Agenda

1. Agenda • Introduction • Session Goals • A puzzle • “When More Uncertainty is Better” • Lessons from two Wall Street Investment banks • Discussion • Take-aways • How can these ideas help companies generate a competitive advantage? • How can you implement these ideas in your organization?

2. Introduction • Dr. Stanton Wortham • Judy and Howard Berkowitz Professor of Education, Graduate School of Education, University of Pennsylvania

3. Introduction • Dr. Alexandra Michel • Faculty at Marshall School of Business • Teach executives, MBAs, doctoral students, and UG • Guest faculty at Wharton • Recent book: “Bullish on Uncertainty: How organizational cultures transform participants” • Field research with over 14 professional service firms on Wall Street • How can firms cultivate high performance in employees? (human potential perspective) • Goldman Sachs, NY: Investment banker (M&A) and training department • Wharton Ph.D.

4. Introduction • Audience • Selected introductions • How do you experience uncertainty in your business? • Who is affected in your organization? • In what form? • What is your role in helping the organization cope with uncertainty? • What would you like to get out of this session?

5. Session Goals • Learn how to benefit from uncertainty • New and effective organizational coping strategy: Uncertainty amplification • Compare to traditional, less effective strategy: Uncertainty reduction • Understand what the two strategies look like • Understand what their relative strengths and weaknesses are • How they affect employees differently • How they affect organization performance differently • Adapt uncertainty amplification strategy to your industry

6. A Puzzle • Two highly successful Wall Street Investment Banks “Individual Bank” and “Organization Bank” • Both banks faced high uncertainty due to • Industry deregulation • Globalization • Fast pace of technological change • Political instability

7. A Puzzle • Time-tested strategies stopped working from one day to the next • Current example: Melt-down of financial markets • Examples from audience? • One bad decision can bring down bank • Banks wanted to help bankers cope with uncertainty

8. A Puzzle Individual Bank • Banks fail when • “individuals are overwhelmed with the information they get or the tasks they have to do” • “aren’t given clear goals or directives” • “do not get the training they need to know their job” • “are getting inconsistent messages from the HR processes we have in place: when you measure them on one thing and reward them on something else”

9. A Puzzle Individual Bank • Reduced banker uncertainty • clear organizational strategy => bankers’ specific goals • carefully trained its superstars in narrow domain of expertise • matched people to projects based on expertise • every banker had predetermined role on projects

10. A Puzzle • How do you think the bank performed? • How do bankers feel about this strategy? • Clients? • Organizational scholars? • What are the general strengths? • What are some of the drawbacks? • Do you have experience with this strategy?

11. A Puzzle Individual Bank’s Performance • A leading investment bank for decades • Bankers happy • “I feel like I have a system that is supporting me” • Clients were pleased • “We give business to the bank that gives us the best banker team.” • Organizational theorists would be pleased • Uncertainty reduction is “fundamental need” at individual level (Hogg & Mullin, 1999) and imperative of organizational design (March & Simon, 1958) • Some drawbacks • When superstars left, colleagues and clients went along => entire business units collapsed • Isn’t this what all knowledge-intensive organizations struggle with?....

12. A Puzzle Organization Bank • Amplified uncertainty for its bankers. For example, it: • emergent strategy; bankers had no specific goals but were inundated with almost daily feedback on consequences of action and trusted to self-adjust • hired graduates without finance knowledge and put them on deals from day one

13. A Puzzle Organization Bank Amplified Uncertainty They pulled me out of introductory training yesterday and staffed me on this fire drill where I have to do all these analyses that I have never heard about before. I told John [the senior banker on the deal] that I am an English major and that we didn’t learn any of this in [the bank’s] introductory training. All we got there was socializing. I actually told all of that to his butt because he was running around like a chicken with the head cut off and didn’t really have time to sit down. He then unloaded a stack of stuff on my desk, with old presentations and templates, explained to me how to get going, and then told me to ask the people sitting around me or call him on his cell with questions. (Junior Organization Banker at entry)

