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Effective asset allocation

Effective asset allocation

Life is lived in a complex framework, and we have to satisfy many imperatives, rather than optimise any one of them. Work by the British cabinet office showed that the long term profitability of a firm relative to its industrial sector depended on at least eight semi-independent internal variables, such as the strength of its human resource development. Risks and uncertainties also mean that we cannot back one important element, but that we have to cover a range of contingencies in everything which we do.

This said, there are plainly better and worse ways in which to deploy assets, whether this be done by the public sector, by private organisations or through the composite workings of many individuals: that is, through markets. What we mean by "well" depends, however, on what balance of outcomes we are striving to achieve.

In simplistic terms, well-deployed assets come from a statement about outcomes - where the organisation wants to be - about tools, resources and risks. Such statements need to be accessible to those whom they affect, whether they be employees inventing the future or shareholders and regulators permitting this to happen. A more detailed examination of what is entailed in having a strategy is available here.

As a starting point, the desired balance of outcomes has to be understood and shared amongst the decision-takers. This sounds obvious, but such understanding as there may be is seldom either explicit or shared. The adaptive, agile organisation needs to understand the field in which it operates, however, and to be clear about its relative position within this. It needs to decide where the field may be in a few years time, and where it wants to be in respect of this. It then needs to deploy its resources - its intellectual, human, financial resources, its reputation and brand, its portfolio of other intangibles - in ways which will take it where it wants to be.

This is hard work to undertake in a focused organisation, and a major challenge in the contentious, merged fields of the public sector. Nevertheless, what should be a central task of management has tended to become a bolt-on afterthought, best addressed when pragmatic fire fighting happens to abate. As a consequence, many organisations can explain themselves only in the most generic or frankly specious terms, and their judges react by squeezing them for concrete performance, cash and short term results.

An industry has grown up around this issue. All manner of programs have been put forward, some appealing to formal analysis, others to supposedly primal concepts. Weasel words such as "shareholder value" seem to dictate an outcome until closely examined, when it becomes apparent that there are many ways of creating value for the shareholder. The shareholder has to be convinced that management is ultimately trying to maximise the value of the asset, but an asset with a high value is one for which the shareholders are convinced of long term value. Such tautologies underlie all simplistic imperatives.

There are two major issues which confront managers in all walks of life. First, the means of navigation through the fast moving complexities of their operating environment absolutely demands a shared, balanced, validated perspective of them. This cannot be acquired from third parties nor form the columnists in the trade press. Second, the source of much of the information against which they build this model, the validation of the model itself and source of new options for the organisation increasing emerge from a large pool of knowledgeable people on whom they can draw. These people are, of course, their staff, but comprise a network that extends far beyond the organisation's boundaries. Shareholders know what shareholders want, for example. However, shareholders will be able to articulate an opinion only after considerable education about potential and practical options, and getting into this sort of dialogue is extremely demanding. Exactly the same is true of staff, of customers, of regulators: dialogue takes time, but surfaces options hitherto concealed.

It follows that a number of iterative processes are in play. We noted the simplistic needs of a system that allocated resources effectively. It knows its world. It can only do this when effort has been made to surface and fuse the latent and actual knowledge of relevant people. Such a system understands where it fits into this world, now and in prospect. Once again, this insight takes effort and synthesis, testing and updating if it is to be valid and seen as valid by the assorted gatekeepers who could deny the organisation access. Successful asset allocation thus relies on a world view and a preferred outcome, but it can do nothing until its agents assess the available toolkit, deciding what balance of measures will achieve the desired end, what resources it can access and what risks it needs to build into its contingency plans. This is a less inclusive process, but nonetheless an iterative, labour-intensive one.

Pragmatism and intuition are not enough. Markets are not enough: markets represent the collective wisdom of usually male twenty-five year olds. "Strategy" is not enough, because a clear idea is useless until tested, worked through into practical steps for individual workers, built into the motivational system, communicated in unique terms to the relevant stakeholders. Party politics is probably not enough, for the ideas put together in back rooms by ideologues and academics will be half a truth, at best.

The knowledge economy places a premium on getting ideas right, and on using routine modular systems to deliver these ideas at low cost. Around half of all business costs, and half of all business value added, consists of patterns of knowledge associated with getting things right.

The determinant of success in the knowledge economy is how well an organisation - nation, form, public sector entity, individual - can see the intangible, and can fuse the information which is available to it so as to create understanding.

The determinant of being seen to be successful in the knowledge economy consists of what the organisation is able to get accepted as its goals by its judges. If it is to be seen as a cash generator or a guarantor of public decency, then its performance against equivalent metrics will be what it is judged upon. If it utterly fails to establish how it should be assessed, then assessment will employ the lowest common denominator.

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