The Silo Effect

by Gillian Tett

  Stringer faced similar resistance whenever he tried to streamline operations. Over the years, Sony had drifted into a sprawling mess of different products and business lines. It produced more than 1,000 gadgets, many of which operated on separate, proprietary technologies. “I have 35 Sony devices at home. I have 35 battery chargers,” Rob Wiesenthal, one of Stringer’s key allies at the company, told reporters. “That’s all you need to know.”36 Stringer was determined to change this. “I went around saying ‘What are we doing in the utility sector? In health care?’ ” Stringer recalled. “But nothing ever got cut, or not fast. I would be in the Tokyo headquarters and we would announce 10,000 job cuts, or whatever. Then, when I returned, we would somehow always have the same number of staff.” Eventually, in a desperate attempt to shock the staff into action Stringer decided to organize a display inside the Sony headquarters of all its products. He hoped this would demonstrate how unwieldy the Sony empire had become. But when the display case was finally installed in Shinagawa building, it had the opposite effect: to the Sony employees, the sprawling display seemed to be as much a source of pride as shame. It was a classic chicken and egg scenario: silos had created products that employees wanted to defend at all costs—and successful products were deepening the silos.

  Stringer then stopped talking about cuts and started emphasizing “collaboration.” He reasoned that if he couldn’t kill the silos, he could at least try to make them cooperate. After all, the company’s motto was “Sony United.” But getting cooperation was difficult. Shortly after he moved into the CEO slot he urged the Sony engineers to use digital technology to create a device that would let consumers read books. Sony seemed well placed to exploit this niche, since it had media, computing skills, and consumer electronics expertise sitting inside different parts of the Sony group. Indeed, the engineers even had some prototypes. However, when Stringer pushed the idea of a digital reader, it became clear that the managers in different departments did not want to collaborate with each other, or with book publishers, partly because they would have to share the revenues. The project ran into the sand. “Two whole years before Amazon launched its own e-reader, I had the same idea [of creating an e-reader],” Stringer fumed. “I asked our guys to do this, but we delayed and delayed and nothing happened. So then Amazon beat us to it.”

  ON FEBRUARY 20, 2013, over a thousand journalists gathered in Manhattan’s Hammerstein Ballroom to listen to the Sony executives. The mood was electric. Earlier that month Sony had announced plans to release PlayStation 4, the first time in seven years that it had updated the famous, device. The Hammerstein event was intended to showcase this leap forward. Above the stage, a gigantic wraparound screen beamed a dizzy jumble of game images down on the audience. Searchlights strafed the dark. Deafening music bounced off the walls. Slogans flashed up. “Imagination is the one weapon in the war against reality!” “To win we don’t need to fight. WE need to play!” “Our ordinary self becomes extraordinary. EPIC!” “We were born different! We grew up renegade! Explore the boundaries of play!”

  The watching journalists sat in the theater seats, rapt. PlayStation commanded extraordinary respect among gaming enthusiasts. Indeed, it was arguably Sony’s most successful product of all, as iconic as the Walkman. And the new PS4 looked particularly impressive, with its blend of software, hardware, and content.

  But as the Sony executives looked down from the stage, as they presented the new console, they might have noticed something striking. Around them the game images were flashing up and the journalists were tapping on laptops in their seats, or snapping shots with their mobile phones. But almost none of these devices in the hands of the reporters was made by Sony. Instead, the auditorium glimmered with hundreds of tiny white pinpricks of light, shining like stars from numerous Apple logos. Sony had been eclipsed by Apple, even in its moment of pride.

