Governance is a communication system for measuring complex needs, articulating a systemic response in Policy, and enforcing that policy. When I say it is a system, I mean that it is a social system abstracted from the people and psychologies that perform various Governance tasks. The people may come and go, but the system remains largely the same.
Smart Governance includes some additional dimensions that make the system evolutionary as well:
1. Dynamic methods for collecting and analyzing needs in an organization or society
2. Hierarchical, Market-based, or hybrid political models for integrating diverse points of view into the policy-making process
3. Diverse communication tools for integrating policies into a variety of business, IT, and social processes
4. Methods to measure policy outcomes, compare them to original needs, and re-define policy to meet new requirements
5. Solutions to measure systemic risks, capture mistakes and losses, and enhance organizational intelligence and Knowledge as a Shared Resource through constant systemic improvement.
The goal of the System is to meet the needs of The Customer, without regard to governing ideology, personal psychology, or vested systemic interests, as well as to continuously diagnose deficiencies in the The Smart Governance System, collect organizational knowledge, and improve over time.
Smart Governance is a challenge for human as well as IT systems. We all understand politics. Few understand Governance Theory as a Sociological System abstract from psychological and political practices. In this way, Governance Theory is a communication science more similar to computer science in its architecture and schematics.
The history of Governance is entwined with the history of governing ideology. But ideologies impose systemic order without regard to evolving customer needs or changing collective goals. In a Knowledge Society, governing system ideology is secondary to customer needs and collective goals. The constant pressure to improve outcomes in a globally competitive world, makes ideology a tool rather than a purpose of governance systems.
Hierarchical, Authoritarian, Democratic, Socialistic, and Market-based governing ideologies are all potentially useful systemic policy-making tools in different governing contexts when meeting customer and collective needs with systemic policy response. These ideologies, as communication methodologies, can be used interchangeably depending on the governing policy requirements.
In 1992, Francis Fukuyama wrote a famous book called The End of History, in which he forecast that the end of the Cold War would see Western Liberal Democracy become the predominant world governing system and that ideological struggle as a function of historical definition was dead. From a Governance Theory perspective, this thesis is hopelessly simplistic. Governing Ideology will cease to be a definition of history when companies, nation states and trans-national organizations liberate themselves from the confines of singular governing ideologies and tailor governing systemic tools (ideological communication instances) to meet ever changing policy needs of customer requirement and collective goals.
Adler on Data Governance
The two most historically important developments of the last two decades are the growth of global markets and the speed of information technology development. Markets and IT are transforming the world at a faster rate than any other developments in human history. And they are also challenging Governance Models in ways that are equally profound. Kings and Crowds fought it out politically at the dawn of the 20th Century when the ancient Russian, Chinese, Austrian, and Ottoman empires fell, and they are battling commercially today in many markets in which Crowds are winning again.
1. Product Development
I'm an audiophile. I buy expensive audio equipment in the hope of reproducing an emotional connection with music in my home that people feel when they attend a live concert. Being on a limited budget, I'm also a cheap audiophile. I like the best product for the lowest cost, which is one reason I applaud globalization. Over the last decade, high quality, low cost audiophile equipment has been coming out of China that rivals the best high cost gear manufactured in North America and Europe. Some companies have setup local design and Chinese manufacturing with online distribution that brings incredible bargains to mainstream US and European consumers. Two such companies are Oppo Digital and Emotiva.
Oppo makes DVD and Bluray players that are designed in San Francisco and manufactured in China. I've owned their products for several years and am always impressed with their price/performance ratio. But now I'm even more impressed with their product development process. In 2008, they announced the development of a new Bluray player, the BPD-83. These days, consumer electronics are more like computers than audio equipment, with complex Digital Signal Processors, graphics chips and CPU's interacting in intricate designs. Oppo knew product development would be difficult and testing even more so. With the complexity of hardware and software in one appliance it is really difficult for a small team of product designers and marketing professionals in San Francisco to test against every potential usage scenario. And when manufacturing is outsourced to China it is even harder. Distance, language, and culture create barriers that make communication a new challenge.
In this environment, Oppo decided to outsource product testing to its customers by using a Crowdsourcing solution. Several hundred customers received pre-production units of the BluRay player and tested it in their homes. Their product feedback went to the design team who translated feedback into design changes for the manufacturer. The Crowd were given the option to vote on final product readiness. The first vote sent the product back for more changes and fixes in late 2008 and the second vote in Spring 2009 released it for GA in June.
