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Friday, October 31, 2008

10 Ideas To Power Up Your Green IT Agenda

As IT teams scramble to figure out a green strategy, here are some ideas to fuel the brainstorming.

InformationWeek

By J. Nicholas Hoover September 20, 2008 12:01 AM (From the September 22, 2008 issue)

Green isn't just an emerging trend anymore. ... It's the kind of issue a CEO just might bring up with the CIO. That, along with energy costs punching holes in profits, makes this a fight the IT team can't sit out.

Green IT efforts must look past the data center. ... But companies have bigger ambitions than that. As IT teams try to do their part, here are 10 often overlooked aspects to consider about going green.

1. Look Beyond The Data Center


Too many PCs are left on too long, a problem that IT can combat with both technology changes and awareness campaigns. ... "There's a cool factor about it, and we want to take advantage of that now," says David Buckholtz, VP of enterprise architecture and planning at Sony (NYSE: SNE) Pictures Entertainment, which has been laying plans for a broad green IT effort.

InformationWeek Reports

... Miami-Dade County Public Schools has cut the amount of time PCs are on by more than half, from 21 hours to 10.3 hours daily, estimating it will save about $2 million on energy annually by deploying active PC management from BigFix to centrally control power settings. ...

Companies choosing software as a service do it for the cost savings. But it also can be seen as a green investment. ... Microsoft's San Antonio data center ... has sensors measuring nearly all power consumption, uses internally developed power management software called Scry, has mass-scale virtualization, and recycles the water used in cooling. ...

Cutting travel is another way companies are going green. Monsanto CIO Mark Showers notes the company's telecommuting and work-from-home programs have grown in popularity over the past year as gas prices have risen. ...

2. Culture Is The Biggest Barrier To Green


... "It can be in some ways a politically charged endeavor," says Rich Siedzik, Bryant University's director of computer and telecom services. At Bryant, employees worried that the efficiency gains would lead to job cuts. Yet culture can work for the good... With the successful rollout of its new data center, Bryant is now discussing broader green initiatives, such as buying electric vehicles for maintenance staff.

... Though companies often set default PC power management settings, Living Life Green says that 70% of employees will turn the settings off. PC power management software from BigFix, Living Life Green, Verdiem, and others can lock settings in and automatically power up just before employees get to their desks in the morning.

Or, with a major awareness campaign, companies might be able to get some of those gains without a technology change. Coca-Cola has done simple things like encouraging employees to print on both sides of paper and cut duplicate printing as a way to push employees to be more green. Sony Pictures ... [is] starting a campaign to get people to turn off their screens if they're going to be away. That will piggyback on a larger company effort to turn off the lights. The IT team will start by working with the most influential PC users: administrative assistants. ...

3. Share The Data--And Perhaps The Pain


Microsoft (NSDQ: MSFT) is trying is trying a new way to keep energy costs low: charging business units by the amount of power they use in the data center, rather than the space they take up on the floor. That's forcing developers writing in-house and SaaS apps to think about how much power their apps will use even as they code them.

... Developers are paying attention to which of two data query methods might save a watt of energy, and choosing that method even if it might make the process slower by a nanosecond or two. Business units are driving efficiency in the selection of the hardware they'd like to see and making the right choices in the amount of hard drives. ...

But that might not be the right fit for everyone, depending on whether the gains from doling out energy costs are big enough to merit line-of-business managers spending time on it. An interim step might be just sharing that information, publicizing any progress the companies' green efforts deliver.

4. Recycle More


... Forrester Research found earlier this year that 40% of companies have some sort of computer hardware recycling initiative in place. But that's not enough with millions of computers and cell phones reaching end of life every year...

Donation is a potential alternative or supplement to recycling. Health insurer Highmark donates PCs to nonprofits and churches and is working to do recycling also. Programs like Dell (Dell)'s Asset Recovery Services promise to overwrite or shred hard drives, remove labels, and confirm the data disposal complies with relevant regulations.

Cell phone recycling is worse. A Nokia (NYSE: NOK) study found only 3% of cell phones are recycled worldwide, and nearly half in that study didn't know recycling phones was possible. Yet, from Nokia to Hewlett-Packard to private companies like ReCellular, cell phone recycling programs are free or cheap.

5. Don't Forget To Measure ...


Bryant University built an energy-efficient data center. But Bryant's Siedzik says the university made one mistake: It didn't take good measurements of its energy use before it started down its green data center path. "We needed to get better data on where we were coming from to measure how successful we were once we arrived," he says.

Green Grid board member Roger Tipley, who works for HP (NYSE: HPQ), recommends companies measure total data center energy use every 15 minutes and monitor at the subsystem level as well to help companies develop baseline metrics and find trouble spots, taking measurements over the course of a year. ...

There are plenty of tools out there from companies such as Johnson Controls to measure power use by circuit or by device, as well as things like airflow. Bryant ... can cap the power that's fed to the system by strategically turning off individual CPUs.

6. But Don't Expect Perfect Data


IT leaders are finding that their green IT impact is going to be a hard number to nail down too precisely. ...

... Commonly used metrics praised by groups such as the Green Grid and used by Microsoft (NSDQ: MSFT) and other companies include Power Usage Effectiveness and Data Center Infrastructure Efficiency, while others, like McKinsey's Corporate Average Data Efficiency, also have made appearances. ...

For most companies, the best benchmark will be the past, using that to set aggressive improvement goals. ...

7. Alternative Energy Isn't Cheap


... Alternative energy sources don't come cheap, and for many companies it won't be practical to locate data centers where wind or hydro power is widely accessible, and the payback is a long time coming from solar. Highmark is looking into solar for energy and propane rather than diesel for backup.

In some parts of the United States, companies can choose alternative energy; customers of Baltimore Gas & Electric in Maryland, for example, can choose to have their power generated by green sources if they pay a bit more. ...

Hosting company AISO.net has 120 solar panels on its California data center. Installation cost nearly $100,000, which has been paid back in energy savings over the past seven years, says CTO Phil Nail ...

8. Buddy Up To Facilities


IT typically consumes only about 10% of an organization's energy costs, says Living Life Green's Scott. So the biggest opportunity is for IT to help companies tackle that other 90%. To do that, IT needs to build a closer partnership with the facilities management team, to implement sensors and automated facilities management software that can go as far as monitoring and controlling everything from lights to air conditioning remotely.

Florida's Ave Maria University is doing just that. The school ... uses off-the-shelf hardware and software from Johnson Controls and Eaton to monitor and manage water, power, lights, and air conditioning throughout its campus. ...

For example, Brian Mehaffey, Ave Maria's VP of technology systems and engineering, found electric bills just for the school's church were running at as much as $22,000 a month, so he used the system to view the airflow, quality, temperature, humidity, and power use. He found the air conditioning systems were running at full blast to handle the church's maximum capacity, even though most of the time the church was empty. During downtime, Mehaffey and his team turned off systems one by one, watching in real time how temperature, humidity, air quality, and power use changed with each adjustment and turning the next system off if the environment inside the church found a comfortable equilibrium. Mehaffey now has the church running on monthly energy costs of only $5,000, while remaining comfortable. "Over a year, we're talking about $150,000 in savings in energy alone," he says.

9. Consider Water Use, Not Just Power


Cooling data centers takes a lot of water. ... Highmark collects rainwater off its roof and stores it underground in a 100,000-gallon tank for cooling IT systems. ...

10. Challenge Conventional Wisdom


IT teams need to be ready to do things differently to get more green.

Even hot aisle/cold aisle configurations and raised floors, long standby practices in the data center, are getting second looks. If racks are too short and air conditioning setups inefficient, hot aisle/cold aisle strategies save less than believed, says Bob Hunter, CEO of power-monitoring company TrendPoint. ...

Companies will struggle to balance green IT efforts with other business needs. Outsourcing firm HCL Technologies finds that storage and backup, two demands that seem only to go up for U.S. businesses, are the largest drains on power in IT, says Anubhav Saxena, associate VP for America. The more firewalls and intrusion-prevention and intrusion-detection systems companies run, the more power those systems use and the more power it takes to get data from one end of the network to the other. Yet no one's suggesting it's time to ease off those efforts.

But security's a good comparison for what IT must do to go green. Information security works best when it's considered at each step of a business initiative, not bolted on during implementation. For green IT to make an impact, it needs that same presence in the process.

-- with Chris Murphy

Photograph By Getty Images

10 Ideas To Power Up Your Green IT Agenda -- Green IT -- InformationWeek

Planning for Succession

Baseline Magazine

By Dr. William Moskal
2008-09-29
The torch-passing that will soon take place in the corporate world as baby boomers retire will pose challenges for many organizations.

For many organizations, succession planning ranks high among corporate priorities—and it should. Millions of baby boomers (born between 1946 and 1964) will leave the workforce by 2020. Known for their corporate loyalty and strong work ethic, the boomers will be succeeded by Generations X and Y.

