Number Crunching vs Analytical Thought
Posted By Rob Millard - 0 Comments -
We wish that we had been wrong, but readers of our blogs will know that my partner Gerry Riskin and I foretold as long ago as mid-2007 that the economy was heading for a wall and that law firms needed to take heed and prepare for rocky times. We do not have huge mainframe computers and sophisticated economic analysis software. Most others that do, at that time held precisely the opposite view to us. At least publicly.
We were not alone, though. Renowned economist Nouriel Roubini earned the nickname “Dr Doom” for his then (in 2007) contrarian view of the economy.
“The bursting of the housing bubble is going to lead to broader systemic banking problems,” he told an IMF audience in 2007. “The rest of the world is not going to be able to decouple from the U.S. even if it is not going to experience an outright recession like the United States.”
What led us to the conclusions that we reached, while those focusing on highly quantitative analytical models did not? In short:
- Markets are far too complex to allow all the variables to be built into predictive software programmes.
- Barring artificial intelligence software (which is still too far on the fringes of R&D .... for now) software by definition can only process data that is inputted, so is not able to account for unforeseen circumstances.
- Economic data is inherently retrospective and therefore only a reliable predictor of the future when current circumstances sufficiently resemble previous circumstances already captured in the data.
There has been far too much slavish reliance on the output of complex quantitative econometric formulae, at the expense of rigorous qualitative logical thought. “Show me the numbers” is all very well and Peter Drucker’s admonition that “if you can’t measure it you can’t manage it” has much truth in it. But the most sophisticated quantitative analysis in the world is no replacement for well informed, critical-analytical human brains looking at the qualitative aspects in ways that computers simply cannot.
Roubini’s proposed solution to the economic crisis is as follows:
- Temporarily freeze all foreclosures.
- Create massive fiscal stimulus packages of at least $400 billion for public works, infrastructure spending, unemployment benefits, and tax rebates to lower-income households. Provide grants to state and local governments in dire need of funding.
- Coordinate interest-rate cuts globally.
- Temporarily insure all bank deposits. Allow insolvent banks to shut down and partially nationalize solvent but distressed banks.
- Open credit lines to solvent financial institutions and companies.
- Inject money into banks by buying equity.
- Coordinate a global effort to gradually adjust trade imbalances.
Gerry and my advice for firm’s that have been hit by the economic downturn is to adjust your business model to assume that fee revenues may decrease by another 10 – 20% in FY 2009. This may include:
- Identify those areas of your business that can be made to be profitable if business contracts further and those that cannot. Unless there is a really compelling reason why the firm should subsidize the non-performing areas, perform triarge (cleanly and humanely.)
- Monitor, collect and conserve cash unrelentingly. Eliminate all non-essential expenditure.
- Enhance revenue flows. Unless your people are already truly expertly skilled in business development and client retention, invest in behaviour-based skills coaching (not just training,) focused on specific key clients and their issues. Out-competing other firms for business has never been more critical.
- Keep your overall strategy in mind. Be alert to seizing appropriate opportunities that arise from difficulties in other firms. Proactively seek them out.
- Realize that when this time has passed, the world will be a different place and keep the changes that are taking place in the market on at least the edge of your radar. They will drive the best strategy for you to adopt when markets return to “normal.”
- Over-communicate both within the firm and with clients. Non-communication breeds rumours, then fear, then sometimes even panic.
- If a sober and objective analysis reveals that your firm might not survive such a further contraction, consider merger or acquisition (or other) opportunities now, before you are forced to do so with your back against the wall. Get outside help for this. You will most certainly encounter very strong resistance from partners in denial.
Whatever you do, please make sure that you don't just accept quantitatively derived conclusions inside your firms (or from consultants) without applying your mind and the minds of trusted colleagues to ask the critical "so what ...." and "what if ...." and "what else ...." questions. Part of the allure of quantitive data is its perceived preciseness (especially when presented to four decimal places) and the ease with which it can be presented in bar charts and other graphics. Don't be dazzled by this. If your gut tells you something different to what "the numbers" do, at least entertain the possibility that your gut may be right!
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