14. A Puzzle Organization Bank Amplified Uncertainty This is really difficult for me. I have always been the best at everything I took on. Now I am constantly in situations in which I feel completely helpless and incompetent. (Junior Organization Banker at entry)

15. A Puzzle Organization Bank • Amplified uncertainty for its bankers. For example, it: • staffed bankers fungibly • bankers substituted for one another when they were overloaded or went on vacation

16. A Puzzle Organization Bank Amplified Uncertainty Even at my level I am still regularly confronted with deals about which I know relatively little. (Organization Bank Vice President) This is unthinkable here. It just doesn’t work that way. You can’t replicate what your colleague knows at the drop of the hat. (Individual Bank Vice President)

17. A Puzzle • How do you think Organization Bank performed?

18. A Puzzle Organization Bank’s Performance • A leading investment bank for decades (“a money-making machine”) • Organizational theorists are puzzled • Clients are initially displeased

19. A Puzzle Organization Bank’s Performance What is this? The high school science project team? I have a granddaughter who is older than you are….My ass is on the line here and this is the best that you can come up with? You know what this is? [pointing to a stack of business cards in front of him]. These are business cards from other bankers I am dealing with. [reading off the name of the bank and the bankers’ title]:…Head of Investment Banking,…Head of Sales and Trading,… Head of Global Corporate Finance. These banks send in their superstars, their most experienced bankers. I want the same kind of attention from Organization Bank. (Client CEO at a pitch meeting) We are fungible. We all do the same thing: we all draw on the resources of the organization. (Organization Bank’s reply)

20. A Puzzle Organization Bank’s Performance • Even when senior bankers left, OB did not suffer additional attrition • Clients also stayed with bank: believed that expertise resided in bank, not in banker

21. Performance • Performance: Adaptability • Which bank do you think was more adaptive? • Why?

22. Performance • Performance: Adaptability • Individual Bank • 15 organizational changes during 2 years (new leadership, new reporting structures), driven by crises • No innovations at task level (e.g., analytics) • Innovation based on imitation (“We follow the Joneses”) • Organization Bank • No changes at the organizational level • Continuous change at the task level • Industry leader in innovation • “People see something and fix it”

23. A Puzzle • Other successful businesses also amplify uncertainty • Apple’s R&D unit (Walker, 2003) • Google’s chaos by design (Lashinsky, 2006) • IDEO • U.S. Army officer combat training intentionally creates “ambiguity and uncertainty” (Wong, 2004) • John Seely Brown was Xerox’s “Chief of Confusion”

24. A Puzzle • Why do these organizations flaunt the time-honored practice of uncertainty reduction? • Organization Bank sells the knowledge of experts. How can it be successful in situations where participants do not have the requisite knowledge? • Why would it ensure that this is not an exception but the norm?

25. 3. A Puzzle Individual Bank • Banks fail when • “individuals are overwhelmed with the information they get or the tasks they have to do” • “aren’t given clear goals or directives” • “do not get the training they need to know their job” • “are getting inconsistent messages from the HR processes we have in place: when you measure them on one thing and reward them on something else”

26. A Puzzle Organization Bank • Banks fail when • “people think of themselves as experts and don’t realize that their knowledge doesn’t apply to a new situation” • “bankers develop these recipes for how to do things and forget that each situation is different” • “bankers rely too much on what they think they know and too little on the organization’s resources” Our most catastrophic losses came about because people thought they were experts. They thought they knew what was going on though the market had changed. What we do around here has to do with dispelling this illusion. (Organization Bank Managing Director)

27. A Puzzle Organization Bank • Banks succeed when • “they can continuously remind people of how little they know” • “create the ‘insecure overachiever,’ someone who doubts what they know all the time”

28. Dumb Experts Financial models are useful tools. But they can also be dangerous because reality is always more complex than models. Models necessarily make assumptions. … But a trader could easily lose sight of the limitations. Entranced by the model, a trader could easily forget that assumptions are involved and treat it as definitive. Years later, traders at Long-Term Capital Management, whose partners included Scholes and Merton themselves, got into trouble by using models without adequately allowing for their shortcomings and getting heavily overleveraged. When reality diverged from their model, they lost billions of dollars, and the stability of the global financial system might have been threatened.(Rubin, 2003)