  Stringer knew this only too well. Back in 2006, during his first year as CEO, he had initially thought he could transform the company. By 2013, he had given up. Some individual divisions were doing well, such as PlayStation. But in most fields the reputation of Sony kept crumbling, along with its share price. When Stringer had taken over the company in 2005, the stock was trading on the New York Stock Exchange at $38.71 a share. By 2012, it was trading at $18 a share. Apple, by contrast, had seen its share price more than double, while Samsung’s share price had also more than doubled. What was particularly humiliating, though, was what had happened to the relative size of the companies, measured by market capitalization. Until 2002, Sony had always been well ahead of Samsung in the Forbes list of the world’s largest 2,000 companies. By 2005, when Stringer took over, Sony however had slipped behind, ranking 123rd, while Samsung was the 62nd largest group. By 2012, Samsung was ranked number 12 on this list, but Sony was 477. It was one of the most startling swings even seen on the Forbes list.37 Nobody was surprised when Stringer announced that he would step down as CEO.

  For a while, Stringer stayed on at Sony as chairman of the board. He was replaced as CEO by Kazuo Hirai, a Sony lifer. But the decline continued. As its share price sank toward 1,000 yen a share—a level last seen in 1980—Daniel Loeb, the American activist investor, started a campaign to break up the Japanese group, to spin off the entertainment arm.38 The move horrified the Sony staff, as well as a generation of Americans who had grown up wearing Sony Walkmans or watching Sony films, and thinking that the brand was the ultimate symbol of “cool.” “Loeb is trying to manipulate the market,” George Clooney, the actor, fumed, when news of the activist bid emerged. “I am no apologist for the studios, but these people know what they are doing.”39 But Loeb, like many other analysts, could not see any reason to keep the disparate silos glued together. They no longer made sense at a company that had now been eclipsed not just by Apple, but Samsung too.

  Just before Stringer left the company, his board gave him a striking present: a metallic case with “007” painted on the lid, like a prop from a James Bond movie. Stringer was thrilled. He had always loved the James Bond books; so much that he kept a collection of first editions in his New York apartment and took enormous pride in the fact that Sony Studios owned the rights to the 007 franchise. But the really clever aspect of the parting gift—which made Stringer chuckle with joy—was buried inside the metal box. Sony’s engineers had installed a set of miniature gadgets that might have been invented by Q in a Bond movie: there was a collection of tiny plastic figures next to a boardroom table, each of which was a likeness of a real, living Sony executive, and tiny flashing dials that spoke messages when pressed. Some had farewell messages from Stringer’s colleagues. Others repeated all the phrases that Stringer had used during his tenure. “Strong yen!” the box squeaked. “Economic crisis!” “Lehman Brothers [shock]!” “Earthquake!” “Tsunami!” “A plague of frogs!” “Locusts!”

  And then, there was one more button with a message: “Breach silo walls!”

  “Well, I guess that one didn’t work!” Stringer liked to joke. He installed it next to his prized collection of James Bond books as a bittersweet memorial.

  FROM TIME TO TIME, when he reflected on his time at Sony, Stringer would wonder if he could have done anything differently. He knew he had been astute at diagnosing Sony’s problems. He also knew that Sony was not the only company with these woes. On the contrary, numerous other corporations were grappling with the silo curse. At Microsoft, like Sony, individual departments had been slow to collaborate, partly because the company had enjoyed so much earlier success that its employees did not see any reason to change.40 “It’s been an issue for us,” said Satya Nadella, a long-serving Microsoft executive who was appointed CEO in 2014. “Whenever you become good at maximizing past successes there can be a tendency to have less synergies . . . and the competition does not respect internal boundaries.” Many public and quasi-public institutions are also beset by silos. A few months after he left Sony, Stringer started working as an adviser to the BBC, and discovered a similar pattern of trib
al infighting. “It feels very familiar!” Stringer joked to friends. “There are lots of silos at the BBC too!”

  But it is one thing to analyze the problem. It is quite another to actually find a solution to the silo curse. Could any company, Stringer wondered, actually build the kind of culture that would reduce the danger of silos? Could they be dismantled when they appeared? Or was it just inevitable that companies had debilitating silos, whenever an institution became large? Did those silos always become more rigid as time passed? Stringer did not know.

