WWC has always been about Innovation, but the amount of traffic devoted to innovation in higher education has grown over the last two years.  In fact, the most popular articles are the ones that talk about how to transform colleges and universities. I’ve tried to categorize the posts accordingly, but it now seems like a good idea to create  separate WWC sites, one  devoted exclusively to innovation in education and the other devoted exclusively to private sector innovation.

Of course, I am not taking  the term “exclusively” too seriously, so you will still find comments, articles, and feeds that relate to both.  But for the most part, the worlds of execution and innovation will be bouncing off each other at

http://innovate-wwc.com.

Meanwhile, all of the inconsistencies that make universities such interesting places will be colliding at

http://innovate-edu.com.

The Ocean Exchange Navigator Award finalists are competing for a $100,000 prize.  Their challenges are daunting: reshaping coastlines, reinventing the sailing vessel, creating a market-based sustainable fishing industry.  It’s a new take on WWC because when it comes to things like saving the rapidly disappearing coastal infrastructure execution is the real challenge.  This video is funny and terrifying at the same time.

“Destroying the culture!” cried the masses in my post about rose-colored glasses. It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

Even in an engineering company with “Invent” in its name, fundamentals matter.  In the Fall of 2001, I was giving a series of speeches at HP labs around the world. Part of my job was to clearly communicate progress to the technical staff of HP’s far-flung divisions, but–increasingly–it involved keeping a lid on things.

The share price free-fall of November 2000 was due in part to a significant earnings miss that had undermined the markets confidence in CEO Carly Fiorina’s ability to execute her way the kind of growth and market share she had promised.  The senior management of the company had fixed on the idea that growth meant growth in market share and profits. Market share was the ever-present  context for discussing why HP’s computer businesses were not performing. Fiorina talked incessantly about it.  It was penciled into my speeches to industry analysts.

Growth was supposed to be the result of wrenching changes, but it seemed to me like HP’s employees wanted to talk about the “wrenching” part.  It was, however, a combination of events that was the hardest to contend with.

The IT industry was in chaos, and most of HP’s employees had never experienced a bursting bubble. The number of companies that only a few months ago had seemed incapable of making a bad bet  but were now winking out of existence.was terrifying. Pessimism spread throughout the company in early 2001.

Then, in rapid succession, the announcement of the Compaq merger and the terrorist attacks of 9/11 seemed to push everybody over the edge. I remember walking into the executive suite after an especially difficult visit to the East Coast, to find much of the corporate staff huddled around Carly’s TV.  It was tuned to CNBC, and an analyst was making doom-and-gloom predictions about the merger.  He was sour on HP’s strategy and technology stocks in general. The ticker flickering  at the bottom of the screen seemed to confirm every dire forecast. Someone looked up and said, “What’s going on, Rich?” It was not really a question. It was an accusation.

The engineers were in a particularly foul mood. Carly had embraced their strategy–three technology directions that they all believed would position HP as a serious internet contender (I’ll talk about that in a later post and about why I believe that HP’s fumbling of WebOS is such a tragedy). In truth, the CNBC guy was right. The merger was a massive distraction. Aside from the printing business–which continued to motor along by figuring out new ways making a lot of money out of selling colored water–execution was anemic. That was why I was pushed over the edge when in a  Town Hall meeting that was supposed to help build a fire under the development teams, someone in the back of the room called out, “Bill and Dave would not have done this to us!”

Anna Mancini, the HP archivist whose offices were just down the corridor from mine, had been in the audience, and a few days later she walked quietly into my office and plopped a folder onto my desk. It was a transcript of a David Packard speech that had been handed to her by Dave Kirby, HP’s first director of public relations.  Anna called them “give’em hell” speeches. I had seen one of the transcripts before.  They were circulated among line managers as graphic illustration that it was ok to raise your voice to employees.  These transcripts, however, were unvarnished. They were about fundamentals, and as Anna told me, they were about “the fact that he definitely held his managers accountable for their performance.”

