Selker Leadership

In our second segment in the continuation of our latest Leadership Interview with Dick Foster, he discusses applying the market principles of create, operate and trade to individual corporations; and using McKinsey as an example, details how these principles apply to the ongoing development of leadership and evolutionary thinking within a company.

Greg Selker: In your book, Creative Destruction, you talk about striking the balance between introducing change, managing the stress resulting from this, and continuing to operationally execute at a high level. If we look at these three legs of the stool, what are the things you see that the field marshals who are down in the trenches in today’s companies need to pay attention to that they haven’t previously?

Dick Foster: That’s a central question. If we have a standard model of how a corporation works, and I’m not sure that we do, but if we have one, it’s a model based around improving operations. The work I’ve done says, well, that’s a very important key part and it’s sine qua non. You can’t do anything without that, but that isn’t enough. Markets actually do something more than that.

Merger and acquisitions clean out the detritus. Bankruptcy does this as well but merger and acquisition is by far the dominant force which takes out companies that have become relatively weaker over time. The creation of new companies acts as a dynamic balance to this that in general times, works very well. We eliminate companies. Think of the S&P 500. There are always mergers and acquisitions. Every time one of those happens a new company is brought into the S&P 500. To make a point, if we didn’t eliminate companies from the S&P 500, by definition we would have no new companies in the S&P 500. So the elimination of companies comes before the creation of companies, which is the opposite sequentially of the way most people think about this, but I believe this description more accurately describes what happens.

This whole system has worked economically, at least up until the last 12 months, where society itself has maintained control. Returns have been reasonable. There have been some fluctuations in that, but the whole system didn’t come to a grinding halt. Well, that’s a very important part. We have to be able to create, operate, and trade without losing control. Now the economy has been a very good model for this over the last 50 years, however, it’s not been a particularly good model over the last 50 months or 50 weeks. We have lost control and we see the penalty that’s being paid for that, but I fully believe we will get back in control, and we have to get back in control.

But I’d like to apply this same idea to an individual corporation. Individual corporations cannot hope to keep pace with the economy if all they do is operate.

They have to create, operate, and trade without losing control and that’s the big thing. Because the one thing that focusing on operations does for you is it makes it a lot simpler to control day-to-day activities. If you’re going to spin things off and shut down some of your businesses that you’ve had for a long period of time, which you will find to be incredibly difficult to do, then you’re going to shrink in size.

Acting in this way does not serve your shareholders interest. So, if you’re going to spin things off and shut down some of your businesses, at the same time you have to have an active acquisition program. I think that you have to do these three things just like the economy does. And you have to do these in a way that doesn’t jeopardize control so you don’t spin out of control, so your multiple doesn’t fall so low that somebody buys you out, or that you yourself go bankrupt. All those things are possible.

Most companies try to simplify it by focusing on operations. But in fact, to stay competitive in the economy, you’ve got to do all three. You’ve got to create, operate, and trade. The companies that say it’s only about creating and operating miss the point. Their operating management spends so much time trying to fix and keep alive old businesses which should be more properly sold, that they never have any time to give adequate attention to the creation side. And so creation is never as competitive in the organization as it is in the overall market. In the market, you’ve got a whole bunch of people that are ready to provide capital. Of course they want something in return called ownership. But the market is very good at sifting these opportunities out and determining which companies should be sold, merged or eventually killed. The markets ultimately get rid of companies that take up our time and don’t return anything to us.

Corporations don’t do that, by and large, and they’ve got to learn how to do that. Google is trying hard to do this. Microsoft tried very hard to do this, and I think the jury’s still out as to whether they’ve fully been able to pull this off because they’re kind of stuck in a corner. They really didn’t welcome open software, the internet, or all these things which they’re now trying to get into with their on-again/off-again deals with Yahoo. Even a company as innovative as Microsoft hasn’t done particularly well at this. The pharmaceutical companies that just ten years ago were viewed as the paragons of innovation and management excellence have also failed as a group at the whole creation process.

So this is a very difficult feat to accomplish. We’ll see whether Amazon or Google is able to pull it off. We’ll see whether any number of the green power companies are able to pull it off. If all you have to do is build and create a business, as hard as it is, it’s much simpler than running an existing business, spitting out old businesses and starting new ones that compete with the old ones, and doing this all without losing control. That’s a tough issue.

Greg Selker: When I look at many of the examples of companies who at one point represented the paragon, as you said, for that particular age, and now they have fallen on hard times, some of them have even disappeared, it appears that one of the things that these companies stopped doing is paying attention to the core set of values that were in operation that had them get to where they were, and began instead to focus on keeping their market share. We can take Microsoft as an example. One of their values has always been innovation. Yet we could say that at some point when being innovative challenged their position in the marketplace, they stopped innovating.

Dick Foster: Right. That’s the dilemma. When it came time to cannibalize their own product lines, no one would ever do that in the absence of any competitive threat, right? It makes no sense. If there is a competitive threat, then you have to do it. But at a certain point, people don’t recognize the future competitive threat, and then they deviate from their underlying values. In the case of Microsoft, they stopped innovating.

I think McKinsey is an example of a company, by the way, who has not lost sight of its values. The way they do it is through controlling their flow of people. I’ve been retired from McKinsey for four or five years, but it used to be that the bottom 12 to 15 percent of folks in McKinsey were asked to leave every year. That means one over that number is the average lifetime of a person in McKinsey, so 1 over 12 percent, for example, is about an 8-year life. So the average McKinsey employee spent 8 years of their career at McKinsey and not more. Now that number has probably dropped to 6 years.