As a result, some of today’s corporate policies and practices need to be revised to reflect both the different values of these younger generations and changes in the marketplace. Organizations, therefore, must create protocols to identify tomorrow’s managers, as well as to develop the requisite knowledge and skills for them to lead.

...Gen Xers (born between 1965 and 1980) are actually quite career-oriented. They simply prefer a good deal of independence and exhibit more entrepreneurialism than did previous generations. Meanwhile, Gen Y employees (those born between 1981 and 1994) have witnessed how corporate America has treated their parents: not very well. That experience, coupled with technology advances, helped foster Gen Y’s need for constant feedback and a flexible work situation.

... How will this generational shift be handled? How will a smaller Gen X talent pool fill the gaps of the previous generation?

How will organizations retain and keep motivated, talented individuals amid the generational shift in values? And what leadership skills will Generations X and Y need in order to work with a more virtual and global workforce?

Managing these challenges will require a systematic talent-retention, succession-planning process. It must be designed to ensure a continued high quality of organizational performance by developing employees at all levels, while paying particular attention to identifying and training high-potential candidates.

Here are some points to consider when planning for your company’s future:

Recognize Key Competencies

... The competencies—knowledge, skills, talents and sensitivities—that are critical to achieving strategic goals now and in the future should be a blend of traditional corporate values and the ability to change. While leadership choices should reflect overall vision and mission, it also is important to be aware of how technology, political factors, and generational and cultural differences will impact an organization’s future.

... Retention and succession planning is a mindset that starts at the top. Beginning with the CEO—and with the guidance of human resources professionals—identifying high-potential candidates and implementing a plan to retain them should be the responsibility of all managers.

Organizations gain a great deal by developing exceptional performers and keeping them. According to Marshall Goldsmith, executive coach and author of Partnering: The New Face of Leadership and What Got You Here Won’t Get You There: “The marginal gain for helping a highly successful person move from the top 5 percent to the top 1 percent may be greater to the organization than the gain from helping the average performer move from the top 50 percent to the top 20 percent.”

...Today’s managers might not always be the best judge of who is promotable and who will be an effective manager in the years to come. This makes 360-degree feedback—confidential performance reviews by direct reports, peers and managers—critical when identifying high-potential candidates, because it provides a well-rounded assessment of a candidate’s performance at, and from, all levels.

When building a high-potential candidate pool, look for employees who excel in 360-degree reviews, are interested in career advancement and possess the leadership attributes that are important to the organization. ...

Develop and Retain

An organization’s core assets are employees’ intellectual capital, skills and talents, and commitment. Cultivating employees’ talents, developing their professional abilities and preparing them for greater responsibilities are among the most important and challenging organizational goals.

To address the needs of high-potential Gen X candidates and up-and-coming Gen Y leaders, firms must pay close attention to mentoring and career-path programs. Employees who believe they are growing and developing professionally, learning new skills and gaining experience are more productive, have higher morale, and are more loyal than employees at organizations that don’t emphasize talent development and knowledge management.

... Gen X employees work an average of three hours more per week than did employees of the same age in 1977. But this generation wants the flexibility to set their own schedules and not be chained to a desk from 9 to 5.

Planning for the Future

Effective succession planning and talent retention nurtures those employees responsible for the organization’s future vision, strategy and success. It assures a sequence of qualified, promotable people as the boomers move on.

Over the next few years, organizations face record-high retirement rates. ... This—coupled with a smaller, younger talent pool and evolving management requirements—will make it extremely challenging for organizations to retain and develop the best people.

It should be a companywide priority to develop strategic talent retention and succession plans that reflect and support the mission of your organization, its culture and values; the goals of its employees; and the skills needed to bridge the gap between current competencies and future organizational expectations. Enterprises that commit to these processes will have a significant advantage over their competitors.

Dr. William Moskal is a principal with IRI, a human performance consulting practice based in Detroit.

Balancing risk vs. reward in retirement years

Employee Benefit News

By Philip J Fogli

September 15, 2008

Although market losses are a big concern, employees shouldn't forget that being too conservative may result in interest rate and inflationary risks that can erode the value of their retirement savings....

... While retirement plan participants should move toward fixed-income investments in retirement, if they take on too little risk in their portfolios, their investment returns likely will not keep up with the pace of inflation, resulting in a loss of real purchasing power.

The 10-year Treasury bond has a yield of 4.01%, slightly higher than the 3.64% average for one-year bank CDs. ...

[Inflation] rose 7.9% in the second quarter of 2008 to bring annualized inflation to 5.5%. If this rate becomes stable, employees will need a 5.5% return just to retain current purchasing power in real dollars. Any money invested at current CD rates or treasury yields will result in a real loss. ...

It is important to remember that bond returns have been bolstered by decreasing interest rates for many years. If increasing interest rates start to eat away at yields, and inflation continues its upward trend, large bond allocations in employees' retirement portfolios ... can jeopardize their financial solvency in retirement. While bonds still belong in portfolios and might continue to make up the bulk of participants' investments, it is important to mitigate the inflationary and interest-rate risks that their portfolios might need to weather.

TIPS to follow

The well-known methods to mitigate pension risk are to buy inflation-linked assets or put in place inflation-linked swaps. ... [Inflation]-linked investments can be purchased in the form of Treasury Inflation-Protected Securities (TIPS). ...

TIPS principals increase with inflation, as measured by the consumer price index. When TIPS mature, the investor is paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal, resulting in interest payments that rise with inflation.

For most investors, it makes the most sense to purchase TIPS in the form of a mutual fund or exchange-traded fund. ... [The] annual inflation rate has run at 3.42% since 1913, about 7% under the average annual return for the S&P 500. Investing some assets in large-cap stocks will help investors stay ahead of inflation over time.

... [Investing] in commodities is a relatively direct strategy with which to keep pace with inflation. ... While commodities are a hedge against inflation risk, they are also prone to long periods of flat returns. Still, their low correlation with the stock market makes commodities another attractive allocation strategy to manage inflation risk. While analyzing portfolios for the risk of direct investment losses is still a primary concern in retirement years, there are other risks that can compromise financial security in retirement. ... Inflation can erode purchasing power. It is important to assess your portfolio for all of the risks you face and invest accordingly.


Philip J. Fogli is a Princor registered representative and financial adviser at PACS Consulting in Philadelphia.

Thursday, October 30, 2008

Flight of the High Performers

A new survey finds that nearly half of high performers are actively looking for other jobs. Why are they seeking greener pastures and what are companies doing to keep them?

Risk & Insurance

October 1, 2008

By MICHAEL O'BRIEN, a staff writer for Human Resource Executive®, a sister publication of Risk & Insurance®

Human resource executives would be wise to keep a closer eye on their company's high-performing employees. Chances are, a good number of them are inching ever closer to the door.

According to a recent survey by Washington-based consultancy Leadership IQ, 47 percent of high performers are actively looking for new jobs, by posting and submitting their resumes and even going on interviews. ...

This prelude to an exodus of valuable employees is a problem facing many companies, regardless of the current state of the economy. To avoid the problem is to risk watching your best assets walk right out the door and possibly into the arms of the competition.

"High performers keep companies in business," says Mark Murphy, Leadership IQ's CEO. "So every company is at risk if these people leave. If you lose some low performers, you might actually be better off. But when your best people quit, revenue drops, quality suffers and snafus increase. Even large companies can take a big hit with the departure of just a few key employees."

The list of reasons many high performers leave their current jobs may be as varied as the skill sets of the high performers themselves, but Murphy thinks the No. 1 reason most high performers leave is clear.

"Frankly, we treat our high performers worse than any other employee," he says. "When a manager has a tough project upon which the whole company depends, to whom do they turn? Who gets the late hours and the stress? It's not the low performers."

Some companies are catching onto the dangers of this negligence and are implementing programs to engage these employees before they burn out or fly the coop, from better identification and communication of their prized status to allowing them to follow their interests and participate in projects outside their immediate job description.

IDENTIFY FIRST

..."It would be an absolute shame to have (a high performer) leave without ever knowing that" the company viewed that employee as such, says Steve Robison, Dow's HR director of succession management.

...He says the company looks at each employee's performance against his or her goals as one indication of meeting high-performer criteria, and then compares them to a global competency model.

After supervisors identify their high-performing employees, Dow's HR department swings into action to organize calibration sessions, where supervisors get together to make sure they are comparing apples to apples. ...

Then there's a diversity review to ensure fair treatment, and the information is updated on the company's online performance-management tool. The employee is notified of his or her status during the annual performance review.

The high-performing group list is reviewed annually to ensure that workers with longer-range goals are being given the proper access to resources in order to achieve them. Robison says the company's attention to this cream of the crop reaps untold benefits in the long run.

"It's all about development," Robison says. "We're looking to build capacity and build a talent pipeline in the organization."

