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Transacting Business Outside of Technology

By Victor Magdaraog

Victor Magdaraog

“The Robots Are Coming for Wall Street”—this is a recent headline banner of a New York Times Magazine article. The article narrates how software and technology have started to replace financial analysts in a big number of banks and other financial institutions. The article also tells the story of how a day trader after working with a software engineer, left her organization because her job was automated.

A new technology called “Blockchain” is also coming to the financial industry. This application, which uses similar foundations as Bitcoin, will initially be applied to automate the clearing and settlements processes employed by financial institutions. It is estimated that it could reduce clearing and settlement costs by about $15 billion a year. Why do organizations continue to focus on developing and implementing these types of technology and software? The obvious reasons are to improve efficiency and manage costs.

Organizations and enterprises, by their nature, operate through business processes and transactions. The exchange of goods and services between an enterprise and customers are realized through a series of transactions. Some of these transactions are proprietary while others are necessary but do not provide any competitive advantage—thus the growth of the Business Process Outsourcing industry. Other organizations realized they can generate substantial savings by consolidating processes under shared services operations. When organizations are viewed as a series of transactions or processes, use of software and automation create better efficiencies and save costs.

In a separate publication on the economics of organization and management, Paul Milgrom and John Roberts expand on the concept of transaction costs to include Influence Costs. They write: “Influence costs arise first because individuals and groups within the organization expend time, effort and ingenuity in attempting to affect others' decisions to their benefit and secondly because inefficient decisions result either directly from these influence activities or, less directly, from attempts to prevent or control them.”

From transaction to interaction

From transaction to interactionThe expansion of business process outsourcing and increased consolidation in shared services triggered a study by McKinsey published in the McKinsey Quarterly, titled “A Revolution in Interactions.” While this study focused on the need for more technology connectivity, it presented a very interesting view of transactions—referred to as Interactions. The study defined Interactions as “the searching, coordinating, and monitoring that people and firms do when they exchange goods, services or ideas.” It further expounds, “They take many everyday forms—management meetings, conferences, phone conversations, sales calls, problem solving, reports, memos—but their underlying economic purpose is always to enable the exchange of goods, services or ideas.”

This research article provides examples of two types of Interaction: interactive activities like communication, data gathering, and collaborative problem solving; and non-interactive activities, such as physical labor, individual analysis, or data processing. Interactive then refers to those transactions that involve interactions between people and the non-interactive refers to performing or managing tasks or processes.

The authors estimate that at the firm level these interactions form a large part of the firm’s activities, while at the individual level, the interactive (transactions with people) can go as high as 80 percent of leaders’ total transactions.

Transactions in organizations can then be viewed as Interacting (with and among people) and Managing (working on processes or tasks).

DDI’s Global Leadership Forecast (GLF) study took a similar perspective to the McKinsey report. Leader respondents were asked to indicate time spent Interacting versus Managing; 41 percent reported they spend more time managing, 34 percent equal and 25 percent more interacting. When asked about their preferred time, 22 percent wanted more managing, 38 percent equal and 40 percent said they should spend more time interacting. On the other hand, 45 percent of organizations value more time managing, 34 percent equal and 21 percent more time interacting. With organizations’ preference for managing, it is no surprise then that the GLF data showed a very high percentage (high 80’s) of leaders struggle with Interactions. One can surmise the cost of inefficiencies of these interactions. On the other hand, the GLF data indicate that organizations that value interacting are twice as likely to belong to the top 20 percent of companies that are financially doing well.

In these interactions, leaders address two aspects: the purpose of the interaction (the practical side or need) and the relationship with others (or the personal level). The practical deals with the purpose of the interaction, such as to solve a problem, communicate, or to provide directions. The personal on the other hand is about concerns and feelings of individuals. The GLF data indicates that leaders struggle most with addressing the personal needs such as building trust, and listening and responding to cues. As they struggle, interactions become more inefficient which involves valuable executive time and man hours of those involved in the transaction.

If the objective of adopting technology and software is to improve process efficiencies, how does one become more efficient in interactions, more specifically those behaviors that address personal needs?

Balancing the practical with the personal—the value of interactions

Leaders need to be better at the essentials of interactions, which is a two-pronged skill set, one that addresses the practical and the other which address the personal need. Combined, these skills lead to more efficient interactions.

The practical need is addressed by the Interaction Steps of Open, Clarify, Develop, Agree, Close. These are used as logical steps to start and end the conversation. To address the personal needs, a leader has to demonstrate the five key behavioral principles of:

  1. Maintain or enhance self-esteem (Esteem)
  2. Listen and respond with empathy (Empathy)
  3. Ask for help and encourage Involvement (Involvement)
  4. Share thoughts, feelings, and rationale. To build trust.(Share)
  5. Provide support without removing responsibility. To build ownership. (Support)

These five are also foundation skills that lead to high emotional intelligence or EQ.

In High-Resolution Leadership, DDI examined assessment center data on about 15,000 leaders and looked into the use of these interaction skills. Most of these behaviors prominently link to job performance with empathy showing the highest correlation to transactions involving decision making, coaching, engaging and planning and organizing. Esteem also correlated well. The research further states: “Overwhelmingly, empathy tops the list as the most critical driver of overall performance. It also consistently relates to higher performance in each of the four leadership domains.” These findings highlight the importance of the interaction essentials in improving efficiency of the interactive transactions most especially those that involve cultivating networks, driving execution, leading teams and compelling communication.

In addition, these findings are related to “influence costs.” The High-Resolution research compared the contribution of IQ and EQ to performance. It reports: “If you want to win someone over, a business case and strong rationale (IQ) may be more critical than interpersonal sensitivity and skills (EQ). On the other hand, once you have influenced someone to take a particular direction, EQ will play a far stronger role in its execution due to the necessity of getting everyone marching in the same direction.” In this case, the cost of winning over and guiding towards the goal can be classified as influence costs.

The quest for automation

In the quest to improve efficiency, organizations look into value creating transactions and processes, then decide which to automate or outsource. One question to ponder—can organizations automate or outsource the interactive transactions?

Martha E. Mangelsdorf published an article in the MIT Sloan Management Review on technology and the changing nature of human work titled “The New World of Work” and observed: “Demand also grew for skills in some areas in which machines haven’t made many inroads. The average occupation in the United States in 2014 more heavily emphasized interpersonal skills—an area where computers can’t yet compete with humans.”

A similar study from Oxford posits, “For workers to win the race, however, they will have to acquire creative and social skills.”

To realize the economic value of interactions, leaders need constant practice and feedback in interaction essentials. After all, roles which require high interaction skills are not going to be replaced by robots any time soon.

Victor Magdaraog is vice president, DDI, with operational responsibility for Philippine, Korea, Malaysia and Singapore markets.

Posted: 20 May, 2016,
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