With many thanks to my good friend, Alastair Campbell, for an impromptu conversation this week, I wanted to raise an interesting issue.

Do the principles of anchoring apply to
companies as much as they apply to individuals?

To remind you, the concept of anchoring is based on the short circuit in our brain which applies a correlation to unrelated facts / opinions and thereby can make us make some assumptions which lead us in the wrong direction.

An experiment I’ve done to demonstrate this concept is to show an audience in Asia this picture…

 

 

….and then randomly pick three members of the audience to guess when it was built. On one notable occasion, the results were as follows: 1000 years ago, 1800 years ago and 600 years ago. The truth is less important than the behaviour which is that, despite strenuous denials to the contrary, the second and third person based their answer on that of the first, and adjusted incrementally to that first response…rather than taking a completely independent view. This led to the cluster impact that we see above.

So back to the question of whether corporates do the same thing. Imagine you’re the senior partner of a major law firm which has the typical distribution of clients (20% generate 80% of revenues). The key relationships have been with the firm for over 10 years and your approach to a range of activities are firmly anchored to the arrangements which are in place with that client. Pricing and terms of payment, service level agreements, team structures…all of the operating principles that have been driven by those major relationships and they become the framework for every other client relationship. Any change from the core is incremental and vigorously discussed.

Meanwhile, the opportunity for disruption arises as those, who are targeting this particular client, take a analytical approach to understand the reality of their needs…which demonstrates that over the years, a misalignment has grown between the current needs of the client and the service framework. Something that may be very expensive to provide (for example a dedicated team which only works on matters related to that client) actually holds much less value for the client (who now appreciates experience from other sectors as products and services increasingly converge).

At some stage, the misalignment grows to such a degree that the entire relationship is put at risk…and the disrupter gains centre stage.

So what to do?

• Acquisitions…does buying the disrupter solve the problem? Only if their approach given some traction internally…to use another term from behavioural economics, the internal ‘friction’ is removed / reduced. A challenge, which evidence would suggest, is beyond many services businesses.

• Change the framework. That is a long term project and one which has considerable challenges…in the context of the law firm, potentially a multigenerational challenge in terms of managing / senior partners tenure. To achieve this, you might want to think about focusing on a specific set of activities rather than a broad cross functional approach. See this link for an approach which may work.

• New ring fenced entity. Does building a separate entity which operates independently and actively looks to create a new approach work? Probably the most pragmatic of solutions, and certainly something that creates least internal conflict…until the realisation of cannibalisation occurs. As a leader, you’d want the new entity to be properly established before that particular awareness hits the broader audience.

I would be interested in any experiences you can share which perhaps demonstrate a similar process.

• Three things to think about when preparing your company for a ‘growth by acquisition’ strategy
• The great unravelling

Categories: Behavioural Economics, C suite leadership, Compliance, Creativity, Mergers & acquisitions, post acquisition integration, Post merger integration, psychology, Transformation

Tags: Anchoring, behavioural economics, innovation, operating model, Pricing, relationship management, services