I bought the product in July 2009 and it is superb. I contrast this to Emotiva, which is also a small design team based in Tennessee that manufactures in China. They make outstanding AV amplifiers, speakers, processors, and other equipment. In 2007, Emotiva announced a new AV processor, the UMC-1, for delivery in 2008. That slipped to early 2009, when it was announced that the product would ship in June. In July, the company announced it discovered bugs in the production units from China and would need a couple of months to fix them. By October, more than a couple of months went by and customers were fuming on the company's forums about the delays and the poor communication. In November, the company announced it would begin shipping to the pre-order list and many customers anticipated units before Thanksgiving. By early December, no units had shipped and the company had to start censoring its Forum because customer rants were getting abusive. The Emotiva CEO promised some customers would receive their units by Christmas, and when that didn't materialize many Forum members started talking about buying alternatives.
Last week, Emotiva finally began shipping a handful of units to pre-order customers without manuals. The first reviews appeared over the weekend and talked about stunning video quality but also a few audio and connectivity glitches. The CEO posted a very nice note on the Forum describing the company's pride in the product but also that a firmware release would soon be forthcoming.
So what this company did was use its customers for an unannounced Beta Testing program. They shipped their product very late to market, after a year of inconsistent market communication, with bugs they were probably aware of but couldn't fix without suffering more brand damage.
Contrast the two companies. Oppo used a market based Crowdsourcing mechanism to recruit customers to beta test the new product. The customers who participated in the testing provided open feedback which was visible to all members of the company forum. They fixed bugs quickly and used customers to determine when the product was ready for shipment. That process created customer loyalty and ensured a bug-free product that shipped only six months late. Emotiva used a hierarchical mechanism of in-house testing and opaque customer communication to ship a product more than 18 months late and filled with bugs that alienated customers and reduced brand loyalty.
Some people might say these companies have different approaches to product development or customer service. I abstract these situations as examples of governance models in complex social systems. Oppo used a market-based governance (coordination and cooperation) model and succeeded in satisfying the needs and interests of its market participants. Needs and wants are at a primary market level. Feedback Information about the product are at a secondary market level. Emotiva used a hierarchical governance model (command and control) and failed to satisfy secondary market interests in information and primary market needs for products.
This doesn't mean that market mechanisms always trump hierarchical control. But when a small number of people are trying to govern complex systems for consistent outcomes, a market-based model can be more efficient and produce better results.
2. Cost Containment.
My boss sent me a note over the weekend reminding me to use our ATT Calling Card from land lines when I am travelling abroad. It seems my cell phone bill in November was higher than the accounting police think necessary. All calls above $100 qualify for an immediate audit. Its not clear from my bill if any of my calls were or could be audited, but my boss, who is altogether a terrific guy, wants me to avoid that root canal and work smart abroad. Being a Governance Guy I do have to question the intelligence of a governance system that controls costs through managerial oversight of cell phone bills and automatic audits for $100 calls.
If there is already a trigger for automatic audit at the $100 per call threshold then someone has already noticed a pattern of calls that exceed $100. That kind of pattern calls for a policy change, but automatic audits require a fair degree of manual labor - both from my boss and the auditors. Wouldn't it be far Smarter to develop policies that cause the cell phone users themselves to police their own usage by giving them alternative means to reduce costs?
Some might argue that the warning note from my boss is a policy tool being used to change my behavior. But because the billing system is deliberately opaque in IBM, it isn't possible for me to evaluate the impact of each of my calls on the overall phone bill I incur each month. I can't see the incremental impact of my decisions as Risks to The System as a whole.
A more intelligent approach to cost containment in this case would be to toss the issue out to the Crowd of cell phone users in IBM and get them to come up with ideas to mitigate costs for each user. That process would include users in the decision-making process, getting them to brainstorm ways to reduce costs instead of treating them like cost creators in a hierarchical model to impose control.
Like, shouldn't IBM have Skype strategy for global travelers who make calls in cars and trains so that productivity isn't imperiled while costs are contained?
Crowds and Kings. What do you think? Post a comment and let me know.
I spent the winter break visiting my sister in Point Reyes. Point Reyes is a small, rural town on a beautiful peninsula north of San Francisco. Miles of untouched sea-shore greet cow pastures, redwood groves, marsh, and gently wrinkled hills. The town has a small elementary and middle school where my sister teaches environmental science and my nephews get straight A's. My oldest son Ben compared the courses he's taking at his school in Port Washington, NY with the courses his cousin takes in Point Reyes and noticed a significant gap - up to 2 years in math and science. Now its worth noting that my son doesn't always get straight A's in those classes in Port Washington and so we discount some of his analysis with self-preserving bias.
But looking at the difference in curriculum between this small rural school on the West Coast and the large surburban school on the East, one is tempted to ask "are people on the East Coast really smarter than the west?"
