Risk Management at Harvard Business School

This morning we find ourselves back at Harvard Business School listening to some of the finest minds in the country talk about "major failures in companies’ risk management practices" that led to the current financial crisis.

David Champion, of Harvard Business Review opened the discussion by posing the question: was the current f

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inancial crisis "unknowable?"
Robert S. Kaplan, the Baker Foundation Professor at the Harvard Business School and chairman, Professional Practice, at Palladium Group, Inc. answers first. Prof. Kaplan sees it as a "classic credit crunch. " Together with David P Norton, Kaplan created the Balanced Scorecard." He sees the current crisis as essentially a "human problem." Financial engineering and executive pressure for growth and on share price, were two factors and nothing new. What is new, sees Simons, is "rationalization...that greed is good...and self-interest is a defining principal...and some people can be smarter than anyone else and can capture value better than anyone else." He felt the measurements they used gave them a "false sense of control," enjoying the numbers but failing ot appreciate the complex assumptions behind the numbers.

Robert L. Simons, the Charles M. Williams Professor of Business Administration at Harvard Business School and an expert in performance measurement and control,
talks about "responsibility and rationalization."

Mikes says, "blaming modeling is not good enough, because models don't make decisions, people do." She sees risk managers tied to the view that all risks are quantifiable. The "ultimate fragility of risk models," is one of the lessons of the current situation, because they are so heavily based on assumptions is where they fail. Different risk areas lend themselves to quantifiable models, other do not, points out Mikes.

Peter Tufano, the Coleman Professor of Financial Management at the Harvard Business School, serves as the school's Senior Associate Dean for Planning and University Affairs, and sits on the executive committee of the Global Association for Risk Professionals (GARP) (http://www.garp.com/), says, he would "hate to see entrepreneurs stop being entrepreneurial."

Acording to the program, Michael W. Hofman is "Vice President and Chief Risk Officer at Koch Industries, Inc., a privately-owned Wichita, Kansas, based group involved in re

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fining and chemicals; process and pollution control equipment and technologies; minerals and fertilizers; polymers and fibers; commodity and financial trading and services; and forest and consumer products. He is a member of the executive committee of the Global Association for Risk Professionals (www.garp.com)." He sees risk managers excessively caught up in the technique of financial modeling, and losing focus on why they are doing the modeling.

Hofman sees advantages in a privately-owned company that "you are playing with real money, the owner's real money. Not shareholders money, not stock option money, not play money, real money." Mikes ponts out some companies like Citigroup who "tried to get out of te dance earlyand got really hammered...they were unable to successfully educate shareholders aboutthe kind of risk with which they wer comfortable."

Simons points out that in the 1970s the questoins was, "how do we get corporate managers take on greater risk?...That led in the 1980s and 90s to a set of performance incentives that led managers to take on more risks." Tufano sees regulatory rethinking in the Obama administration regarding capital structures on companies' balance sheets.

Kaplan returns to the Balanced Scorecard which, he explains, contains measures of the varying types of risk. He explains a 'heat map approach" which highlights high risks and reasonable likelihood of adverse consequences. "This doesn't count black swan events, very low likelihood, catastropic consequences," though, cautions Kaplan.

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Hofman comments on all these tools that "there are times when these tools are very helpful in informing your decisionmaking. And there are other times when they just aren't. We start with the premise that the future is unknown and unknowable." The best premise for a risk manager is to assume that "whatever predictions you make for the future, you will likely be wrong." That leads risk managers to spend time considering, "what will happen if I am wrong?" in their predictions, which, Hofman feels, is productive thinking. A self-confessed reformed accountant, he feels the problem with derivatives is that the leverage is invisible.

Tufano feels greater professionalism and independence among risk managers is an answer, to which end he has devoted time and energy to GARP.

Mikes comments, "Risk manages were seen only as compliance officers or buyers of insurance. The road to professionalism and independence has been problematic for this reason."

Simons has a concern that the professionalism of different disciplines like IT and HR has led to the view among CIOs that they can then be freed up from significant personal involvement. "Risk," he says, "is not like that." Kaplan feels a problem with risk officers is their lack of line experience, sine they are staff. He feels risk officers need line experience.

Mikes points out that functions that have evolved over the last 100 years have been reframed depending on changing priorities, and she sees te rise of the "risk executive" as a possibility going forward.