Let me be clear about something. The weakest performers at McKinsey are still very strong outstanding people. But because McKinsey got rid of those lower performers, they could hire new employees, and some fraction of those new employees were the ones that became the future leaders, and you keep that process going. Because McKinsey embedded their values in a management system that allowed them to create, operate, and trade without losing control, they have come through down economic times pretty well. They’ve had their share of bumps and bruises, but they are still there and still doing quite well.

I think more companies need to figure this out for themselves, and I think that is exactly your point. If you don’t have management systems backing up your values, you may not really ever have to test your values. If your values give way when you decide to maintain your management system, well you really didn’t believe your values in the first place.

Greg Selker: That was beautifully said and that’s actually a perfect segue for the next area that I wanted to talk about. Ultimately, regardless of whether it’s a value system, or a management system, it all comes down to people who are executing and making it happen.

Dick Foster: It sure does.

Greg Selker: It sounds like one of the things that you’re pointing to is that McKinsey discovered a way to systematically make certain that they were always moving ahead and introducing innovation via bringing different people, thinking, intellects, and life experiences into the melting pot.

Dick Foster: Right,  and it’s very simple to say, but that system turns out to be quite elaborate. First of all, there are two parts to it: one is asking folks that have done well for you to leave, which is not an easy task. The second is bringing in the new people. Let me comment on each one of those.

In McKinsey, asking people to leave is a very elaborate and a very fair process. It starts in your first interview when you’re told, “this is the way McKinsey works. If this doesn’t sound appealing to you, if you’re looking for lifetime employment, don’t come here because it isn’t going to work that way.” McKinsey has the biggest alumni organization in the world and that’s because we have more people that have left on good terms than any other company. So McKinsey is not a good place to work if you really think you’re going to be here forever, or you are uncomfortable with the concept that you won’t work at McKinsey forever. This process starts before you even begin working at McKinsey.

Then at every level of McKinsey, there is an evaluation process that’s incredibly thorough, fact based and objective. This system allows people to move forward, and those that don’t move forward in the system don’t stay as employees. They’re asked to leave the company, and this is done in a fair and equitable way. This is absolutely essential and is one of the core values of the firm. When you first start at McKinsey, the evaluation system is in your office, your local environment. As you become more senior, it’s in your country or region. Then, as you become most senior, it’s on a global basis. So the sphere with which you’re being evaluated keeps increasing in size and the pressure keeps increasing over your career with the firm.

By the time you’re a senior partner and are evaluating other senior partners, you’re probably spending on the order of three to four weeks a year on this process. Out of the total senior complement – and again, I’ll make these numbers up. Maybe 1 out of 15 of the senior partners are asked to be on a committee that evaluates other senior partners. If you are one of these senior partners, you remain on this committee for six years. During this time, you’re evaluating your peers, not your subordinates. This is a very tricky proposition.

You’re spending about a month a year going out, understanding the programs of your colleagues, talking to their clients, trying to understand the quality of the work as seen by the clients, coming back and then rank-ordering everybody to figure out who’s in the top and who’s in the bottom.

This is a very elaborate process that has scaled very well when it comes to hiring new people and growing the firm. When I joined McKinsey we had approximately 15 offices. When I left, we had 85 offices. I was the first Ph.D. in the natural sciences, or among the first Ph.D’s, hired by the firm. Now, if you go into McKinsey, there are around 1,500 Ph.D.s and M.D.s in the firm. We added an enormous technical complement of people, some of whom have never been to business school. We added an enormous amount of Europeans, and then we added a lot of Japanese, Asians, Indians, and Middle Easterners to the system. And obviously, we added tons of women. A lot of our diversity came from hiring these different pools of people, and these different people brought us new ideas, different ways of doing things, and different ways of thinking. This process continually revitalized the firm.

So McKinsey has a very elaborate system of getting rid of things, in this case lower performing people. This gave us the ability to bring on new hires while increasing the pace of change without running the risk of losing control, or at least we tried very hard to maintain that control.

Greg Selker: How important is it that a non-professional services company, a product company, adopts a similar kind of methodology, with a similar goal in mind of rigorous internal evaluation of people, rotating people out and making way for the continual recruitment and expansion of top talent from the outside?

Dick Foster: I think it depends a lot on the firm. If you’re in a mature, slow-moving industry, you can’t do the same thing without fundamentally changing your strategy. McKinsey’s in a very rarefied environment for sure. However, regardless of what kind of company you’re in, you do have to create, operate, and trade at the pace and scale of the markets without losing control, or not meeting your shareholder goals, one of two things. So you’ve got to figure out how to do that and it’s hard for me to imagine that a crucial part of that isn’t going to be in selecting your leadership. If you’re not turning over your entire staff because that’s not the right thing to do or the skill base you have, the leadership at the top should be turning over in some way to allow that leadership to refresh themselves and to move the corporation ahead.

Greg Selker: Either from bringing people in from the outside or promoting from within?

Dick Foster: Yes, and you need to have that reasonable balance. The psychological phenomena that happens, and it is becoming increasingly important, as decision makers we’re all trained to believe that the more knowledge we have and the fewer assumptions we have around the decisions we make, the better off we are. But as the pace of change increases, we don’t have the luxury of increasing that knowledge to assumption ratio. In fact it more often than not decreases because we’re just moving too fast. I mean who knew a year ago we would be where we are right now? We may have thought we had knowledge, but in fact we had assumptions.

In these kinds of circumstances, most people fall back and rely on the mental models, the way they have seen the world up until then. Quite often, the more senior the executive, the more rigid those mental models become. These mental models not only determine what information is accepted and how that information is processed, they also determine what information is rejected. That information can be, “I think the markets are going to collapse.” “Oh, no, they’re not. They never have before.”