NEW OPPORTUNITIES

Indeed, the opportunity to put their skills to use in a different setting or develop new skills are two major reasons high performers seek new job opportunities elsewhere.

According to Scott Thomas, senior vice president and senior HR business partner team leader at Charlotte, N.C.-based banking and financial services organization Wachovia Corp., employee engagement surveys consistently show that "advancement and development opportunities are a high priority for our employees."

In order to satisfy that demand, a new program has been instituted there that allows the 6,000 employees in the company's IT department the opportunity to work on new tasks and projects recommended by department leaders that may lie outside their current position. ...

LIFELONG CAREER

By keeping employees focused on pursuing opportunities within the business rather than outside, one company is looking to return to the idea that an employee can build an entire career at one organization.

Linda Sharkey, vice president of people development at Palo Alto, Calif-based computer maker Hewlett Packard, says it's important for HR executives to "take the time to go out and know your high performers well, know your business and strategies well, and help people find the right path. ... That way, they know that someone is paying attention to who they are." ...

HP recently overhauled how it categorizes jobs for its 156,000 worldwide employees, by "collapsing" all their jobs into 400 job families to make it easier for employees to view online in order to plan for career moves within the organization.

The company also took a look at its own internal recruiting process and turned an eye toward giving its own high-performing employees the first crack at new openings.

"Now, we post our jobs internally (before going public) and then search our internal database, where we look for people who match the jobs. We're continuing to do more and more of that at every level of our employee base," she says. ...

The program also allows employees to "do career-development plans for themselves, so they can continue to grow within the job they have or within other jobs," Sharkey says.

However one chooses to entice one's high performers to stay, Dow's Robison says a company needs to effectively communicate their plans for employees' future development.

"The challenge is to make sure we have a compelling case as to why people should stay with us, and oftentimes, that is going to align with development opportunities. If you can't make that case, then I don't know how you can expect people to not go somewhere else where they will have those opportunities."

Copyright 2008© LRP Publication

Lowering the cost of chronic health conditions

Employee Benefit News

By Leah Carlson Shepherd

September 15, 2008

Employers across the country are struggling with the cost of insuring employees with chronic health conditions, who represent a growing portion of the population. Speaking at a conference in July organized by the Center for Health System Change, experts recommended preventive measures, appropriate behavior incentives, better communication with employees and a variety of other solutions.

Identifying the problem

More than 40% of Americans have one or more chronic conditions, and people with chronic diseases account for 75% of health care spending in this country, according to a recent study published in Health Affairs. ... About 60% of people with chronic diseases are working-age adults.

... The highest cost conditions include heart disease, cancer, mental illness, pulmonary conditions, hypertension and diabetes. Many of these conditions are more common among low-income workers and minorities, noted Dr. Carolyn Clancy, director of the Agency for Healthcare Research and Quality. ...

Employee roadblocks

...Some patients may believe there's nothing they can do that will help their condition. Self-efficacy, or the belief that you can make a difference, "is a huge component of self-management," said Kristin Carman, principal research scientist at the American Institutes for Research.

Another barrier occurs when patients think that the medical guidelines for their condition are biased, too inflexible or just rooted in limiting personal choices, Carman said. ...

Employers step in with messages and programs to promote health and wellness, but employees don't always trust them. Workers "tend to be suspicious because they believe employers are concerned about costs," Carman observed.

To develop trust, "employers need to show what they're doing to support employees and improve health care. When you do that, you begin to break down some of those barriers and the bias," Carman said. ...

Systematic solutions

Each speaker at the event discussed many different remedies to fix the structural, clinical and economic ills of the health care system.

Paul Ginsburg, president of the Center for Studying Health System Change, called for a greater emphasis on prevention. ...

In addition, more research should be done to find the most effective treatments for patients with several chronic conditions, Clancy said. Most research is for one disease at a time, and "where our evidence base is thin is in how to manage people with multiple chronic conditions," especially when one of those conditions is a mental illness, she explained. ...

Eric Finkelstein, the director of the public health economics at the Research Triangle Institute, said better financial incentives could help. "You need to change the environment and make it easier and cheaper [to do healthy behaviors]" and more expensive and harder to do unhealthy behaviors, he explained.

Employers have seen success with environmental changes, such as installing fitness centers, walking trails and healthier snacks in vending machines, according to Ron Goetzel, vice president at Thomson Reuters Healthcare and director of the Institute for Health and Productivity Studies at Emory University.

He also recommended onsite health screenings, health risk assessments, subsidies for gym memberships and holding managers accountable for specific wellness goals.

What doesn't work

..."There's a lot of ignorance out there in terms of what works and what does not, and a lot of what doesn't work is being put in place by employers," Goetzel said.

For example, screenings alone or health risk assessments alone won't work, he said; instead, they should be part of a more comprehensive wellness initiative.

Simply sending workers to a Web site with wellness information, or just relying on awareness-building without follow-through, isn't likely to bring you the results that you want. Likewise, financial incentives that are too high or too low aren't effective, he said.

Beware of implementing changes or limitations that are so sweeping that they leave employees feeling as if they are disempowered or have less control over their health care, Carman suggested.

...Despite the potential pitfalls, you shouldn't dump your wellness program too quickly. The evidence base shows that wellness programs can reduce health risks, lower health costs and prevent disease, Goetzel noted.

"There's a growing body of evidence" that wellness programs can bring a return on investment, if you do things that are evidence-based and well-implemented, he said.

Monday, October 27, 2008

The True Drivers of Loyalty

CRM: September, 2007

The first mistake? Thinking that loyalty is all about improving customer satisfaction.
Click here to learn more!by Woody Driggs


Saturday, September 01, 2007The loyal customer is perhaps the most elusive subject in all of management science. In fact, one recent customer-loyalty study suggests that the psychology at the heart of customer buying patterns and preferences is far more complex than previously thought.

What makes customer loyalty such a vexing matter? ...[C]ustomers are harder to reach and impress than they used to be. ...[C]onsumers pursue various "market of one" activities: iPods, video games, movies on demand, and personal video recorders that allow commercial skipping. In the hypercompetitive Internet age, customers also have more pricing information and buying options than ever before.

But a number of misconceptions about loyalty have also led companies to make misguided investments in customer management programs.

The notion that loyalty is all about improving customer satisfaction is perhaps the most common mistake. ...[A] consistent finding from customer research is that 60 percent to 80 percent of lost customers across all industry segments reported on surveys just prior to defecting that they were "very satisfied" or "satisfied."

Another misstep is thinking that a loyalty program is the only thing a company can do to improve customer loyalty. Loyalty programs are one part of an overall loyalty strategy, but they lack the nuance that gives companies the ability to target the most profitable segments.

To attract and retain the most loyal and profitable customers, a firm must first understand the true drivers of loyalty -- the customer attitudes that drive the different types of behaviors that must be understood and nurtured.

Our own research and client experience, coupled with leading academic studies, has helped us to develop a model that enables better analysis of loyalty drivers. At the heart of the model is a better delineation of the different types of loyalty exhibited by customers. These types can be understood as spectrums of attitude and behavior along three dimensions:

  • Involvement with the Product or Service Category: How interested are customers in the category's products and services? ...
  • Commitment to the Brand: How passionate are customers about the brands they buy? ... [L]eading companies have discovered that the very process of advocating a brand to others creates deeper loyalty to that brand.
  • Likelihood to Reevaluate: How prone are customers to reevaluate their current buying choices? ...


By analyzing the behavior and attitude indicators of this model, different loyalty segments emerge, each with its own distinct loyalty drivers. Companies that recognize these nascent segments can improve their market focus and position by identifying previously unseen markets within markets. Taking this approach can help companies better understand what their customers are thinking and what motivates their purchasing decisions -- and can help retain the most profitable customers.

Woody Driggs is the global managing partner responsible for the CRM service line at Accenture, a global management consulting, technology services, and outsourcing company.

Your money and your brain

 

Money Magazine:  Aug. 23, 2007

Humankind evolved to seek rewards and avoid risks but not to invest wisely.

Money Magazine

By Jason Zweig, Money Magazine senior writer/columnist

August 23 2007: 1:38 PM EDT

(Money Magazine) -- For most purposes in daily life, your brain is a superbly functioning machine, steering you away from danger while guiding you toward basic rewards like food, shelter and love.

But that brilliant machine can lead you astray when it comes to investing.

jason_zweig.03.jpg

Jason Zweig is the author of "Your Money and Your Brain", Simon & Schuster (2007).

...We're beginning to get answers. Scientists in the emerging field of "neuroeconomics" - a hybrid of neuroscience, economics and psychology - are making stunning discoveries about how the brain evaluates rewards, sizes up risks and calculates probabilities.

... You, like every other human, are wired to crave what looks rewarding and shun what seems risky.

To counteract these impulses, your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind. And when you win, lose or risk money, you stir up some profound emotions, including hope, surprise, regret and the two we'll examine here: greed and fear.

