Elegant Gurus Beating Straw Men

Beware of consultants bearing gifts.

A while back, I wrote a post about false gurus, those with loud voices and negligible expertise who babble on about things they don’t begin to understand.  They are sometimes nefarious, sometimes well meaning, but always a waste of time.

Yet just as bad (and sometimes worse) are the elegant gurus.  They work with gold-plated advisories and consult for blue chip clients.  They have real acumen and even true insights to offer, but then chose to deal in hyperbole and sophistry rather than sound analysis.

The Decline of Western Civilization and the $30 Hamburger

I recently read two very popular books that describe new trends afoot in the world of business today:  The Power of Pull by John Hagel III, John Seely Brown, and Lang Davison of the Deloitte Center for the Edge and The New Capitalist Manifesto by Umair Haque of the Havas Media Media Lab.

Both books offer easy-to-read guides about real and important trends afoot in the world of business today.  Both are written by authors who work for prestigious institutions and write for Harvard Business Review.  Pretty heady stuff.  Certainly, those are credentials that make people take notice!

However, offering advice isn’t enough.  For some reason, they feel the need to invoke a crises as well (as if we don’t have enough of those!).  In the former case, they posit a 45 year business decline and in the latter, we are told that even the simple hamburgers that we eat are driving society to the poorhouse with nearly $30 of hidden costs.

In both cases, the evidence is either very weak or simply doesn’t exist at all.  In both cases, the specious premise is repeated and emphasized to such an extent that it becomes a core part of the overall argument.

The False Crises of Return on Assets

In the case of The Power of Pull, the authors utilize data gathered over more than four decades and chronicled in the Shift Index report (pdf) that they publish regularly.  In it, they show a consistent decline in firms’ return on assets (ROA).

A nearly half-century of decline in business performance?  Oh my!

It seems like a real problem, but is it?  Since the 1960’s management consultants have been encouraging companies to leverage more debt against stockholders equity in order to lower their cost of capital.  This has resulted in lower financing costs and a requisite increase in assets that company owners have under their control.

It was foreseeable that a widespread increase in leverage and a decrease in capital costs would lower overall return on assets, so it’s not surprising that the metric is falling.  What is surprising is that now management consultants are holding falling ROA up as evidence of an overall decline in business operations.

Seems like they get ya comin’ and goin,’ doesn’t it?

The Importance of Equity

Return on total assets is a red herring.  What concerns shareholders is the return on the capital that they’ve invested. To be fair, the authors include return on equity data (ROE) in their Shift Index report (albeit misleadingly labeled and not included in their book).

Here, as the authors admit, the trend is considerably less visible.  However, I would argue that it doesn’t exist at all.  ROE as shown is subject to considerably large swings and those points of volatility affect the broad trend.  In order to smooth the graph, they could have either eliminated the outliers or simply taken a moving average.

They didn’t and I’m curious as to why.

Moreover, the period of 1965 to 2009 seems a bit arbitrary.  If they would have started in 1970 and ended before the crises (2008 and 2009 are certainly not good data points to establish a long term trend), they would have shown a dramatic increase in ROE.

If a trend is real, it shouldn’t depend on what years you choose.

Externalities and the $30 Hamburger

Economists have long known about externalities, costs and benefits incurred by society at large and not the specific economic actor responsible for them.  For instance, when you drive your car, you emit both noise and pollution.  These don’t show up in your bank account, but can be readily seen in the difference between houses that rest near highways and those on cul-de-sacs.

So I was very much intrigued when Mr Haque insisted in his book that a $3 hamburger actually costs $30.  Wow!  I’m a big, gluttonous guy who loves hamburgers and can scarf down a handful in one sitting along with a few pitchers of beer.  Am I bankrupting society with my questionable culinary habits?

My curiosity aroused, I went to study the matter further.  Haque stated that his assertion was a “back-of-the envelope analysis,” but he did supply an endnote that led me to this article in which an agrarian economist insists that a pound of ground beef would cost $35 without subsidies.  However, no support is given (there’s that envelope again!).

Nevertheless, the mysterious $30 hamburger assertion is repeated throughout the book.  Anytime his argument gets a little flimsy, he brings up the $30 hamburger.  Disagree with him? The $30 hamburger.  Worried that his advice might kill your business?  The $30 hamburger.  And on it goes…

Pardon me if I seem barbaric and obtuse, but for now I’ll enjoy my lunch in peace.

Bowing to GAFA

In ancient Rome, sophists arguing their case in the Forum would often point to one of the various temples situated there in order to lend credence to their rhetoric.  Totems were powerful devices in the ancient world.

Alas, it seems as if we haven’t progressed very much since then.  Today’s high priests of business (speaking generally now and not specifically about the aforementioned gurus), can always be relied on to conjure up the modern day pantheon of GAFA: the combined wisdom of Google, Apple, Facebook and Amazon.

Those are truly formidable deities and far be it from me to disparage their amazing feats of heroism.  I admire those companies as much as the next guy (and probably a bit more).  They are not only profitable, but each has something to teach us all.

But what, pray tell, besides being enormously successful and somehow related to the Internet, do these companies have in common?  They vary in their management styles, business practices, core competencies and financial structures.  Invoking them is not an argument, it’s a diversion.

It seems that, “Yo Google!” has replaced “Yo’ Mudda!” as the mindless rejoinder of choice in today’s discourse.  I’m not sure it’s an improvement.

Manifestos Should Not Be Written on Split Hairs

I don’t disparage these men out of malice.  I’m sure, in practice, that they not only mean well but deliver real value and sound advice for their clients.  However, in seeking to sensationalize business trends by citing and then continually reiterating false premises, they do us all a disservice.

They are not, after all, simply opining, but heralding a need for revolutionary change.  That should require standards that are higher, not lower.

Ideas matter.  As John Steen of the Innovation Leadership Network blog wrote, great business scandals begin with false notions.  They are believed in so fervently that when the cracks start to show, chicanery begins.  Assured that they will ultimately be proved right, executives help the facts out a bit along the way.

We all know how that ends.

Good advice doesn’t need to be dressed up.  Sound arguments can succeed on their merits. Serious professionals shouldn’t feel the need to emulate hucksters.

– Greg

 
Update: Umair Haque commented on Twitter to say that “as long as the true cost of a burger’s >~$6, my argument holds.”  That may be true, but it would be nice if he could point to some empirical evidence or to at least explain his reasoning for the $30 (or $6 or whatever) assertion.  I offered to make a correction if he could point out evidence he cited.  No answer so far…

Many people who aren’t famous have to substantiate what they say all the time.  I’m not sure why he feels that he doesn’t.

Note: Special thanks to Wim Rampen and Mark Mulholland of the Mathew 25 Fund for helping me smooth out some rough edges. Any mistakes are, of course, my own.