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A Distribution Approach to Fraud Detection

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Say the Dow Jones Industrial Average rose on average 20% per year (I am not hallucinating, just want to make a point). If the Dow Jones average started at 1000, in order to get to 2000, a 1000 point increase, it would have to rise 100%. That is a very large percentage increase and would require about 5 years (simple growth not compounded). But if the Dow was at 9000 and experienced 20% growth in order to get to 10,000, also a 1000 point increase, it would take about 6.5 months. That means that the number 1, the first digit in the Dow Jones at 1000 would appear as the first digit for about 5 years and the number 9, the first digit in the Dow Jones at 9000 would have the honor of being in that position for about 6 months.

If you mapped out all the digits that could appear as the first digit in the Dow, 1, 2, 3, 4, 5, 6, 7, 8, 9, and the time duration in which they would hold that position, with a fixed rate of growth, you would find that the duration of each digit from 1 to 9 would conform to a logarithmic scale. The number 1 would be the first digit about 30% of the time, the number 2 would be the first digit about 17.6% of the time, etc. A table showing the likelihood of the duration of how long each digit would be the first digit follows:

1 – 30.1%

2 – 17.6%

3 – 12.5%

4 – 9.7%

5 – 7.9%

6 – 6.7%

7 – 5.8%

8 – 5.1%

9 – 4.6%

This is a logarithmic scale and the notion that this scale can be applied as an explanation of various naturally occurring events was first elucidated by Simon Newcomb in 1881 and then by Frank Benford, a GE physicist in 1938 and it became known as Benford’s Law. The application of this law to the real world is fairly astounding and Dr. Benford applied his law to 22,229 sets of numbers including topics as unrelated as areas of rivers, baseball statistics, street addresses and numbers appearing in magazine articles.

Here is one example. If there were 100 bacteria in a sample and the bacteria could double in number each day, it would take the first full day for the number of bacteria to move from 100 to 200, finally reaching the number 2 as the first digit at the end of the first day. But on the second day it would double from 200 to 400, moving past the number 3 as the leading digit fairly quickly, and on the third day from 400 to 800, moving past the numbers 5, 6, and 7 even faster. Each higher digit would spend less and less time as the leading digit. As the order of magnitude of the number increased the pattern would repeat and it would again take a full day to move from 1000 to 2000, or 10,000 to 20,000 or 100,000 to 200,000, in total once again giving the number 1 the lead position about 30 percent of the time.

Here is another example. Say there were a group of 100 people and you split the group into two equal groups. One group is to toss a coin 200 times and write down whether it came up heads or tails. The second group is going to try to perpetuate a fraud. They will skip the toss and just write down heads or tails 200 times. A knowing eye looking at the patterns of responses will likely be able to determine to which group each person was assigned. While most people know that over 200 coin tosses the end results would be roughly a 50/50 split between heads and tails, they are unaware of patterns likely to emerge during those 200 coin tosses, patterns which Benford’s Law predicts. Applying Benford’s Law to the written down list of heads vs. tails invariably correctly categorizes the participants in the experiment, those who honestly tossed the coin vs. those who attempted to commit the fraud.

Benford’s law has been used in forensic accounting to detect fraud as the pattern of the fraud typically deviates from the patterns that one would expect naturally to emerge in a set of books at a macro-level. It works at a mirco-level as well and in expense reports the number 24 tends to show up more often than expected due to the policy that many companies have that receipts are required for amounts over $25. This results in a greater number of receipts being submitted, than would naturally occur for $24 dollars and change.

Most recently Benford’s Law has been used by Walter Mebane a statistician at the University of Michigan to demonstrate that the last Iranian election was likely fraudulent. Mebane has studied election results from the USA, Russia and Mexico and has demonstrated that they conform to Benford’s Law in the second digit. He indicated that in any fair election there are a certain number of votes that are invalid or otherwise have to be discarded. In fraudulent elections, those stuffing the ballot box for their candidate, often fail to add the appropriate number of invalid ballots. When he analyzed the results from Iranian polling stations he found that the number of votes cast for Ahmadinejad and two of the minor candidates didn’t conform to Benford’s Law at all. And in fact in 172 out of 320 polling locations where he had data the election results did not conform to the statistical law’s expectations. He is careful to say that this is not a method that proves with 100% certainty that fraud took place but it increases the chances of the results being fraudulent and worthy of follow-up analysis. While it may not matter in the long run as you could argue that both candidates were hand selected to run anyway, so by definition it was not a free and fair election even before the voting took place, if you are going to cheat you should at least do your homework so you are perhaps less likely to get caught.

I was drawn into this evolving story and explored the technique a bit to see if it was applicable to detecting fraud in survey results. One worry that some client’s express is that the fix was in and their survey results are not to be believed because someone, a disgruntled party, perhaps a union, told all their members to respond negatively. While these concerns are most of the time unfounded, a conclusion I draw based on other analyses I have run, I am afraid that this particular technique for uncovering fraud will not provide conclusive evidence one way or the other regarding survey fraud, since the typical survey scale is not logarithmic in character. However, if this was a pressing issue for any particular client, it may be possible to change the scale to one that is logarithmic in nature.

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Visit OV: http://www.orgvitality.com

Written by Jeffrey M. Saltzman

December 12, 2009 at 7:06 am

The Fundamental Benefit of Consistency for Organizations

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“We are what we repeatedly do.” – Aristotle

The other day I tried to track down the origins of the joke “How do you get to Carnegie Hall?” My recollection of the response was “Practice, Practice, Practice”.  I had thought that it was an old Jack Benny joke.  To my surprise I found many different potential origins to that joke but the one I liked and settled upon was the version that had violinist Jascha Heifitz being hailed by a man on a New York street. The man asks Heifitz, “How do you get to Carnegie Hall?” And Heifitz replies, without missing a beat, “Practice!”