Understanding how those feelings - as a matter of biology - affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor.

Greed: The thrill of the chase

Why is it so hard for most of us to learn that the old saying "Money doesn't buy happiness" is true? After all, we feel as if it should.

The answer lies in a cruel irony that has enormous implications for financial behavior: Our brains come equipped with a biological mechanism that is more aroused when we anticipate a profit than when we get one.

I lived through the rush of greed in an experiment run by Brian Knutson, a neuroscientist at Stanford University. Knutson put me into a functional magnetic resonance imaging (fMRI) scanner to trace my brain activity while I played a kind of investing video game that he had designed.

...When a shape signaling a small reward or penalty appeared, I clicked placidly and either won or lost. But if a circle marked with the symbols of a big, easy payout came up, I could feel a wave of expectation sweep through me. At that moment, the fMRI scan showed, the neurons in a reflexive, or emotional, part of my brain called the nucleus accumbens fired like wild.

When Knutson measured the activity tracked by the scan, he found that the possibility of winning $5 set off twice as strong a signal in my brain as the chance at gaining $1 did.

On the other hand, learning the outcome of my actions was no big deal. Whenever I captured the reward, Knutson's scanner found that the neurons in my nucleus accumbens fired much less intensely than they had when I was hoping to get it. ...

Why does the reflexive part of the brain make a bigger deal of what we might get than of what we do get? That function is part of what Brian Knutson's mentor, Jaak Panksepp of Bowling Green State University in Ohio, calls "the seeking system."

Over millions of years of evolution, it was the thrill of anticipation that put our senses in a state of high awareness, bracing us to capture uncertain rewards. ...

If we derived no pleasure from imagining riches down the road, we would grab only at those gains that loom immediately in front of us.

Thus our seeking system functions partly as a blessing and partly as a curse. We pay close attention to the possibility of coming rewards, but we also expect that the future will feel better than it does once it turns into the present.

A vivid example of this is the stock of Celera Genomics Group. In September 1999, Celera began sequencing the human genome. By identifying each of the 3 billion molecular pairings that make up human DNA, the company could make one of the biggest leaps in the history of biotechnology. Investors went wild with anticipation, driving the stock to a peak of $244 in early 2000.

Then, on June 26, Celera announced that it had completed cracking the code. How did the stock react? By tanking. It dropped 10.2% that day and another 12.7% the next day. Nothing had occurred to change the company's fortunes for the worse.

Quite the contrary: Celera had achieved a scientific miracle. So what happened? The likeliest explanation is simply that the anticipation of Celera's success was so intense that reality was a letdown.

Getting exactly what they wished for left investors with nothing to look forward to, so they got out and the stock crashed.

Greed: The stuff of memories

Researchers in Germany tested whether anticipating a financial gain can improve memory. A team of neurologists scanned people's brains with an fMRI machine while showing them pictures of objects like a hammer or a car.

Some images were paired with the chance to win half a euro, while others led to no reward. The participants soon learned which pictures were reliably associated with the prospect of making money, and the scan showed that their anticipation circuits fired furiously when those images appeared.

Immediately afterward, the researchers showed the participants a larger set of pictures, including some that had not been displayed inside the scanner. People were highly accurate at distinguishing the pictures they had seen during the experiment and equally adept at recognizing which of those pictures had predicted a gain.

Three weeks later the participants came back to the lab, where they were shown the pictures again. This time people could even more readily distinguish the pictures that had signaled a financial gain from those that had not - although they hadn't laid eyes on them in 21 days!

... It turned out that the potentially rewarding pictures had set off more intense activation not only in the anticipation circuits but also in the hippocampus, a part of the brain where long-term memories live.

... "The anticipation of reward," says neurologist Emrah Düzel, "is more important for memory formation than is the receipt of reward."

Anticipation has another unusual neural wrinkle. Brian Knutson has found that while your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward.

If a lottery jackpot was $100 million and the posted odds of winning fell from one in 10 million to one in 100 million, would you be 10 times less likely to buy a ticket? ...[Y]ou probably would shrug, say "A long shot's a long shot" and be just as happy buying a ticket as before.

That's because, as economist George Loewenstein of Carnegie Mellon University explains, the "mental image" of $100 million sets off a burst of anticipation in the reflexive regions of your brain. Only later will the analytical, or reflective, areas calculate that you're less likely to win than Ozzy Osbourne is to be elected Pope.

When possibility is in the room, probability goes out the window. ... That means your brain will tend to get you into trouble whenever you're confronted with an opportunity to buy an investment with a hot - but probably unsustainable - return.

Fear: What are you afraid of?

Here are two questions that might, at first, seem silly.

1 Which is riskier: a nuclear reactor or sunlight?

2 Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark

Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.

In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.

...What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.

...According to a recent survey of 1,000 investors, there's a 51% chance that "in any given year, the U.S. stock market might drop by one-third."

In fact, the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement.

If we were logical we would judge the odds of a risk by asking how often something bad has actually happened under similar circumstances. Instead, explains psychologist Daniel Kahneman, "we tend to judge the probability of an event by the ease with which we can call it to mind."

The more recently it occurred or the more vivid our memory of something like it in the past, the more "available" an event will be in our minds - and the more probable its recurrence will seem.

Fear: The hot button of the brain

Deep in the center of your brain lies a small, almond-shaped knob of tissue called the amygdala (ah-mig-dah-lah). When you confront a potential risk, this part of your reflexive brain acts as an alarm system - shooting signals up to the reflective brain like warning flares. (There are two amygdalas, one on each side of your brain.)

The result is that a moment of panic can wreak havoc on your investing strategy. Because the amygdala is so attuned to big changes, a sudden drop in the market tends to be more upsetting than a longer, slower decline, even if it's greater in total.

On Oct. 19, 1987, the U.S. stock market plunged 23% - a deeper one-day drop than the crash of '29. Big, sudden and inexplicable, the '87 crash was exactly the kind of event that sparks the amygdala.

...One bad Monday disrupted the behavior of millions of people for years. There was something more at work here than merely investors' individual fears. Anyone who has ever been a teenager knows that peer pressure can make you do things as part of a group that you might never do on your own.

But do you make a conscious choice to conform or does the herd exert an automatic, almost magnetic, force?

People were recently asked to judge whether three-dimensional objects were the same or different. Sometimes the folks being tested made these choices in isolation. Other times they first saw the responses of four "peers" (who were, in fact, colluding with the researcher).

...Brain scans showed that when the subjects followed the peer group, activation in parts of their frontal cortex decreased, as if social pressure was somehow overpowering the reflective, or analytical, brain. When people did buck the consensus, brain scans found intense firing in the amygdala.

Neuroscientist Gregory Berns, who led the study, calls this flare-up a sign of "the emotional load associated with standing up for one's belief." Social isolation activates some of the same areas in the brain that are triggered by physical pain.

In short, you go along with the herd not because you want to but because it hurts not to. Being part of a large group of investors can make you feel safer when everything is going great. But once risk rears its ugly head, there's no safety in numbers.

Fear: Fright makes right

I learned how my own amygdala reacts to risk when I participated in an experiment at the University of Iowa. First I was wired up with electrodes and other monitoring devices to track my breathing, heartbeat, perspiration and muscle activity.

Then I played a computer game designed by neurologists Antoine Bechara and Antonio Damasio. Starting with $2,000 in play money, I clicked a mouse to select a card from one of four decks displayed on the monitor in front of me. Each "draw" of a card made me either "richer" or "poorer."

I soon learned that the two left decks were more likely to produce big gains but even bigger losses, while the two right decks blended more frequent but smaller gains with a lower chance of big losses. ...

Early on, when I drew a card that lost me $1,140, my pulse rate shot from 75 to 145. After a few more bad losses from the risky decks, my body would start reacting even before I selected a card from one of them.

Merely moving the cursor over the risky decks was enough to make my physiological functions go haywire. My decisions, it turns out, had been driven by fear even though the "thinking" part of my mind had no idea I was afraid. Ironically - and thankfully - this highly emotional part of our brain can actually help us act more rationally.

When Bechara and Damasio run their card-picking game with people whose amygdalas have been injured, the subjects never learn to avoid choosing from the riskier decks.

If told that they have just lost money, their body doesn't react; they can no longer feel a financial loss. Without the saving grace of fear, the analytical parts of the brain will keep trying to beat the odds, with disastrous results. "The process of deciding advantageously," concludes Damasio, "is not just logical but also emotional." Top of page

Daniel Kahneman: Master of the imperfect mind
8 tips for taming your brain
Quiz: Is your brain wired for wealth? 5 questions

Only the Brain Damaged Are Good at Risk Management

 

Risk & Insurance Online - Story October 4, 2007

It is an odd fact of life that you often find what you are looking for in the place you would not expect to find it. For example, the best risk management books--such as Moneyball, Bringing Down the House and Fooled by Randomness--were not explicitly about risk management. Similarly, I find some of the best ideas concerning risk management come from science magazines.
By Beaumont Vance

In the June issue of Scientific American, regular columnist Michael Shermer frames the issue of decision-making from an evolutionary perspective. Decision-making, he suggests, is the product of the evolutionary drive towards efficiency:

"Life, like the economy, is about the allocation of limited resources that have alternative uses. ... It all boils down to energy efficiency. To a predator, prey are batteries of energy."

