Back in April I wrote about Citigroup's announcement of laying off 17,000 people, "Are Citigroup displaying the Efficiency Myth". Charles Prince the CEO said the company was going to be more efficient and more tightly managed company.
With Citigroup's share price dropping over 6% and Charles Prince under threat you would be right in questioning these predictions. But we might claim that it isn't Charles Prince's fault, instead the fault of the sub prime mortgage market fall out? In an interesting article by David Hirst, "Adventures of a Vulture Capitalists, Selling Short on Citi" he explains how he predicted the sub prime market collapse and singled out Citigroup as one of two companies to short. Hirst also lays out the fact that with these large financial companies relying heavily on their "models" to ply their trade. It has become "model" versus "model" instead of "model" versus "market". That is, the reality of what was happening in the real world has been lost within the virtual world of financiers playing with each other.
The fallout has already claimed the CEO of Merrill Lynch, Stanley O'Neal, described in one article as someone who has "never gone out of his way to win friends. Just six months after he completed his meteoric rise to the top of Merrill Lynch he ousted two of the broker's most senior executives – including his right-hand man. His brutal cost-cutting regime has seen tens of thousands of jobs axed all over the world." Sounds familiar!
What is happening here is that these CEOs and many more like them are falling into the trap of the efficiency myth, the myth of control and trying to achieve the mythical benefits of shared services. The impact of actions which centralise control and create shared services structures is to remove decision making from the people interacting with the real world. When you centralise decision making in this way it is impossible to handle the volume of all the decisions therefore you have to create rules so that they can be processed quickly. These rules become models under which the company operates. (I know Hirst meant financial models not operating models) As time goes by the world changes and adapts much faster than the internal models of how a company operates. Getting out of sync with the real world eventually catches up with you and artificial attempts to stem the change end up in even bigger disasters. Hirst's refers to a secret government group called the Plunge Protection Team that tries to prop the markets up by artificial means, without success. There is a blog called Plungeprotectionteam.
These centralising actions are like removing the feeling from a person's hands; as the cup you are holding gets hotter you are powerless to let go, you are waiting for the memo from headquarters telling you to put the cup down, meanwhile the pain intensifies. It is also like disrupting the connections between the eyes, ears, nose and the brain. You can see, hear and smell the change coming but trying to warn the central brain is slow, disconnected and sometimes fraught with danger because you are accused of being a maverick or at least not a team player.
If a financial reporter in David Hirst can see the train wreck coming from half way around the world why couldn't Stanley O'Neal or Charles Prince? What are CEOs doing to lead an organization that has every nerve ending tingling and communicating when the slightest hint of change occurs. Who do they have as receptors of that information helping the people at the extremities share information and constantly adapt to the change? The fact that we end up with deaf, dumb, blind and numb organizations is why we never see, or react in time to, a shock such as the sub prime meltdown coming.
What if there was one financial institute that did operate in a decentralized, highly connected, locally empowered way? What would their returns be like? Consistently better than their competitors I bet. Of course the CEO of that company would have to convince their shareholders that the short term profits Merrill Lynch and Citigroup chased in the sub prime market were not real and not sustainable. Hopefully the shareholders would listen.