Kirby’s cover memo gave some bakground for the speeches which were made in early 1974 to a group of HP managers:

HP had experienced a disappointing year in 1973, at least in the eyes of Packard and Bill Hewlett. Inventories,accounts receivable and other expense items exceeded appropriate levels and there was even talk among some managers of seeking outside funding–incurring some long-term debt–to get the company over its rough spots.

After apologizing for a Bill Hewlett PA system address during which

…you know Bill got a little mad about it and I guess he got carried away over the PA.

Dave got to the heart of the problem:

…I thought it might be helpful to take a few minutes and turn around see if we can really define what some of our management objectives in this company should be…for some reason we’ve gotten a little bit off track in the last couple of years…For some reason we’ve got this talking about one of our objectives is to increase the share of the market, and I want to start right out by telling you that that is not a legitimate management objective of this company, that it leads you to the wrong kind of decisions, and that hereafter if I hear anybody talking about how big their share of the market is or what they’re trying to do to increase their share, I’m going to personally see that a black mark get s put in their personnel folder.

It must have been a stem-winder, because he catalogs all the profit shortfall, division-by-division. Accounts Receivable comes under fire,

It’s your job to see that this gets done and we just didn’t do it last year. Everybody thought it was somebody else’s business, and I even found some cases where a salesman had gone out and…told a customer that he doesn’t have to worry about when he pays his bill.

So does engineering project management

…if anything you might argue that the R&D costs ought to be allowed to grow as rapidly as our sales,

and capital equipment,

We don’t have to have every goddamn thing we’re doing gold plated.

But what really struck me was the harsh tone he directed to a strategy that valued maximizing profit growth above all else. Packard was a student of Peter Drucker:

To Drucker, businessmen who talk about profit maximization are doing more to hurt the system than anyone else…What strikes Drucker as most moronic is that the maximum profit which management hopes to achieve with their maximum profit goals is often less than the minimum profit needed to keep the business healthy and growing.

In the Fall of 2001, the entire company was transforming itself for growth.  The kind of growth that the IT industry had become accustomed to. But in the early months of 1974, David Packard told his employees,

The growth company is not a sound investment.  Such a company sooner or later, and usually sooner, runs into real difficulties. Sooner or later it runs into tremendous loses, has to write off vast sums, and becomes in fact unmanageable.

HP’s transformational strategy was based on growth envy. Carly Fiorina was in a fierce battle with Scott McNeely of Sun Microsystems over his seemingly boundless capacity to chew up huge portions of the Unix server market. On the other hand, Apple’s share of the PC market hovered around 6% (even today it it only has 10% of the total PC market).  It ranked 287th in the Fortune 500. When Oracle acquired Sun in 2009, effectively shutting down a growth-driven powerhouse, Sun’s market cap was slightly under $8 Billion.  When the market closed last Friday, Apple’s market cap was well over $300 Billion. It was more valuable than Exxon, the next largest company.

What about HP’s transformational strategy? In January of 2001, the total market cap of HP, Compaq, and Agilent (which was in the process of being spun out in an IPO) was slightly over $75 Billion when adjusted for inflation. In July 2011, after a decade of mergers, acquisitions, and divestitures- all aimed at increasing size and market share–the market cap of HP hovered around $72 Billion.

in 1974, David Packard told his managers,

Now I guess that you’ve judged by now what what I am getting back to is that one of the traditional policies of this company has been that we were going to manage it so we would finance our growth from earnings, cash flow, and as we somehow seem to have gotten away from that I see absolutely no reason why that should not still be our basic objective.

It mattered, because

The market doesn’t give a damn about your sales, they don’t give a damn about your share of the market; the only thing that counts is the rate of growth of earnings if your going to be in a growth company, and a growth company is not growing in size, it’s growing in earnings potential., and this is the thing that is so important for all of us to understand and is so important to do something about because we’re just facing a disaster if we don’t.

If culture matters on the world of innovation, then it also matters in the world of execution.  The HP-Compaq merger and subsequent events were under the watchful eye of an experienced board of directors.  Many of them had long ties with both companies, and it’s possible that some of them were in Dave Packard’s audience that February day in 1974.  I never heard any of them talk about, though.

