How "New" this year?

I do not like to bring this up on the dawning of the New Year (it's barely Jan. 5 here in Brooklyn) but a serious challenge for 2009 will be our willingness to think the unthinkable in realistic and creative terms, and act on our convictions despite all the uncertainties. No one is suggesting this will be easy.
I woke a little before 3 a.m. thinking about a client who did not call me back last year after I led a session with a roomful of his clients. They were mostly CEOs in the information industry in whose companies his firm holds significant private equity stakes. I had been retained to stimulate them to "think the unthinkable" about their businesses for a couple of hours before their "real" meeting began.
It was early October in '08. The "unthinkables" were mounting: AIG's bailout, Wachovia, Lehman gone bust, Bear Stearns, Fannie Mae, Freddie Mac, to name a few, with WaMu then the largest US bank failure ever. Reserve Primary had "broken the buck" and people were beginning to wonder, as investors pulled $130 billion from US money markets in two days, well, where is a "safe" place to store cash?
Still, interest rates had not yet dropped nearly to zero and Bernie Madoff was not yet a worldwide household name. I can't detail the precise totals of new currency printed by the US government since the crisis began to unfold, but please note: it took two centuries for US monetary base to grow to $800 billion and in the last three months it has nearly doubled to $1.5 trillion - an implied annual expansion rate of 300%. This fact alone sets in motion its own new set of uncertainties.
These musings led me to recall another meeting in the spring of 2006, in which a convocation of  managing directors from one of the Top Five global financial institutions wrestled for two days with two major uncertainties likely to influence their business – would the US-China dynamic as the primary engine of global growth remain positive and healthy, or decline in serious ways? Would the US capital markets model (political, economic, regulatory) remain dominant in globalization, or come under attack, and perhaps decline seriously? A cursory look at the matrix implied here quickly revealed the dreaded "lower left quadrant" scenario, where a deteriorating global growth dynamic would converge with slippage of US influence in the world. What might happen to them in that world?
(Sound familiar?)

The MDs quickly evidenced antipathy for the matrix and the process of thinking through its implications, perhaps because their business model – and their livelihoods – would become quite unpleasant (if not untenable) in at least two of the scenarios implied (particularly the one that has in fact developed, in which numbers of them have lost their jobs.) This is not surprising in one sense, since the most unthinkable circumstances are often those in which we won't do very well.  In psychology this is often referred to as denial.
What I watched unfold among these bankers when faced with this particular scenario framework was a two-step cognitive process.  The first step involved an intense interrogation of the "rightness" of the framework. Were these really the key macro uncertainties?  Once the framework had been explored and discussed, the second step involved painful deliberations about whether this thinking process, if pursued, could possibly suggest prudent actions.  While the discussion was eventually allowed to proceed, general resistance managed to preserve the bubble of group think. Whatever else might be true, they were not willing to take these possibilities seriously.   This particular crowd of leaders could not, or would not, look down into the dark possibilities that were clearly latent in the world system. I left the meeting thinking about reasons to short their stock, which has fallen about 65% since that day – one of the truly valuable investment insights never expressed openly (til now) and not acted upon. (Was I, too, in denial?)
Since then, several different versions of these scenarios have been broadly used by various practitioners to encourage executives to think "outside the box" of their own official futures in 2008-10. Not all are equally capable or willing to take this on, useful as it may be.

I am trying to get at something here, which came up again in a very recent meeting with a group of bankers from another top-tier institution, charged with expanding capital markets businesses. The most senior and outspoken member of the group asserted that the firm had excellent plans in place that "just needed execution!" I asked politely whether it was more important to prosecute those plans or - given how different the world had become in recent months - try to figure out what in their operations had to be radically different? What did they need to stop doing, or start doing, that would amount to real change in behavior? This question provoked uncomfortable silence, but several of the people at the table nodded in a way that suggested they might proceed down this path if enough of them dared to do it.  
In any engagement of this kind, we may struggle to find exactly the right set of uncertainties, but I do not see how most businesses can proceed in 2009 without aggressively addressing this question: Given that things have become so different from what we imagined, and unprecedented in ways likely to become more so - don't we need to radically rethink the assumptions under which we have been operating? Now?
This is the challenge many of us face in this New Year. "New" arrives with a capital N in more ways than anyone bargained for. It demands more new thinking – and new acting – than in any recent times past. I suspect that many people remain unprepared for the efforts involved, but the refusal to think about radical change is almost certainly not the answer.  The best we can do is to begin.

Comments

[CT Karpel]

Interesting how your experiences with very highly placed finance executives mirror mine in the decidedly less glamorous world of government contracting. I recently led my executive team through a scenario-based planning exercise for the first time.

First they argued over the framework. Then several of them went wildly off course just to postpone meaningful discussion. After the theatrics, most dismissed the direst of the scenarios as implausible (that's the point, hello!) and then we settled into a groove of "let's keep doing what we have been."

That's when I had to get the cattle prod out and started asking the tough questions. I learned a valuable lesson about scenario planning: you need to have backup data handy in order to show executives why they need to think differently about the future.

By showing them why we needed to respond to our markets and customers with one eye several years out and the other on current financials, they responded with some value-added ideas. I believe the exercise was a success, and I'll do it again next year.