GM, RIP

The more I reflect on the news of GM's bankruptcy, the more shocking I find it.  My reaction is surprisingly akin to that when I learned of Eliot Spitzer's or Bernie Madoff's flameouts:  How on earth could this happen?  What were they thinking?  And who in their right mind could dig themselves that deep a hole?

Some day the definitive book will surely be written about GM's 40-year descent into mediocrity, irrelevance, and ultimately failure, just as I'm certain authors are hard at work as we speak attempting similar explanations for how seemingly intelligent and successful folks like Spitzer and Madoff could bring their worlds crashing down around their ears--emphatically so.  Since I'm not a psychiatrist but a purported armchair student of organizational behavior, that's all I'll have to say about Messrs. S and M; let's go to GM.

Given an event such as GM's bankruptcy that is, from any objective rational perspective, nearly inconceivable, my instinct is not to try to explain it in terms of analytic reasoning or syllogistic logic but to look to the irrational, cultural, and emotional behaviors and syndromes that must have set in to lead such a storied firm to such an ignominious end.  (Lest you think I slight syllogisms entirely, one can always deploy them, along the lines of "Poor quality products alienate customers who then demand ever and ever greater bribes in the form of rebates and discounts even to think about buying your offerings, which eviscerates your profits, starves R&D, invites short-sighted corner cutting, undermines whatever quality was remaining," etc., etc.  It's a perfectly valid syllogism but it explains precisely nothing.  What begs for explanation is how GM could sink into such a vicious whirlpool to begin with.)

David Brooks, sensitive and astute observer of human decision-making that he is, starts off today's column (emphasis mine) thus:

On Jan. 21, 1988, a General Motors executive named Elmer Johnson wrote a brave and prophetic memo. Its main point was contained in this sentence: "We have vastly underestimated how deeply ingrained are the organizational and cultural rigidities that hamper our ability to execute."

On Jan. 26, 2009, Rob Kleinbaum, a former G.M. employee and consultant, wrote his own memo. Kleinbaum's argument was eerily similar: "It is apparent that unless G.M.'s culture is fundamentally changed, especially in North America, its true heart, G.M. will likely be back at the public trough again and again."

These two memos, written by men devoted to the company, get to the heart of G.M.'s problems. Bureaucratic restructuring won't fix the company. Clever financing schemes won't fix the company. G.M.'s core problem is its corporate and workplace culture -- the unquantifiable but essential attitudes, mind-sets and relationship patterns that are passed down, year after year.

Gary Hamel, writing in the WSJ, paints a similar picture of cumulative and collective denial of reality:

GM's failure isn't the result of one spectacularly ill-conceived decision--the company didn't jump off a cliff. Instead, it meandered into mediocrity, one small short-sighted step at a time. Like a two-pack a day smoker, GM committed suicide in degrees.

Dodgy quality, a toxic labor environment, incoherent brand identities, clunky power-trains, adversarial supplier relations, and subterranean resale values--these were the chronic symptoms of a management model that regarded profits as the game rather than the scoreboard, that valued financial finagling more highly than inspired engineering, and elevated MBA-types to rule over the car guys.

A scant eight months ago, GM's then-chairman, Rick Wagoner, boasted that his company was "ready to lead for 100 years to come" --a comment that only could have been made by someone who was either naively optimistic or hopelessly delusional.

No less an eminence than Alfred P. Sloan Jr., the firm's legendary CEO, wrote 45 years ago in My Years Wtih General Motors:

"Success, however, may bring self-satisfaction.... The spirit of venture is lost in the inertia of the mind against change. When such influences develop, growth may be arrested or a decline may set in, caused by the failure to recognize advancing technology or altered consumer needs, or perhaps by competition that is more virile and aggressive.... This is the greatest challenge to be met by the leader of an industry. It is a challenge to be met by the General Motors of the future."