Hofman responds to Kaplan's suggestion that risk managers should come from the line, however, he sees drawbacks. A line manager is too anchored by his experience of what goes on in the business, and he may need to think bigger than than. For example, what will be the effect of the global economy today? More important is a willingness to admit when the risk officer does not understand. "I don't get that, can you explain that to me?" articulates Kaplan.

Simons closes by saying we need the courage and confidence to say, "hold on, I don't understand."

Ranch Kimball and John Halamka at HBS

by Sarah Cortes

Another early morning at the sunny and elegant Spangler Center at Harvard Business School finds over 100 leaders of industry preparing for a double feature from two health care movers and shakers. First on the program is the well-known Ranch Kimball, President and CEO of Joslin Diabetes Center and former Secretary of Economic Development under Governor Mitt Romney. As if Kimball weren't enough, John Halamka, pictured left playing the Japanese flute, will be speaking. CIO of Harvard Medical School, among many other roles, posts and responsibilities, this high-profile medical technologist is one of the most sought-after thinkers and speakers in the world of health information technology("HIT"). Although unclear at first why these two are double-billed, it soon becomes apparent.

Kimball runs through a deck of slides with dizzying speed and stunning clarity of message. Russ Vandenpool, a board member of HBSAB, the sponsor of the event, summed it up: "Kimball takes a page directly from Michael Porter's book on competition by applying focus on quality and defect reduction to health care delivery." Although only at Joslin since 2007, Kimball explains he has retooled the center based on lessons from Toyota's famous revolution - focusing on quality of care delivery up front to significantly reduce cost and improve patient quality of life over time. Kimball shows us how tuning and focusing on eight specific service delivery points with patients early on reduces the need for dialysis and surgery later. Some pretty clear slides prove this, he explains, where the purple Joslin cost bar is clearly shorter than the green cost bar for all other providers, as everyone can plainly see for the microsecond it flashes on the screen. It's just long enough to make the point effectively. Complete economy of Kimball's message and our time.

Next up is Halamka, who we look forward to from our acquaintance with his well-regarded daily blog, "Life as a Healthcare CIO." On this topic, electronic health records ("EHR") and electronic medical records ("EMR") are core concepts. Halamka apprises us how BIDMC coordinates with Joslin by sharing medical records, a technical feat in the world of health care, we come to understand. According to Kimball, pictured right, Joslin went to all-EMR seven years ago and was, he believes, the first Harvard hospital to do so. The disarming interchange between Kimball and Halamka informs us how closely these two coordinate professionally. An insight into a human success factor behind technical coordination?

Halamka's part of the program soon conveys how far from simple is his world of medical computing. Halamka's slides reflect a close watch on the Washington pulse, including a HIT Policy Committee, an HIT Standards Committee, and "Regional HIT extension centers." The first of these, the HIT Policy Committee, is apparently focused on "meaningful use," of electronic records, an elusive concept on which Capital Hill is still wandering in the wilderness. $19 billion in federal funds lie in the balance, it seems, available to spend and waiting for consensus on the best way to spend it. Only 2% of hospitals, we learn from Halamka, are currently on-line with EHR, and these funds are intended to encourage and allow the rest to get there as soon as possible. The government has announced it will divide the $19 billion among doctors, providing each with $44,000 to go into electronic records in 2011. Doctors can qualify for reimbursement if they show "meaningful use," whatever that is. As best as anyone can tell, this relates in some way to certification of the electronic method and software that doctors select against some technical standard. Guidance from HHS is expected to be available by the end of the year.

Because state law pre-empts HIPAA, Halamka notes there are, in effect, "50 privacy policies," in the sense that the patchwork of individual state policies effectively prevents information-sharing, quite apart from technical challenges. "Privacy has been protected differently in each locality," notes Halamka.

He hopes policymakers can do away with the current system whereby, after seeing a patient, the doctor calls a phone number on the patient's insurance card and "gets to argue with a high-school educated triage clerk about the appropriate diagnosis." Halamka's cynical humor conveys a deep-seated frustration with the current system, coexisting curiously along with what seems like good-natured optimism that we nevertheless can and should improve health care.

Halamka flashes a detailed slide on the data interoperability capability for all providers in Massachusetts, called the "MA-Share Appliance." Apparently this is opensource software, "built on a common messaging gateway," by which health care providers can communicate with each other to improve quality of patient care delivery.