29. Dumb Experts • IBM’s difficulties in the early 1990s to adapt to a changing environment was caused by “a mistaken belief in the ability of the mainframe computer to sustain its profitability, growth, and size, despite the information which it possessed (and processed) contradicting this belief.” (Fransman, 1994) => Internalized concepts prevented management from noticing readily available information

30. Dumb Experts A recurring characteristic of the recent trouble in financial markets is that many lenders, funds, and brokerages were following statistical models that grossly underestimated how risky the market environment had become. (Wall Street Journal, August 7, 2007)

31. Short Answer • Short answer to Organization Bank puzzle • Experts over-rely on their own knowledge • Don’t notice when environment changes and knowledge is no longer applicable • Only when people are uncertain of their own knowledge do they use organizational resources and pay close attention to the situation • Use a more organization-centric form of cognition that is highly adaptable • High uncertainty avoids • Silo effect • Not-invented-here syndrome

32. Other Examples IDEO • Designers do not specialize but move to a new industry after completing one project • Typically work on products with which they had no experience • Similar to Organization Bank’s fungible staffing • Amplifies designer uncertainty “We were learning as we went. If we didn’t know how to do something we would never say to the customer, ‘we don’t know how to do that!’” (IDEO designer)

33. Other Examples IDEO We are all very smart people, but given the complexity and constant trade-offs associated with the design process, brilliance comes from the minds of lots of smart designers rather than the actions of one brilliant designer. A true design genius wouldn’t be happy here. But I don’t know if they exist. I have never met one smart enough to consider all those variables at once. (IDEO designer) • Similar to Organization Bank’s organization-centric form of knowledge production

34. Other Examples US Army Officers in Iraq • Army has tried in vain to cultivate adaptable leaders through traditional training • But achieved this goal in unexpected ways: “The complexity, unpredictability, and ambiguity of postwar Iraq is producing a cohort of innovative, confident, and adaptable junior officers.”

35. Other Examples US Army Officers in Iraq • “The question is not which role, but how many?” • “You are not trying to learn one job, you are trying to learn several dozen jobs. Everything from being a politician to being a commander. That is just an incredible amount of information for someone to carry around in their head.” => Similar to OB in broadening range of information

36. Other Examples US Army Officers in Iraq • “… a surprising lack of detailed guidance from higher headquarters. Geographical dispersion, changing tactical and strategic situations, and volatile environments prevented higher echelon commanders from developing plans with specific guidance for junior officers.” • “The big thing is that it is bottom-up fed.” => Similar to OB: lack of top-management guidance, emergent strategy

37. Other Examples US Army Officers in Iraq • Recommendation: • “instill ambiguity and uncertainty instead of following closely scripted scenarios”

38. Identity Elaboration Cueing Application Very High High Med. Low Individ.Banker Identity Transformation Search Demotion Very High High Med. Low Org. Banker ? ? Six Months Entry = Social Identity = Stress = Sensitivity

39. Discussion • What are the key take-aways? • How can these ideas help companies generate a competitive advantage? • How can you implement these ideas in your organization?

40. Research Setting • Two highly successful Wall Street investment banks: “Individual Bank” and “Organization Bank” • Comparable in terms of • Type and number of employees • Task (financial advisory) • Client • Remuneration • HR processes • League table standing, profitability

41. 2. Data Collection • Participant observation: 2 years, 5 to 7 days (80- 100 hours) per week (about 7,000 hours in total) • 136 semi-structured, formal interviews (30-45 minutes each) • 120 informal interviews • Performance data • Recruiting, training, and client materials

42. 2. Participants • Recruited from top universities, including Chicago, UCLA, NYU, Wharton, Harvard, INSEAD • Associates • Mostly MBAs • Average of 2 years work experience • Average age: 28 years • About equal number of men and women