Sloan's remarks, of course, invite us--well, me at least!-- to broaden the perspective beyond the bloody and pummeled basket case that is GM today and to ask if there may not be some intrinsic risk that tends to afflict highly successful organizations.  After all, even Jim Collins' new book, How the Mighty Fall, has to deal with the awkward fact that two of the firms he admiringly profiled in Good to Great, Fannie Mae and Circuit City, turned out to be anything but.

Back to Gary Hamel, who reminds us that GM is by no means alone:

Motorola, Citi, NASCAR, Starbucks, Sony, United Airlines, EMI, Kodak, Alitalia, Sprint Nextel, the New York Times, Unilever, AOL and Chrysler--these are just a few of the businesses that seem to have lost their mojo. Truth is, every organization is successful until it's not--and today, there are a lot that are not.

How does this happen? How do yesterday's icons become today's also-rans? How does excellence degrade? What are the causes of corporate dysphoria?

Hamel nominates three causes (emphasis in what follows mine), but then I'd like to turn to a fourth which I think is even more telling--and potentially more germane for law firms.  Hamel:

First, gravity wins. There are three physical laws that tend to flatten the arc of success. The first is the law of large numbers. We all know that it's a lot harder to grow a big company than a small one. ...

Then there's the law of averages. No company can outperform the mean indefinitely. ...As you lengthen the relevant timeframe from one year to five and then to ten, the probability of out-performing the average rapidly approaches zero. In the long-run there are no growth companies.

Second, strategies die. Like human beings, strategies start to die the moment they're born. While death can be delayed, it can't be avoided. Autopsies reveal three primary causes of death.

[1] Clever strategies get replicated. Hewlett-Packard ultimately learned how to make computers as cheaply as Dell. JetBlue took a chapter out of Southwest Airlines' playbook. ...

[2] Venerable strategies get supplanted. Digital cameras made film obsolete. Downloadable music deflated the market for CDs. ... Sometimes newcomers improve on an existing strategy, but occasionally they shoot it out of the sky.

[3]  Profitable strategies get eviscerated. ...

In life, death can come as a shock. In business, it never should. ...Companies die when they can't escape the grasp of a dying strategy.

Third, change happens. Think of the number of things that have been changing at an exponential pace: ... the production of knowledge itself. In the past, there were many things that protected incumbents from the gale-force winds of creative destruction, including regulatory barriers, technology hurdles, distribution monopolies, and capital constraints. But in most industries these bulwarks have been crumbling. ...

Fact is, most businesses were never built to change--they were built to do one thing exceedingly well and highly efficiently--forever. That's why entire industries can get caught out by change--industries like big pharma, publishing, recorded music and the major U.S. airlines. In a world where change is shaken rather than stirred, the only way a company can renew its lease on success is by reinventing itself root and branch, before it has to--a feat that even the smartest companies have trouble pulling off.

Hamel is presumably no longer addressing GM specifically, but to say that even the smartest companies have trouble turning away from their traditional customers and abandoning the processes that made them great is, when you state it that way, not surprising.  What's shocking about GM is how deep the pathology ran.  Consider this vignette, from early summer 2008:

Around [June 2008], Bob Lutz [former Chrysler CEO and pre-eminent "car guy"] sat down for lunch with [CEO Rick] Wagoner. Spiking gas prices and the global meltdown of mortgage-backed securities were creating visions of empty dealerships loaded with unsold inventory. Over sandwiches in the Ren Center, as GM's headquarters is known, Mr. Lutz told his boss, "Rick, I don't like the way this smells. My gut tells me the economy is set up for a real collapse."

Years of massive losses had left GM ill-prepared for a major economic shock. At the time it had about $21 billion in cash, but it was burning a billion or more each month.

On Wall Street, speculation about GM's fate intensified. Merrill Lynch issued a report in early July headlined, "GM Bankruptcy Not Impossible."