The answer: Of course not. But the way education resources are allocated via public monopoly creates a distortion that makes it seem so. Education resources are distributed on a state level through the seemingly elastic supply of teachers to student demand using fixed ratios of how many warm bodied students fill seats in classrooms. That means that small communities with low populations often get fewer educational resources than large communities. In an industrial society, which is the one that created this educational system, this formula is adequate because it provides basic levels of education to a large population whose primary productive value is measured in skilled and un-skilled manual labor.
But in a Knowledge Society, where productive capacity is measurable in intellectual value creation - this formula is dismally inadequate. A warm body in a chair is not an accurate articulation of intellectual needs for learning. Smart kids in California should have the same educational resource opportunity as smart kids in NY. But the State has created primary education as a monopoly prerogative. It isn't that the sovereign control is wrong. Its that the model is not changing fast enough to meet the needs of a Knowledge Society.
In a Knowledge Society, every student in every school is a customer in an educational market that should be designed to cater learning to that student's individual learning potential and style. The Educational System would provide real-time transparency on student learning demands and fulfillment so that parents can actively evaluate how well the Educational System is meeting the needs of each Student Customer.
Today, even in a school like Port Washington HS, we parents only get mid-term progress reports, term report cards, and SAT scores to evaluate our child's progress in School from a teacher normative perspective. That is, we get to evaluate standardized grading done from the system as a reflection of our child's educational performance. But we don't get to evaluate how well each teacher is performing in terms of educating our children, which school policies have positive or negative impacts on our children, or other factors. Its a very recent innovation that teachers provide course materials on websites at all, and most are rarely available or responsive via email or phone.
As a parent, its extremely frustrating to confront the Educational System with complaints about a teacher. Evidence is hard to accumulate and it always comes down to our word against theirs - in which case the teacher normally wins. This isn't a system designed to produce the best outcome for each student. Its a system designed to produce predictable outcomes for all students, even if a predictable percentage of them drop out at 16.
In a Knowledge Society, every drop-out at 16 carries a huge economic burden for the rest of society because that person has handicapped their potential intellectual value creation for many years if not for life. Even Students who only finish 4 years in University will be educated to a level that fails to match their Knowledge potential.
But if we had more information about what are children are learning, how they are learning it, and how each of their incremental projects, tests, and homework assignments contributed to their overall "grade," we parents could play a far more informed and intelligent role in the development of our children at home before and after school.
And if the school budget system were also calibrated on individual learning instead of warm bodies in seats, we parents as citizens might have more levers to force change in recalcitrant Educational Systems that are not meeting the needs of their Student Customers.
The Nation State as the primary supplier of primary education 1-12 needs new market mechanisms to meet the needs of the Knowledge Society in the 21st Century. There should not be a discernible curriculum difference in the learning opportunity provided in public schools West Coast to East, North to South except the capacity of students to learn and the willingness of parents to monitor their progress.
I hope someday to have the power to choose school board members based on individual report cards of academic achievement of every student in terms of their ability to learn and the System's ability to meet their needs.
That day should not be far off if we hope to succeed as a nation in the Knowledge Society.
It starts with the definition. Systemic Risk is the risk inherent to an entire market or market segment, so says one website. From the definition, we can already see that systemic risk is primarily concerned with the prevention of risks to The System. The System in question is the global financial "system." So the goal of Systemic Risk is the prevention of loss to those involved in The System.
You might ask, "why is Adler focusing on the obvious?" Well, I don't think it is that obvious who The System is and what their interests are. There are lots of well meaning people running around trying to craft new laws and methodologies to assess and prevent Systemic Risk. Most of them will fail without first understanding the needs and interests and goals of The System.
The Goal of every System should be to serve the needs and interests of The Customer. Corruption of The System is when individuals or groups place the needs of themselves as actors in The System above the needs of The Customer. When The System is mostly serving the needs of itself, it is mostly corrupt.
The Global Financial System has had corruption for decades. In the last decade, the influence of Systemic Actors exercising the needs of themselves over the needs of The Customer has become acute. The Financial Meltdown of the past 30 months is the result of this imbalance.
So I wonder, which new brew of experts and which new conference will measure the needs of The System and compare them to the needs of The Customer to assess Risk?
I have a self-serving answer:
Amazon has some Information Governance problems.
A week ago, I placed a large order of Nerf Guns that Amazon keeps refusing to process. My kids love these things and I guess some adults I know kind of like them too. We're all heading out to my sister's house in Point Reyes for Christmas this year and a combined Family Reunion. Both my sisters will be there with 7 kids in a medium-sized house for four days and the best we could all come up with to keep them occupied was felt-warfare among the tall grasses of the Inverness wetlands.