There are two important components to the response of “Practice”. One aspect of practicing is that you know the piece and can play it correctly. The better violinists can also play with emotion, giving the piece “life”. A second component of “Practice”—one much less talked about—is that you deliver the piece in a consistent manner time after time. When the audience lays down the dollars to see you play at Carnegie Hall they get what they pay for. Again, from Heifitz: “If I don’t practice one day, I know it. If I don’t practice two days, my critics know it. If I don’t practice for three days, everyone knows it.”

The need for consistency

The need for consistency is pervasive. People are looking for consistency in their personal lives; organizations are looking for consistency as they deal with other organizations. Customers are looking for consistency as they interact and purchase either products or services. The attainment of consistency is a very powerful organizational tool—a tool that can greatly increase organizational performance; a tool that I believe is underutilized.

The philosophy of consistency is at a unique crossroads. It is one place where personality theory and organizational theory merge. Let me explain. There has been much effort expended on trying to understand people—what makes them tick. How do we classify their personality and abilities, from a personnel standpoint how do we select for certain characteristics that are more likely to lead to success on the job, how to develop them, etc. The desire for consistency is a characteristic that can be used to describe people. In fact, a Consistency Theory dating back to the 1950s utilizes a concept called cognitive dissonance. (“The discomfort of cognitive dissonance occurs when things fall out of alignment, which leads us to try to achieve a maximum practical level of consistency in our world” – Festinger 1957). The theory states that people have a strong innate desire for consistency.

Organizations have a strong need for consistency as well—after all organizations are nothing more than a group of people. An organization that makes maximal use of consistency in its performance from a product standpoint (uniformity of product—zero defects), from a customer service standpoint (customers have a similar experience each and every time they interact with your organization), and from an employee management standpoint will outperform the competition. At the same time, consistency is not some magical elixir that will solve all our problems. We live in a real world which is complex and has many critical, complex interactions for us to deal with and no single solution works for all problems. Consistency, though, when viewed correctly can become part of a larger whole, a piece of the puzzle that helps organizations maximize performance.

Managers within organizations are constantly faced with challenges. Oftentimes they need to produce more with fewer resources while maintaining quality. This requires a constant evaluation of processes and procedures to increase efficiency. (One coping mechanism that some managers use is to simply put in more hours. While this may work for the short term, over the long term real efficiency will only be obtained by rethinking processes and procedures.) What is a manager to do within an organization when faced with the real need to constantly change, to innovate in order to stay competitive in today’s fast changing world—especially when the natural tendency of many is toward consistency”?

The customer viewpoint

If you examine some of the most successful organizations, one thing stands out very clearly— their customers get what they expect. Consistency of performance helps drive that success. Some of these organizations even work it into their slogans and sales mantras—having, consistently, the lowest prices in a retail environment, or in a hotel chain having the same comfortable bed in each room have become mainstays of advertising campaigns. For other organizations it simply becomes part of what customers expect. People don’t go to some of the fast food shops for exquisite cuisine, they go because they know what they are going to get—fast food at a good price. The philosophy of “location, location, location” is critical in the retail (and many other) environments but you could add to that “consistency, consistency, consistency”

This is not only true at the end user consumer level but is also true for business to business customers. Can you imagine if an airplane manufacturer turned out planes of the same model that performed inconsistently? Some flew better at 5000 feet and some flew better at 30,000 feet? Or if a chemical plant could not deliver a consistent chemical composition to their product?

Six-Sigma

People and organizations are not only looking for consistency of performance to help deal with the world in which we live; it is crucial for success. Consistency is closely tied to predictability, and predictability is what organizations depend upon and what helps individuals cope in a complex world. This is the whole crux of the billions of dollars that have been spent on quality programs over the years. Six-Sigma has focused on the removal of variance from our products and from work processes, making them more consistent. The consistency of a product or the employment situation also helps organizations build trust, the trust of the customer and the trust of the employee.

The principles of Six-Sigma can be applied successfully to help improve organizational culture, creating a more performance oriented culture.  In order to know if the performance of the organization is indeed consistent it helps tremendously to have consistent performance measures and to aggregate those performance measures in a consistent fashion across geographies and business units. Displaying that information in a consistent fashion to help in corporate decision making is also very powerful and can be a challenging effort.

The employee at work

So what about the employee at work? Do these concepts of consistency hold within the working environment? I would argue that they do.

What if you walked into your place of employment each day and were met by inconsistency—a quantum mechanics of unpredictable behavior if you will. One day being late was measured by being at work at 5 minutes past the hour, the next day it was 1 minute. One day you walk in and your boss is helpful in all aspects, helping you manage your workload and the next day the boss is extremely difficult to deal with. One day your job is to perform task A by procedure B and the next day it changes to procedure C, only to change back to B the following day for no apparent reason. What is an employee to do? Any attempt by employees to develop coping mechanisms to deal with what is expected of them would be futile and because of the changing standards by definition they would end up failing. In a situation like this trust would also fall by the wayside.

I am not advocating the blind adherence to a rigid set of rules for organizational decision making. That would be a disaster. Good decision making may require setting up systems that allows managers to be consistently flexible (often within a framework), rather than adherence to a set of fixed rules. The consistency here is that managers are allowed to exercise their judgment, and given the appropriate tools so that good decisions can be made. As the environment changes (and it will need to change), employees need to be brought along—informed as to the rationale behind the decisions—and the consistency of the decision processes and outcomes desired need to be pointed out.

Is everyone really looking for consistency? What about dare devil thrill seekers? Certainly they are not looking for consistency or boring routine. Well in fact they are. Take for instance bungee jumping. One aspect of what they desire is the adrenaline rush, the thrill, associated with jumping, even though most of us would be more than a little reluctant to try it. If they lost the adrenaline rush my guess is that they would move on to other activities. They have different needs than many of us, a different threshold for what they are looking for—to satisfy those needs, but it does not mean they are not looking for consistency in those more dangerous pursuits.