That mistake was made thousands of times over the past year because people were not able to change their fundamental framework and the fundamental way they look at the world. They weren’t able to change their mental models. I think in most corporations, people in general and leaders specifically have to learn to become more adept at changing their mental models. Or, you’ve got to change the leaders and people. I think for most people it’s very hard to change your mental model. In fact the whole concept of a “mental model” is so abstract a lot of people say, “well, that’s just for consultants, and that’s just a lot of nonsense”, and, “mental models, I don’t know about mental models.”

But they are very real. Psychologists have documented them for decades.

Greg Selker: Absolutely.

Dick Foster: They have huge practical impact on the way we see and solve problems. And in a world that is changing increasingly, rapidly, and with increasing volatility, and I hope no one doubts that right now, we just have to learn how to do this. We have to learn how to change and adapt our mental models. If we don’t learn how to do this, then we’re going to fall behind. So either we as individuals change our mental models or we change the individuals.

Our latest Leadership Interview is with Richard (Dick) N. Foster, the Managing Partner of the Millbrook Management Group, LLC. Prior to forming Millbrook, Mr. Foster was with McKinsey & Company for 30 years. While at McKinsey, he served as a Senior Partner and Director for 22 years and retired from the company in 2004.

Mr. Foster co-founded the firm’s high technology practice in the late ‘70s, the chemicals practice in the early ‘80s, the healthcare practice in the late ‘80s, and the private equity practice in the ’90s. He also led McKinsey’s worldwide knowledge development from 1995 to 1998. He served over fifty leading global companies primarily in healthcare, electronics, and chemicals as well as a number of nonprofit institutions.

Mr. Foster’s research interests are in the relationships between capital formation, innovation, and regulation. Mr. Foster has written two best selling business books: Innovation: The Attacker’s Advantage (1986) and Creative Destruction (2001), that focus specifically on the relationships between technological change, innovation and capital formation, and destruction. In 1999 – 2000, he led the Study Group for the Council on Foreign Relations on Innovation and Economic Power which led to the publication of, Technological Innovation and Economic Performance (Steil, Victor, and Nelson, editors, Princeton University Press, 2001).

Mr. Foster was elected a Fellow of the American Academy of Arts and Sciences and the President’s Circle of the National Academies. Mr. Foster is also member of the board of directors of: athenahealth (chairman of the Governance Committee); Trust Company of the West, a wholly owned subsidiary of Société Général (Audit Committee); Memorial Sloan Kettering Cancer Center (Member of the Executive and Finance); Yale School of Medicine Dean’s Advisory Board; W. M. Keck Foundation (Executive Committee); Council of Foreign Relations (Nominating and Membership Committees); Council for Aid to Education (chairman, Strategy Committee); and a member of the Chambers Street Executive Network of Goldman Sachs. Mr. Foster was director of the Santa Fe Institute from 1996 until 2004.

Mr. Foster received his BS, MS, and PhD from Yale University in Engineering and Applied Science.

In the first of this four part series, Dick discusses our current economic conditions and the types of leaders that need to emerge in the midst of these crises.

Greg Selker: Thank you for doing this interview. I appreciate it.

Dick Foster: You’re welcome. It’s a pleasure to do it. This is a good moment in our economic cycles to be discussing these matters.

Greg Selker: How do you see the current economic recession affecting the importance of a management team’s leadership in terms of their ability to balance the rate of change against the rate of stress that results from introducing change?

Dick Foster: During these periods we need more leadership and we probably need different kinds of leadership. There are so many firefighting exercises we have to go through today, and so we certainly need the field generals out there who have the ability to take us through all this. We probably also, by the way, need a few “conceptualizers” that analyze the deeper causes of how we got into our economic situation. And more particularly, of why it is that even the most knowledgeable people in the country who spend their whole lives thinking about these things have been so surprised that we are here now.

Almost none of them would have predicted this a year ago October, maybe half a year ago in April. But one year ago I think it would be very hard to find anybody that was quite as pessimistic as people are today. So we need these leaders to sort out the mess.

Greg Selker: Why do you think that is? Why do you think very few people saw this coming?

Dick Foster: First of all, we all know at some level that the system has globalized, but we don’t really know what that means, and we don’t understand how this level of globalization has resulted in these instabilities. This is a very complex system. Somebody was saying to me, “it’s like forecasting the weather”, and I think it’s actually quite a bit more difficult than forecasting the weather because the weather is relatively predictable based on strong scientific models. While there are also strong economic models, the outcomes can be manipulated because we think and act based on the forecasts of our economy and that induces further changes.

For example, someone says, “I think we may go in that direction” and that may trigger ten other people saying, “I think you’re right.” Then everything is amplified. Weather doesn’t respond to outside influences with the exception of seeding clouds. Weather is unbelievably complex, of course, but it doesn’t have that all-important feedback loop which is what has been driving a lot of economic uncertainty.

I think what’s happened in the current environment is that trust has gone away. There was a story I read the other day about scrap metal providers. The scrap metal market has totally dried up because people don’t trust each other. Somebody will say, “I’m going to pay you $10.00 a ton for that pile of scrap,” and nobody believes him so they won’t ship the goods. Actions and responses like this stop a market cold, and we have not integrated this kind of phenomenon into our current economic theories.

So the first kind of leadership we need is economic leadership. We need economic leaders to think deeply about our current situation, how we got into it, and how we can move forward. Obviously, the G20 is doing this. There’s also a group of economists called the G30 that has no official status, but they’re pretty good economists that include Paul Volcker, Roger Ferguson, and others. I hope they will start to look at this. But in spite of the current upheaval, we also need to remember that every time we lose one of our national forests to forest fires, six months later the little green shoots start coming up and start making the next forest.

