14. A Systemic Model
The principles or columns we have described in earlier chapters allow us to explain in analytical form the characteristics of Arthur Andersen’s management model. However, more than each single element, what made it more distinctive and gave it the special touch that made possible its great force was the overall balance and the reinforcing mechanisms between the machine’s gears. That was its great secret, as is surely the case with most successful, hard to mimic, business models.
It is possible to have business activities with alternative models; what is difficult is to achieve balanced harmony and consistency sustainable over time.
Under this perspective, in the opinion of the book’s authors, the most valuable secret was to make compatible what was apparently in contradiction.
What do we mean? Well, apparently Integrity is hardly compatible with Ambition or with Serving the client at any cost. Or with Results orientation. It seems difficult to make Cooperation compatible in an organization that underwrites Ambition or Talent. Unity looks incompatible with Ambition or with the Results approach. Combining Client Service with Results does not come easily. And so on.
Models that are easy do not differentiate. They are easy to copy and do not make you different from your competitor, or lead you to excellence. The Andersen model was not an ordinary model. Not an easy model. However, in opposite terms, the special models demand in its implementation a balance that is difficult to achieve and is essential for success. On the other hand, that makes them unstable and demands quite an effort of continuous monitoring and correction. Perhaps that explains Andersen’s difficulties when the model was shaken by special circumstances, like the Firm’s splitting in two business units (Arthur Andersen and Andersen Consulting).
In order to make compatible principles that are apparently in contradiction it is necessary to carefully define the values’ limits and to bet on talented professionals, persons that can move in an environment full of nuances. That confirms the Talent bid’s importance as a supporting column of the Firm’s value structure.
Only accustomed professionals with certain characteristics can move in business environments with a nuance-demanding organizational culture. And every company with a strong identity has a nuanced business culture.
Concentric circles
A first systemic approach to the principles here identified allows us to classify them in two initial categories:
More on the surface, we have Services, Results and Talent, that could be considered the outer envelope, the skin that in a simple manner could be called “bread and butter”.
In a professional services activity it is a bit obvious to say that the key to success consists in satisfying customer’s needs to a degree of excellence, which requires a prime material (Talent) of the highest quality. Talent and Service will bring good Results, to make the model sustainable. To say it in a popular way: “your Service, Talent and Results song...”.
It is also quite obvious that the three elements reinforce each other, since with a good service the client reports better results, can hire and retain better professionals, attracted by the organization’s reputation and the promise of good results, what on its turn feeds again the capacity to offer a high quality service.
However at a deeper level we find the other elements (Integrity, Unity, Cooperation and Ambition). They are not so evident, they build up incrementally with time, but they are the ones that truly mark the difference, so much because they represent a certain way to understand excellence as because they channel the practical interpretation of the first three principles.
Unity and Integrity: the fundamentals
In any systemic model, the choice of an initial engine can be somewhat deceptive, but from the description point of view, one starting point is needed.
In choosing this first initial point our option goes to Integrity; this principle as defined in Chapter 9 (Think Straight, Talk Straight) is not only a “personal or romantic” view of professional service but a deep conviction about what is called an excellent service to the client and to the business community; its main traits are independence of judgment, rigor, transparent communication and respect of standards, above possible short term benefits. It also implies a wide vision about who is the final client, beyond the idea of having as client the Management of the company we are working for. From the Integrity perspective, the client is the company we are working for, which includes a complex interest range of the different agents: shareholders, employees, suppliers, clients, public administration and society in general. From this point of view, with the intuition of the tensions and conflicts that an auditor in particular and a professional in general may face during his work, it is necessary to have in place a very solid code of behavior with deep ethical and technical foundations.
Starting from the choice of Integrity as fundamental core of business development, the concept of Unity (One Firm, One Voice) appears as indispensable tool; the underlying idea is, the more compact the organization that joins the professionals providing service, the easier will be to get a powerful structure allowing coverage of the two sides of Integrity: on the one side, reducing the risk that pressure from one specific client on a specific project can get so strong that the professionals feel “defenseless” in face of the need to get short term results; on the other side, it is a bet for a type of organization able to create a homogeneous workforce, subject its own inner working rules and ready, from a strong training effort, to do a technically excellent job. In this context, Unity and Integrity are finally two faces of the same coin that need each other and feed each other.
