Wednesday, 3 June 2009

Similarities between design and the financial services sector

Last week when I asked Paul what he wanted me to talk about tonight, he said something contemporary, entertaining and provocative.

So that is why I have decided to talk about derivatives and credit default swaps,
I also wanted to talk about synthetic collateralised debt obligations, but that is so hard to say and Paul has only given ten minutes. So sadly we can’t go there. I apologise in advance for this oversight.

You probably think I am joking, but I believe that many parallels can be drawn between design and the financial services sector and there is most definitely much we can learn by exploring the similarities and that is what I hope to do with you this evening.

As designers we are constantly reinventing ourselves: our approach, our business model, even the language we use to describe our work. Innovative evolution is one of our key qualities.
Look at indesign, the magazine is now almost 10 years old but it has renewed itself many times over that period. Yet even though it evolves it continues to maintain its unique scope of content and its focus on commercial interiors and hospitality.

In the same way the financial services sector has evolved and reinvented itself. That is how they came up with derivatives.

Do you know what derivatives are?

Derivatives are products whose value derives from something else. So say you have a bar of gold, and you think that the price of gold is going to rise or fall, you could either trade the gold or you could write a contract that mimics the way the price of gold will behave. That’s a derivative. Bankers realised it was a lot easier to write a contract that mimics the way a price will trade, than to actually trade the tangible item.

Who the heck came up with this idea? JP Morgan that is who

To start with derivatives were not a new thing, they were reinvented. In the past interest derivatives were generally applied to commodities like wheat. But in the early1990 guys at JP Morgan had the idea to apply this concept of interest rate derivatives to the banking sector and the idea of making loans.

Despite what any of us thinks about this today, you can’t deny that the thinking behind this was sheer brilliance; it was innovative and ground breaking. By thinking laterally they created a whole new financial market that had not previously existed. Isn’t this the same thing we all try to do most days, to challenge ourselves to develop something completely new. Rarely do we see designers make such advancements in their work, we would chew off our leg to come up with an innovation as disruptive in our field as derivates were to finance.

So how did they do it?

The group at JP Morgan who came up with this idea was the ‘swaps department’ the team was run by 35 year old Peter Hancock. By all accounts Hancock was brilliant, a lateral thinker, hardworking and an inspiring and gifted leader. Like many of us here, he was obsessed with creating a condition for innovation in his team. He did this using very unconventional methods for an investment bank.

> He created KPIs for his team that challenged them to make ½ of their revenue from a product that didn’t exist before and this encouraged them to develop bold new ways to generate income.
> He empowered the sales force to quote prices, which had always been done by traders, this motivated them and the results were very positive.
> He designed a new remuneration strategy that discouraged excessive risk taking or hoarding of projects.
> He was so convinced that ideas must be shared that he hired a social anthropologist to study corporate dynamics and did firm wide polls at JP Morgan to understand the ways different departments interacted with each other, in fact he wanted to monitor e mails to scientifically track cross departmental interaction, but human resources wouldn’t let him.

Does any of this sound familiar? I know at Geyer we have adopted many of the same tactics to foster a greater climate for innovation.

I believe that for designers to remain relevant today, we should do the same kinds of thing Hancock’s team did. We must engage brilliant thinkers outside of our industry to gain a different perspective. We need to dig deeply into our clients issue’s and look for the meaning or insight required to really push us in new directions and finally we absolutely must adopt an air of questioning and provocation.

If we don’t do this, I fear our craft will become more and more commoditised with the thinking work outsourced to tenant advocates, project managers and furniture dealers.

Do you know what Credit default swaps are?

They were another brilliant new product developed by bankers. The way they work is that banks loan money and with that is the inherent risk that the person with the loan might not pay it back. Recognising the risk and knowing they had all of their eggs in one basket, the banks invented a new vehicle called ‘a credit default swap’. They simply swapped or divvied up their high risk loans among many banks. They believed that a problem shared is a problem halved. They were protecting each other.

When was the last time you shared risk with a fellow design firm? It seems these days there is more energy spent undercutting one another and eroding our own pricing structure and market, than doing something as creative as the bankers did to protect themselves and their industry. Instead of po poing the bankers we should learn something about not polluting our own waters.
Around now you might be thinking, enough about financial services, why mimic them, look at the mess they’re in - and you would be right. After all it was derivatives and credit default swaps that played a major role in the worst economic crisis since the great depression. But even in their failure there are lessons to be learnt. If we study the parallels perhaps we can minimise the risk of following in the bankers footsteps.

For instance the problem with credit default swaps was that loans got passed on to banks and they had no idea who the initial borrower was, they didn’t have a relationship with the guy taking out the loan. So the banker felt no accountability or responsibility. I worry that in our own way we do this too, ideas pass from one project to another without the designer really questioning the appropriateness of a solution to a particular set of problems. Sometimes we just don’t take the time to really get to know our clients well enough

Another thing that happened in the banking industry was it had no way to monitor the debt after it had been swapped, chopped and changed; eventually an air of panic and mistrust grew around the entire industry. In a way this has happened to us too, we don’t self monitor and the result is that all designers get painted with the same brush and as a whole we are often viewed as not being accountable or responsible. Leaving the door open for others to come in and take on that responsibility.

I want to close with one final area of similarity and this has to do with why the financial services sector failed to see the mistakes they were making. There were two contributing factors.
One was the fallacy of ratings agencies like Moodies, Standard & Poor and Fitch. The problem here is the agencies take fees from the banks, so it was hardly in their best interest to be honest. So metaphorically when the banks asked ‘does my butt look big in these pants’ the agencies answer was no way girlfriend, you looking mighty fine, your looking hot. No one had the guts to honestly describe the situation and say girlfriend your ass looks so big you could have Fisher on one cheek and Paykel on the other.

Another reason is that all of the goings on were completely ignored by journalist. Business press was much more about adopting and pandering to the banking culture than reporting on actual happenings. The press went ‘too native’ they lost their sense of context and judgement – many of them were working for the banks and not the publications they were writing for.
For us this is where magazines like Indesign come in; I believe they play a pivotal role in ensuring what happened to the financial services industry doesn’t happen to us.

As the magazine relaunches I have an expectation that they are going to continue to keep us on our toes by encouraging us to entertain diverse viewpoints and take a broader perspective.
I have no doubt they will do this; currently indesign goes to 47 countries and is truly national. With the re-launch it is also committed to giving space to regional activities including what is happening in New Zealand and S E Asia.

We will continue to rely on Indesign to keep us connected to the works of today’s best interior, architectural, lighting, graphics, furniture and product designers and I hope they will provoke us to look for the connection between the works they expose us to, and the society we live in.
I have further expectation that there be a brutally honesty in the review of our work and a challenge to us as designers to continuously grow, learn and lift our game; but most of all, I ask Paul and his team to help us connect to the true meaning or purpose behind what we do

Because it is in that meaning that we will sustain ourselves over the long haul.

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