Still Excellence After All These Years

I was on a panel at the Consumer Bankers Association’s annual “CBA Live” conference in Orlando on Tuesday, when CBA president (and event moderator) Richard Hunt asked me, clear out of the blue, “Tom, what’s your all-time favorite book on business?”

I may not have seen the question coming, but still knew my answer right away: Tom Peters’ and Robert Waterman’s In Search of Excellence. Richard didn’t give me much of a chance to expand on why I like the book so much (he had a banking conference to run, after all), so allow me to explain now.

When it was first published in 1982, In Search of Excellence was something of a breakthrough in the business-book genre. Rather than focusing strictly on a company’s numbers and formal business processes the way most prior management books did, Search tried to identify the less quantifiable—but no less important—habits of successful companies that made those companies great. In particular, the authors got deeply embedded in 43 highly successful Fortune 500 firms—they talked to executives, walked factory floors, interviewed mid-level managers, whatever they could think of—to figure the common practices that made those companies great.

The result, to me, was a revelation. One reason why had to do with timing.  Search was published soon after I became an equity analyst, in 1980. The eight common attributes of great companies the book identified provided a helpful template for me as I began to examine companies for myself.

Analysts and investors take all kinds of approaches to understanding the companies the follow. Some just look at the financial results, to the exclusion of all else. Others might place more emphasis on the broader dynamics of the industry the company’s in. For me, I’m more like a 300-pounder at an all-you-can-eat buffet.  I want to know everything I can about a company and its industry. The numbers? Sure. Industry trends? You bet. But I also try to take account of random unquantifiable facts and seeming minutia. (I also can’t resist gossip.) The more info I can accumulate to get a sense of how a company really operates, the better I feel. Then I stash all that info away for the long term. I’m the opposite of a trader.

In Search of Excellence, and the eight attributes of great companies it identified, opened my eyes to how I could evaluate companies, and separate poor and mediocre ones from the good and great ones.

The second reason the book was so important to me is that it also eventually taught me how tough it is to sustain even great business models. The fact is that more than a few of the 43 great companies the authors featured (Eastman Kodak and Nintendo, to name two) later foundered and encountered some very tough times. But that’s just the way the business world works. Economic environments change, disruptive innovations happen, consumer preferences shift—all without warning.  These sorts of seismic events tend to trump even the best management practices. As an investor, you can’t get too complacent owning even a great company.

The name of our firm, Second Curve, is taken from a book written by Ian Morrison titled, well, The Second Curve. Morrison set out to look at what happens when disruptive change occurs within industries. His point is that, in cycle after cycle, in industry after industry, old ways of doing business are always at risk of being fundamentally overturned by new, better ways. The first curve gives way to the second curve. Very few companies have historically been able to successfully make the transition. Often, they don’t even see it coming.

In my hotel room in Orlando the night after my panel, I sat down to review the eight attributes of the great companies Peters and Waterman first laid out.  In my opinion, they apply as much today, at least to the financial services industry, as they did as in 1982. Here they are:

1. A bias for action. The book talks about management getting out of the office, hearing from the front lines, and making decisions. We need more of this today. Less hypothesizing, and more testing and learning.
2. Stay close to the customer. The best companies obsess over what customers want by watching what they actually do—not just by asking them to, say, fill out a customer survey.
3. Autonomy and entrepreneurship. The best companies distribute authority for making small tests (and taking small risks) and don’t discourage failure.
4. Productivity through people. Many years after In Search of Excellence was published, the Gallup Organization’s surveys of employee engagement showed that the most engaged employees were the ones who knew what their companies wanted them to do, were given the tools to succeed, and were rewarded for their performance. However, despite all the research, the number of fully engaged employees in business and financial services remains depressed.
5. Hands-on, value-driven. This relates to culture. A distinct company culture is created by telling stories and creating myths that get at why the company is successful. I see this over and over in great financial services companies.
6. Stick to your knitting. I believe most banks should be more focused with respect to the products they provide and the customers and geographies they serve. Get to know those well, develop and reinforce your advantage, and resist the temptation to stray.
7. Simple form, lean staff. The fight against needless bureaucracy is difficult and never ends. Too often, public companies get lazy. US Bancorp (USB) and Lakeland Financial (LKFN) are great examples of banks that have been vigilant.
8. Simultaneous loose-tight properties. Giving decentralized autonomy but maintaining centralized control of key functions (compliance and risk control, say) is especially tough for financial services companies. However, the best companies do a very effective job of balancing this conflict.

The companies cited by the authors of In Search of Excellence did not all continue to perform at a high level–but the attributes of great companies Peters and Waterman identify in the book did. In all, the book has stood the test of time better—and in a different way—than perhaps the authors expected. In any event, In Search of Excellence is still my favorite book.

What do you think? Let me know!