The Silo Effect
Gillian Tett
Hachette
Pp 290
R599
WE ALL know that every organisation has several departments with each having some degree of specialisation. This structure is considered necessary. However, what’s also true is that sometimes these parts tend to work in isolation, irrespective of the grand strategic plans that every company talks about.
And this leads to what Gillian Tett calls ‘silos’—different parts of a system that do not communicate with one another—within an organisation. These silos could result in fairly catastrophic consequences for companies, exacerbated by the high degree of competition between them. In fact, this competition could result in employees becoming reluctant to share information with each other as well.
The Silo Effect is an excellent book. It takes readers through several examples of companies—Sony, JP Morgan, Bank of England, etc—which ran into trouble on account of these silos. The author, with a background in anthropology, cogently shows how silos and their impact can be translated in the context of societies, companies, regulators, hospitals, police departments, etc.
Talking about the financial world and, more specifically, the downturn, the way the cards came tumbling down during the crisis was largely due to the absence of conversation between various arms of the same organisation. One stark example of this is UBS. The Swiss financial services company had a small derivative desk, which took on large exposures sitting in the US. And no one monitored this. Hence, when the crisis struck, it was cataclysmic. The New York office was ‘long’ in the market, while the London bank was ‘shorting’ housing risk. The issue here was that the two offices did not speak to one another. The traders of London should have asked the financiers of New York questions and then corrected their position. But this did not happen. Hence, the chief risk officer of the investment bank was not aware of the collateralised debt obligations (CDOs) being built in the New York investment warehouse.
The rest, as they say, is history.
The Silo Effect is all about avoiding silos. The author not only provides examples of companies that bore the brunt of having such cultures, but also companies that overcame this problem by recognising its perils. In fact, there are some companies that actually took advantage of it and profited. The story of hedge fund BlueMountain Capital Management is relevant here. The CEO and chief investment officer Andrew Feldstein—who had earlier worked with JP Morgan—was aware of the perverse incentives that existed in the ‘silo’ system. By analysing these incentives and their impact on prices, BlueMountain exploited these and profited. For instance, Feldstein studied how Wall Street organised its activities into rigid teams and trading flows, which distorted markets and prices. He exploited this by buying low and selling high. They would sell some pieces of debt or create CDOs to create demand. Once Wall Street followed, as it was programmed to do, the prices would go up and they would sell at a higher price. The trick was to break down the artificial buckets, or classification, created by Wall Street when trading. This is a case of taking advantage of the shortcomings in the ‘classification system’.
However, the most glaring example of a company that ran into trouble because of silos is of Sony’s. In the 1990s, the company was well-known for launching multiple products in the same domain at the same time—Memory Stick, Walkman, Vaio Music Clip and Network Walkman were all launched in 1999. While it might sound impressive, this is exactly what brought about the decline of the company. Different departments at Sony would develop their own digital music devices with proprietary technology, which wouldn’t be compatible with another department’s. These parts, or silos, worked in isolation driven by their own departmental goals, which led to Sony’s decline.
Silos take a toll at the regulatory level as well. Take, for instance, Bank of England’s case. At the time of the financial crisis, the economists at the bank were aware of what was happening, but were more immersed with modelling, which had become a fad in the bank. It was assumed that the Financial Services Authority (FSA), the market regulator, would address the issues, as this wasn’t the job of economists. The then Bank of England governor Mervyn King felt the bank did not have the tools to curb any bubble. In this process, the spiralling problem of lending to ‘other financial corporations’ did not catch anyone’s attention and it was only when the crisis struck that they realised that there was a problem.
Interestingly, Tett doesn’t just stop at corporates in the book. She also gives examples of public services—like the fire department in New York—whose departments don’t share databases with each other. A simple thing like putting together data of all buildings along with their ages, the kind of people who live there, income levels, etc, would lower the perimeter of scrutiny for the fire department, which could then work towards focusing only on the more vulnerable buildings.
There are other examples provided, too, like how a computer geek in Chicago, US, changed careers and made the police department cross the silo barrier. In this case, the departments in the police force rarely shared information.
Here, the silos were broken down by mapping information of all departments and putting them in a centralised system, which helped track and predict crime.
The example given about Facebook in the book is the opposite of Sony’s. Here, the staff developed an internal silo-busting experiment by keeping boundaries of its teams flexible and fluid, enhanced by rotating staff between departments.
Silos, as per Tett, are an anthropological phenomenon. They arise because groups and organisations have created conventions on how they classify the world. While they do have their benefits, companies need to get out of silos whenever collaboration is required.
Some lessons that may be drawn from the book are that we need better coordination to overcome silos since they can’t be completely abolished. Job rotation and constant interaction between different departments of an organisation are necessary. Also, pay structures need to be rethought. The ‘eat what you kill’ approach of investment banks creates perverse incentive and must be avoided. Flow of information is a must across all departments to ensure that everyone knows what’s going on. The taxonomy, or classification system, must be reimagined—the case of Bank of England economists failing to see the leverage building in the system is a good example of what should be avoided.
The Silo Effect is an easy to read and entertaining book, as it gives several examples that aren’t just in the esoteric domain of the financial world. The reader will be able to relate to the book both at the general, as well as the specific level. At the general level, we always say different arms of the government work at cross purposes and that the left hand does not know what the right is doing. But even at the organisation level, departments are always competing and holding back information from one another. While managements try and foster competition, often the lure for rewards tightens these silos. And this can have disastrous consequences if and when a meltdown occurs. This is something that all companies should work towards avoiding.