All non-director officers were tossed out of the boardroom when “strategic” matters were discussed, so I guess it’s possible that someone showed up to “giv’em hell” and I never knew about it. Culture trumped strategy in 2001, but not in the way that most people think. Strategy was in the hands of an executive culture that placed their bets on company size, market share, and earnings potential that never materialized.

NEWMAN: Wait a minute. You mean you get five cents here, and ten cents there. You could round up bottles here and run ’em out to Michigan for the difference.

KRAMER: No, it doesn’t work.

NEWMAN: What d’you mean it doesn’t work? You get enough bottles together…

KRAMER: Yeah, you overload your inventory and you blow your margins on gasoline. Trust me, it doesn’t work.

JERRY: (re-entering) Hey, you’re not talking that Michigan deposit bottle scam again, are you?

KRAMER: No, no, I’m off that.

NEWMAN: You tried it?

KRAMER: Oh yeah. Every which way. Couldn’t crunch the numbers. It drove me crazy.

Even Kramer got it. Fundamentals matter, but there is a persistent legend in many engineering organizations that culture trumps the bottom line. It’s a legend that propagates because, as change management consultant Curt Coffman has provocatively noted, “culture eats strategy for lunch” when it comes to execution. What Coffman and others who talk about “soft stuff” don’t tell you is that in the end culture doesn’t matter.

The reality is is this: culture only trumps the bottom line in organizations that are heading in the wrong direction. It’s easy to see why: bad execution can be excused when it is in the service of a higher calling.  Sometimes — the legend goes — cultural purity even demands failure. Briefings that begin with a retrospective tour of a company’s glory days or the exploits of its leaders are not going to end well.  It’s a malady that afflicts start-ups, Fortune 100 companies, universities, and political office holders.

It was a rare meeting at Bellcore or Bell Labs that did not begin with a bow to a century of innovation and accolades. Theirs was a tradition so rich that it was bound to color all projects in perpetuity. I knew a  business development managers who intoned “WE ARE BELLCORE!” at the start of engagements. It always sounded to me like a high school football chant designed to cow the opposition.

The remnants of the Army Signal Corp  research lab at Fort Monmouth New Jersey had long dispersed by the time I interned there in the early 1970’s, but stories of the famous scientists who once stalked the cavernous halls of the enormous hexagonal building near Tinton Falls were retold to each new class of PhDs as if  the great men would be dropping in any moment to don lab coats and resume their experiments.

Start-ups are not immune, either. A few weeks ago, I was nearly ejected from a meeting with a CEO who was raising early stage money for suggesting that the distinguished professors who had founded the company might have had less than complete insight into market realities.

The “We are great because…”  meme  is propagated by leadership at all levels. Even in this age of the decline of the celebrity CEO, countless university and corporate websites are travelogues for executive jaunts to far-flung campuses. Supporters of one prominent Silicon Valley CEO would muse to anyone who cared to listen: “I wonder what it feels like to always be the smartest person in the room?”  The phrase found its way into an industry analysts’ briefing at the very moment that the company’s stock was falling off the edge of a cliff. I watched the faces of the analysts, and it was clear that they were pondering entirely different questions.

I’ve had my share of run-ins with employees who were not at all shy about using vaguely remembered words of long-departed leaders to pit culture against execution. In one instance, a series of patents led to an ingeniously conceived system for streaming audio and video from conference rooms and lecture halls. Unfortunately every cost projection showed that the effort required to install and maintain the equipment swamped any conceivable revenue stream. When I confronted the inventors with the inevitable conclusion, I was excoriated in the most graphic possible terms because I had not taken sufficient account of  the intellectual beauty of the system.  The crowning blow: “Dr. [insert the name of any of my predecessors] would have understood my work!”

On another occasion, I was called upon to invest heavily in a newly conceived and revolutionary mathematical method that would transform not only our  business but scores of related industries.  The inventors’ local managers had been completely sold on the idea and were willing to put a substantial portion of their margins at risk to develop it.

Key to the idea was the notion that every textbook in the field had been written by authors who willfully ignored the power of the new theories. The invention involved an area in which I had done research in the past, but  I couldn’t make much sense of the claims.  I dutifully sent drafts of patent disclosures to experts, but the feedback was discouraging.  The claims in the patent disclosures were either false or so muddled that further analysis was useless.