He then quotes Read Montague: "This doctrine mandates that evolution discover efficient computational systems that know how to capture, process, store and reuse energy efficiently."

The real problem with the state of our decision-making is that the environment for which these programs were designed no longer exists. There might be some nasty people at work, but it is unlikely that they are going to attack your village in the night.

In that confusion we can be tricked. Coca-Cola, Shermer points out, was shown in experiments to trick the human brain: "The Coke brand has a 'flavor' in the ventromedial prefrontal cortex, a region essential for decision-making."

A soft drink ad can impact the decision-making region of our brains.

Shermer's article is yet another arrow pointing at how our brains are not as well equipped to make decisions as we think. ...[B]ehavioral scientists have so far identified about 200 biases that cause us to make illogical decisions. If we are not aware of these, they will trip us up (see the July 2007 issue of Risk Management Reports on correcting biases.) But if we understand them, we gain an advantage when dealing with decisions involving risk....

Aside from allowing one to escape from unwanted cocktail party conversations, this little part of the brain is also very important for decision-making. According to Time (the January 29, 2007, issue, P. 116), this has been demonstrated in an oft repeated experiment in which researchers pose hypothetical situations to the subjects and measure how long it takes them to make a decision.

Josh Green of Princeton has made a career out of strapping people into an fMRI machine (or functional Magnetic Resonance Imaging machine), which can graphically depict brain activity, and asking them to make decisions involving the death of others.

For example, he proposes a situation in which a runaway train is headed for a group of five people. The train can be diverted to a side track, but there is one person standing on the side track. Therefore, by diverting the train and saving the five people, the guy on the sidetrack will be killed. In other words, it is a choice of letting five people die, or killing one person.

The researchers then measure how long it takes the subjects to decide. Readers should remember that in such a situation, lengthy deliberation will mean that five people will die; no decision is indeed a decision.

Then, to spice up what would be an otherwise tedious experiment, the researchers change the scenario. This time, the train is still heading for the five people standing on the track. But instead of pulling a switch to divert the train, the subjects are told that they can stop the train only by pushing a bystander in front of the train, thus derailing it and saving the five people. It is the same problem: Let five people die or kill one person.

In the first scenario, where the switch can be pulled, 90 percent of the subjects have no trouble deciding to pull the switch. However, in the second scenario, when they have to push an innocent bystander in front of the train, 90 percent choose to let the five innocent people on the track get killed.

According to Josh Green, the subjects use completely different parts of their brain on each of these decisions. In the former, logic tends to win out. In the latter, an older part of the brain takes control. It is the same decision, but our brain takes over and throws logic out the window when the circumstances change a bit.

This same experiment was conducted with people who have damage to the ventromedial prefrontal cortex (VMPC). It turns out that people with damage to the VMPC are three times more likely to advocate throwing a person to certain death to save five lives. They made the decision much more quickly than people with undamaged brains.

Human decision-making is a complex process that we still fail to grasp completely. While it is hard to see any practical applications to this study--aside from screening all decision-makers, board members and political leaders for VMPC damage--it is a great demonstration of the folly of believing that decisions can be entirely rational. ...

There are, however, some practical implications to these studies. ...[T]hey also demonstrate how differently people make decisions if they have to get blood on their own hands.

Think of this in the context of layoffs. A senior executive might make a rational decision to fire 500 workers. All managers in the company could agree that it is necessary for the survival of the company. After all, if the cuts are not made, the entire company could fold and then everyone would lose their jobs.

However, when the individual, lower level managers are asked to actually fire some of their own people, they balk. In other words, senior management is simply pulling the railway switch, while the line managers are pushing innocents under the train. No wonder layoffs are so difficult to execute!

We should be careful about our assumptions of what constitutes "rational" thinking. If ads for Coke can affect the VMPC, one has to wonder what else can rewire our decision machinery. The better we understand how our brain works, the better we can become at correcting deficiencies. Who knows, perhaps advertising Coca-Cola in the office place could nullify the problems caused by that pesky VMPC. Have a Coke and a RIF!*

(* For those of you not familiar with American corporate slang, RIF is the acronym for Reduction In Force. It is a euphemism for a layoff.)

BEAUMONT VANCE manages risk for Sun Microsystems Inc. This column was a complimentary excerpt from one of his latest "Risk Management Reports" newsletters, which he edits and publishes. For more information on how to subscribe to the full version of the newsletter, please visit www.riskreports.com/ .

Click here to read Beaumont's latest Risk & Insurance® columns.

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Investment Risk vs. Volatility

 

Financial Advisor Magazine October, 2007

By Patrick R. Chitwood
A definition of risk must include an investor’s own perception of it.
    It is common today to find that investment risk is frequently expressed in terms of the annualized standard deviation (SD). Because the consequences of such usage are significant to portfolio construction and investment decision-making, we must carefully examine our premises and our definitions.

    In his landmark text A Random Walk Down Wall Street (1973), Burton Malkiel defines risk as follows: “Investment risk, then, is the chance that expected security returns will not materialize and, in particular, that the securities you hold will fall in price. … Thus, financial risk has generally been defined as the variance or standard deviation of returns.” 

    In two short sentences this groundbreaking publication has transferred the concept of risk to a number. It is interesting to note that even Markowitz (1953), dodged defining measures of volatility as risk.

    From Malkiel, Fama and French, Treynor, Black and Sholes, Sharpe, etc., the study of portfolio construction centered around enhancing return while decreasing “risk” as defined by SD. “Risk” by this definition is completely dependent on SD values. Uncertainty is only a byproduct of the dispersion around a mean. 

    Unfortunately, investment risk requires a decision maker—a human, in the case of investing. To the extent that events are important to the decision maker, one could posit that those events may impact the likelihood of making an undesirable decision. Because these events may be entirely unrelated to the underlying investment, risk is clearly much more than the volatility component of an investment.

    Addressing FAME in February 2002, Peter Bernstein stated: “What do we mean by risk? It’s a very messy four -letter word. Volatility is the most popular proxy for risk. It’s a good one. First of all, intuitively, it makes sense. When something is jumping around, it hits you in the gut, you’re not comfortable, none of us is comfortable with volatility. If we have a sense something is going on we don’t understand, we don’t know where the limits are. There are plenty of intuitive reasons for using volatility as a proxy for risk. Volatility is also nice because it’s a number, standard deviation or variance, it’s a number, and that means we can manipulate it mathematically. All those beautiful equations wouldn’t be there unless we had a mathematical concept for risk. But volatility cannot deal with fat tails, with non-normal distributions, with nonlinear relationships, with nonstationarity, with multiperiod analysis, and there’s more. It gets messed up, it doesn’t hold together. So we have to think about different kinds of risk models, and more elaborate kinds of risk models, and the more elaborate they get, maybe the further away we get from the basic ideas. And for long-term, buy-and-hold investors, volatility is essentially irrelevant. So our definition of risk, the thing that we use the most, is in a sense a floating crap game. Uncertainty means—this is what Keynes and Frank Knight were very clear to explain—uncertainty is something we cannot quantify, we do not know what is going to happen, we don’t know what the probabilities are.” And later in the same speech: “How well do we really understand investor responses and how they weigh the trade-offs between risk and return? How do we define risk aversion? How variable and how stable are utility functions? These are very important in making policy decisions for long-term asset allocation. We need some sense of this, and it’s very slippery because it is so intuitive and so internalized.”

    If the standard deviation does not represent risk but rather is simply a measure of volatility, what then is risk and how do we define it, or do we even need to do so? A critical part any risk definition necessitates that we understand that investment risk requires human behavior. That behavior is unique to the investor. 

    Put much more eloquently in the words of Glyn Holton (Financial Analyst Journal, Vol. 6, 2004): “The definition (of risk) depends on the notions of exposure and uncertainty, neither of which can be defined operationally. … All we can hope to define operationally is our perception of uncertainty. Consequently, it is impossible to operationally define risk. At best, we can operationally define our perception of risk. There is no true risk.”

    So then, we are left with the factors that influence an investor’s perception of his investment risk. This is the embryonic domain of behavioral finance. As professionals we must strengthen our ability to determine the risk for each individual, recognizing that the same investment has different risks in the hands of different investors. Because of the extensive dynamics of an individual life, risk determination is dynamic and potentially complex. Perhaps it is for this reason that there is such unfounded allegiance to quantifying risk with the proxy of a standard deviation. 

    As a point of discussion I would like to propose the following operational definition. Investment risk can be defined as the exposure of capital to a future decision based on the perceived value of an investment at the time of that decision.

