver) is waiting for you.  You unlock the car with your phone (or the key), load up, get in the car, and head off to your destination.  Everything operates as a flat-fee[2], and advanced loyalty and price discrimination schemes can be easily implemented on top.  On the backend, advanced logistics technologies like those employed by Lyft and Uber would route the cars far more efficiently than having massive parking lots where cars sit idly. This would also lower the required PP&E investment from parking the cars and maintaining the rental counters.

Which begs the question: with the advent of ridesharing, would anyone even want this experience? This is the discussion (read: argument) that my venture capital co-workers and I had repeatedly in the office.  Why on earth would anyone rent a car when I can call one on-demand from my phone?  To these colleagues, the world would consist of two types of riders: “stable-riders”, who would own their own car and require amenities and personalization to keep them engaged while the car was in autopilot; and “on-demand-riders”, who would use some form of app to hail a car as needed.

But I firmly believe there is a vast middle.  We can call these folks “extended-stay-riders”.  Much as extended stay-style hotels cater to a niche ($1.3 billion in revenue) clientele that require something in between a hotel and motel, there will always be consumers who need a rental-car-like experience.  Families traveling with children and pets that need to make stops, cost-conscious travelers who do not want to be squeezed by on-demand supply shortages, and business travelers who accumulate rewards and build loyalties with brands.

This is the billion-dollar brand that I can’t wait to be launched.  We could call it, “Disrupterprise” or “Self-Drivertz” and it would have curb-side service of extremely clean, self-driving cars, all for a flat fee.  If you want to run with this idea, take it! I have the feeling it will exist eventually, and after looking through the 2017 financial statements of Avis there is more than enough margin to make it happen[3].

[1] The 2017 financial statement also reveals hundreds of marketing partners and resellers that the company relies on, as opposed to a strong direct-to-consumer brand appeal.  This does not even get into the weeds of company-owned vs. licensed locations, which adds another layer of complexity and cost obscurity.

[2] This is one thing I truly loved about the Zipcar service.  They made booking/re-booking so simple and transparent.  In addition, gas and insurance were not an issue when renting.  I was convinced they would disrupt the rental car industry, but after the Avis takeover it looks as if the company has stagnated and focused on cutting costs.

[3] Avis-Budget’s financial statements reveal a staggering $1B+ in yearly SG&A on only $6B or so in core revenue.  In addition, they carry $10B in car assets on their books, net of depreciation.  This is all financed heavily by debt, which carries about $180 million per year in interest payments (half of Net Income).

Corporate Strategy

Healthcare Primitives or Primitive Healthcare?

No one wants to hear Odysseus go to the corner store.

– Alex Blumberg, StartUp

The other day Ben Thompson released yet another great Stratechery piece on Amazon’s latest foray into the world of healthcare.  It repeats Amazon’s desire to take a slice of all global economic transactions (healthcare is nearly 1/5th of the U.S. GDP alone), and lays out a potential strategy for Amazon to create a “common health interface” that employers and providers can sign on to. Using Amazon’s model of converting a market into “primitives”, they could then match things like payors/payees, or providers/patients and garner some of the profits as a middleman.

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New Advertising for Amazon Health

It is, as Ben Thompson’s writing always is, a very compelling argument, but I think it fails on a few accounts that are worth noting.  First and foremost, the joint health effort was not created with the goal of disrupting healthcare. It’s easy to see evil everywhere Bezos lurks, but Dimon stated that the first group he wants to see benefited are his U.S. employees.  The bank employs hundreds of thousands of people in corporate offices and branches across the country that could be helped by this.  I think that Occam’s razor applies here and we should try to avoid overthinking this.

Secondly, J.P. Morgan does not need to drastically disrupt the healthcare industry in order to get a major win.  Last year, the bank spent $1.25 billion alone on healthcare costs.  This amounted to 2 percent of companywide expenses.  That’s an incredible amount for a single benefit! According to their most recent 10-K, non-healthcare compensation amounted to just over $28 billion, or 45 percent of companywide expenses.  With healthcare costs growing at nearly 6% annually according to a recent AMA report, it is crucial for Dimon to control this expenditure or it will continue to balloon as a non-salary expense and prevent the firm from giving bonuses and raises that can help retain and motivate talent.

Finally, the healthcare system may just be too complex and regulated for Amazon to truly be effective.  Amazon has never played in a highly regulated industry, and there is an open question of whether it would be able to execute in healthcare.  Of course, the news of Amazon obtaining pharmacy licenses in 12 states in November sent the first shockwaves through the healthcare industry, but the real story was more nuanced.  Amazon later cancelled one of those applications (in Maine) and announced it will not even sell drugs in multiple applications.  So what could it do? It could gather more retail data from the operation of a pharmacy/retail chain and launch a broadside against industry stalwarts like CVS and Walgreens.  The recent Whole Foods acquisition bolsters the case for this.

At this point you might be saying, “Well, Amazon may not be able to play in the healthcare industry, but Dimon and Buffett run highly regulated firms (including insurance) that could make major waves when combined with Amazon’s technological prowess!” And that is partly true, but mostly uncertain.  For starters, JP Morgan has no experience with the healthcare industry’s regulations, which are covered under separate acts like the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA).  It is unclear whether JP Morgan’s compliance, legal, and regulatory departments would be able to effectively transfer their skills successfully handling Dodd-Frank into the healthcare space.  Similarly, Buffett’s Berkshire Hathaway has only been involved in healthcare reinsurance, not the primary payor system.  Navigating the world of electronic medical record handling, billing, network management, contract negotiation, and more is not one of Berkshire’s core competencies.

I think what we are seeing in the market is a repeat of late last year’s “Amazon panic” that sent Kroger shares into a spiral (losing 20% or $5.4 billion in enterprise value in a single day).  In fact, since I commented on Ben Thompson’s piece on the Whole Foods acquisition, Kroger recovered to its pre-Whole Foods acquisition price[1]. With the recent hits to United Healthcare and CVS stock it is worth remembering Twain’s oft-quoted adage, “History does not repeat itself, but it often rhymes”.

[1] This is even after suffering a temporary earnings miss in Q4