I pulled the plug. Reaction was swift and heated.  Here’s what it boiled down to: the founders would have had faith in the employees, and I did not. They were right about me, but not about the founders.

It is in the nature of engineering organizations to reconstruct the past to suit the present.  Hewlett-Packard was famous for such rose-colored glasses.  When then-CEO Carly Fiorina combined ninety or so business units — each of them concentrating on a slice of a business that overlapped with a half-dozen others, driving down operating efficiencies and, with them, margins — into a total of six, howls could be hear from every HP lab on the planet.  “Bill and Dave would not have done that to us.” A casualty of Mark Hurd’s rapid moves to salvage the strategic advantages of the two year old Compaq merger by slicing investments that did not have a clear path to revenue was the revered software laboratory at HP Labs.  “Destroying the culture!” cried the masses.

Now I happen to think that both moves were unwise, but not because of any cultural imperative that had been handed down from Bill and Dave. The numbers were seldom that hard to “crunch”.  It always boiled down to fundamentals. Risks were taken, but only when the fundamentals made sense.

It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

“Culture” often reared its head during my tenure at HP — usually as an excuse for ignoring business fundamentals. It was a problem that plagued Joel Birnbaum, my precedessor, Dick Lampman, head of HP labs and others over the years. On those occasions, I was happy to have the words of Bill Hewlett and Dave Packard to fall back on.

I’ll talk about that in my next post.

Normally collegial discussions took a nasty turn after I suggested that most universities lose money on sponsored research.

Incredulous: “I don’t believe it. My department tacks a 50% surcharge to all my contracts; how can they lose money?”

Defensive: “Here are all the reasons that doing research is a good thing, so what’s your point?

Defensive with an edge: “Why are you attacking research?

Let’s be be clear about it:  if it’s your institution’s mission to conduct research, then spending money on research makes perfect sense.  In fact, it would be irresponsible to deliberately starve a critical institutional objective like research.

On the other hand, there are not all that many universities with an explicit research mission.  But there is an accelerating trend among  primarily bachelor’s and master’s universities to become — as I recently saw proclaimed in a paid ad — the next great research university. The university that paid for the ad has absolutely no chance to become the next great research university.  Taxpayers are not asking for it.  Faculty are not interested. Students and parents don’t get it either.

The administration and trustees think it’s a great idea.  Research universities  are wealthy.  Scientific research requires new facilities and more faculty members.  Research attracts better students. Best of all, federal dollars are used to underwrite new and ambitious goals. Goals that would be out of reach as state funding shrinks. As often as not, the desire to mount a major research program is driven by a mistaken belief that sponsored research income can make up for shrinking budgets. It’s a deliberate and unfair confounding of scholarship and sponsored research

If your university is pushing you to write grant proposals to generate operating funds, then alarm bells should be going off.  Scholarship does not require sponsored research. Chasing research grants is a money-losing proposition that can  rob funds from academic programs.  It’s an important part of the mission of a research university, but for almost everyone else, it’s a bad idea.  It’s a little like shopping on Rodeo Drive:  there’s nothing there that you need, and if you have to ask how much it costs, you can’t afford it.

How is it possible to lose money on sponsored research?  After all, professor salaries are already paid for.  The university recovers indirect costs. Graduate and undergraduate students work cheap.

A better question is how can anyone at all can possibly make money on sponsored research. Many companies try, but few succeed.  A company that makes its living chasing government contracts might charge its sponsors at a rate that is 2-3 times actual salaries. Even at those rates, it is a rare contractor that manages to make any money at all.

On the other hand, a typical university strains to charge twice direct labor costs.  Many fail at that, but the underlying cost structure — the real costs — of commercial and academic research organizations are basically identical.  There is a widespread  but absolutely false assumption that underlying academic research costs are lower  because universities have all those smart professors just waiting to charge their time to government contracts. The gap between what universities charge and what sponsors are willing to pay commercial outfits is the difference between making a profit and losing a lot of money. Just like intercollegiate athletics, sponsored research programs tend to lose money by the fistful.