He shares that he was the fourth human to have his genome mapped as a way of illustrating the rapid way the cost of such sequencing is coming down, from $350 million for the first human (which might include all sunk costs to that date. Or the special carrying case), to $100 million for the second, $100,000 for the third, and his cost only $10,000 for genome sequencing.

Halamka also shares that his annual budget is $30 million, which is 1.8% of revenue, always an interesting data point for IT professionals

Kimball, scheduled tightly, rushes off apologetically after Q&A, while Halamka lingers graciously a few minutes after the meeting ends as a crowd surrounds him, eager for every word with this oft-quoted, pace-setting CIO.

copyright 2009 Sarah Cortes

Harvard Business School Series: Branding and Search Engine Optimizers (SEOs)

by Sarah Cortes

Branding in 2008- Cheat Sheet

It turns out that understanding and controlling Search Engine algorithms is where the future of marketing is headed, and is influencing branding by incorporating aspects that can affect SEO.

Tonight Harvard Business School hosted a CEO Roundtable called "Creating Best-Selling Brands That Drive Long-Term Growth. 5 CEOs Share their Marketing Insights on creating long-term brand equity." It provided "30 Minute Breakout Session w/ each CEO after Panel Discussion." It was described as a "Leadership Track Event," and said, "Enjoy a one-of-a-kind evening with 5 CEOs as they share their insight, vision and strategies to build sustainable, leading brands that drive business growth and increase shareholder value. In today’s ever-changing competitive landscape, it takes dynamic leaders to innovate, inspire, and motivate their teams to focus on innovative marketing and business strategies and drive revenue, build brand equity, enhance loyalty and drive growth to a new plateau of success." The CEO Panel Included:

Torrence Boone, CEO, Enfatico, a cool ad agency, we learned, whose first client was Dell
Scott Griffith, CEO of Zipcar, a pretty cool company
Ralph Crowley, CEO of Polar and Adirondack Beverages. Cool drinks.
Diane Hessan, CEO of Communispace, which, we learned, provides cool online customer focus groups
Charles J. Kravetz, CEO of NECN-TV, which we all know as "the news." Pretty cool.

Invited were members of the HBS Association of Boston, of whom 172 registered and 150 showed up. Pretty impressive turnout, but small enough to be intimate, in a fascinating way. Like viewing a squash match with its small and intimate gallery.

We did not learn much about how these awesome brands were created. Rather, we learned about what’s on the CEO’s mind at present, which, as it turns out, is mainly customers and customer experience.

A question about search engine optimization sidetracked everyone for quite a while. It seems CEOs are discovering search engines provide free advertising, in a sense. But they are focused on purchasing “key words.” SEO is so much more. Torrance Boone pointed out that SEO doesn’t end with your firm popping up at the top of Google’s list. It begins there, because where your customer lands when he clicks on your Google link can make all the difference.

Forgot what “branding” and SEO are considered, exactly, these days? Here’s a cheat sheet:

The following definitions of "branding" and “SEO” were found:
"From a shallow point of view, brand is what's given by a company to its merchandise so the manufacturer can be identified by consumers. Yet, after an increasing evolution on the production systems that allows almost any manufacturer to make high quality and satisfactory products, brands became a way of distinguishing simple commodities and their manufacturers by status, emotional characteristics and subjective qualities. A well-built brand gives the company or product personality, and evokes emotional and subliminal characteristics that are not necessarily found in the company or product themselves." - Yardeena Sherry, How To Understand Branding.

Wikipedia tells us the following:
A brand is a collection of symbols, experiences and associations connected with a product, a service, a person or any other artifact or entity. Brands have become increasingly important components of culture and the economy, now being described as "cultural accessories and personal philosophies" - Birkin, Michael (1994). "Assessing Brand Value," in Brand Power.

Search engine optimization (SEO) -As an Internet marketing strategy, SEO considers how search engines work and what people search for. Optimizing a website primarily involves editing its content and HTML coding to both increase its relevance to specific keywords and to remove barriers to the indexing activities of search engines.

Yet another way that the world keeps changing under your feet.

copyright 2009 Sarah Cortes

You can read Sarah's other tech columns at IT Knowledge Exchange