The Challenge Dividend

I'm Voting for Gridlock

The buzz, spin and predictions are hitting a fever pitch this week as the nation prepares for yet another too-close-too-call election.  And while I prefer to keep my personal politics out of this blog, one thing I am proud to say is if "The Challenge Dividend" were a party, it would vote for a Democratic Congress.  Not according to party policy, but because there is nothing better for government than challenge from divided branches; and nothing better for progress than gridlock.

"Gridlock" has mainly been a description of derision in politics.  It happens when the parties prefer  fight and debate to making laws, and sends a message that "nothing is getting done."  There are two reasons that I love gridlock in government.

First, at minimum, it means that there are good debates and more than one perspective tipping the scales of lawmaking.  The recent Republican majority in Executive, Legislative and Judicial branches has led to some of the most one-sided thinking and policy in my lifetime.  Subsidies to oil companies, record deficits, bridges to nowhere, homeland spying, and the disastrous decision-making on Iraq all were mainly driven by a lack of balance and too many blank checks due to Republican control.  The Cato blog points to research that shows government spending runs out of control during times of united government.

Second, at best, government IS unable to get anything done.  By and large, government is more likely to make bad laws than good laws.  So it is often better to have no laws at all.  Here's why:

• You can't guess the market.  The world changes before laws can even be put into place, and it cannot wait for government to pick a direction. 
• Out of touch.  Internets - 'nuff said.
• There is no unified goal.   Is government's job to boost productivity?  Or to protect jobs?  Without clear objectives they cannot make clear decisions.
• Self-interest.  Politicians are worried about their jobs more than making the right decisions.  And at times, make decisions that personally benefit them and their friends.  This is human nature.
• Imbalance of special interest.  Special interests of all kinds use funds and favors to push their agendas, and there is no group that similarly lines up the majority to fight them.  Voters are literally nickeled and dimed for special giveaways because it is not worth fighting for.
  

A do nothing Congress is doing just fine by me.  Although it means that we lose the opportunity for some "good" laws to get passed, in times of trouble we have seen legislatures unite for what is right. 

So if you want The Challenge Dividend voting guide: pick Democrats in 2006.

Side Note: If you are interested in predicting the results, forget the polls, look to the money  The Iowa Electronic Markets is a forum where experts and regular citizens can bet on the results.  This method of prediction has beat polls again and again.  At this link you can see the history of the Congressional race bets, which suggests a Democratic House and Republican Senate.

UPDATE:
- The Democrats have picked up both House and Senate
- The Iowa Electronic Markets got it right
- Most voters and the business community appears to agree that "Gridlock is Good"

Cummins Calls Out Its Core Competitor

One of the key drivers of the Challenge Dividend is the presence of a tough, "Core Competitor".  For a smaller company, the Core Competitor may be the market share leader who seems to have all the resources.  For the share leader, a Core Competitor might be the young, growing start-up that is breaking the rules and inching into its sweet spot.  Nearly every company has a single Core Competitor, but few publicly call it out.  But those with the courage to do so can send a strong signal to employees and investors.

Over this past weekend I was trapped in the house thanks to cold rainy weather, and while flipping channels landed on a History Channel show called "History's Business".  This particular episode featured the story of Cummins.  Cummins was founded in 1919 as one of the early innovators in diesel engines, and nearly 90 years later the company is still growing strongly.  In 2005 the company enjoyed its most profitable year and nearly reached $10 billion in total revenues, after coming out of a tough global recession.

The highlight in the interview came when Tim Solso, Chairman and CEO of Cummins, was asked which company is his main competitor.  I have seen countless similar questions each morning on CNBC and most leaders choose to downplay competition and avoid a direct answer.  But Solso stepped up to the plate:

"The main competitor for engines is Caterpillar.  We're the last two global companies and we compete in every market...all over the world.  Caterpillar is really the company that makes us be better in order to compete with them."

Solso gets it.  He understands that a strong Core Competitor is not a curse, but rather a blessing.  Further, he is unafraid to publicly name and give kudos to Caterpillar.  This message will reverberate throughout the halls of Cummins, keeping the employees hungry and focused.  They know they have a long way to go to beat Caterpillar, a company 4 times its size.  But they can be confident that the challenge itself will make their products and work better.

I love to see two strong competitors going head-to-head in global markets.  It ensures that the pressure to win will keep them improving, and building better, cleaner, more fuel-efficient engines for the world's consumers.

