Aug 4, 2008

Book Review: The Halo Effect

We in HR are quite used to hearing about the Halo Effect, specially (but not limited to) related to recruiting. It refers to a particular characteristic/trait of the interviewee that biases the interviewer to making erroneous conclusions about his other skills. For example, the interviewee is from a premier school, ergo he/she must be better on the job than someone else who graduated from a lesser known institute.

Phil Rosenzweig's book The Halo Effect and Eight other business delusions that deceive managers however focuses on The Halo Effect that makes consultants, journalists and others make the same mistake when observing organizations and mistakenly make assumptions about why they are successful or not.

He uses the business press to highlight these mistakes and to show how the halo is shaped by an organization's performance. This is the trap that business researchers fall into, primarily by identifying "High Performing/Successful/Excellent/Great" organizations and then trying to study why they are successful. As Phil says - this is flawed.

 When a company is growing and profitable, we tend to infer that it has a brilliant strategy, a visionary CEO, motivated people, and a vibrant culture.  When performance falters, we’re quick to say the strategy was misguided, the CEO became arrogant, the people were complacent, and the culture stodgy.  Using examples like Cisco, ABB, IBM, Lego, and more, I show how the Halo Effect is pervasive in the business world.  At first, all of this may seem like harmless journalistic hyperbole, but when researchers gather data that are contaminated by the Halo Effect—including not only press accounts but interviews with managers—the findings are suspect.  That is the principal flaw in the research of Jim Collins’s Good to Great, Collins and Porras’s Built to Last, and many other studies going back to Peters and Waterman’s In Search of Excellence

He also focuses on my favorite wrong conclusions based on statistical studies. The interchangeable way in which people seem to infer that correlation is about 'causality'. He also reminds that in the business world success is always relative - and not dependent on the 10 things an organization needs to do to be successful. As he shows:

I provide a very striking example about Kmart: on many objective dimensions (e.g., inventory management, procurement, logistics, automated reordering, etc.) Kmart improved during the 1990s.  Why then did profits and market share continue to decline?  Because on those very same measures, Wal-Mart and Target improved even more rapidly.  Kmart’s failure was a relative failure, not an absolute one.

So what does he say? Well, that there are many reasons for an organization's performance, which are dependent on taking risks - risks about making strategic choices and risks to execute those choices. These are never certain - and recognising that business world is a probabilistic world can make managers and leaders cope with uncertainty better. I highly recommend the book, if you haven't read it. It has helped me to question all the business 'success formulas' I have studied so far. As he says:

I wrote The Halo Effect because during 25 years in and around the business world, I've seen so much nonsense—unsupported claims by famous gurus and self-described "thought leaders," sweeping assertions based on poor data, and simplistic stories that claim to be rigorous research. Worse, most people—including many very smart managers, consultants, and journalists— can't tell the difference between good and bad research. The Halo Effect is an attempt to raise the level of discussion in the business world, and to sharpen our skills of critical thinking about management.