Gillian Tett
Hachette
Pp 290
R599
WE ALL know that every organisation has several departments with each having some degree of specialisation. This structure is considered necessary. However, what’s also true is that sometimes these parts tend to work in isolation, irrespective of the grand strategic plans that every company talks about.
And this leads to what Gillian Tett calls ‘silos’—different parts of a system that do not communicate with one another—within an organisation. These silos could result in fairly catastrophic consequences for companies, exacerbated by the high degree of competition between them. In fact, this competition could result in employees becoming reluctant to share information with each other as well.
The Silo Effect is an excellent book. It takes readers through several examples of companies—Sony, JP Morgan, Bank of England, etc—which ran into trouble on account of these silos. The author, with a background in anthropology, cogently shows how silos and their impact can be translated in the context of societies, companies, regulators, hospitals, police departments, etc.
Talking about the financial world and, more specifically, the downturn, the way the cards came tumbling down during the crisis was largely due to the absence of conversation between various arms of the same organisation. One stark example of this is UBS. The Swiss financial services company had a small derivative desk, which took on large exposures sitting in the US. And no one monitored this. Hence, when the crisis struck, it was cataclysmic. The New York office was ‘long’ in the market, while the London bank was ‘shorting’ housing risk. The issue here was that the two offices did not speak to one another. The traders of London should have asked the financiers of New York questions and then corrected their position. But this did not happen. Hence, the chief risk officer of the investment bank was not aware of the collateralised debt obligations (CDOs) being built in the New York investment warehouse.
The rest, as they say, is history.
The Silo Effect is all about avoiding silos. The author not only provides examples of companies that bore the brunt of having such cultures, but also companies that overcame this problem by recognising its perils. In fact, there are some companies that actually took advantage of it and profited. The story of hedge fund BlueMountain Capital Management is relevant here. The CEO and chief investment officer Andrew Feldstein—who had earlier worked with JP Morgan—was aware of the perverse incentives that existed in the ‘silo’ system. By analysing these incentives and their impact on prices, BlueMountain exploited these and profited. For instance, Feldstein studied how Wall Street organised its activities into rigid teams and trading flows, which distorted markets and prices. He exploited this by buying low and selling high. They would sell some pieces of debt or create CDOs to create demand. Once Wall Street followed, as it was programmed to do, the prices would go up and they would sell at a higher price. The trick was to break down the artificial buckets, or classification, created by Wall Street when trading. This is a case of taking advantage of the shortcomings in the ‘classification system’.
However, the most glaring example of a company that ran into trouble because of silos is of Sony’s. In the 1990s, the company was well-known for launching multiple products in the same domain at the same time—Memory Stick, Walkman, Vaio Music Clip and Network Walkman were all launched in 1999. While it might sound impressive, this is exactly what brought about the decline of the company. Different departments at Sony would develop their own digital music devices with proprietary technology, which wouldn’t be compatible with another department’s. These parts, or silos, worked in isolation driven by their own departmental goals, which led to Sony’s decline.
Silos take a toll at the regulatory level as well. Take, for instance, Bank of England’s case. At the time of the financial crisis, the economists at the bank were aware of what was happening, but were more immersed with modelling, which had become a fad in the bank. It was assumed that the Financial Services Authority (FSA), the market regulator, would address the issues, as this wasn’t the job of economists. The then Bank of England governor Mervyn King felt the bank did not have the tools to curb any bubble. In this process, the spiralling problem of lending to ‘other financial corporations’ did not catch anyone’s attention and it was only when the crisis struck that they realised that there was a problem.
Interestingly, Tett doesn’t just stop at corporates in the book. She also gives examples of public services—like the fire department in New York—whose departments don’t share databases with each other. A simple thing like putting together data of all buildings along with their ages, the kind of people who live there, income levels, etc, would lower the perimeter of scrutiny for the fire department, which could then work towards focusing only on the more vulnerable buildings.
There are other examples provided, too, like how a computer geek in Chicago, US, changed careers and made the police department cross the silo barrier. In this case, the departments in the police force rarely shared information.
Here, the silos were broken down by mapping information of all departments and putting them in a centralised system, which helped track and predict crime.
The example given about Facebook in the book is the opposite of Sony’s. Here, the staff developed an internal silo-busting experiment by keeping boundaries of its teams flexible and fluid, enhanced by rotating staff between departments.
Silos, as per Tett, are an anthropological phenomenon. They arise because groups and organisations have created conventions on how they classify the world. While they do have their benefits, companies need to get out of silos whenever collaboration is required.
Some lessons that may be drawn from the book are that we need better coordination to overcome silos since they can’t be completely abolished. Job rotation and constant interaction between different departments of an organisation are necessary. Also, pay structures need to be rethought. The ‘eat what you kill’ approach of investment banks creates perverse incentive and must be avoided. Flow of information is a must across all departments to ensure that everyone knows what’s going on. The taxonomy, or classification system, must be reimagined—the case of Bank of England economists failing to see the leverage building in the system is a good example of what should be avoided.
The Silo Effect is an easy to read and entertaining book, as it gives several examples that aren’t just in the esoteric domain of the financial world. The reader will be able to relate to the book both at the general, as well as the specific level. At the general level, we always say different arms of the government work at cross purposes and that the left hand does not know what the right is doing. But even at the organisation level, departments are always competing and holding back information from one another. While managements try and foster competition, often the lure for rewards tightens these silos. And this can have disastrous consequences if and when a meltdown occurs. This is something that all companies should work towards avoiding.
No comments:
Post a Comment