Psychologists have relatively recently created a theory of personality called “The Big 5”. It consists of five dimensions of personality that are supposed to be overarching in describing people and their personality. One of those dimensions is “openness to new experiences”. A group of people, if you measure them on this trait, would differ on where they fall along the scale of being complex and open to new experiences to being conventional and uncreative. I am not implying in this work that people are not different. People are different and selecting the best fit for the various positions within your organization is critical. However, taking into consideration the various differences between people, there will be a fairly strong tendency for people to look for situations that delivers to them consistency—the consistency that they need.

Don’t fall into the trap, though, of thinking that consistency of performance means stagnation—little growth, no innovation, no increase in organizational effectiveness. That is absolutely not true. To be successful a company can be, needs to be consistently innovative and nimble (among other things) and organizations can absolutely create an environment allowing that to occur.

How to create consistency in the work environment

There are many things companies can do to create that environment. For instance, some of the data I have seen over the years strongly suggests companies with stronger diversity programs are able to deliver more consistently on business outcomes such as innovation, customer service and other performance metrics. It seems that the very act of organizations being diverse and allowing diverse people to feel that they have equal opportunity to excel and achieve allows for greater differences in thinking to occur and hence spurs innovation. It does not mean that your product or service is delivered to your customers in an inconsistent fashion. If that is occurring it has nothing to do with diversity, but rather poor process control – inconsistency.

Another aspect I have studied over the years is whether there are generational differences in what employees are looking for out of the employment situation. While the entire answer of what employees are looking for is somewhat complex, the bottom line is that there are larger intra-generational differences than inter-generational differences. In other words, within any particular generation you will find a range of people with differing desires and those differences within generations are larger than cross generational differences.

The fundamentals of what people are looking for in the employment situation are extremely consistent. How you deliver on those fundamentals is what may change.  I have looked at this from gender, geographic, ethnic, cultural and generational perspectives and always come to the same conclusion.

However what I have also seen is that there are no magic silver bullets.  Simply putting in a diversity program or a Six-Sigma program, or any other program in a vacuum, standardizing it regardless of the situation, without looking at what is going on in the organization as a whole is another recipe for disaster.  You are likely not to address root causes and are likely telling your managers “here is the silver bullet – the magic” (at least for the next 6 months until it fades away).

There are additional sound practices that can be followed and implemented by organizations that can greatly help them achieve consistency. Let me focus on a few elements, the elements that I believe are most critical.

The fundamentals of creating consistency for employees in the work environment first centers around content and consistency of “organizational message”, describing for employees what the organization is about and their role in achieving that goal and then sticking to that message. I am making the assumption that the organization gets that original message right. This is critical. You don’t want to stick to the wrong message.

I am not talking about mission, vision and value statements, though at times those can help, I am talking about strategy and goals, but I mean strategy and goals not only at the corporate level but also down at the personal level. What do I need to do in order that my department, division, BU etc. be successful?  (Together these 5 components are often called an organizational charter.)  The organization needs to understand who it is and what will make it successful in its market, and needs to convey that to its employees in a way that makes them feel like they are doing meaningful work. Secondly, the organization needs to provide the employee what they need to get their own jobs done – done in congruence with the organizational goals. Thirdly, the employee needs to feel appreciated for what they have accomplished and see a future for themselves within the organization. Message, Performance, Future (MPF) is an action focused framework that can be used to guide organizations. Three questions should be kept in mind as a manager thinks through this framework:

  • Message: Am I sending the right message in a consistent fashion throughout my organization?
  • Performance: Are people getting what they need (in the broadest sense) to be able to deliver on that message – to get the job done?
  • Future: Do people feel recognized and feel like they have a future with this organization?

I recall presenting the results of a culture survey to a high level executive of a very large firm. In comparison after comparison to other firms on similar items, his company was scoring well above average and in fact was benchmark on a number of items, until we got to pay. When I went over the pay items with him the results for the organization were rather average. He was perplexed about how his organization, which scored highly on many items could be so average on pay. I asked “what is your pay strategy”? The response was without hesitation “to pay about average”.

The point is that you get what you work towards and if you looked at a list of the top performing organizations on different aspects of performance and culture, you would be looking at lists of different organizations. Who is the most innovative, the most nimble, provides the fastest service, the best customer service, who has the best prices, the highest quality, the most dedicated employees? No organization has the resources, the time or the energy to do everything at the level of “the best in the world”.  Management may feel it is a requirement to strive for that, but it is simply not realistic. Mission critical then for each individual organization is to figure out what it needs to excel upon, to be first in its industry upon, the “best in the world” and to concentrate on those objectives.

Organizations need to do most things at a minimally acceptable level, to be competent (the price of admission) and I would argue that the minimally acceptable level can be a changing target over a relatively short period of time. You need to get the “engineering” right, to have good products, you need to be able to send out bills correctly, provide good customer service, you need to have effective sales and marketing etc.

Picking the items to be the best in the world at, constantly improving your delivery on those items, monitoring your performance so you know how you are performing is what will give an organization an unbeatable competitive advantage.

Delivering on that list of “we will be the best at….” requires that you get all of your business processes focused on those objectives, making sure that they are in alignment. All processes that effect all constituents should be examined, the processes that impact your customers, your suppliers, and those that affect your employees. It will require that the organization create and managers can work in a consistent environment. That environment can be consistently creative, nimble, innovative, diverse, customer focused, etc. I have seen organizations and managers operate this way successfully and you can too, but it will require plenty of “practice, practice, practice”.