Let me say up front that the data to support this conclusion are not easy to come by.  Accounting is opaque. Sponsors know a lot about what they spend, but relatively little about what their contractors spend.  It is in nobody’s interest to make the whole system transparent.  But my conversations with senior research officers at well-respected research universities, paint a remarkably consistent picture.  With very few exceptions, it takes $2.50 to bring in every dollar of research funding.

Fortunately, the arithmetic is easy to do.  If you know the right questions to ask, you can find out how much sponsored research is costing your institution. Here are ten sure-fire ways to lose money on sponsored research. You do not need all of them to get to a negative 2.5:1 margin.  If you are clever just a couple will get you there.

  1. Reduce senior personnel productivity by 50%: university budgets are by and large determined by teaching loads, a measure of productivity. It is common to adjust the teaching loads of research-active faculty. Sometimes normal teaching loads are reduced by 50% or more.  It is, some argue, table stakes, but a reduced teaching load is time donated to sponsored research because funding agencies rarely compensate universities for academic year support.
  2. Hire extra help to make up for lost productivity: Courses still have to be offered, so departments hire adjuncts and part-time faculty.
  3. Do not build Cost of Sales  into the contract price: The sales cycle for even routine proposals can be  months or years.  Time spent in proposal development converts to revenue at an extraordinarily small rate. In nontechnical fields and the humanities where research support is rare, the likelihood of a winning proposal is essentially zero.
  4. Engage in profligate spending to hire promising stars: Hiring packages for highly sought-after faculty members can easily reach many millions of dollars.  A sort of hiring bonus, there is little evidence that this kind of up-front investment is ever justified on financial grounds.
  5. Make unsolicited offers to share costs: Explicit cost-sharing requirements were eliminated years ago at most federal agencies.  Nevertheless, grant and contract proposals still offer to pay part of the cost of carrying out a project.
  6. Allow sponsors to opt-out of paying the indirect  cost of research: An increasingly common practice is to sponsor a research project with a “gift” to the university.  Gifts are not generally subject to overhead cost recovery, so a university that agrees to such an arrangement has implicitly decided to subsidize legal, management, utility, communication, and other expenses, and
  7. Accept the argument that indirect costs are too high: The  meme among federal and industrial sponsors is that indirect costs are gold-plating that must be limited. Rather than believe their own accounting of actual costs of conducting research, they argue that universities, should limit how much they charge back to the sponsor.
  8. Build a new laboratory to house a future project: Sponsors argue that it is the university’s responsibility to have competitive facilities.  But that new building is paid for with endowment funds or scarce state building allocations that might have gone toward new classrooms or upgraded teaching labs.
  9. Offer to charge what you think the sponsor will pay, not what the research will cost:  Money is so tight at some funding agencies that program managers are told to set a (small) limit on the size of grants and proposals independent of the work that will be actually be required.
  10. Defray some of the management costs of the sponsoring agency: It has become so common that it is hardly noticed.  University researchers troop into badly-lit conference rooms to help program officers “make the case” to their management.
The list goes on. It is so easy to turn a sponsored research contract into a long-term commitment to spend money for which there is no conceivable offsetting income stream that institutions routinely chop up the costs and distribute them to dozens of interlocking administrative units.  The explosion in the number of research institutions has all the elements of an economic bubble.
  • It is motivated by a gauzy notion that all colleges and universities are entitled to federal research funds..
  • It is fed in the early stages by accounting practices that make it easy to subsidize large expenditures.
  • It has the cooperation of funding agencies who know that the rate of growth is not sustainable.

Virtually everyone involved in university research knows that the bubble will burst.  A colleague just showed me an email from his program director at a large federal research agency.  It said that — regardless of what he proposed — the agency was going to impose a fixed dollar amount limit on the size of its grants. But in order to win a grant, he had to promise to do more.  His solution: promise to do the impossible in two years instead of three.  Just like the famous Sydney Harris cartoon,  a miracle is required after two years. At least there would be enough money to pay the bills while a new grant proposal was being written.