And while this has been the worst and the most comprehensive pull back that I can ever remember, the little green shoots in our economy are coming up now. I look at 8,000 securities every day and it’s very hard to find any of those that are compelling. I look at ones that are mainly over half a billion dollars in size. Around the world it’s very hard to find anything that’s a compelling case for investment right now.

That being said, if I go a little bit smaller, if I look at securities that are $100 million to a half a billion, and I look for companies that have been growing at least 20 percent a year for the last three years and that have a forecast of at least 20 percent in earnings going forward, I can find several hundred of those around the world, many of which are here in the United States.

These companies are in the fields of healthcare, education, and interestingly, offshore drilling, and a variety of others. If this recession is like every other one, some of those will turn into really great companies going forward. This is the second kind of leadership we need now. Leadership that sees new opportunities and introduces new ways of operating that changes the fundamental rules of the game for their individual market segments.

When our economic downturn happened in the mid ‘70s, The Limited emerged. Nobody had ever heard of The Limited in the late ‘60s but it was really starting to move fast through the recession in 1974 and then produced an average annual rate of return for shareholders of 52 percent for the next 15 years. That’s not so bad. In addition to The Limited there was also The Gap, Home Depot and Wal-Mart. All these companies got started after the ’74 recession.

Then in ’86 when we went through it again, Microsoft really took off, Oracle ascended from the pack of database companies, and Amgen really started. Every time we’ve had a downturn, some of the little shoots grow into great trees. I’m pretty certain that will be the case now.

Greg Selker: Some of these “big trees” have fundamentally altered and transformed the businesses and markets in which they were in.

Dick Foster: All of them have that common characteristic, Greg. That’s absolutely correct. To do that and sustain this growth requires a special kind of leadership. By the way, there are some big companies doing this now, Amazon and Google to name a few. This is the third kind of leadership we need now: the leadership of the existing companies who represented the recent and past breakthroughs. We need these individual leaders within these companies to carry us forward now as well.

We may need a fourth kind of leadership, which again like the second group of leaders, is a little bit more abstract because it is emerging rather than existing. The next phase of the world’s growth, no matter how you calculate it in the next 15 to 25 years, is going to occur in China and India. Their growth will not occur because they’re going to leap ahead of the United States in advanced technology applications. Their growth is a look back in time, similar to the late 1800’s. China and India are now building the power plants and putting in place the basic infrastructure that we’ve been building for the last 100 years. They’re going to build their telecommunications networks, power grids, and physical transportation grids.

They’re going to have to build the hospitals, the schools, all these core infrastructure components which exist in our society, and they will be building these in numbers that are impossible for us to imagine. All of this is not really technology work. In China alone, the people moving into cities over the next 25 years will be the greatest human migration ever, if my colleagues at McKinsey are correct. And there’s a migration into cities of equal size which will occur in India.

This is just unprecedented in the history of humanity, so we’re going to need extraordinary leadership to pull all this together. You probably saw as I did recently, that the Chinese are saying they are going to build a battle group, and they have designs now they’re considering for an aircraft carrier. This will be the first time we’ve had a Chinese battle group floating around the world. We dominate this area right now. I think we have 13 naval battle groups in the United States. France has part of one. Nobody has anything remotely approaching what we have.

The Chinese say, “we’re not interested in whether you think we should have one or not. We are going to have one. We’re happy to talk about how it’s used.” We need to remember that it is 1 compared to 13, and maybe by the time the Chinese launch their naval battle group we’ll have 15. Maybe we’ll have 10. Who knows?

The point is that the next 25 years are not going to be a repeat at a larger scale of the last 25. Politically, we’re going to need plenty of leadership at the national and global level, and similar to the different kinds of economic and business leadership I’ve talked about; our political leadership will also have to think about themselves and what they’re doing differently than they have before, because we’ve never faced the kinds of issues we are facing now. This is the fourth kind of leadership we need now.

So I think in answer to your basic question, we need different kinds of leadership, and we need these different leaders to have the flexibility to lead differently dependent on the circumstances. Sometimes they will need to focus on planning and strategy. Sometimes they will need to be field marshals. But we need these different leaders now more than ever.

Let me elaborate a little bit more on the leadership needed to sort out our financial crisis right now. To do this will require operating leadership. We saw the other day that Circuit City is no longer. It’s not a circuit town or it’s not even a circuit village. Circuit City is going away. Neiman Marcus had the worst month on record in October. Christmas is shaping up to be absolutely awful. We need a lot of field marshals now to get us through this period of time with minimal damage. I think we’re vastly better positioned than we were in the ‘30s to do this. We know with the help of cost reduction, our productivity has been going up through this whole period of time. We shouldn’t forget about that.

Our guys that are down there in the trenches, the leadership of their current companies, non-financial companies, are doing quite a good job. Their leadership is incredibly important to us as well, and will help us move through this down period as quickly as possible.

I have been in the executive search industry for more than 20 years, and I have never seen more commitment to the status quo, regardless of the long term impact. But I can’t say I blame you. Given the odds and the growing reality that the state of economic uncertainty is here for a longer haul than any of us want, more of you are concluding that, “if it isn’t completely broke, we’re not going to fix it.” Bluntly, it makes more sense to stay with the “devil we know”, rather than hiring from outside only to find out that they’re the devil we don’t know.

Unless your organization is clearly in a bind where new leadership is needed from the outside, most of you have determined that the risk of failing with a search outweighs the probability of success. Again, I can’t really blame you.

I have always been a true “maverick” (with apologies to Senator McCain and Governor Palin) in this industry, pushing the boundaries and driving actual value to my clients, and I have a way to defy the status quo and mitigate that risk:

It is called a Benchmark Introduction and it is the new economic model of executive search.