If only Amazon would cooperate.
I have no desire to carry ten Nerf weapons on trans-continental jets. I can see explaining to turgid DHS officials why a family of four needs automatic-nerf canons with heat-seeking velcro missiles. So, I prefer to order them online and let Fedex make the arms shipments discretely.
But my order is stuck in Amazon credit card limbo. It seems that the last time I bought something and shipped it to my sister instead of my home address I used a credit card which expired in May. Problem is, Amazon somehow associates that credit card with my sister's mailing address. I've deleted it in my online account, and I buy things from them all the time with the current card, but Amazon hasn't purged this relationship.
From an Information Governance perspective, what kind of problem is this? It is of course a Data Quality issue, but normal DQ tools might have a hard time with rules matching in this case. My gut is that Amazon just doesn't sweep and purge their accounts for outdated credit cards. Its pretty frustrating as a consumer, especially during these busy days. Some records management would solve that problem, but by now the point is moot for me. I just don't have the time or patience to bother fixing their sloppy Information Governance issues.
Fortunately, Walmart sells Nerf Guns too...
It is that simple.
You have supply chains that deliver toys from manufacturers in China to sit under Christmas trees in Canada, oil and gas from Russia to factories and homes in Germany, Diamonds from mines in Namibia to jewelers in New York.
Real World supply chains keep the global Industrial Economy running.
Alongside, you have Information Supply Chains that deliver crop yields to traders on the Chicago Mercantile exchange, raw video footage from journalists in Afghanistan to news desks London, Paris, and Atlanta, and sales performance reports from branch offices in Omaha to main offices in Arkansas.
Around the world, Information Supply Chains drive the Knowledge Economy.
They need to be Smart - Instrumented, Monitored, Measured, and Coordinated. And we need to be aware of when they are designed, what flows through them, and how we can improve them.
Without awareness, Governance itself can never be very Smart. It is that simple.
Over the years, the IBM Data Governance Council has had many international meetings:
On January 21-22, 2010, the IBM Data Governance Council will be starting a chapter in Poland by meeting in Warsaw.
Around the world, Data Governance is in hot demand.
We want our leaders to make the right decisions. But often they lack the right information. And when they do, they "trust their gut." Unfortunately, the stomach is the wrong organ for decision-making and ignorance, fear, and prejudice are often the poor substitutes for trusted information and rigorous analysis. And we know the result.
We don't want every decision belabored by bureaucracy. We want decisions that are Smart; informed by what we know we don't know, contextual to past experience, compared to current conditions, and prepared for future exigencies.
Few organizations have mastered this process today. Few in fact have any notion of what information they need to make Smart Governing Decisions. But everyone wants to. The aspiration is universal, because the competitive challenges in a flat world make bad decisions very costly.
Smart Decisions demand Smart Information - Information about what's going on. Operational Awareness. That's the kind of information we will be exploring at The Smart Governance Forum I will be hosting on February 1-3, at the Ritz Carlton Half Moon Bay in California.
I think we can make a difference and I hope you will join us.
Smart Governance Forum Agenda
DataGovernor 120000GKJR 4,787 Views
It was raining hard yesterday morning when I awoke in Krakow. November 11 is Independence Day in Poland and all businesses are closed. No customer meetings could be held and the trip from Krakow to Wroclaw can only be made comfortably by car. It is about 380km that separates the main cities of Galicia and Silesia, but the 5 hour train service still relies on mid-50's Soviet cars and I am assured they smell worse than NY subways. We opted for a modest Kia and the open road.
But before we drove off, we took a rainy walk up to the Wawel Cathedral, which sits on a mount next to the Vistula River and guards the city. The walls surrounding Wawel are impressive, with large turets, and massive ramparts. It is an imposing fortress, with a cathedral and royal palace inside. As we walked up the ramp leading to the old gate, we were joined by scouts, priests, soldiers, police and fire brigades carrying bouquets of flowers, in official uniform, marching up to a ritual we would soon be swept up in. At the gates, dignitaries were smoking cigarettes and preparing their uniforms for the event. Inside the church, representatives from the Polish Home Army, the resistance during WWII, were marching into the cathedral with unit flags and solemn stares. And of course there were representatives from Solidaritait, the labor movement in the 1980's that challenged Soviet rule and began the destruction of the Iron Curtain.
The church was crowded wall to wall with young and old alike, all there to celebrate Polish Independence from the Russians, Germans, and Austrians in 1918, and again from the Soviets in 1990. Young priests walked in processions around the church, soldiers, police, and fire brigades marched behind with carbines and formal uniforms. And a choir sung beautiful songs of freedom. It was a magical event, and I felt privileged to be there - not just a tourist looking in, but a participant standing shoulder to shoulder with other Poles celebrating Freedom and Independence.