Netflix Submits a Challenge

UPDATE: Only a few months in, the contest has led to a 5% improvement - half-way to the $1 million prize for a 10% improvement.  743 teams have joined the contest so far.  Not a bad R&D department!

Way back in April I wrote about an increasing trend where companies and organizations outsource or encourage innovation by offering up a prize for a winning solution.  The best recent example is the Ansari X-Prize, which was a $10 million prize for the first private spacecraft to launch a man into space twice in two weeks (won by Burt Rutan).  Now, Netflix is taking the model in its search for a better movie recommendation engine.

Netflix is offering $1 million to the inventor of software to upgrade its Cinematch recommendation engine.  The current engine does a decent job of matching movies based on the likes and dislikes of each individual member using comparisons across its membership.  However, Netflix wants to take it to the next level.

There are several Challenge Dividend dynamics at work here:

• There is a "bar" - a 10% improvement in results.
• There is an incentive, a $1 million prize for the first 10% improvement; and there are annual $50,000 prizes for the best result of the year (to keep people plugging away).
• The contest is open to anyone, not just internal R&D at Netflix, Inc.
• The results are openly visible, so contestants get immediate feedback on where they stand and how much better they must be to win.

I love the fact that this challenge is also completely consistent with Netflix's business model and core challenges in the marketplace.  The company is fighting against big players like Walmart as well as improving movie-on-demand cable systems.  It is a small company without the R&D resources of a Google or Microsoft.  And it knows that if it can recommend better movies, its consumers will be happier (frankly, the biggest issue for Netflix is that once you see all the movies on your list, there's little reason to keep paying $20/month).  I would expect that Netflix can see in real time that each 1% improvement in Cinematch results in $X improvement in sales and Y% increase in loyalty.

At worst case, and as some commenters at digg.com suggested, this may be just a great way to build marketing hype around the Cinematch service!

Notes:
- Thanks to Gary Stein and the MIT Ad Lab for pointing this out.
- Anousheh Ansari, whose family created the Ansari X-Prize, recently became the first Muslim woman astronaut by buying her way onto a Russian flight.

No Love For Family Business?

Last week a study in the McKinsey Quarterly suggests that family businesses run by outsiders are better managed than those run by eldest sons.  I believe it brings data to something that many have seen and heard repeatedly: sometimes the kids shouldn't be put in charge of the shop. 

McKinsey conducted a study of more than 700 mid-size manufacturers in France, Germany, the UK and U.S..  It looked at key management performance metrics on a 1 to 5 scale, and found that the average management score for family-owned businesses was 3.2.  However the average score for companies led by the eldest son was 2.9, while that of companies led by outsiders was 3.6.  The biggest difference was seen in France, where family-owned companies run by eldest sons accounted for 43% of the gap in managerial quality.

I think there are several Challenge Dividend factors at play here:

• Diversity is needed.  In any business, a range of perspectives helps come up with better ideas.  Outside management can bring this, while family-only management often does not.
• Some children are pressured to join up.  We all know the stories of fathers who pressured sons and daughters to take over the business when it was not their choice.  This sets them up to fail.
• Other children are less pressured to succeed.  Families can be much easier on each other in a business operation.  You can't fire your family, so you accept limited skills or poor results. The eldest son may expect to take over rather than having to work hard for it for decades. But outsiders can be selected amongst thousands of candidates, and are easily fired if they fail.
• Ownership is usually private, so there is less outside pressure to drive results.  These companies are protected from sharing their results publicly and can choose to operate unprofitably for decades.

Interestingly, the downsides of family businesses are one of the reasons that many companies in China and other emerging Asian economies may not make the jump to the big leagues of global business.  There are cultural traditions in the East that place heavy value on the importance of the family and in sons following in the footsteps of fathers.  Meanwhile, there is the natural tendency to trust one's family more than strangers, especially in an emerging economy with fewer laws and more corruption.  In much of the Western economy, meanwhile, we have learned to trust strangers thanks to strong legal enforcement of contracts.

I am a big fan of family business and know several people who work in them, but I agree with McKinsey that a mix is best, especially for those companies that wish to grow from a small, family-owned business to large, publicly-traded corporation.  In a way, a family business with outside management can be the best of both worlds, as it combines long-term thinking and owners who are personally invested in the operation with outside experts who bring diverse skills and can be easily let go if they fail.

GoogTube: Challenge Insights - Part 2

Today is Part 2 of a Challenge Dividend analysis on the stunning $1.65 billion purchase of YouTube by Google.  My second entry in this series covers a piece of news that was quickly overwhelmed by the merger coverage, but has even bigger potential for revolution.