Executive search is an expensive proposition when you have a 50/50 chance of coming out ahead. I know you are all familiar with the economics of traditional executive search: the commitment to pay 33% of an executive’s salary regardless of how long the search takes, not to mention the failsafe built into the contract that says the firm will be paid in full - even if the search is cancelled. Statistics show that with this model there is up to a 35% chance of a mishire even at the most senior level. Nobody wants to take a chance with those odds.

A Benchmark Introduction, on the other hand, starts with intensive research, narrowing desired candidates down to a highly selective group who are contacted to potentially engage in an extremely confidential discussion with a client. A typical executive search generally identifies around 100 people to contact, whereas a Benchmark Introduction narrows this group to the top 20 or so in terms of seniority, skills, experience and accomplishments. As opposed to recruiting someone for a particular position where the interest will either be a yes or a no, a Benchmark Introduction focuses on a strategic value proposition from which a number of option could occur.

This creative solution leverages the best elements of executive search, improving on them to a dramatic degree while significantly mitigating the risk. For a fraction of the cost of a full executive search, you realize these benefits:

A Benchmark Introduction allows you to meet the highest caliber talent in a tightly controlled environment that is also open-ended in terms of intended results.

This highly strategic conversation appeals to senior individuals not normally attracted to a standard recruiting call and search.
Given the lower number of people contacted and the confidential nature of the conversations, a Benchmark Introduction delivers maximum protection to both a company and candidates ensuring that no word will be leaked out either to the general marketplace, or internally within a company.

It may be that the result of the Benchmark Introduction is that a high-level relationship is initiated. It may result in the exploration of a business partnership. It may produce the identification of a specific opportunity, and it could possibly result in the identification of a senior leader who would be an exceptional match for a specific strategic, compelling role.

Our milestone fee structure and industry-leading Performance Values Assessment methodology ensures that you are only investing in the best talent for your organization. And with the placement of a Benchmark candidate, you are insured by our two-year performance guarantee.

What I am proposing is a new way of doing business when it comes to executive search and providing an economic model that removes the risk and provides a solution to the talent issues illuminated by the tough times we are facing. It makes a lot of sense.

The question is: can you afford to stick to the status quo, to this “devil you know” mentality or should you explore a new way of doing business that will bring top level talent into your organization today?

Ford Tamer, Ph.D. is an Operating Partner at Khosla Ventures, the leading clean-tech venture capital firm spearheading investments into areas such as bio-refineries for energy and bioplastics, solar, battery and other environmentally friendly technologies. At Khosla Ventures, Ford is focused on breakthroughs related to mechanical and electrical efficiency, solar and IT. He has led Khosla Ventures’ investments in and is on the board of EcoMotors, Kaai, Soraa, and Topanga. He also sits on the boards of eASIC and PAX Streamline.

Before joining Khosla Ventures, Ford was Senior Vice President and General Manager of the $1.2 billion Enterprise Networking Group at Broadcom. During his five years with the company, he grew the networking semiconductor business four-fold to leading market share at tier one customers worldwide.

Ford has over twenty years experience founding and building successful technology businesses. He co-founded and served as the President and Chief Executive Officer of Agere, Inc., a semiconductor manufacturer, until it was acquired by Lucent Microelectronics for $430 million. Following the acquisition, he served as Vice President of the Processing, Aggregation and Switching business unit at Lucent’s Agere Systems. Prior to founding Agere, he was part of the founding executive team at Dazel Corporation, which was acquired by HP, and MegaKnowledge, which was acquired by IntelliCorp.

Ford earned a Masters of Science and PhD from MIT in engineering with theses focused on material science and system numerical modeling.

We are thrilled to present this interview with Ford Tamer. For the complete interview with Ford Tamer click Ford Tamer Complete Leadership Interview.

Greg Selker: Ford, when you look at your career and the successes that you’ve had in creating a culture that delivers the results we are talking about, and when you look at the companies you are now investing in and building, what do you see as the consistent core values that you are putting in place, and how do you determine that the leaders you’re hiring have those values?

Ford Tamer: I think there are five principles or values I have always tried to stress, and they are: innovation, focus and execution, open communication, teamwork, passion and fun. Innovation and leap frog-ability is a defining element for a company. This is something I stressed at Agere, and I think you know I ended up stressing in some of my other jobs as well. You want to start with an environment in some of these early-stage companies, where you foster and focus on leap frog-ability. Because you want a team that’s going to be motivated to create and imagine a 10X improvement over what’s in existence today.

If all you realize is a 10% to 20% improvement, by the time you get to market, your competitor - which is a large company - will have already equaled your achievement. This means you can’t just have a commitment to marginal improvement. You’ve got to focus on leap frog-ability and creating a true gap in innovation to stay ahead.

We have also determined the flatter the organization is, the better it is for fostering innovation, and we have learned that you have to put in place a system that rewards innovation in order to continue to encourage behavior that leads to it. For example, creating an incentive structure which rewards patent generation and IP creation can help encourage behavior that leads to innovation. We also look at a balance in an organization between the CTO/Advanced Development Office, and the mainstream engineering organization, paying attention to the number of people working on advanced projects, and those that are executing on the mainstream bread and butter projects.

In terms of hiring, a good measure of whether someone has these qualities of innovation and leap frog-ability is by trying to understand what they’ve done in their past. Have the products that they have introduced in the market created discontinuity, or was it a “me too” product? Do they understand the need for leap frog-ability and gap-opening products and does their career history prove this?

Greg Selker: In particular, how do you define these elements of leap frog-ability and innovation so you know what you are looking for?