Later, we walked down to the Old Town and had a coffee as the rain came down and went back to the hotel to get our car and leave. Krakow melts away into rustic suburbs in 30 seconds on the motorway. The 4 lane road is well-designed and modern feeling, but there is almost nothing on either side except fields, valleys, and farms.
We are driving to Wroclaw with an obligatory stop at Auschwitz and Birkenau. The trip takes 1.5 hours and during the last twenty minutes I try to steel myself for the horror story that awaits. It is still raining, cold, and visibility is terrible. I have been to Dachau, outside Munich, and Bergen Belson, near Hamburg, but never to a place purposely built for the industrial destruction of human beings.
The camp is not how I imagined it to be. Auschwitz itself is really three camps, each about 50 brick buildings two stories high, quite long and wide, surrounded by wide earthen and stone streets that were full of very sharp stones that must have been painful to walk on without shoes in any weather. The blocks are surrounded by rings of barbed wire, and the horrible gates where it says "Arbeit Macht Frei." We all know what it means without translation, and inside each barrack block is now a museum of terror, illustrating the systemic ways people were destroyed.
The story starts with the 1939 pact between Russia and Germany to carve Poland up in two. The Soviets got Vilnius, Bialystok, and Lvov, and the Germans got the rest. Plans were made in that year for the systemic elimination of the Polish state. Both sides shared a vision for the termination of the entire Polish intelligencia, police, army, civil service, and anyone with an advanced education. 30% of the Polish nation was to be exterminated, and they succeeded in killing close to 6 million Catholic and Jewish Poles in six years.
After touring the museums, we drove 2km to Birkenau, which is far larger than Auschwitz. There must have been 500 long single story wooden blocks at Birkenau, but only about 30 remain today. Most, including the gas chambers and crematoria were destroyed by the Germans as they fled the Soviet Army in 1944 and 5. As we arrived, a large group of Israeli students were getting out of buses, unfurling large Israeli flags and making their way to the infamous Birkenau gates. I followed them in, happy to be there among living Jews come so far to remember the dead.
At one of the blocks, the Israelis set themselves up to recite prayers and sing songs. They were about 50 gathered around the stone central mound in the middle of the room. Thin windows above let some of the late afternoon light in, but the room was dark, and the rain dripped outside. Candles were lit to lighten the room, and as I walked in the room, a guard at the door said to me, "who are you." His eyes and attitudes said, "you are not one of us." I told him, "I am Steven Adler from NY, who are you?" He smiled and let me in.
In the room, they said prayers in Hebrew and sang songs. They were young, boisterous, and defiant going into the room, defiant and somber going out. Auschwitz is a museum. Birkenau is a mausoleum. The cold field whispers death. You leave haunted.
I will never forget.
Winter and I have arrived in Warsaw. It is November 9, 2009, twenty years to the day since the Berlin Wall fell and I am in a gorgeous Hilton Hotel in the city that still has the scars of the 20th Century written in it's streets. The trees are bare here, the temperature hovers around 5C. A foggy rain shrouds the city. All around this hotel are the scarred foundations and empty lots from the Jewish Ghetto, destroyed in 1943 by the barbaric Nazis.
It's an eerie feeling, but this day is like any in Warsaw. My hotel is full of professional wrestlers and their groupies from a large match nearby. The lobby has men with necks the size of my waist. They are drinking at the bar, flirting with women drawn to the spectacle, and loudly proclaiming their happy personalities.
We remember this day as the end of tyranny in the East, the final chapter in a 50 year book of horror that began in 1939. Lucky those alive today who don't have to remember.
Last night, I was one of two panelists at a Global Association of Risk Professionals (GARP) symposium on Systemic Risk at Fordham Business School in New York. We were to be a moderator with three panelists, but one canceled at the last minute, presumably to stay home and watch the Yankees lose to the Phillies last night. The room was on the 12th floor in a mid-60's squat tower accessible from two elevators among a bank of six in the stone cold open and office-like lobby. Twelve is the top floor in the building, with a Rockefeller penthouse atmosphere. Black marble floors, mahogany paneling, subdued sixties swank.
The symposium room was longer than wide, seated classroom for one hundred in three neat blocks. We panelists were paired on a white-clothed-table with microphones we didn't need. The moderator introduced us both; the NYU Business School professor and the IBM Data Governance guy. The audience looked half-asleep, and the first question rolled out on the table, "What is Systemic Risk?" Our gracious moderator had prepared a raft of intelligent questions for us that evening, but we would only get through two in the brief hour we digested.