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Visit OV: http://www.orgvitality.com

Written by Jeffrey M. Saltzman

November 28, 2009 at 10:58 pm

Warning – Marketing Ahead

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I was sitting in the middle seat with 3 across on a long red-eye flight recently. My legs were cramped, my back was killing me, my seat only went back about 5 degrees and I could not even extend my elbows beyond the armrests since the seats on both sides of me were occupied. What are all those ads about all the comfort you are supposed to experience when you fly? I haven’t seen any comfort in quite some time. I was wondering how I was ever going to get any sleep on the flight and then I got my answer – I didn’t get any. Of course with the seats being so cramped you can’t open up a computer to do any work. So not being able to sleep and not being able to work I started looking at the magazines in the seat back pocket and I thought I would look for other dubious advertising. Since I could not bend at all I simply tore the interesting pages out of the magazines and stuffed them into my briefcase.

Here are some tidbits from the airlines in-flight magazine.  

  • An ad for Babel Yak™, “Learning a language is not only good for your career but it makes you look sexy too!”  Nowhere in the ad is there any explanation on how learning a language will make you look sexy or is the word even used again, only in the attention grabbing headline, so I guess we will have to let our imaginations run wild.
  • “Suntheanine®, the award-winning, patented dietary ingredient for stress.” “…clinically proven to reduce stress, improve the quality of sleep, diminish normal symptoms of PMS, heighten mental acuity, and reduce negative side effects of caffeine.”  Then in very small letters on the bottom of the ad, “these statements have not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent any disease.” My immediate thought was who gave them the unnamed award? Since it was not mentioned anywhere I assume they gave it to themselves. As for “clinically proven”, well let’s just say that I would believe the rigorous study with control group design when I see it. For an ingredient that is supposed to do all those things mentioned, to then state that is actually doesn’t treat, cure or prevent anything is a bit of a letdown. Well at least they are honest in the fine print.
  • The screaming headline for Dr. Charles Karrass’s negotiating seminar, “It’s like steroids for your career.” Given all the negative publicity surrounding the steroids scandals in baseball I think I would recommend to Dr. Karrass that he hire a new marketing firm, one not willing to connect his company, however tenuously, with illegal drug use. I have been flying regularly now for about 26 years and I swear it is the same photo of Dr. Karrass in the ads today as it was 26 years ago. I can’t believe that he hasn’t aged in all that time. For a while his son’s picture was also in the ads, but then it disappeared, I guess that did not work out. Maybe dad was so tough in how he wanted to run things that his son left the business. Too bad they couldn’t negotiate on the matter.  
  • “Cenegenics – GQ suggests it is the path to reversing the signs and symptoms of aging.” Well if a respected scientific journal like GQ says it…. In the ad they show a picture of Jeffrey Life, MD at age 67 and describe him as having a body of a 30 year old, except for his head which looks like a 70+ year old head. If this program works to reverse the signs and symptoms of aging how come it doesn’t work above the neck? Maybe Dr. Karrass is using the program and that is why he hasn’t aged in the last 26 years.
  • YogaToes, yes you may not have known it but your toes can do yoga. And if your toes do yoga it will “stretch, strengthen and straighten your toes”. I don’t know about you but my toes are long enough already.
  • You too can buy a $14,615 machine that allows you to exercise in 4 minutes per day. They actually have a statement in the ad that says, “The more we tell people about the ROM the less they believe it.” Ok, I don’t need to hear any more then. If you went and purchased this machine and used it exactly the proscribed 4 minutes a day for a year, 365 workouts, each of your workouts would only cost you $40.04 or $10.01 per minute for that year. What a bargain.

I looked and looked hoping to find the magic bullet that would solve the personal problems I encounter. You see, as I have aged I have found that the hairs in my ears as well as my eyebrows have been growing longer, at the same time that the hair on my head has been thinning out. Yes it sounds quite attractive, I know. What did you say? You don’t have any hair in your ears? You don’t know what you are missing. I searched and searched and searched but could not find any product in the magazine that would get rid of the hair growing out of my ears. No even one that would make a somewhat spurious claim.  Oh well, maybe on the next sleepless flight I will find my magic bullet.

Written by Jeffrey M. Saltzman

November 1, 2009 at 8:39 am

Transparency and Organizational Success

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The key to long-term organizational and managerial success is transparency. It will sound somewhat contradictory to some, but transparency around processes, products, and procedures can take the organization to higher levels of performance than those organizations and managers that shroud their activities in mystery.

One challenge I often discuss with senior management groups is the necessity to pick and choose which aspects of performance they will excel upon. As a planning activity when responding to survey results, the organization should not simply have a knee-jerk reaction to the lower or more average rated items, and likewise they should not have a knee-jerk reaction to those items that are simply highly correlated to some outcome. Survey results are a snapshot of what is, at this moment in time, and senior management’s role is not only to manage for what is, but to put into place what can be, what needs to be, to achieve long-term organizational success. Surveys are really good at predicting the future only if the future is a static state – not a likely situation. However, surveys can give you a very good grounding as to where you are now and that forms a stepping off point into the future.   

No organization has infinite resources, so no organization can simply say that “we will be the best in the world at everything we do”. Organizations need to choose, for their market niche, for their industry, for their state of organizational evolution, what aspects of performance will give them a competitive advantage and enable them to succeed. Will we become the most customer focused, the most innovative, the highest quality, the best value, the most trusted, the most transparent? If you take a look at the top performers across a standard set of employee survey items, you will find a somewhat different list of top performers across the items, an indication that there is variance in the list of top performers by area, and one key to success is to pick the area(s), the thread that you will pull that will lead to across-the-board organizational success.    

I would argue that for many if not all organizations transparency is one of those keys. Transparency not only conveys confidence, fairness and quality, organizational transparency forces quality and fairness to occur and hence creates confidence in the organization and its management; transparency is a linchpin. When the organization operates in a fashion that clearly demonstrates that they have nothing to hide, the only path to long-term success is in fact to have nothing to hide. When your customers and your employees have the ability to look within your organization and to see how the work is getting done, how day-to-day processes are being handled, how decisions get made, in an open and clear fashion the organization is forced to do many good things regarding how it runs the various components and processes that make up its business.