   Notice that the exposure of capital is to a future decision, not to an investment. Also, that the decision is based on perceived value, and that perception is based on several factors such as observation frequency, deviation from expectation, volatility and current life factors, to name a few.

    It is not the purpose of this article to propose a strategy for assessing risk and recommending investments as a result of that assessment. Nor is its purpose to address the components associated with risk and how those components can be impacted by investment work.  What I do hope to accomplish is to further motivate a dialogue for investment professionals to open their thinking to other ideas of assessing risk and to question, (in the words of Ken Fisher), “What is it that I believe that is wrong?” 

    To quote Bertrand Russell, “In all affairs it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.”

Masters of the Breakthrough Moment

strategy+business

by Sally Helgesen
For 50 years, Edith and Charles Seashore have taught people how to make organizations productive by confronting conflict and misunderstanding head-on.

In a conference room in Columbia, Md., 78-year- old Edith Seashore sits among 24 young men and women, about half of them U.S. Navy officers or civilian employees working for the Navy. The group, seated in a circle, has come together for a course called “Working with Differences.” Ostensibly focused on diversity, the session is really set up to teach people how to confront the unspoken conflicts, fears, and resentments that make life in organizations painful and unproductive. And as if on cue, right off the bat, two of the participants have gotten into a dispute.

Photographs by Steven Edson

It seems that Patrick, a naval medical center commander, was deputized to act as timekeeper during the session’s “check-in,” or opening introductions. Now the group is running behind schedule. When another participant, a consultant named Michael, asks him to account for this, Patrick shrugs and says he didn’t let anyone run past the allotted two minutes. Michael persists in questioning him, and after a few minutes of argument, Patrick assumes the authoritative tone that one associates with a naval commander: “I believe we’ve covered this. It’s time to move on.”

People nod, relieved to bring this tedious dispute to a close. But then, as the group begins to analyze its first case study (a difficult conversation that one member needs to have with her boss), a feeling of awkwardness remains in the room. People fidget in their chairs or cross their arms. Finally, a participant breaks in: “I have to speak up!” She turns to Michael. “I know we’ve moved on, but I can’t help feeling irritated by how you handled the business with Patrick.”

Michael, she says, had himself been so abrasive and authoritarian in manner that the rest of the group felt intimidated. Another group member seconds her view. A third asks why Michael himself didn’t make his point earlier, when it might have hurried things along. Someone else remarks that Patrick never gave a satisfactory answer to Michael’s question.

Edith Seashore — small, poised, and confident — sits silently and observes. Although the group is splintering into disarray and contention, she seems immune to the typical group leader’s instinctual urge to jump in and set things right. Indeed, like her husband, Charles Seashore (they are known to students and colleagues around the world as Edie and Charlie), Edie is a connoisseur of disturbance, a master of those awkward moments of conflict and unease that most of us prefer to gloss over, move past, get beyond. But it takes time for such moments to surface in a typical group, so Edie holds back, allowing the tension to build and watching as misunderstandings surface.

When at last she speaks, it’s with a quiet but clear authority that pulls the whole group back from the melee. “I think we’re all noticing a couple of things here,” she says. “One is that Patrick and Michael have both been acting on the assumption that they’re right. This often happens when people are in conflict; each one keeps asserting his position. It upsets people around them, as we see reflected here. And the upset doesn’t go away just because the group tries to ignore it. So everyone ends up in a difficult conversation, even though they are trying to avoid one. It’s a little thing, but it’s a big thing too.”

Michael says, “This is what makes groups so difficult.”

Edie laughs. “This is what makes groups so interesting!”

Before long, Patrick is musing with the group about the episode. “Being a military officer,” he says, “I’m trained to move on quickly, because I always have to be prepared for the next action. And some of my staff say I seem unapproachable. I think this may be part of the reason.”

Deborah, an administrator at the hospital that Patrick commands, cuts in. “I’ve been uncomfortable all morning,” she says. “I kept wishing Edie would intervene. But she held back. She had the confidence to let things get really messy.”

Edie asks, “And what does that teach you?”

“It teaches me that being a leader doesn’t mean avoiding the mess of conflict, but helping people learn from the mess.” She beams. “This is why I came here today!”

Patrick nods. “I think I could say that too.”

It’s a typical Seashore moment — a small thing, as Edie might say, but also a big thing. Her patience in waiting for the right moment to intervene, and her skill in helping the group members see themselves as an outsider would see them, have led to a breakthrough. Suddenly, people like Patrick and Deborah recognize how their habitual ways of speaking and acting shape their relationships with co-workers, and thus set the direction of their overall workplace.

This type of experience is the primary building block of group awareness. It feels surprising when it happens: Participants sometimes refer to it as the “big aha.” But in fact it is the intentional result of a refined set of practices used to make interventions in groups. For more than 50 years, Edie and Charlie Seashore have been developing and honing the subtle art of helping people learn from difficult conversations. They are pioneers in, teachers of, and probably the most influential living advocates for the art of the breakthrough moment. Productivity and creativity in the workplace, in their view, occur when members of a group or team wade together into the muck of confusion and unspoken assumptions in order to surface concerns and conflicts that get glossed over in the rush of daily life.

“Organizations can’t change unless people change,” Edie explained not long after the workshop, “and the most efficient and powerful way to help people change is in small groups. You can affect the whole system if you work with the group.”

The design of virtually every prominent effort in recent decades to make organizations more productive — organizational development, the famous GE Work-Out program, high-performance teams, 360-degree evaluations, diversity awareness, the recent management interest in peer coaching — can be traced back to this fundamental insight. There are, of course, hundreds of people who have experimented with small groups and used them to make organizations more productive, and many of them are influential: Edgar Schein of MIT, Chris Argyris of Harvard Business School, Warren Bennis of the University of California at Los Angeles, and Jerry Harvey of George Washington University are a few of the well-known management thinkers who emerged, at least in part, from the same tradition. But the Seashores have been at the center of the field for so long that they are uniquely identified with it. Their patience, persistence, and sheer passion for working with small groups — thousands upon thousands of them, decade after decade — have spread the practices they’ve honed over many years into the mainstream, in organizations as diverse as the Defense Mapping Agency, the National Institutes of Health, IBM, and AT&T. In courses the Seashores have designed and taught at American University, Fielding Graduate University, and the National Training Laboratories (itself the original seedbed of organizational development), they have influenced thousands of people who have made fixing organizations the core of their professional enterprise.

As Professor Bennis puts it, “Their major impact has been far more important and has had a much wider horizon than any single discipline. They helped to create, from the time they started in the 1950s and ’60s, a new social awareness in organizations. And on a personal level, they are two of the most transformative figures I know — change agents, if you will — who have inspired all around them.”

Toolkits for Democracy
It’s a few days after the “Working with Differences” workshop, and Edie Seashore is recounting the breakthrough moment to Charlie in their kitchen. They live in a penthouse apartment in Columbia, a planned community conceived in the 1960s as a mixed-use, racially diverse D.C. suburb. Being with the two of them is like spending time with a pair of highly intelligent stand-up comics who couldn’t look more different from each other, but whose routines and timing have been perfected over the years. Edie is smartly dressed and vivacious, with the quick wit and rapid-fire speech of a New Yorker (she grew up in northern New Jersey). Charlie, at 74, is tall and rumpled, with tufts of white hair standing on end, a slow-burn Midwestern pace, and a mischievous desire to constantly provoke a laugh. Earlier today, he stopped at a deli with a female visitor who ordered a meatloaf sandwich. Charlie turned immediately to the teenage waitress. “According to my research,” he said good-naturedly, “only 12 percent of women ever order meatloaf. Would you say that’s what you find here too?” An impromptu mock-academic colloquium ensued, with customers and other staff members getting drawn into a discussion of gender and lunch preferences, until everyone in the restaurant realized the absurdity of the situation and joined in the laugh.

Now, back at the apartment, Charlie recounts a mentoring session he conducted with a student at Fielding Graduate University — a school for mid-career professionals seeking advanced degrees in the behavioral sciences, on whose faculty he has served since 1985. The student had misinterpreted an assignment. “She said, ‘That was a terrible thing I did!’ And I agreed, yes, it was terrible. It was so bad that I wouldn’t be surprised if you ended up going to jail. But please don’t be too worried, we’ll help you find the best lawyer. In the meantime, is there anything I can do?”

Charlie explodes into laughter. Edie rolls her eyes. “Can you imagine, 45 years of this?” Pragmatic and down-to-earth, she is prone to quick retorts and sharp, incisive comments, whereas Charlie — who spent much of his early adulthood performing as a unicyclist, ladder walker, juggler, and clown — is more apt to draw out the absurdity of a moment in improvisations that operate, as he puts it, “at the edge of goofiness.” In his serious moments, Charlie’s relaxed and deliberately informal manner immediately puts others at ease.