What is Systemic Risk? The professor told us it was the result of exogenous market conditions that created upper atmospheric bubbles in complex derivative instruments capable of devastating global economies. It could be measured in the up and down-swing of aggregate equity performance and controlled through the central banks he currently advises. He saw Systemic Risk as a macro-economic phenomena, the product of weak government regulation, greed on Wall Street, outrageous compensation packages, and unnecessary complexity in financial markets.
Before the event, I wasn't quite sure what I was going to talk about. It was a hectic Monday full of ten conference calls on twenty different topics. I left late, had traffic on the Grand Central, got lost at Lincoln Center looking for parking, and there was no coffee when I arrived. I'm not an evening person un-caffeinated, and perhaps not the best morning person in the same condition. But droll media babble passed as tenured professorial wisdom will rouse me on the sleepiest of days.
Systemic Risk is the probability of loss to a system. It is not actually a thing that can be calculated. It is a series of things that result in a loss event with causality and impact. Systemic Risk is not only about macro-economic catastrophe, because to say so is to say that we are not involved in Systemic Risk accept as victims. And that ain't true. Insofar as all of us, The People, are members of communities, parties, religions, nations, and environments we are part of a System. We are inter-related, inter-dependent, capable of causality, errors and omissions, losses and claims. Each incremental failure can cascade and result in systemic exposure.
The Credit Crisis is the result of a series of public policy mistakes from 1999 to 2006 that encouraged bad business practices at many different stages of the mortgage underwriting and securitization process. These were incremental failures that contributed to loss events that destroyed parts of the economic systems upon which markets rely. The lesson to humanity from this experience is that We The People are all members of SYSTEMS large and small that can fail as a result of incremental policy mistakes. Actuarial Science has for too long focused on the probabilities of contained loss events.
My body is a SYSTEM and Cancer is a systemic risk to me. It causes a chain of events which can result in organ failure and death. Your company is a system, and bankruptcy is a systemic loss event. If bees die, plants won't be pollinated, and that can be causality to a systemic risk to our ecoSYSTEM. The BBC Reports (http://news.bbc.co.uk/2/hi/science/nature/8338880.stm) that record numbers of plants, mammals, and amphibians are under threat of extinction. This is a systemic risk. When entire species of frogs in remote places like Tanzania become extinct in the wild, humans take note - this incremental failure is closer to your role in the food chain than you may think.
Every System has risk. Every person in every system has a role.
If we accept the gossip-press gospel that the Credit Crisis is purely the result of greed on Wall Street, and can only be fixed by wise regulators in Washington, shame on all of us for missing the opportunity to internalize the economic externalities. It is not an academic exercise to study the risk in every system large and small. Systemic Risk is a real-world imperative for all of us.
In 2004, when I hosted the first Data Governance Forum at Mohonk Mountain House, I had three teams of IBMers developing the narrative discussions for three tracks on a common use case. The tracks were called "Infrastructure," "Policy," and "Content." The use case was "Data Supply Chain." The Forum had two days of meetings stretched across three, starting in the afternoon of the first, going until lunch of the last. On the only full day, we hosted the three breakout meetings, and each team worked to integrate their track discussions around the use case. The use case came from some business process definitions software group had developed for business component models, something to do with insurance claims processing. As it turns out, we had only one or two insurance companies at the event, and we spent more time focusing on the track headings and business process model than on the idea of a Data Supply Chain. A conference is always the product of the people and the ideas in a room, regardless of what one puts on the agenda. And at this first event, when most of us only had the most vague understanding of what "Data Governance" was or could be, business processes were familiar and Data Supply Chains were distant.
Three weeks ago, I hosted another Data Governance Forum at Mohonk Mountain House. It was again two days of content stretched across three, and again a very diverse group of people came together to produce discussions that were engaging, powerful, and divergent from what was planned on the agenda. In three breakouts on "Data," "Risks," and "Governance," the panelists and audience exchanged ideas and I ran back and forth between the breakout rooms to listen, learn, and occasionally drive the conversations. What I heard among talks about Data as an Asset, Risk Taxonomies, Governance models, and Security & Privacy, was the loud echo of Data Supply Chains reverberating off the walls. It was like an archetype of the first meeting, the temporary suspension of historical time, as if in all these years of Data Governance we had lost the original truth, like a spring disappeared under the ground, rediscovered at the source.
Every company does Data Governance today, for ill or good, with intent or dystopia. Every company also has at least one, but often many more, supply chains. These are real supply chains that may only stretch across one or two towns or six continents. Supply chains link producers, distributors, and consumers. They enable outsourcing and resourcing. And they are a fixture of modern business since business became modern in the mid-1970's. And with disciplines like Six Sigma, large multi-national supply chains enable massive economies of scale with quality control that previously were only available to the largest organizations with fixed multi-year labor contracts.