Ford Tamer: For example, the Nintendo Wii controller, which was based on Broadcom chips, was a leap frog innovation. The wireless aspects of the controller totally changed how people played with games compared to the Sony PS3 or the Xbox from Microsoft. Having this wireless controller gave a total new dimension to gaming and changed the games which could be introduced into the market.

Greg Selker: So what was it about the culture from a values perspective that allowed for this innovation to occur at an individual engineering level, and then be accepted and embraced?

Ford Tamer: I think by large the founders of Broadcom, Henry Nicholas and Henry Samueli, were able to put in place an early culture that has largely survived until today, and the number one value in this culture is innovation. We talked a lot about leap frog-ability, about “word first” product; a product that represented the leading edge in people’s minds, and was talked about, was on the tip of people’s tongues. Everybody was encouraged and rewarded for coming up with these “word first” products, and you could see how this was very much reinforced in the culture at all levels of the organization, all the way to the top.

Greg Selker: Ford, there are many organizations that would like to be innovative, and even say they have a commitment to it, but there are few that actually achieve a culture that supports risk taking, allows rapid decision making, is a learning by doing culture, and supports fun and passion.

Ford Tamer: You’re right; those are all supporting elements of innovation. Because if people cannot take enough risk, and failure is not okay, then innovation does not happen. In an innovative company, the only issues should be, technically does the product make sense, and, is there a market discontinuity in which we can introduce this product?

You also have to manage the company so this innovation can actually move from R&D into the marketplace. This is where the top management and leadership of a company make a huge difference, and the CEO is the key person. Meaning, if the CEO and top management understand and embrace innovation, and they allow it to happen, it will happen. In addition, you also need an environment that encompasses financial discipline and is focused on execution, to drive innovation to market.

Execution is the second value we look to create and try to find in the people we hire. I used to give new hires a pep talk focused on culture, and my second tenet was execution, and what I used to say is “listen, these innovations are not going to just languish in a closet somewhere, we’re going to find a path to bring them to market”.

An emerging company lives or dies by getting products to market that are going to work, are high quality, and are ahead of their competition. The phrase we used to coin was, “over-promise and over-deliver”. The definition of mediocrity in my mind is “under-promise and deliver.” This is making it too easy.

The third value in building a highly successful company and culture is open and constructive communication, as opposed to a culture that frowns on tough communication. We used to teach people in meetings that if you’ve got a problem with the direction of the business or technology, just say it right then and there in the room full of people. There is no need to have a one-on-one chat in the back room. Yes, you’ve got to be sensitive to people. But you don’t have the time to be private or secretive with your concerns. You do need to take the time you have to provide constructive criticism.

’You just need to remember, that what goes around comes around. If you present your feedback from a personal rather than a technology and business perspective, at some point somebody will present their feedback to you from a personal perspective. The most important thing you can do is to stay focused on the business problem at hand.

The fourth value is teamwork. You want to hire very smart people, and create a team that checks their egos at the door. Egos destroy companies. It has to be a team that’s going to work well together, deliver together, and go through the difficult and tough times together.

And finally, I think the last necessary value is passion and fun. You want to recruit people that are passionate about what they do, and are interested in changing the world. This is especially true on the green side. The good news for green companies is that by default, the people that want to work for them truly do want to change the world, and at the same time, have fun doing it. Regardless of what kind of company you work for, life is too short to say, “I’ve got to go to work in the morning.” You can’t build and sustain a highly successful company if people are not going to be passionate about what they do, and have fun doing it. This allows you to create a culture of passion and fun.

Greg Selker: That’s great, Ford. We’ve had a far ranging and fascinating conversation, but I’d like to get back to several of the things you’ve spoken about in terms of green technology. You’ve talked about the building of clean tech companies as a movement that is giving rise to a whole new generation of businesses, and people who have a focus on green educational learning, particularly the technology and science aspects of this, in addition to an emphasis on public accountability. Given the emphasis on “green” science, technology, and on public accountability, what would you say to young people who are in the middle of their college years about green technology, green business and the importance of this in their careers?

Ford Tamer: I think it’s a very important trend that’s here for the long term. The one thing I would say is, go back to basic science. These technologies, whether we look at new car engines, or lighting, or new materials like cement, or solar and new types of bio-fuel, all of these go back to the basic sciences such as thermodynamics, fluid dynamics, material science, chemistry, and biotechnology. The basis for all these green companies and businesses is all fundamental science.

Greg Selker: I just have one more question I’d like to ask you. When you look at your career, what do you think is the best or the most important piece of leadership advice that you’ve received?

Ford Tamer: I think it’s interesting. Probably the phrase that I would say is probably the most important, is one that I learned from Vinod [Khosla]. “Dare to be great.” I think this is true. If you want to be great, imagine the future and amplify your goals, and dare to imagine that you can reach them.

Greg Selker: Yes. Well that’s excellent, Ford. That’s something that I personally believe in at a very deep level as well. And it’s thrilling to hear you say that - as one of the most important pieces of advice, in terms of leadership, that you’ve received.

Ford Tamer: Thank you. This has been a very good and a very interesting discussion.

For the complete interview with Ford Tamer click Ford Tamer Complete Leadership Interview.

Unlike the movie Trading Places, we do not play games for sport with the careers of future leaders by creating the conditions where one is pushed out and another, in this case, a most unlikely leader, is placed at the top.’ We certainly would not create such a condition just for the sake of betting a dollar on the outcome. Mortimer and his brother played a very high stakes game with people’s lives, for a very small bet to determine whose social beliefs were right.

The more I think about this it seems that we inadvertently DO create an unintended game of sorts when company leaders and boards don’t take any action in planning for the future leadership of the company. This lack of planning is essentially a “bet” that things will work out, and that through the safety of a large search firm (really bad assumption here) the company will be able to find the very best leader to take them to the next level. They must place these bets since they have no other alternatives by the time a change in leadership is recognized as critical.