“His gift is for asking those real-time questions,” says Cindy Miller, a Ph.D. candidate at Fielding who is training director at a major California biotech company. “Charlie will say, ‘This is what I think is going on, but I’m wondering if I’m just imagining it?’ It sounds simple, but it’s the hardest thing to do because you have to be aware on a moment-by-moment basis. Most people don’t take time to do that in complex organizations where everything is moving fast. But without that quality, most so-called leadership development is merely coaching for behaviors. Being aware of yourself and how you affect everyone around you is what distinguishes a superior leader.”

When visitors join them in their Maryland condo, Edie is quick to ask about their personal lives — marriages, children, the personalities of family members. Charlie is likely to leap into a long and thoughtfully detailed discussion of how attitudes toward groups have changed over the last half century. During this same afternoon at the kitchen table, for example, he begins diagramming the cultural history of group dynamics. There was the upsurge of interest in small groups following World War II, when people were wary of hierarchy because of fascism’s legacy; the fear of small groups as Communist cells during the Cold War; the flowering of group consciousness in the 1960s and early ’70s when grassroots activism took hold and people made a point of questioning authority; and the growing suspicion of small groups in our own era, provoked by public fear of terrorist nodes. Threading through Charlie’s graph is the trend of individual empowerment; the use of small groups, in the Seashores’ view, has made individual decision making more competent and helped organizations become more open to it.

Over the course of their long careers, Charlie and Edie have been instrumental in shaping three managerial disciplines. The first emerged in the business world in the 1950s: group dynamics, or the study of small group interactions as they occur in real time. The second, dating to the 1960s, is organizational development (OD), the practice of making organizations more effective by building up their members’ individual and collective capabilities. The third, diversity awareness, started in the 1970s and ’80s, when people of different races, sexes, ages, sexual orientations, and backgrounds needed help in working together and charting their careers. These three fields have gone in and out of favor with managers and leaders through the years, in part because they have often been practiced unevenly. They have at times been dismissed as ineffective, difficult to implement on a large scale, or simply “soft.”

Yet at their best, these disciplines have introduced a reliable set of methods for achieving authentic relationships in the contemporary workplace. During the “organization man” era of the 1950s and early ’60s, most organizations were secure, stable, and multilayered bureaucracies — almost designed to avoid authentic conversation in the name of standardization and the mass economy. But the rapid technological changes and fierce global competition that characterize today’s intense and evolving environment have forced many organizations to rely on the speed and creativity of high-performing, self-organizing teams, rather than on the command-and-control of traditional hierarchies.

In their work with groups, notes Warren Bennis, “Edie and Charlie breathe and exude transformation as seriously as Buddhist monks practice their teachings.” They are known not just for sparking moments of insight, but also for teaching others to do the same. In 1997, they incorporated many of these techniques into an influential book called What Did You Say? The Art of Giving and Receiving Feedback (coauthored with computer scientist Gerald M. Weinberg; Bingham House, 1997). They see this practice as a way to cultivate not just capability in organizations, but democracy — the spread of skills, power, and decision-making authority throughout an enterprise.

In the 1980s, for example, Edie Seashore served as a consultant to the major general who directed the U.S. government’s Defense Mapping Agency, helping him rethink the role of the central bureaucracy. The mapping officers at headquarters had long seen their role as disseminating battlefield images to the soldiers on the ground. Edie helped them understand that the soldiers on the front lines were the real experts and decision makers. They needed the mapping officers to serve as a service bureau — gathering information from field reconnaissance and translating it into simple, straightforward maps that soldiers could use in rapidly changing conditions. To the Seashores, decentralized authority, although it is messy and difficult to control, continues to thrive because it works. But it is always under pressure from leaders who fall into authoritarian habits, even if they pay lip service to change.

“We keep hearing that OD is dead,” complains Edie Seashore at the kitchen table. “We hear that change management has replaced it. But change management is about driving change from the top, and reasserting hierarchy. It’s a way of talking about change but not changing anything.”

Charlie adds, “What’s really needed is to create enough managerial agility to enable people throughout the organization to keep learning so they can adapt to an unpredictable environment. And the way you do that is in groups.”

Roots of Perspective
The idea of the small group as the premier vehicle for fostering organizational change can be traced back to the guilds and monasteries of the Middle Ages, and was influenced both by the cooperative movement of the 19th century and by 20th-century psychological research. But for 50 years, the most influential center for studying the role of groups in organizational change has been an institute called the National Training Laboratories (NTL). Kurt Lewin, a social psychologist who taught at the University of Iowa after fleeing his native Vienna in the Nazi era, designed the institute with several of his students in 1947. Professor Lewin saw small groups as ideal laboratories for observing forces of cohesion, disruption, and challenge in microcosm, since such forces were too complex to discern in larger social systems. He and his students envisioned an experimental setting where researchers could in a systematic way lead groups and study the forces that held them together or drove them apart.

Charlie and Edie Seashore on their property in Bethel, Maine.

Though Professor Lewin died of a heart attack several months before NTL opened, his students started it on schedule and ran it every summer from 1947 through the late 1960s. Purposely remote in a far western corner of Maine in order to provide a “cultural island” uncontaminated by daily concerns, NTL offered intense three-week sessions called “T groups” (T for training), led at first only by the most eminent social scientists in the field. Participants included up-and-coming academics, along with senior executives from major companies (TRW, Digital Equipment, Esso, various oil refineries, and the wonderfully archaic-sounding Doughnut Corporation of America) who could afford NTL’s hefty fees. Many well-established practices of group process were pioneered at NTL: giving feedback, conducting “check-ins” to begin meetings, sitting in circles, using flip charts, scribbling on big pieces of paper taped around the room, collaborating on visions for the future, and forming “fishbowls,” or groups set up in the center of a larger circle to interact while those around them observed what they were doing. The institute’s leaders, called “fellows,” established organizational consulting practices and thus carried what they learned to corporations, educators, military units, health-care providers, religious leaders, associations, and communities around the globe.

The personal history of the Seashores is inseparable from NTL. They both came as students. The then Edie Whitfield had been student body president of Antioch College, a prestigious liberal arts college in Ohio. She was also a protégé of Antioch’s President Douglas McGregor, who was author of The Human Side of Enterprise, a pathbreaking 1960 book about humanistic management. Introduced to NTL in 1954 by her mentor, Edie was an instant hit — a self-possessed college girl thriving among the accomplished and idealistic, but somewhat stiff, professors who congregated there. Charlie Seashore arrived a few years later with a more conventional resume. He was a Ph.D. candidate at the University of Michigan, from a family of well-known psychologists; his grandfather had been instrumental in bringing Kurt Lewin to the University of Iowa. Charlie was a group dynamics natural; he disliked the detachment of conventional social science research, wherein experimenters were so intent on remaining “objective” that they would barely talk to their subjects or help them with their problems. What good was a social science research project if it didn’t improve people’s lives?

Neither Edie nor Charlie was typical of NTL. Charlie’s love of clowning and laughter could lead others to miss his underlying seriousness of purpose. And Edie, while popular, was “basically a mascot,” she recalls. “I was cute and funny and the guys liked having me around even if they didn’t know what to do with me.” For nine years, less-skilled and less-experienced trainers were named fellows while she was turned down, partly because she had no Ph.D. (the prospect of getting one bored her) and partly because she was a woman, a condition to which fellows could then still openly object. “T groups were basically devised by men,” she later recalled, “to teach other men the kind of collaborative skills that often come more easily to women. I think the men feared that once they let women in, women would run away with the program.”

The fear was not unfounded. In the mid-1950s, rather than subject the male participants’ wives to one more shopping trip through Maine’s woolen mills, the faculty decided to start a spouse group. It was the only women’s group at NTL during its first two decades, and it struggled until Edie volunteered to take over. “The participants said, ‘So this is group work? We can do this!’ They ended up entering the field, teaching NTL sessions, getting Ph.D.s, divorcing their husbands, completely changing their lives,” she says. Women consultants, tiptoeing quietly out of the NTL closet, suddenly found a distinct managerial role in organizational development work — a role that is taken for granted now, but was revolutionary then.

Edie set up shop as a consultant in New York in the 1960s, her serene confidence in her own instincts her most formidable asset. At first she worked primarily with religious and community groups — then considered suitable work for a woman — but she soon began to make her name with business and then military clients. She often had dinner in New York with Douglas McGregor, who was then consulting for Standard Oil. One evening, Edie asked him the secret of his success, and he gave her the advice on which she would build the rest of her career. “I listen, and I listen, and I listen,” he said, “and then I come up with one good idea that impacts the organization and makes me worth every penny they pay me.”

Edie adopted “one good idea” as her personal motto. Fred Miller, CEO of the Kaleel Jamison Consulting Group, who has worked with Edie Seashore for many years, sees her success as rooted in this approach. “Edie dispenses wisdom in short doses, little insights that people can assimilate as they go along,” he notes. With her self-invented career and indifference to academic qualifications, Edie, says Mr. Miller, “is credentialed by her practicality, and by her engagement.”