Humans though have a tendency to have secrets, to keep some information close to the vest, as it is often viewed as giving a competitive advantage, even if it is only for the short-term. For instance, we build many of our games around just such thought processes. Having a “poker face” means that you don’t telegraph the cards you are holding in your hand to your opponents. Football teams don’t shout out what they are going to do on the next play, they huddle to share that information in secret. The pitcher on the mound during a baseball game will give the barest of nods to the catcher, as signals between the two get secretly shared regarding what the next pitch to be thrown will be, or if the pitcher should throw over to first base instead of home plate. How good does a pitcher have to be though to be able to say, “here comes my fastball or slider, just try to hit it”. If you are a really good pitcher you might get away with that, the more average ones can not. Will your organization step up to the plate and be really good, saying to the competition “here is what we are doing, just try to do it as good as us”, or will it settle for average? The natural tendency of course is to be secretive.

Going beyond our games, other examples abound. Lawyers and prosecutors will stake out positions prior to a trial regarding what sort of plea deal would be acceptable to a defendant or to the state, treating the court room as a version of a high-stakes poker game, trying to get the best “deal” for their client or for the state. They stake out almost absurd positions at times in an attempt to get the most advantageous result. (A comedic interpretation of this can be found in “Liar, Liar” a film in which Jim Carrey plays a lawyer who can not function when he is forced to tell the truth, to be transparent, for 24 hours). Businesspeople behave in a similar fashion when negotiating with suppliers or customers, during an acquisition or when two organizations decide to merge together, behavior that does not lead to long-term trust and relationship building.  Purchasing agents from the company side and sales people from the supplier side have made lack-of-transparency into an art form. There is a tension that arises from keeping secrets, from hiding things a bit. From the world of fashion it is well known that a woman who desires to dress somewhat provocatively, realizes that is often more effective and provocative to cover some things up, to keep some things hidden.

It may be viewed, regardless of whether you are an organization, manager, lawyer, prosecutor, pitcher, quarterback, sales person, or purchasing agent, that you need to keep secrets, because the other side is keeping secrets and you will be at a disadvantage unless you compete in the same fashion. So now we regress to the lowest common denominator. Is that what being human is all about? Is that the noble end state to which we should strive? 

Magic black boxes that have secret processes and information contained within abound all around us, but I am not a black box kind of guy. For instance, when I present survey results back into an organization, I want to point out in the data what is intuitively obvious to any thinking person, what they themselves could easily see if they knew to look at the data in a certain fashion, in other words to be transparent. When I buy a product at a store, I want to know where it was made, what it is made of and what it will do, not simply relying on the marketing information splashed across the label in advertising-like fashion.

I find that a lack of transparency in organizations is often a cover up for lack of robust, high quality processes. The logic is something like “I can’t show you how something is actually done because then I might have to justify why it is done that way, that it is not arbitrary, and that is something I can not do”. I find I have to bite my tongue in meetings when someone says “we have a terrific way of doing this, or figuring out that, better than anyone else has”, but they are often very short on details – details that would point out that in reality they are simply flying by the seat of their pants.

Scam artists play on the natural human tendency of some to trust the word of others. Trust me, take it on faith, believe me, or believe in me…this week in the Wall Street Journal there was an article that described how some organizations are getting around the national “Do not call” list by sending out flyers to the elderly that have a scary warning about how they could lose their house and that they should send away for more information on how to avoid this potential tragedy, a card that is designed to look like it is coming from a federal agency is included. By sending in the card the elderly are opening themselves up to all sorts of sales gimmicks by those they should trust the least – something that is conveniently not mentioned in the flyers sent out. This lack of transparency will last only for a short while, as these organizations operating in this fashion will be ferreted out and stopped. They have nothing real, nothing of value, and nothing substantial to offer people and hence need to rely on a lack of transparency for their short-term survival. Others however will soon rise to repalce them for there is no shortage of dishonest or scheming people out there.   

Imagine a fawn bending its head downward at the edge of a pond in order to sip a cool drink of water. Suddenly the leaves on the edge of the pond, a short distance away from the fawn, rustle. The fawn bolts and runs away from what it perceives as a potential threat. The fawn did not know if that rustling was simply the wind or a coyote looking for its next meal. But by making the assumption that it was a coyote or similar threat, the fawn, while missing out on its drink, helps to assure that it lives to see another day. This assumption by the fawn of intelligent intent by something that may simply be the wind has evolved as a survival mechanism and exists in humans as well. I have a picture that shows a gorilla holding a book in its hands in a position that any human would use if we were reading that book. When I show that picture to an audience, they are drawn immediately to the conclusion, at least momentarily, of intelligent intent or purpose behind the gorilla holding that book in such a fashion. It is only upon further reflection (maybe only a second or two later) that one realizes that gorillas can’t read. By the way the title of the book that the gorilla seems to be reading is “The Origins of Man”. The point here is that when humans find themselves in situations where there is a black box, a lack of transparency regarding how things work or what is going on, there are plenty of mechanisms available to help us fill in the blanks and many times what we come up with on our own will not necessarily reflect reality.    

In The New York Times (October 28th), there is a story about how everyday Russians are taking on the local traffic police because of seemingly arbitrary stops as they drive around. These stops are characterized as done by police who are actually looking for bribes rather than for any real infraction of the traffic laws. One citizen who has repeatedly pointed out the law to the police and refused to pay the bribe was hauled away and beaten to the point where for the next several months he will be in the hospital. While there are a multitude of causative problems, such as the low pay for the police force, the fundamental lack of transparency as to how they enforce the law and why they are enforcing the law in the fashion they are, is indicative of severe systemic underlying issues that will eventually come to a head. Meanwhile confidence and trust in the system is eroded, the sense that the system protects the average citizen, and citizens should work through the system is nonexistent. The lack of transparency of the system is creating conditions whereby unless rectified, the system itself can collapse.  