A day before its merger announcement, both Google and YouTube independently cut deals with major recording studios that would allow for consumer-generated videos to use copyrighted songs without permission.  Under the terms of the deal, GoogTube will identify when copyrighted material is used on consumer-submitted videos, and will send music labels a cut of the advertising dollars that are generated.  This is historic in that it opens up the market of home-generated content, while creating new business models for the companies involved.  The consumer gets 15 seconds of fame without legal threats; music labels get a percentage of revenue from a growing market that it saw zero from before; and GoogTube gets to pursue marketers dollars in this space without threat of lawsuits.

The studios involved include Universal Music Group, Sony BMG, CBS, and Warner Music Group.  For years, the studios have been aggressively fighting the tide of online material that uses its artists' work without permission.  They have issued thousands of threats and pushed Google and YouTube to remove thousands of videos from their site. 

But the tide has been rising too high and too fast for music companies.  Perhaps they learned the hard way from Napster that suing your consumers has a way of backfiring, and that this online music thing is quickly replacing CDs and traditional albums.  This time, they felt the pressure to serve consumers and the opportunity to make a buck. 

Meanwhile, YouTube responded with this innovative solution because of the pressure from legal action and its desire to have a legitimate business model.  These two pressures literally put a billion dollars in the balance, as analysts suggested YouTube was too tainted by legal pressure to be purchased.  It's no small conincidence that Google swooped in days after the deals.

I'm excited and quite amazed that these forces all combined to make this revenue-sharing deal happen.  But I'm not surprised at the reason: Challenge leads to improvement.  And everybody wins.

GoogTube: Challenge Insights - Part 1

Last week the media world was rocked by the stunning $1.65 billion purchase of YouTube by Google.  While not that unexpected, it offers an exciting new chapter in the evolution of both the Internet overall and advertising in particular.  I believe there are two interesting takes on the merger from a Challenge Dividend perspective and offer them up here.

Nate Elliott, a star analyst at Jupiter, published an opinion on his blog and in the UK's Daily Telegraph last week that is at the heart of the Challenge Dividend.  According to Elliott, YouTube will be much less successful because of its purchase by Google, because it will feel less pressure to generate profits.  Here's his argument in brief:

• As an independent company, YouTube would have aggressively sought out new revenue models.
• Google makes so much money from search that it has less need to force YouTube into profitability.
• Google itself has been unable to shift from its successful text-based ad model, but its huge profits on these ads mean it has less pressure to change.

Elliott points out one early example of a pattern of "unpressured choices" in that YouTube and Google have both chosen not to place short ads (called "pre-roll advertising") at the start of video clips.  This is a service that media agencies and their clients are literally begging for; and most consumers seem to accept that to see free content they need to watch a short ad.  But in August, YouTube's CEO rejected the idea.

Some might argue that Google is making a long-term bet and YouTube should not be under pressure to create immediate returns.  In fact, one of my loyal readers suggested that the weakness in my entire Challenge Dividend argument is that it may decrease the opportunity for important long-term investments (that need protection from quick payout). 

I believe that long-term investments can and will be successful in a Challenge Dividend world, but only if companies continually challenge their investments in other ways.  There are more examples of failed long-term investments than successful ones, mainly because these are completely isolated from pressure of any kind - be it profitability, ROI, or hitting key milestones.  Xerox PARC was an amazing source of new technology and brainpower, but most of its ideas never made it to market first.  This brain trust was famously isolated away from headquarters and failed to tie into existing products and markets for Xerox. 

A better example is Procter & Gamble's investment in diaper technology that led to today's Pampers franchise.  As described in the book Will & Vision, P&G knew that it had to get the price down to about 6 cents for disposable diapers to be used on everyday occasions by parents in the 1950s.  This challenging number became the rallying cry and internal ROI measure.  It took R&D and test marketing 10 years to figure out how to dramatically reduce production costs while honing the marketing needed to convince parents to switch from cloth.  Its rollout in 1966 was a huge success and the disposable diaper market grew from $10 million to $370 million by 1973.

Time will tell if GoogTube is able to payout its $1.65 billion investment.  I would be more confident if Google had made a "statement" like P&G in diapers - that it was shooting for a long-term goal that was meant at opening up a new market.  But even if the merger fails, the good news for consumers and advertisers is that the YouTube payout is a motivator for new entrepreneurs, and the Google purchase is pressure for Yahoo! and MSN to take similar risks. 