Many companies fail to do their best in planning for the act of “trading places” on leadership teams. The reason is simple - it takes a lot of work. First, successful planning requires keeping up to date as to where the leaders are in their growth and potential. It takes rigor and persistence to asses, understand and plan the developmental pathway for rising leadership teams. It takes even deeper assessment to know which leaders will be right for which key assignments. You need to be paying attention!

The most successful companies, in our experience, are those who are clear about their performance values. This is a behavioral essential.’ Some companies focus their performance values in ways that create a leadership culture across the entire company. This approach ensures a deep pool of emerging strong leaders for the future. They then pay attention to the development of their leaders, give them career broadening assignments, and review their leadership cadres on a regular basis as they plan the leadership teams for the future.

“Mortimer’s bet” will continue to define the approach used by far too many companies.’ They will place their bets based on social and personal biases rather than a deep understanding of the kind of leaders the company needs to reach their goals. They will take it lightly when their failures and biases become known. Perhaps some of them, like Mortimer and his brother in the movie, will feel the full force of their bad decisions by losing everything, including that last dollar.

Jim Champy is recognized throughout the world for his work on leadership and management issues, and on organizational change and business reengineering. His first book, REENGINEERING THE CORPORATION: A Manifesto for Business Revolution, sold more than 3 million copies and spent more than a year on The New York Times best seller list. He is also the author of the best seller, REENGINEERING MANAGEMENT: The Mandate for New Leadership, which was recognized by Business Week as one of the top ten best business books of 1995.

Jim’s latest book is OUTSMART!, How To Do What Your Competitors Can’t. Published in April of 2008, OUTSMART!, shows how to achieve breakthrough growth by consistently outsmarting your competition. Champy reveals surprising, counterintuitive lessons learned by companies that have achieved super-high growth for at least three straight years. Drawing on the strategies of today’s “high velocity” companies, he identifies six powerful new ways to compete in even the toughest marketplace. You can read more about OUTSMART!, at www.jimchampy.com.

We are thrilled to present excerpts from the interview with Jim Champy. To read this interview in full, click here: Jim Champy Complete Interview.
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Greg Selker: What do you believe are the best practices for hiring top leaders?

Jim Champy: If I were going out and recruiting a person for a leadership position - I’d want to hear about their experience. I’d want to hear about the difficult situations they’ve managed, how they made decisions - and try to get a sense as much as I can in advance about how they behaved.

In the end, leadership shows up in how a person behaves. And unfortunately, you don’t always know that until you put a person in a leadership role. By the way, I also believe that a person is never fully prepared for a leadership role. Many times I have seen an organization looking to elevate someone to a higher position and the question is: is he or she ready? Well they’re never completely ready - they’ve never done the job. And so there’s always some risk. But I certainly think you look at past behaviors and past performance, and you ask some “belief” questions to see how they respond. “

I also think there’s a need to assess someone around the alignment of their values and their principles - with the values and principles of your own company. In looking at hiring a leader - a very senior manager, you may not be quite sure about whether he or she has the immediate skills to do what you need or has had the immediate experience in the job. Also, when an executive starts in a new job, the job can change. And as I said earlier, very few people are completely ready for the next job. So, the most important and reliable thing is to find out if the new executive shares the fundamental beliefs and principles of your company.

Greg Selker: What is the best approach to identify and develop leadership competencies within companies today?

Jim Champy: I think it’s open engagement with your people - the ability to have very open conversations about what they see, about what they think, about what you see - and then coming to agreement and alignment about points. But today this needs to be done more quickly than ever before, because time is of the essence in making decisions about people and their leadership skills

I think one of the biggest mistakes I see organizations making is that they stay too long - far too long with people who frankly are unable to do the job. And one of the things that I think needs to be different today is to make decisions around performance and leadership skills more quickly - and then take the appropriate action. When I’m in conversations with other CEO’s - and I ask them what they might have done differently in the last year or two - or once they’ve made a tough decision, these are sometimes tough decisions to make about a person who didn’t have leadership skills, they’ll often say to me, “I wish I had made that decision earlier”.

Greg Selker: What do you think a board’s obligation should be in this post-SOX world to guide the competitive development of its leadership cadre?

Jim Champy: You know, a board cannot manage an enterprise. But one of the most important responsibilities they have to their shareholders is to make sure there are a very highly competent Chief Operating Officer and Chief Executive Officer in place. And then to be certain that those officers - particularly the CEO, has put in place some set of processes around development and succession.

I think it’s legitimate for a board to actually expect to see and hear from the next line of management, those reporting to the CEO, so that the board can actually sample and sense whether the development job is being done and whether there is within the company potential for succession, and if not, then encourage the CEO to go outside and bring in people who in fact can be his or her successor.

So the first priority is to put in place a CEO with the right competencies, and then to encourage that CEO to address issues of succession and development, and lastly for the board to be sure that the issues of succession and development are in fact being dealt with. If a board doesn’t do that, Greg, what happens is that the board finds itself in some trouble when the CEO retires because there’s nobody there. It means the board has to go outside. That’s a dangerous thing to do because then you are betting on someone who you don’t know and who does not know your company. A really well-run company has been hiring and developing leaders all along in kind of a steady stage, so that you always can look and say - I can see three successors getting developed here for our CEO.”

Greg Selker: Do you believe we’re moving into an era that it is difficult for companies to find talent?