Sarbanes-Oxley was initiated in direct response to a lack of transparency on the part of organizational processes and procedures, a lack of transparency that was felt to be so severe as to require a legislative remedy. However, Sarbanes-Oxley is just scratching the surface of what an organization can be transparent about. Sarbanes-Oxley is viewed as very onerous and costly by many organizations, so what is the benefit of this increased transparency to the organization?  How about long-term success. The real benefit to the organization will occur when they can be transparent in such a way that it is not burdensome to the organization, but rather enhances organizational functioning. Image for instance, if a client for a professional services firm could see their work progress through its various stages, in real time, throughout the organization. How much more attractive would that be to other potential customers? Imagine if you could track the history of the items you buy from source to store, so that you knew exactly what it contained, how it was handled and whether it had any defects. The list could go on and on. 

In addition to the above there is another force that is making transparency so key to future organizational success. And in one word that is information; the amount of information that is available to us is growing at a phenomenal rate. In one study it is estimated that the amount of information we humans produce is growing at 50% per year! (I am making no judgments on the quality of that information). With the amount of information available and with people more and more used to using tools that allow them to access that information in a comprehensible fashion, it will become much more common for people to expect more information about the organizations they interact with, and about the products and services that they purchase.  Those products and services couched in mystery, those organizations with obtuse practices and procedures will become less and less attractive entities with which to interact either as an employee or as a customer. Those organizations that continue to operate in mysterious fashion will be less likely to survive and hence organizational evolution as to the normal standards for transparency will occur.

The question is do you want your organization to be ahead of the curve? So throw me your best pitch.

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Written by Jeffrey M. Saltzman

October 30, 2009 at 2:35 pm

Errors

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“If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man.” – Mark Twain

We all make errors, it is part of life. I have made more than a few, and some of them were big ones. When an error occurs by an employee inside an organization, there can be a concern on the part of the employee that the over-riding motivation on the part of management when investigating the error is not simply to learn from the error and put into place corrective actions, but that there will be some form of retribution taken against the employee. This can often be the case no matter what words are coming out of the organization regarding their motivation to find the cause of the errors, and to learn from mistakes so that they don’t reoccur.

One clue that brings you to this conclusion is seen in emails that inform everyone that an error has been discovered where the identity of the person who committed the error is kept secret. A sure sign that not everyone is operating, or has everyone else convinced that the organization is operating with a no retribution lets learn from our mistakes kind of philosophy.

It seems like some organizations are constantly trying to learn from the same kind of mistakes over and over again. It is like having 1 year of experience 20 times. One approach that can get organizations out of that rut is to employ an organizing framework. An organizing framework allows errors to be examined systematically within that framework and for conclusions to be drawn regarding what needs to change to prevent the error from occurring once again. But, it is however like the old joke – “How many psychologists does it take to change a light bulb? Only one, but the light bulb has to really want to change.” Organizations when they examine and properly conclude the causes of their errors still have to really want to change. Knowledge of the cause, in and of itself, does not fix the problem. (See Is Grandpa going to be ok, for a discussion about the role of wishful thinking and organizational change).

First there is the issue of whether the employees are capable of doing the job from a basic knowledge skills and ability standpoint. That issue is a selection issue and for our immediate purposes lets put that aside and assume that the people who have been put into the job, if the conditions were right, could actually perform it. (See There is Something Fishy about Employee Selection). With the framework that I use there are then just a few questions that help get at the heart of the matter.

First do the employees know how to do a good job?

A failing grade on this first question could be due to issues of messaging within the organization or perhaps performance. From a messaging standpoint has it been made clear what the definition is of a good job? Do the employees know what criteria levels are defined as good or error free? From a performance perspective have employees been given the training they need so that they know how to perform in an error-free fashion?  

Second question: Do the employees have the resources needed to do a good job?

The best messaging is for naught if employees don’t have the resources they need to perform error free. Resources can be thought of very broadly in three main categories.

  1. Information
  2. Physical Environment
  3. Processes

Information includes knowledge about how to do the job, including the relevant training; it also includes information flows that enable a job to be performed correctly. For instance a production report is an information flow that allows an employee to predict accurately when an item might be shipped.

Physical Environment includes the needed equipment, staffing levels, organizational structure etc. If one person is put on a 3 person job you can be pretty sure it will have problems. Or if one person is simply not given the appropriate amount of time to do a good job it just won’t happen. Likewise if needed computer equipment, or other equipment is not provided it is difficult to get the job done. Remember the old adage – the right tool for the right job.

Processes cover administrative issues, engineering and science. Administratively for instance, can a bill be sent out correctly and within an acceptable period of time. When a customer calls can they get through to someone, preferable someone who can help them? From an engineering perspective are the business and manufacturing or service processes ones that make sense, do they optimize resources? What kind of person with what background and skill set do you have doing what job? Does the work flow make sense? Are needless processes eliminated?  Etc. From a science standpoint, are the basic business products or processes based on sound science. For instance, if you are in the oil industry but you can’t get the geology right and hence keep digging in the wrong spot, the rest doesn’t matter.  

Third question: Do the employees care enough to do a good job?

The appropriate information and resources may be in place but if the individual employee just does not care, or is rewarded for the wrong behavior then it is again unlikely that you will achieve the desired outcome. We all know you get what you reward so examine what you are rewarding. If you are rewarding X don’t expect A.

The other aspect of just not caring is potentially one of the most complex. It involves the entire culture that the organization has set up and that is why it can give an organization an unbeatable edge. Processes and products can be reverse engineered, prices can be even more easily matched, but duplicating a culture and the resultant ways the individuals within your culture interact with your customers and care about their work can be very difficult to match to a successful competitor.  It involves the whole gestalt of how the organization is viewed by the employee (is the place effectively managed, does the organization really care about its people, do people get a fair shake here etc.) and at the individual level what is in it for me? Why should I stick around this place? And do people have a sense of future that if they stick around good things can happen for them.