The cost-cutting effort remained incomplete as the Fourth of July approached. Just before the holiday, GM's top 20 or so executives gathered at Mr. Wagoner's estate in Birmingham, Mich., for a barbecue. It was an annual event for the CEO and meant as a social gathering where no formal business was to be discussed. Even though GM's fortunes were worsening, the usual rules held, people familiar with the matter said.

This is the tale of a company profoundly and fatally committed to a totally delusional world-view.  I guess we can only hope the hotdogs and hamburgers were first rate, but Emperor Nero had nothing on these guys.

I promised you a fourth perspective, and it comes from my friend (disclosure) Don Sull, professor of management practice in strategic and international management, and faculty director of executive education at London Business School.  Don has a new blog at the FT, where he wrote yesterday:

Many people tell a simple story of corporate failure. Success breeds hubris which leads to overreach and triggers decline. After studying the causes of corporate failure and helping companies avoid it for two decades I have discovered a more profound dynamic that drives corporate decline. The commitments required to succeed harden over time and prevent companies from adapting effectively when circumstances shift. Organisastions often succumb to active inertia - they respond to disruptive changes in the environment by accelerating activities that worked in the past. [...]

Several factors harden commitments. Time and repetition enhance familiarity. Managers avoid reversing commitments to maintain their credibility. New commitments often reinforce the status quo. Interconnections among commitments hinder make it hard to unpick one without disrupting the rest.

When stable commitments meet turbulent markets, active inertia often ensues. [...]

Companies caught in active inertia resemble cars with their back wheels in a rut. Managers press on the gas - respond with a flurry of activity to market shifts. Instead of pulling out of the hole, they just dig themselves in deeper. Hardened commitments constitute the ruts that lock them into accelerating activities that worked in the past.

Looking in from the outside with the benefit of hindsight, it is easy to deride managers who spin their wheels as stupid, lazy, arrogant or complacent. All these vices play a role, no doubt, but the root cause goes much deeper. Corporate failure is rarely a morality play where the virtues of humility and hard work degenerate into the vices of arrogance and complacency. Rather it is a tragedy where two goods - commitment and flexibility - collide.

Don is perhaps more kind to the managers of doomed firms than I would be.  I would be tempted to tell them to snap out of it or face the inevitable consequences of their dereliction. 

But the key insight he brings is the vivid one of commitments.  Commitments are indeed what make it hard for us--myself included--to abandon:

• Processes that are familiar, although no longer optimal (summer associate programs?);
• Values that were once inspiring but become sclerotic (the Athenian democratic wisdom of the partnership as a whole when it comes to management of the firm?); or
• Relationships that become burdens (becoming or remaining overly dependent on a handful of clients; hitching your wagon to Wall Street investment banks, for instance, or to structured finance as a practice area).

I must wonder, as you, I imagine, should be doing at this point, which of these lessons might apply to the great law firms that bestride the globe today.  Lest we hastily forget, GM was once the paragon of 20th Century management.  John Kay wrote in the FT:

General Motors is stumbling towards oblivion. The failing giant was the iconic corporation of the 20th century. It implemented mass production, created the idea of professional management and defined a structure for the diversified industrial corporation. These features of our industrial landscape, today obvious and inevitable, were novelties a century ago.

At one Financial Times breakfast, we debated which were the most important business books ever published. I nominated three. Peter Drucker's Concept of the Corporation pioneered the intellectually rigorous analysis of management issues. Alfred Sloan's My Years at General Motors is the most thoughtful business autobiography. Alfred Chandler's Strategy and Structure turned business history and corporate strategy into academic disciplines. Only then did I notice that all were about GM. The history of modern business is the history of GM, and vice versa.

Kay concludes that the moral of GM's demise is "the challenge of how to reconcile professional management with a culture of innovation." 

Translating that to law firm land, I would say that the challenge facing 21st Century law firm leaders is how to reconcile sophisticated business-side management with a culture of professional excellence and innovation in legal practice and client service. 

To firms that figure that out will go the mantle of 21st Century leadership.  And to those who don't?  Perhaps a senior leadership 4th of July barbecue would be in order.