Edie was Charlie’s first trainer at NTL. They worked together occasionally in the late 1950s, while she was building her business in New York, and he was finishing his Ph.D. in Michigan. In 1961, Charlie proposed to a woman named Sandra, using this line: “If you married me, your name would be Sandy Seashore.” She turned him down. Later that summer, working with Edie, he mused absentmindedly: “If you married me, you could work and travel as much as you liked.” It was a novel suggestion in an era when women were expected to quit work after marriage, and though they weren’t dating, Edie agreed on the spot. Charlie then tried to back off, claiming he had been speaking hypothetically, but with characteristic directness Edie told him it was too late, she had already accepted. Unlike Sandy, Edie found the prospect of being known as Seashore irresistible. “Who could turn down a name like that?”

They settled in Washington, D.C., where NTL had begun a variety of programs, mostly for federal clients, and Charlie accepted a position as program director with the institute. He also began a long association with the National Institutes of Health, building collaborative networks that sought to break down barriers between physicians and staff. Edie, whose one good idea decisiveness made her a natural for hierarchies, worked with the Naval Academy, which was suddenly required to admit women in 1972. “The captain didn’t want to hire me because I wasn’t Navy and I was a woman. He stood up when I entered his office and barked, ‘Okay, what should I do?’ I said, ‘Put women officers into the plebe summer program.’ He picked up the phone, barked at someone else, and said, ‘Done! Now what else?’ I said, ‘That was my one good idea. I’ll get back to you with another. Meanwhile, let’s sit down and talk about it, so we can get it right.’” This was the start of what would be an eight-year contract.

Over the next two decades, Charlie and Edie designed and taught courses at Johns Hopkins, American University, and Concordia in Montreal, bringing group process and techniques into traditional academe. They bought a house in Washington’s Rock Creek neighborhood and filled it with friends, dogs, piano music, and children. Their daughters Becky and Kim were born in the 1960s (Edie threw a dinner party the night before she delivered one of the girls). Edie often took her children along on business trips, pioneering the role of professional mother. “Our work and our lives were the same thing,” she recalls, “and the girls were part of it. They always talked about how their friends’ parents seemed to hate to go to their jobs because they weren’t much fun. We were having fun.”

Among the Horsepersons
Then, in the mid-1970s, NTL once again catalyzed a new kind of management thinking: diversity awareness. But this time, it happened almost by accident. NTL was facing acute financial difficulties. The “T group” business was declining — in part because of new competition from the less rigorous “encounter group” movement, in part because some of its own most popular leaders were defecting to start their own consulting practices, and in part because as the business environment became more competitive, managers could no longer justify spending three weeks in Maine on “group dynamics,” especially if the results could not be easily quantified. At the same time, the institute had acquired a sprawling Victorian mansion, known as the Founders House — a picturesque setting for workshops but a money pit.

In 1975, Edie joined with three NTL veterans to form “The Four Horsepersons,” a task force charged by the board with trying to save the institute from financial collapse. The other three horsepersons were all longstanding OD consultants: Hal Kellner, who died in the mid-1980s; Peter Vaill, now based in Minnesota; and Barbara Bunker, who works in New York. Together they persuaded 67 associates to donate two weeks each year for the following two years to keep NTL programs running. Edie was then selected as president. “Without the dedicated work of the Seashores at this time,” recalls NTL Fellow and MIT Professor Edgar Schein, “the institute would probably not have survived.”

With Edie at the helm, the NTL members took on the mission of making both the board and the membership far more diverse while also developing techniques for doing group work in diverse settings. To accomplish the former, they expelled all the NTL trainers — about 200 people at the time, many with long-standing pedigrees in the organization — and then admitted trainers one by one, insisting that there be equal numbers of white men, white women, men of color, and women of color. This created a dramatic upheaval, especially for the many white men who had been NTL fellows for three decades but now had to apply for membership all over again, with no guarantee of being chosen.

At that point in the late 1970s, a group of highly educated baby boomers — white women, and women and men of color — were entering the workplace in the United States. There were few models to help these newcomers advance, and resentments and uncertainties made it difficult for highly diverse teams to achieve cohesion. With Hal Kellner, Edie began an in-depth initiative to help AT&T, then the largest corporation in the world, deal with the consequences of a court-ordered mandate to achieve greater gender and racial balance. She saw that NTL had a great opportunity to establish itself as a standard-bearer in modeling the kinds of conversations, more difficult and daunting than ever, that were needed to surface and resolve conflicts in a diverse work force. NTL came to be a defining center for the new field of diversity training; for example, Edie was among the first to form the internal associations that would now be called “affinity groups” for women and for people of color within organizations, a highly effective way to develop collective strength and understanding.

NTL regained its economic health during the next few years, under the leadership of Edie Seashore and Elsie Cross, who became the first African-American to chair the organization. The new leaders maintained NTL’s rigorous emphasis on research, which kept it from becoming a cultlike encounter group or a sales-oriented program like Erhard Seminar Training (est). Edie and Charlie continued to reside in Bethel every summer, buying a big comfortable house next door to the Founders House, and bringing new generations of students with them to learn. Meanwhile, Edie started teaching at Johns Hopkins and at American University, where she established a degree-granting program under NTL auspices, and Charlie joined the faculty of Fielding Graduate University.

Blankets and Sandpaper
On an icy weekend in February 2006, the Seashores drive up to Bethel to conduct what will turn out to be a pivotal session at the 50-year-old NTL site, which the board has decided to sell so that it can “get out of managing real estate,” as Edie puts it. Twenty-two Fielding Ph.D. candidates have flown in from around the country to present case studies on challenges they face. Most are senior executives eager to develop their group skills so they can have a greater impact on their organizations. Charlie is leading the weekend’s session with two other Fielding faculty members.

Before the participants break into small groups, Charlie tells them: “Some of you will be blankets, providing comfort and support to others, and some of you will be sandpaper, irritants that lead the group to breakthroughs. Group process is basically a means for applying both blankets and sandpaper to a given situation.”

Calvin, a real estate developer from Boston, presents the first case study. He starts by noting that his greatest challenge is getting people to listen when he talks. Then he goes to a flip chart and starts to diagram his company. As he delves into its intricacies, he turns away from the group. After a few minutes of this, two participants begin to whisper restlessly between themselves. A third joins in. Calvin soldiers on.

At last Connie, a university teacher from Wisconsin, breaks in abruptly. “Excuse me, but would Calvin mind facing his audience? I was interested in what he was saying, but now I’m lost in the details.”

There’s a moment of silence. Someone asks why Connie feels entitled to encroach on Calvin’s time. Other participants agree that she is being disruptive. Connie tries to justify herself.

Charlie watches intently. It’s as if he can see the social forces that Professor Lewin described — cohesion, disruption, and challenge — playing themselves out with predictable regularity. Finally, he asks, “What happened here with Connie?”

“She broke in,” someone volunteers.

“And how did that change the dynamic?” Charlie asks.

“It pulled the attention away from Calvin.”

“Does anyone remember what preceded Connie speaking up?”

There’s a pause. Someone recalls that people had begun chatting. One of the chatters then admits that he had stopped listening to Calvin. “But,” he adds, “I didn’t make a big deal of it like Connie.”

Charlie asks the group to consider the role that Calvin played in provoking inattention. Calvin says, “I don’t think I played any role. I was just presenting my case.”

“You say you have trouble getting people to listen. That’s what happened here. People stopped listening, especially when you turned your back on them.”

“That’s like at work. I get absorbed in the details and I lose people. Then I feel bad because no one listens.”

“So you do have an impact when you’re talking to a group. It’s just not the impact you want to have.”

Such breakthrough moments occur with regularity as the sessions continue throughout the weekend, with Charlie performing a variety of interventions. He plays the role of one participant’s boss, and coaches another to deliver the eulogy at his mother’s funeral. By the end of the weekend, the 22 participants have become increasingly sophisticated at spotting their own evasions, more likely to jump in and say, “I see what’s happening here!” and more intentional in assuming a role within a group.

It’s not possible to tell, of course, whether these insights and epiphanies will lead to permanent changes after the participants go home. Observers such as Charlie and Edie’s old colleague Chris Argyris, an NTL veteran who later joined the faculty of Harvard Business School, have criticized the disciplines of OD, group dynamics, and diversity on the grounds that the breakthroughs and epiphanies fade away; they do not change behavior in any lasting way. Will Calvin, returning to the pressures of his job, be able to squarely face those he is seeking to influence? Will Patrick, the naval hospital commander from Johns Hopkins University, draw upon what he learned to become more patient with his direct reports? And will Deborah, his colleague, confront conflict rather than trying to avoid it? Or will they all simply retreat into habitual patterns when they are once again immersed in their office routines?