Seeing like a CEO

What really happened to Boeing?

A cliché has emerged to explain Boeing's decline. Following the merger of the two firms, McDonnell Douglas' "financial", "Wall-Street-oriented", "bean-counter" culture displaced an engineering-centered culture that had hitherto prevailed at Boeing.

I find this explanation unsatisfying, because I do not know what it means. "Culture" is a kind of catch-all in social affairs that can be deployed to explain almost everything everywhere, and so it usefully explains nothing at all. If the advice your theory yields is "change the culture", then you have no meaningful advice.

Boeing's turning point was arguably when Harry Stonecipher, formerly of McDonnell Douglas, more formerly of Jack Welch's General Electric, ascended to the firm's leadership. Stonecipher's successor, James McNerny, also hailed from GE.

Jack Welch managed GE as a certain kind of rationalist. The business of a business is to maximize revenue and minimize costs. Plant, labor, and raw materials are costs. GE was already a conglomerate, not a unified firm. Welch sought to rotate its holdings towards lines of business that would bring in greater revenue with fewer of those costs, which meant he increasingly favored finance over industry. He gutted activities like basic research, whose connection to revenue was too loose to reliably value. He imposed very blunt, clear, incentives — ranking all employees, firing supposed underperformers and giving bonuses to outperformers in fixed percentages.

A thing to notice about this style of management is that you don't need to know anything about GE's particular businesses or technical processes to understand it. Welch's prescriptions reflected a form of economic rationality that is universally accessible, that could be taught in business school and tried anywhere. In my own little lingo, they reflect unsituated virtues.

But if you think the one weird trick to managing highly technical cutting-edge business processes at scale is a checklist of B-school bromides, you might just be mistaken. Basic research is very difficult to value. It remains essential to many firms' long-term viability regardless. Performance in highly collaborative processes may be hard to measure and easy to game. Canning supposed underperformers and rewarding "your best" might in practice lead you to shed your best and reward the cunning and disloyal. The mere exercise of ranking performance might undercut trust between employees, hobbling productive collaboration.

So a simple, not wrong, story about what happened at Boeing is that Jack Welch acolytes were elevated to the firm's leadership, and began to impose Welch's caricature, one-size-fits-all, business-school-friendly management style on what had already been an excellent enterprise, and in doing so they destroyed it.

I want to tell a slightly more sympathetic story. What, after all, was Harry Stonecipher supposed to do?

A modern aircraft is a marvel of technology, built upon an edifice of hard, empirical, science. Every element of an aircraft can be precisely described, characterized, and tested. But each choice about how any of those elements should be designed and all of those elements should be combined introduces tradeoffs, benefits and costs that are not straightforwardly commensurable.

You might think aeronautical engineering would be the ultimate "hard-information" kind of enterprise, but you would be wrong. The design space of an aircraft, the alternative combinations of plausible choices at every level from the tiniest part to the shape of the fuselage, is effectively infinite. There is no one true optimal design. Beneath the broadest specifications — how big, how far, how fast, burning how much fuel — an endless array of choices may have been made well or poorly, and expensively or cheaply. There is no objective measure by which to judge the quality of the process from outside of it. Designing and building — "engineering" — an aircraft is a soft information exercise. You can only have any idea if it is being done well if you are situated within the process and interacting with participants.

The key fact to note about Harry Stonecipher is not that he was influenced by Jack Welch. It's that he was, for the first time in the firm's history, an outside hire. Stonecipher had been President of McDonnell Douglas, which had under his stewardship been merged into Boeing. But he had no access to, no visibility into, no way to monitor, judge, understand, or discipline the je ne sais quoi that made Boeing work.

In order to do his job, Stonecipher undertook to rationalize and simplify and render legible the firm. Lacking access to "soft information" that could only come from developing relationships within Boeing over years of collaboration, he sought to manage the firm on the basis of "objective" so-called hard information. Among the most salient hard information in any business enterprise is cash flows, so the sway of "bean counters" was elevated automatically. Among the least legible information in a firm, to an outsider, is the quality of employee judgment calls, so internal expertise was demoted.

The Boeing Harry Stonecipher inherited was an integrated powerhouse. Every step, from the conception of new aircraft through their design, manufacture, and sale, was controlled and performed in-house. The new CEO infamously sought to transform the firm into a narrow specialist that would outsource all but a few aspects of the process. Again, you can blame Welch's simplistic B-school dogmatism for that. Specialization and trade are better than bureaucratic central planning. Focus on your core technology and let the market provide the rest. In retrospect, those ideas were obviously stupid for a domain where modification of any one element can cascade into requirements that myriad other elements change, requiring intensive coordination and costly renegotiation of contracts if those other elements are outsourced. Ronald Coase is also taught in business schools.

But the terms of contracts with outside vendors are objective and tangible in a way that continually evolving plans by managers and employees are not, especially when you don't know those managers and employees well enough to know whom to trust. Outsourcing was a business school fad by the early 2000s, but it also solved an information problem for Boeing's new CEO, who, fêted but flying blind, was trying to manage a company that ran on processes he could not evaluate or even perceive.

Contracts, however, he could read. And understand, and negotiate. Organizational competences are soft information. The terms of legal documents are hard information.

In Seeing Like A State, James Scott famously described the perverse results that can occur when attempts to rationalize a system necessarily simplify it, eliminating as extraneous elements that in fact are essential, but whose role is not included in the reformer's simple model.

How was Harry Stonecipher supposed to run a firm whose excellences were embedded in talents and habits that could not be tabulated, systematized or measured? Was he just supposed to trust the judgment of "old Boeing hands"? Which ones? With whom would the buck stop?

That was his job. He had to reorganize the firm into something he could see, understand, and manage. So he did. Of course it did not help that Stonecipher and his successor James McNerny came out of Jack Welch's orbit. They had Welch's playbook too close at hand. But if you think the Boeing they inherited was a national treasure, the root of the rot was to bring in outside hires.

Contrary I think to many of our perceptions, the vast majority of firms, especially larger firms promote their CEOs internally. The idea of the superstar CEO turnaround artist, endowed with a managerial g factor enabling excellent leadership at any firm, is bullshit. Complex human institutions are their own realities, whose most important characteristics subsist in habits and relationships and invisibly distributed skills.

Effective leaders certainly do strive to surface and measure objective, quantitative data about their institutions, and incorporate it into their decision making. But those kinds of measures cannot be remotely sufficient to guide and govern the living organism that we call a firm. Track your EKGs and blood oxygen and body mass and lung capacity all you want. You'll never think out how to get peristalsis right. A brain detached from, incapable of regulating, the most of what we are that is submerged and "autonomous" is the brain of a creature not long for this world.

Firms like Boeing, that are not mere holding companies, but that develop and sustain and expand unique and complex competences, are each their own "deep state". Making outsiders brain and dictator of such an organism is an incredible disruption, an incredible sort of gamble. Perhaps when we have decided that the pathologies of our deep state so outweigh its capabilities, a YOLO on effectively killing the organism and reconstituting something else from its assets might make sense. But usually all you end up with is a corpse.

Which is what Boeing is, or would be, if its customers and the government that regulates it didn't require it so much. It's a firm on a ventilator. Perhaps it can be restored to rude good health, but that will take a great deal of time and dedication and care, and I think recruiting a lot of help from people likely now retired who knew it, and made it, when.

What it does not need is further bloodletting by shareholders. Even the most productive workers demand subsidy when they find themselves in intensive care.