Today every organization also has large distributed Data Supply Chains. Some parts may be automated, others batch, and still others quite labor intensive. The variety and function is often the ugly mess the CIO would not like the world to see. And with seldom exception, they are not "governed" with anywhere near the same quality control and rigor as are real supply chains. When an oil company puts down a new oil terminal, well defined engineering processes are used to map out every step of production from well head to refinery. If Data Supply Chains are intended to capture the same kinds of flows with information, the methods used are mostly ad-hoc, one-off dependent upon project leader, never to be repeated again. And the result today is that companies have tens, hundreds, and even thousands of ad-hoc supply chains designed individually, some existing in their original state for decades. The disconnects create massive inefficiencies, quality control problems, and functional friction.
What every company should be doing is inventorying their existing Data Supply Chains and begin re-engineering. There should be one Data Supply Chain engineering standard. And each new real-world supply chain should include a well defined process to create a logical and efficient Data Supply Chain that monitors itself. This is not a small undertaking. But we can't create a Smarter Planet full of sensors and instruments to monitor the changes in our real world if we do not also monitor and instrument, standardize and re-purpose, the changes in our own enterprise.
Every time I speak to an IT audience, I ask "What is Data Governance?" Of course the audience has come to hear me tell them the answer if they do not already know. But I'm more interested in what my audience thinks. Invariably, the answer has words like "Policy Enforcement," "Control," and "Compliance" in it. And to me what this reflects is a desire among IT professionals to expunge chaos and confusion from their world and create order, stability, and simplicity. Perhaps this is very human, but I think our desire to transform complexity to simplicity focuses far to much energy and attention on the world "To Be," or perhaps even on the world "Never-To-Be."
I think we need to spend more time focusing on the world "As Is," the one with dirty, grimy, confusing, and complex Data Supply Chains that are not yet instrumented, monitored, or in any way Smart. It is this world that needs the bright white light of assessment, discussion, policy, implementation, audit, and dynamic steering. This dark and dishonorable world "As Is" is the past most of our Data Governance programs struggle to change in the present with business plan funding for the future. It needs new methods that monitor the information flowing through its electronic veins, real-time auditing of the tools that are used to change it, and brand new business intelligence solutions that analyze past performance, compare them to current conditions, and predict blockages and failures.
In 2009, at the Mohonk Mountain House, back in the place where it all began, surrounded by 52 Data Governance Thought Leaders, I saw again the source that we mistook all these years - Data Governance is a quality control discipline for the Data Supply Chain.
Fix the world that is.
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Many months ago, I agreed to speak at a Global Association of Risk Professionals (GARP) NY Chapter meeting on Systemic Risk Regulation and Taxonomies and last night, in a packed room of 200+ people, on the 30th floor of the Reuters Building on Times Square in NYC, on one of the warmest evenings in October, when I would rather be out playing tennis with my son, I fulfilled that agreement. And it was a lot of fun.
The audience was a mixed crowd of current, out of work, and hopeful Risk Professionals from the NY area. The room had a stunning view of Times Square facing North and the Hudson River facing West. It was modern, 21st Century clean, with professional rows of seating, a raised platform on stage, two huge mirror screens with my presentation, and a wide open reception area to the rear. GARP really knows how to put on an event!
My presentation (available here: http://www.garpdigitallibrary.org/display/displaychapter_meetings.asp?yr=2009) focused on some things I've learned the past year looking at the Financial Crisis, Systemic Risk, Regulatory Information Architectures, and the Danish Mortgage Model. I used several charts from my friend Alan Boyce, who has been a tireless advocate for the Danish Mortgage Model in America, and to be honest the audience found this material the most interesting. Truth is, with 12% foreclosure rates across America and 9.8% official unemployement (17.6% including those who are underemployed, or no longer even looking for employment), our recession is far from over. Normal foreclosure rates are 3-4% and can rise to 6-7% in a recession, due to rising unemployment. This recession started with 12%, hasn't abated in 18 months, and could rise to as high as 20%. The non-GSE mortgage market in America is dead since July 2007. All current mortgage reform measures are small-bore band-aids that are not working. Financial Regulatory reform that addresses market risk taking and compensation packages are addressing the symptoms of our problem not the cause. The cause is a mortgage system in America that has been inefficient for decades, is now broken and discredited around the world, and can only be rescued with a totally new model.
I've written on this page before about the Principle of Balance Mortgage Model and I encourage everyone reading this page to learn about it:
Thank You GARP for the opportunity to present at such an excellent event.