This transmission belt is again consistent with the three epidermal elements; Integrity and Unity, together, increase the capacity of Service to the client, especially as companies grow and management gets more complex. Furthermore, the joint application of the Unity and Integrity concepts in parallel, gives more and more sense to the bid for Talent, in order to have more competent professionals, but also to meet the need to invest strongly in internal training and development to reach the technical quality and criteria homogeneity demanded by the application of the chosen service model.
Cooperation and Ambition
It is certain that Arthur E. Andersen had always the vision of the auditing professional service as something more than the pure financial statements certification and that, from this perspective, he pioneered the idea of developing professional services in consulting and advising; it is also true that he was bent on forging a united Firm with a single voice, based on the principles of integrity and professional rigor. From this perspective, he was a visionary that established solid foundations for the Firm’s future development, but when he died in 1947 not all the elements were sufficiently developed.
To begin with, he held the Firm’s control majority, so the Unity concept had a strong personal control support. His concept of Unity was closer to that of a pater familias than to that of an extremely complex professional organization. In fact, he did not believe it would be possible to maintain the basic principles with a number of partners over one hundred, relying for cohesion on mutual knowledge between the partners and the shared training and development programs.
It was really during the strong expansion and growth out of the USA, under the Leonard Spacek’s leadership, that the Unity principle began to suffer the first difficulties because of the more or less simple form of management. Mutual knowledge and strong control by the leader were not enough to maintain Unity and the concept of Cooperation made way as the best formula to keep unity. The Cooperation concept materialized later with the creation of the partnership system in a cooperative format and the recognition of different practice areas (auditing, tax advice and what was then known as administration services) co-existing with the always powerful force of geography.
From that moment on, along the years (perhaps up to the late 70s) the One Firm concept was supported by Cooperation systems (between partners, offices, countries, practices, generations, industries) that tried to maintain Unity by means of the balance between mutual interests and the financial support of those practices with higher earnings to those earning less.
In spite of all the difficulties to maintain the complex Cooperation systems, there is no doubt that the bid was successful and, again, a very powerful systemic reinforcement. Cooperation contributed to Unity with new values and, additionally, set in motion new activities development dynamics that improved the capacity for Service to the client, with very positive impacts on Results and in the capacity to attract and keep Talent, all in a virtuous circle, feeding the system.
Finally, but not less relevant, the development of a comprehensive and powerful model, its geographical growth and its service diversification, all helped by Cooperation, along with the conviction of working with the high qualification schemes and the professional rigor, rooted in Integrity, all created a breeding ground for the deployment of a pride of belonging and spirit of Ambition.
On its turn, with the typical behavior of systemic models, this Ambition helps to reinforce both the total system and each of its elements in particular: improves the will and the spirit of Service to the client, stimulates Cooperation as the formula to facilitate diversification and growth, promotes and makes easier the Talent policies, increases the pride of belonging to One organization, etc.
In the attached chart we try to represent visually in a schematic way the relation and reinforcing mechanisms as a whole.
Andersen Systemic Model
A good for any company model?
One of the purposes of this book is to give an explanation of a Management Model, in this case the Arthur Andersen one, which could inspire the readers. In this sense, the question comes up: What can be learned from the Andersen Model? Is it suitable for application, totally or partially, in any company, today?
In this regard, we do not believe in magical solutions. The great concepts, simply stated, may seem to be suitable for universal application: Integrity, Unity, Cooperation, Ambition, Talent, Service to the client, or Result orientation, are principles that may provide value to any activity, but to do that they must be adapted to each particular context, adjusted to a specific business purpose, and develop a specific framework of systemic relationships.
In the analysis of the systemic relations between the different elements of the model, we have been able to perceive how the columns build up over time and, occasionally, regenerate its meaning to adapt to changes in the environment’s conditions. The One Firm idea, for instance, appears as a mechanism to protect Integrity; the efforts to create a dense Cooperation network are emphasized when protecting Unity just when the personal relation between partners becomes difficult; development of policies to attract, keep and develop Talent accommodates changes in business requirements over time, and Service to the client adapts also over time to the challenges posed by developments in auditing standards and the arrival of new management techniques.