When errors occur, systematically working through these questions can help the organization determine the correct course of action so the organization can implement lasting improvement, thereby reducing the number of errors and to learn from its history.     

“An error doesn’t become a mistake until you refuse to correct it.”

Orlando A. Battista

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Written by Jeffrey M. Saltzman

October 30, 2009 at 2:31 pm

Cause and Effect

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“Maybe she sat on the couch, on the same exact spot he had sat upon and that is how she got pregnant”? So hypothesized my young daughter on discussing how one person she knew may have conceived. What is very interesting about her comment, after the smile that is brings, is that she knows it is not possible to conceive that way. She is an avid fan of the Discovery and Science channels and watches all shows that have anything to do with how babies, whether human or another animal, are conceived and born. So why would she have responded that way?

Prior to making that hypothesis she had a conversation with my wife regarding this pregnancy. She was curious how it was possible since this person she knew was not yet married and so did not fit her definition of when babies were to be conceived. In her world babies were conceived when two individuals got married and began living together. Her notions did not fit this new situation and hence she was looking for a new answer as to how it might have happened, even if the answer was one she knew was incorrect.

Cause and effect, what causes what? That is a sometimes very difficult question to answer, especially when the answers staring at you may not fit your preconceived notions or cherished beliefs.  

Did you know that there is a relationship between going to the hospital and dying? Yes, there is a tendency for those who are rushed to the hospital, especially by ambulance to die. The casual observer to this relationship could conclude that the last thing you want to do, especially if you are really sick is go to the hospital. Because people who are really sick and go to the hospital have this nasty tendency of expiring. Does going to the hospital in and of itself cause the expiration? No of course not, but the potential to draw erroneous conclusions from that causal relationship is there. There is a concentration of very sick people in hospitals, who have a greater chance of expiring due to their various illnesses and not do to their physical location. I could look at another relationship, the percentage of very sick people who go the hospital and recover vs. the percentage of similarly ill people who don’t go to the hospital and recover and draw very different conclusions.

Observers to causal relationships have been drawing erroneous conclusions for millennia. The phenomenon is exacerbated tremendously when we are observing things that are beyond our comprehension. Arthur C. Clark, the noted science fiction writer and physicist stated that “Any sufficiently advanced technology is indistinguishable from magic”. I would add “for those who do not understand the technology or the naturally occurring event they are witnessing”. The implication for his statement in this context is that erroneous conclusions could be draw from an observer to an event, attributing the event to “magic”, rather than understanding the advanced form of technology being observed.

A casual observer to an oil drilling platform, one who is completely ignorant of geology, upon seeing the oil rushing out of a newly drilled well, might assume that the Earth, under it’s top layer, is floating on a sea of oil. All you have to do to get at this oil is drill a sufficiently deep hole. If this observer needed some oil of their own and had the resources, based on that limited knowledge, they might conceivable rush around drilling holes here and there, wondering why the drill holes were not gushing with oil. 

So how can we draw correct conclusions from the events we observe? One approach is the scientific one which involves using experimental design with control groups to try to tease out cause and effect, but even then the room for various interpretations, partly due to the limitations of field vs. laboratory experimental design, can be large. For instance, cigarette companies for years put up a strong defense based upon their own “scientific” studies, arguing that the evidence that smoking caused cancer was just not there, was not proven beyond a shadow of a doubt. Meanwhile millions of people died.

Today similar debates rage around global warming. Do mankind’s activities have enough of an impact on the Earth to cause global climate change or are the changes we are currently seeing simply natural patterns? Part of the flaw in asking the question that way is that it assumes that the answer is one way or the other. Either humans are having an effect or they are not and either we are seeing a natural pattern or not. Maybe we are seeing a natural pattern that is exacerbated by human actions, or humans are having a tremendous impact that is exacerbated by a natural pattern. The question in my mind is largely irrelevant (see Virtuous and Deleterious Cycles) and by the time the definitive answer is known it will likely be too late to prevent a looming catastrophe regardless of the cause. In this case it would seem to be only prudent to limit to a minimum the emissions we as a species emit.

In the world of business cause and effect are often just as muddied; sometimes on purpose to serve a political agenda, sometime due to the limitations of the person doing the interpretation and sometimes due to legitimate differences of opinion. Upon entering a situation where the cause and effect must be divined in order to solve issues, the very first step in helping you draw conclusions is to put off drawing hasty conclusions. Often times in the rush to judgment (I am talking about a real rush to judgment, not the people who want to take a wait and see approach to climate change), people take positions before all or enough of the information is in, positions which may simply become hardened if those people are challenged by differing opinions (after all if I change my opinion I am admitting that I made an initial error, something that cognitive dissonance makes difficult to do). 

I remember an experiment that described how many interviewers, when interviewing candidates for a job, made up their mind about the potential employee within 30 seconds of beginning the interview (that is a rush to judgment). The most effective interviewer training was to train the interviewer to delay their decision making and judgment calls about the candidate for as long as possible into the interview time period, the longer the delay the higher the quality of the final decision.

The human tendency to rush to judgment, to quickly categorize and our sometimes gullibility has been utilized by others, in fact has been counted upon, to shape our opinions. Advertisers count on it when they imply in their ads that all you have to do is use their product and you too will look like the models they employ, or become more attractive, lose weight, or make money on real estate, or advance your career, or never have to buy another kitchen utensil etc.  Politicians count on it when they imply that the effects we desire in our nation can be achieved by signing onto their cause and voting for them.

One trend that I have noticed is the increasing use of “scientific studies” to create credibility around the cause and effect relationship, scientific studies that are anything but. The notion of simply labeling something “scientific” is that it gives instant credibility (however at the same time it can give legitimate science a bad name). Even in the world of survey research I come across work that makes broad generalizations about populations, about cause and effect without proper design or sufficient “n” to justify the conclusions drawn.