Recently, I played tennis with my son. At 16, he's tall and lanky like me, but full of boundless energy and I have to play smart to keep up with him. I taught him most of what he knows in tennis and we both play at the same level - though I do enjoy when he wins. But on this day, there was no winning or losing. Our rallies were endless. We exchanged vollies, drops, topspin, and slice. If I won a point, he came back and won the next. There was no mercy and no letup. At one point, he sliced a ball low to my mid-court forehand and I had to rush from the backhand side of the court across to reach it. I'm not as fast as I once was but on this day I crossed the court with speed. As I got to the ball and lined up a chip drop, I looked up and found that my intrepid son had already anticipated that move and was rushing to the net to cut me off. I stopped short and just laughed. I said "you know what I'm going to do next, don't you," and he said "like, yeah, I know all your shots." That happens when you play with your son, because we know each other so well.
We played out the rest of the match and after I thought about that laugh we shared at the net as a metaphor for much of what I've learned about Data Governance, Risk Measurement, the financial crisis and the challenges of information and knowledgeknowlegde. You see, people are best at anticipating what they expect - especially in situations that breed familiarity. That's the reason why Value at Risk (VAR) was such a seductively attractive formula - in a largely pro-cyclical business culture, a formula that helps you anticipate what you expect (that today will look mostly like tomorrow, yesterday and the day before) is a winner. People who anticipate other outcomes are either brilliant visionaries who make "discoveries" (minority), or outliers who make trouble (majority).
I began the year thinking that financial regulatory authorities could make better policy decisions if they had the right data. But I now understand that many of them had the right data in 2005, 6, and even 7 but they didn't understand it, chose to ignore it, or lacked the political will to make radical, outlier, decisions that would adversely effect many key constituencies.
Hence my conclusion: Data Governance isn't enough. Collecting and aggregating data is an important step, but people need to understand what the data means as information, and that information needs to be communicated widely as knowledge. Not the finite biological knowledge we all have in our brains - the organic translation all of you reading this article are performing right now - but the metaphysical knowledge of a community knowing a common truth about the world so they are prepared to accept a decision to avoid an outcome they did not expect.
I don't care what kind of new Systemic Risk Council gets built at the Federal level of our government, or indeed what kind of new Regulatory Information Architecture is designed to support it. All of that is important but not as important as the steps people take to disseminate the information in both raw and interpreted form to a wide and varied constituency. The more people inside and outside the group that know what the group knows the better chance we have that outliers will interpret things the group will miss. And it is upon those outliers - the ones who anticipate what we don't expect - that crisis prevention most rests upon.
This last point is the hardest. In the financial crisis, only a few economists like Nouriel Roubini predicted the credit crisis before it began. Most of the other economists predicted it perfectly only in hindsight. But Nouriel was largely ignored by those economists and the media as "Dr. Doom," the naysayer who only saw the bad while so much good was going on. And that is human nature. If you aren't in the tribe of believers you are a barbarian, an outsider, who can't be trusted and must be demonized or destroyed.
This is of course very bad for the discovery of non-expected results, unless of course you ARE a barbarian trying to hack your way into the group in which case you should be destroyed. Trusting what you know, where it came from, where its going, and who's going to know it and do something about it will require new forms of transparency and self-governance. George Orwell wrote about the alternative, and we don't need to follow his example.
Because what we want is Trusted Information that empowers Doubt. Doubt about what information means is essential to effective decision making. And this is where I think a new Information Governance discipline, one that focuses on the Information needs of Governance as well as the challenges of Governing the use of Information is needed.
That's at least what I learned from my son on the tennis court last week. We'll see what he teaches me today.
This morning, EU Regulators announced that they propose to create a Risk Board to monitor financial market performance and systemic risk indicators among the 27 member nations in the European Union. I've advocated a Council approach to risk-based decision-making since the beginning of this year and I think the EU proposal is a good idea in concept. Unfortunately, in Europe it seems decision-making takes a large number of people, becaue the European proposal would have 63 people participating on the Risk Board. A deliberative body with 63 people is not a "Board" - it is a legislature. To complicate matters, "only" 32 members of this board would have voting rights. Unfortunately, the only power they can vote on is a warning to member states that some part of their market performance contains systemic risk. How they plan to determine that threat and get everyone to agree on what it means in any reasonable amount of time is not clear. My guess is that this is a proposal to setup an intra-governmental think-tank that will study issues, write economic reports that no one reads, and only threaten to issue warnings because a vote on a warning will never happen.
Note to Obama Administration: If you want to create a Systemic Risk Regulatory Structure that is guaranteed to fail due to political indecision and lack of authority, copy the EU model.