In any case, a first reflection would be that the question has more to do with the systematic and persistent application of the principles than with their choice. For example, once Integrity is defined as principle, the intensity in its application is much more important than the pure rhetorical statement. If we believe that business demands it, let’s get to work, analyze the systems and provide the organization with the tools, methods, controls, systems, procedures and support structures so that effectively becomes part of the organization genetic code. When, following another example, we believe that Talent is a competitive key, it seems logical to devote efforts, investments, system analysis and discipline to recruit, train, evaluate, develop and compensate in an excellent manner the professionals. Probably nobody would say that Integrity and Talent are not part of their business principles, the difference usually consist in how much energy and attention are invested in their practical and daily application.
A second reflection, which will be best understood after reading Part II of the book, is the need for consistency in the value proposal the company makes to the different agents participating in it. If there is anything like a magic concoction in business models, it is surely related to its capacity to stimulate, encourage and attract in a natural manner the different groups involved; the achievement of a work scheme that “rightly compensates” everybody generates by itself a huge energy potential.
A third reflection coming up from the analysis is the verification of how a powerful and sustainable business model needs to “transcend” its leaders or creators.
In the Firm’s history there are obviously many outstanding names, who contributed very significantly to its development; these start, without any doubt, with the founder. However, in many cases we have been able to verify how a business evolution needs sometimes to molt, to get rid of some corset that unwittingly its more charismatic leaders may have imposed. This capacity to overcome their leaders is also a trait of an excellent organization, even if it is often done through painful episodes.
Finally, lessons can also be learned from the contraindications found during the application of the principles and also from the way a model can deteriorate and reach the disappearance of a Firm such as Arthur Andersen.
We’ll analyze that in further detail in Part III.
Andersen’s prescription
- Unity: to be and feel part of the same
Any company can apply the Unity principle. Circumstances are different for each company but the principle is valid for them all.
Successful management of a company requires unity in action and in response. It is not possible to manage as an ensemble something whose parts respond on different patterns and follow diverging interests.
In a small company we can refer to the departments and in a group to the divisions. A matter of dimension, but the concept remains the same.
If each one thinks and acts differently, following different objectives, having different values and not feeling part of the same company, progress is impossible. Union, Unity is, therefore, an essential requirement.
The degrees of implementation of that Unity, and the way in which it is done, may be different. In translating the Unity principle to its management model, each company has to provide its particular seal. - Integrity: be honest and act honestly
Integrity is a general principle in any honest organization that wants to respect commonly accepted social values. Furthermore, respect for Integrity helps the managing task and is cost-effective in the end.
This principle goes usually unchallenged. - Cooperation: support each other
Promoting Cooperation between people, departments or divisions of a company makes it stronger. There seems to be no question about it. Perhaps the most important would be to decide how that cooperation should truly happen. Help on this is given by fulfilling the Unity principle and by the establishment of a personnel evaluation system that takes Cooperation into account. - Ambition: having ambitious goals
The Ambition principle is one of the most difficult to understand and communicate because it has negative connotations if wrongly explained and applied.
However, supporting Ambition in the persons of the organization helps them to set ambitious goals for themselves and not to be conformists. If growth is desired it is necessary to be ambitious. But it is necessary to know how to be ambitious in the right measure.
Ambition also means fearing nothing. Not fearing failure. Being afraid of nothing. Without hang-ups. It is something that should emanate from the organization summit to reach everybody. - Talent: a bid for the best
The bid for Talent is quite general in most companies. The question is how to transfer it to the management model in a consistent and comprehensive way. It should go from hiring to compensation, passing through the relationships structure, the evaluation system and the work environment - Service: passion for the client
Satisfying the client at any cost beyond his expectations is something where surely all companies will concur. The question is how to take it to the end and how to translate it into the management model.
Management of the client is a key piece of any company’s success. Executives must know how to do it and how to transfer that knowledge to the whole organization. Because, in addition, it is the whole organization (and not only the sales people) who must be conscious of “the client is king”.
And when saying the client is king it is necessary to set limits to the clients who are not worth of the royal crown. - Results: never let profits out of sight
This is also an irrefutable principle, but it demands shades in its application.
It is a good thing to have the income statement present in all activities if one knows how to combine it with the rest of principles. In the end, companies are there to make money. The question is to combine short, medium and long term to maximize profits.