The list of individuals and organizations who try to manipulate our understanding of cause and effect goes on and on. I wonder then, given the assault we are constantly under is our ability to determine what is really going on diminished?  So maybe she did sit on that couch, on that exact same spot that he did, but that is not how she got pregnant. (I am pretty sure.) Better not touch any dirty door knobs, you could have twins.

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Written by Jeffrey M. Saltzman

October 26, 2009 at 12:48 am

Diagnosing Organizational Ills

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To help, or at least to do no harm” –

Epidemics, Book I, Section V of the Hippocratic Corpus

A few weeks ago I had a chance to try out the heath care system in New York.  I went to bed with some lower back pain. Thinking it was from stretching for burned out light bulbs I changed earlier in the day I ignored it. I woke up at 3:00 am with the back pain intensified and now intense stomach pain as well.

I had a client presentation that morning so I took some aspirin and thought I could run into the city do the presentation and get home and be sick for a while with whatever this was.  At 5:00 am with the pain continuing to intensify, I woke up my wife and said that something was going on. She took one look at me and said I had to go to the hospital.

We got to the hospital at about 5:30 am and I saw the ER doc. He ran blood tests, a CAT scan, EKG, took X-rays. Everything seemed within normal limits. The pain was now under control because of the meds I was getting through an IV.

He was ready to release me, and since it was now about 3:00 pm, I was ready to go home, but I started to throw up (reverse peristalsis if you want to be proper), so he called in a surgical consult. They guy on duty happened to be the head of surgery for the hospital. I described the symptoms and he was able to immediately diagnose me saying it was likely my gall bladder, he ordered an ultrasound to verify it. It showed an inflamed gall bladder with stones lodged in the ducts. So after spending the entire day in the ER without a successful diagnosis once someone familiar with the illness asked the right questions, heard the problem and examined me a diagnosis was had in relatively short order.

Does this kind of experience transfer over to diagnosing organizational problems and enhancing organizational performance? I think so, but let’s examine it a bit.

Over the years I have been asked to use surveys to accomplish many differing organizational goals as well as diagnostics. The rationale has ranged from measuring employee satisfaction, commitment or engagement to enhancing effectiveness and decision making, improving quality (TQM), or communications,  decreasing turnover, evaluating merger effectiveness/success, senior management effectiveness, strategy effectiveness/implementation, and customer service ability or providing organizational assurance against policy objectives, and even providing a platform for dialog. These are the more generic reason why organizations have hired me to do surveys there also exist more topic specific reasons such as: measuring ethics/SOX compliance, assessing benefits (types and levels to be offered through conjoint analysis), transparency of practices, communications vehicle evaluation, even employee personality traits.

What always struck me as odd were that the companies came to me with these specific rationales, often times saying something like “we want to measure effectiveness, we are definitely not interested in measuring satisfaction – sometimes derogatorily called a ‘smile survey’ ”, (the well done satisfaction surveys were never smile surveys). And yet if you looked at a well done effectiveness survey and a well done satisfaction survey you would find 95% or so item overlap. In other words, the items used to measure satisfaction and effectiveness are the same survey items. Going further, it always seems a bit ludicrous to me to think you could measure effectiveness without measuring satisfaction as though dissatisfied employees could be effective or create an effective organization, or that those things that make an organization effective may be different from those that make an employee satisfied. They are the same! And in fact many if not all of the organizational goals listed above are so intertwined that measuring one component without taking into consideration the larger context will run the risk of not being able to properly diagnose or will results in a misdiagnosis and hence inappropriate action being taken on the part of the organization (they may go home rather than having their gall bladder removed). This would be the case if you are examining the results from a very high level, say total line or whether you are delving into the bowels of the organization.

This is also closely related to my reluctance to rely on indices. Indices are attractive, they are sexy (as much as that is possible for a number), an index gives you something to hang your hat upon and say “we were 63 last year and this year we are 66, we are improving”. But the index number can hide a lot of complexity going on beneath the surface. At the hospital 4 out of 5 of the tests ran upon me were in the normal range, if they were placed into an index I would probably have been sent home. But the last test, the ultrasound showed a problem that needed to be resolved. Just as a single survey item might show a problem that needs to be resolved within an organization, a survey item that can get lost within an index. And even if the index was low and a cause of concern, it would not be known what actions should be taken based upon the index, what should drive corrective action is the individual item score, the individual item that indicated that safety or customer focus or constipated decision making were in need of improvement. The individual items if worded well are very directional.

I believe that there is one underlying rationale of all of the rationales given to me for the reason for conducting employee surveys that allows them to hang together in a commonsensical form; that rationale is one of organizational effectiveness. Organizations have many different constituents and are pulled in many different directions at the same time, but from what I have seen those organizations that have effectiveness as an overriding paradigm generally excel in many other areas as well. Effectiveness and in general organizational culture I believe is driven by 3 main components and one outcome: Message, Performance, Future and Outcomes. A very simplified depiction of the MPFO framework:

  • Message: Am I sending the right message in a consistent fashion throughout my organization? Do people know what they are supposed to be accomplishing?
  • Performance: Are people getting what they need (in the broadest sense) to be able to deliver on that message – to get the job done?
  • Future: Do people feel recognized and feel like they have a future with this organization?

In the center, of the overlap of Message, Performance, Future, is “Optimum Performance”, is where Organizational Effectiveness resides. There are specific survey items that can be used to measure each of the main circles above and to measure the outcomes that fall within the overlapping center.

Just as having an expert review your case and asking for the right test to verify a diagnosis, asking the right questions in the right framework along with a powerful analysis goes a long way towards correct organizational diagnosis and is the basic building block of organizational improvement.

Written by Jeffrey M. Saltzman

October 23, 2009 at 10:42 am

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