Great Business Via Great Place to Work

I am happy to report to my readers that Bridge Worldwide, my day job, was named the #9 Best Small Business to Work For in America by the Society for Human Resource Management.  This is the same organization that lists the Fortune Best Companies to Work For.  And I am very proud both as an employee and executive at Bridge.  From the day I first joined Bridge, I learned that the best hard-core business strategy for a successful advertising agency is to make it a great place to work. 

I joined Bridge Worldwide two years ago last week and it has been an amazing learning experience in how the power of people can drive a company to success.  Before, I was a Brand Manager at P&G with 6 direct reports.  If the plant kept turning out cleaning product, our jobs were pretty safe.  At Bridge, an advertising agency, I inherited a group of more than 30 and quickly learned that if people don't show up, or show up unmotivated, the work will clearly suffer.  My learning curve continues to be nearly vertical as I help drive our team through high growth and manage some bumps and bruises along the way.

To be clear, being a great place to work is NOT about short hours and foosball.  What most of us love about working at Bridge is the people.  We work hard and play hard together.  We talk about family and life a lot.  We always know that we need to get better and improve.  And we are continuously growing as individuals, work groups and as a company overall. 

I enjoy interviewing new hires and hearing about how they came to Bridge because they knew it is a special place.  I love the chance to impact skills by teaching, and I love being molded as well by my direct reports.  I love seeing one of my people come up with a great idea or leading a big meeting for the first time without my direct involvement.  Through the fire of a new business pitch to the pain of an angry client, our people pull together to help each other succeed.

A great example of the result of our culture happened on Friday.  One of my Account Supervisors left the company to prepare for full-time motherhood, and she sent a note that said Bridge was the best place she ever worked.  It really made my heart smile to hear this, as it shows that we are not just building a great business, but building a place where people actually love coming into in the morning. 

Getting back to the Challenge Dividend, I love that organizations like the Society of Human Resource Management and Fortune make the effort to establish rankings for "fuzzy" things like the best places to work.  It gives our company a way to challenge ourselves to improvement, a way to measure ourselves against competitors for quality people and great clients, and a "trophy" to hold up to celebrate a job well done.  Perhaps best of all, like in sports, the rankings start over every year - and we must push ourselves to make it an even better place. 

Next year we're determined to be #1, by enjoying our jobs even more.

UPDATE: As a loyal reader pointed out, yes we are hiring!!

Adjusting the Rules of Limbo

This post continues a short series with examples of how even religion is adjusting and improving due to the challenge to keep/gain believers over competing faiths and world views (see previous here and here).

Last week, I discovered in the BBC News that religious experts at the Vatican are expected to recommend a change in church doctrine which would no longer assign the fate of unbaptized children to "limbo".  This belief has lasted for more than 2,000 years, yet the Roman Catholic church, under continuing pressure to modernize, appears ready to make this important change. 

The idea of limbo for unbaptized babies is a fascinating, but tragic concept.  In the Roman Catholic religion, the unbaptized are unable to enter Heaven.  At the dawn of the faith, this meant that these babies would actually be doomed to Hell; since all men and women inherited the original sin of Adam and Eve, even innocent children would pay the price. 

But in the 13th Century dissatisfaction with the idea of babies sent to Hell led to a theory by Peter Abelard, a French scholastic philosopher.  He first suggested that babies who had no personal sin did not deserve punishment.  So instead, they would go to "limbo", a state of existence "where unbaptized babies, and those unfortunate enough to have been born before Jesus, would not experience pain but neither would they experience the Beatific Vision of  God."

Today, 800 years later, the Roman Catholic church seems ready to adjust, and I would argue improve, further.  The pressure from believers is very strong.  Millions of parents have suffered untold misery knowing that their children - taken so horribly soon after birth - would not be reunited in the afterlife.  My father and his brothers experienced this first hand; growing up in a strict Catholic home, his mother suffered two miscarriages.  She would remind them to, "Don't forget about your unborn siblings wandering in limbo, while you have the grace to be alive."

Some suggest the move to abolish limbo is an effort to remain competitive with other faiths.  Scholars suggest that limbo is interfering with the growth of Catholicism in Africa and Asia, where infant mortality is high and "growth potential" of converts is strong.  Interestingly, Islam teaches that all babies in the world are born innocent.

While many seem ready to applaud the Vatican, other believers recoil at the idea that doctrine thousands of years old can be easily swept aside.  These are people who have most embraced the faith, and all of its less appetizing aspects.  For them, a quick change of ancient rules could weaken their belief system.