Jim Champy: I believe there’s a lot of talent out there in companies - lots. I think much of it is undeveloped. But I’m always impressed and surprised - frankly I shouldn’t be any longer, when I go into a company and look down a couple of layers and I see a lot of really smart people trying to do the right thing. But they’re not fully developed. And that’s particularly true in larger companies. In smaller and medium size companies, there’s an informal set of systems or processes that develop folks.

I think in larger companies people get put into very narrow roles early - too early. And they’re kept in narrow roles for a great deal of their career - and of course, some companies have job rotation programs that actually do work -but most people get locked into a role - locked into a function, and their ability to see and understand becomes limited and narrow. And unfortunately, they can develop a limited and narrow perspective. Whereas in a small or medium size company, you move around more naturally - you not only move around, but you have problems thrust upon you more directly - big problems that you have to deal with and the work isn’t fragmented the way it’s fragmented in a large company. Yet in large companies, there are very, very capable people whose development I think is just stunted by the fact that they’re put into very narrow roles.’

Greg Selker: How do you make certain that you are identifying the top talent or top leadership, screen for it, develop it, and hire it?

Jim Champy: It’s about where you set your standards. Where do you set the standards for the performance of your business, and therefore - where do you set the standards for the performance of your people? And what skills do you cultivate and how do you cultivate and develop people towards those standards?

And once you get a set of processes going that are based on really high standards for performance and have an underlying set of very good values and principles - I think the whole process becomes self-reinforcing, it perpetuates itself.

Now I can tell you I see organizations that have very high standards and very strong people that I would not want to be part of because I don’t like their values. And so for me, building the really high performing organization is a combination of very high performance standards - both for the company and the individual, but also a set of values that will attract the kind of people that you really need and that you really want.

To read this interview in full, click here: Jim Champy Complete Interview.

© 2008 Selker Leadership LLC

Every company risks exposure to UV-Rays (Useless Values, Rituals, Acronyms, Yawns and Sameness). When you take a step back and observe it as an outsider, the ritual ceremony that companies take part in of developing and posting business values is really a quasi-religious program. Like a tribal celebration, lofty values about good behavior, honesty, hard work, and even morality, are heralded, and the tribe feels good for awhile about the ideals set forth. But ultimately, nothing changes. Because in most organizations, values exist as general statements with little, if any, relationship to the actions people take. They are stylized words or clever acronyms on plaques, screen savers, posters in elevators and prefaces to employee handbooks. So the tribe goes on about its business, believing that if their values are defined and publicized, they will, of their own accord, make their way into the culture and influence actions. Since there is at least a short lived momentum, members of the tribe conclude that the ritual of developing, discussing, and posting values is important to the leaders and thus episodically important to the tribe, at least for a few days each year. Celebration ensues and the cycle repeats. Useless.

Over the past two years we have examined a number of large corporations in terms of the gap between their declared performance values and their actual performance behaviors. We have assessed what they do and how they do it at the individual and team levels. What we observe is that most companies are able to agree on values that would produce real results if practiced. What these companies have been unable to achieve for the most part, is a disciplined way to implement them and have them live in the organization. They know “what” to do but not “how” to do it in alignment with their declared values.

As a result, over time, the leadership teams drift further away from their ritually declared values and reach a status quo that keeps them well below their potential performance levels. In other words, nothing really improves. Companies are leaving a lot of value on the table that could be applied to improving the performance of the entire company. But, they do not do the work to understand how performance values actually drive the capabilities of the company to compete, innovate, improvise, and lead significant change. Understanding how performance values can be managed to expand company capabilities may be the most significant learning failure of companies around the world.

If leaders are really interested in building the asset value and competitive capabilities of their companies, they should take the time to learn how to implement and manage the values process. The few organizations that we know to have done this have taken a grass roots approach - bottom up, and top down. They have the right level of SPF (Specific Performance Fundamentals). They have defined their values at behavioral levels that reflect each function. Expected performance values behaviors are clear to each employee from the get go, and they are integrated into each job description, assessment and incentive programs.

Taking performance values operational and turning values into assets of the corporation, requires a strong program of learning and practice, measurement and management. Without this disciplined approach the long lists of declared values and all the posters on office walls will always be empty words and useless business values.

1. Develop Your Talent. This is your #1 priority for 2008. So many CEOs say, “talent development is critical,” but what they really mean is “I have HR working on it.” If you’re serious about talent development, you need to make the leadership development and mentorship of your senior team and their direct reports your personal priority.
2. Implement Succession Planning. Every CEO talks about the need for a successor, although very few do anything about it. If you or your board doesn’t have someone who could step into your job if you got hit by a bus, then you need to take action now. If you don’t have successors today, recruit “bench strength” candidates for the most critical positions, including your own.
3. Unplug Yourself. Most CEO’s have forgotten about the importance of scheduling “disconnect” time. They move from one task to the next and’never’unplug themselves’from their cell phones, email, or blackberries. Make and take the time for you to reflect, think, contemplate and integrate. You will be surprised at what will happen in a good way.
4. Define Yourself in New Terms. The most powerful leaders all ask themselves, “What kind of leader do I need to be to help my organization and people achieve their maximum promise? What do I need to do to have the impact I envision? The bigger the vision and broader and more expansive your self-definition is, the’higher the likelihood that you will achieve greatness.
5. Invent New Behaviors. Identify three things you can do with your senior team, your board and your customers that are driven from your redefinition of yourself. Translate your words into new actions and sustainable behaviors.
6. Involve Your Board With Your Team. If you are like most CEO’s, your board only interacts with your team in formal board presentations. This is like leaving money on the table. Your board is a valuable resource. Create opportunities for them to interact with your team in non-board room settings.
7. Develop Your Board. Succession planning and building bench strength are not just concepts for your company, they work for your board as well. Encourage your board to invent innovative approaches to developing new directors and in turn themselves.