I applaud the Vatican for continuing to evolve its views, even if it comes late for millions of families stricken by the loss of a child.  At the end of the day, religion should exist to serve the spiritual needs of people.  These needs and society itself change over time, so adjustments to the present and improvements for the future will ensure that the positive effects of faith continue.

A Challenge to Charities

Challenge can drive improvement in any organization.  Usually I focus on business or political organizations in this space, but one of the most important opportunities for improvement through challenge is not-for-profits. 

Not-for-profits hold a special place in this space because: (1) charities' core mission is to improve lives, whereas businesses improve lives as a by-product of generating profit; and (2) they typically get a "free pass" from many challenges and traditional competition, meaning that they have less pressure to improve. 

Light must be shed on the inner workings of charities now, more than ever, as the organizations can be as scandal prone as Enron or Congress.  For example, the United Way, the country's largest charity, has seen scandals that would lead businesses executives into painful prosecution.  For example:

• In 1992, the United Way's national leader, William V. Aramony, was accused of fraud and embezzlement, while receiving a surprisingly large annual salary.  He was convicted in 1995 on 25 counts including conspiracy to defraud, mail fraud, wire fraud, transportation of fraudulently acquired property, engaging in monetary transactions in unlawful activity, filing false tax returns and aiding in the filing of false tax returns.
• In 2002, the New York Times uncovered that the United Way had double counted donations and included the value of volunteers' time in order to artificially depress expenses as a percentage of donations.  While this may seem small, the United Way uses claims of low expenses as a way to (unfairly) win dollars away from competing charities.

Not-for-profits need the pressure to improve just like the rest of us, and, thankfully, the Internet is fostering new challenges for charities.  One of my loyal readers recently informed me of Charity Navigator, a not-for-profit itself that was created to allow givers to see unbiased information regarding specific charity efficiency. 

To test Charity Navigator, I ran a search of the Aloha United Way in Honolulu, Hawaii.  Within seconds I was able to see a report on this charity's overall rating, efficiency index, mission, leadership salaries, and a comparison to other United Way chapters.  Users can also compare any two charities in a vast database.

Independent ratings, expert opinions, key financial indicators, and competitive comparisons are all measures that can drive the Challenge Dividend payoff.  They provide an even playing field of comparison for donors to choose where their dollars are best directed.  As a result, the better, more efficient not-for-profits are more likely to get additional funding.  And these measures become targets for charities to use in driving improvement.  Finally, with the help of a third party like Charity Navigator, we can trust that the numbers are legitimate, apples-to-apples comparisons.

Result: not-for-profits try harding to spend our dollars wisely, and more people benefit from our giving. 

Competing For Salvation

Since I didn't seem to generate too much anger with my last religious-oriented post, I figure it is safe for a second round.  One of the things I find interesting about religion today is that there seems to be increasing competition among faiths for the minds of followers, as well as increasing marketing skills among religious leaders.  One benefit is that religions are innovating and improving to better serve their parishioners.

One example of this improvement due to competition is seen in the photograph here, from Zion Lutheran Church near my neighborhood.  As you can see, this church has divided its Sunday service into various formats, each appealing to a different target segment.  These include:

• Classic Service: Note use of the term "classic" to positively signify that this is old-time religion.  Most likely a traditional sermon catering to an older crowd.
• Christian Edge: Bible classes for all ages; allows for extra learning by the Classic crowd and Sunday School for the kids.
• Praise Ablaze: Billed as "contemporary worship", this is for the younger crowd that prefers music and less traditional messages.

Years ago options like this would be unheard of.  When I grew up we didn't attend church very often, but when we did it was a lot less "consumer centric".  You had a traditional sermon and maybe 30 minutes for Sunday School.  Today, there are churches in town that use Powerpoint and barely crack the Bible open. 

Many churches have adapted their messages and presentation in response to the challenge of competing media as well as competing faiths.  Today's "consumer of faith" is busier than ever and all forms of media have become more aggressive and innovative in courting their attention.  And if Sunday services fail to adapt they will simply lose this empowered consumer to other alternatives.

Some may believe that making church services more user friendly is a mistake - maybe another example of the consumer society negatively impacting tradition.  Some may see the slow pace of a  "traditional" service as a small cross that they must bear.  But I believe churches are smart to adapt to modern times and modern believers. 

Habits and culture continuously change whether we want them to or not; and for a faith to meet its core purpose - improving people's lives - it must adapt as well.  Only those faiths that adapt to "consumers" will make an impact and continue to grow.