  However, unbeknownst to him, out in California a group of officials at Facebook did have some ideas. And these were rather intriguing. As Sony ailed, the Facebook engineers had taken close note of Sony’s fate, along with the troubles that beset so many other technology giants such as Xerox and Microsoft. Moreover, they were trying to find some answers to Stringer’s questions by exploring ways to avoid succumbing to these silos. In the second half of this book I shall tell this story, by explaining how Facebook has tried (and is still trying) to be an “anti-Sony” or “anti-Microsoft,” as some of its senior officials like to say. But first I shall look at some other ways that silos can manifest themselves, and present dangers, starting with the ailing of a gigantic company in a completely different field and part of the world—the mighty Swiss bank UBS.

  3

  WHEN GNOMES GO BLIND

  How Silos Conceal Risks

  “It is very difficult to get a man to understand something, when his salary depends upon his not understanding it.”1

  —Upton Sinclair

  ON MARCH 9, 2007, A team of regulators from Switzerland flew from Bern to London for a meeting at the offices of UBS, their country’s largest bank.2 It was a fateful encounter. To a casual observer, UBS seemed a shining success story. It had produced stellar results in previous years from its offices in Zurich, London, and New York. It was also famous—or infamous—for being cautious in how it ran its business. No surprise perhaps: Switzerland is a country that makes a virtue of being quiet, if not downright dull; a place where bankers are dubbed “gnomes” because they usually toil away in sober silence. And UBS epitomized this gnomic culture. No fewer than 3,000 people worked in the bank as risk managers,3 charged with spotting threats to the bank’s business. These half-hidden banking gnomes were considered to be so diligent that UBS was sometimes described by regulators as “exemplary” in the industry, in terms of how it controlled risk.4

  So, as the Swiss regulators flew to London for their meeting in March 2007, they were not worried that the bank had any big problems lurking. But there was one cloud on the wider economic horizon that they planned to discuss. Over in America, the housing market was booming, as bankers and mortgage brokers issued a flood of mortgages. UBS, like most banks, had gotten involved in that game by buying bonds and derivatives linked to those loans.5 But though the business had produced fat profits, the Swiss regulators wanted to know whether the UBS bankers understood all the risks of this new development. Could the bank be hurt if house prices fell? Would it suffer losses if homeowners defaulted?

  The answer that day was an emphatic no. For several hours, the Swiss regulators sat in the UBS office in London, an imposing skyscraper with blackened windows, near Liverpool Street. The bank’s risk officers explained to the regulators that the bank was well protected against any future house price falls, since UBS had not just insured itself against losses with derivatives trades, but also placed additional bets in the market that would create profits if the housing market soured. In financial jargon, the bank had thus gone short the market—or made a bet that house prices would decline. Thus the bank was actually “profiting from the deteriorating market” in mortgage bonds—and not at risk at all.6

  There did not seem to be any sign that the UBS bankers in London were lying; on the contrary, as far as the regulators were concerned, the explanations seemed credible and confident. So the regulators returned to Switzerland, and reported that UBS “had taken the changes in the US real estate market into account and that no major risks had arisen in this area.”7 UBS was safe.

  Six months later, however, it became clear that this verdict had been disastrously wrong. On October 30, the Swiss bank presented its annual results. These showed record-high levels of revenues. But it also revealed something else: UBS had suffered a dent to its earnings totaling some 726 million Swiss francs (a sum then worth about $700 million), due to bad American mortgage investments.8 Far from profiting from falling house prices, the bank was suffering big losses.

  This reversal was embarrassing. But it got far worse. In early December, Marcel Rohner, the bank’s Investment Bank chairman and patrician chief executive officer, suddenly revealed that the bank had somehow lost $10 billion—ten billion dollars—from bad mortgage bets.9 He also admitted that the group had secretly accumulated $50 billion worth of U.S. subprime mortgage securities on its balance sheet, apparently without any of the top managers at UBS noticing.10 Indeed, the losses were so vast that the bank was forced to tap Singaporean and Middle Eastern investors for an injection of funds to stay alive.11 It was a shocking turn at a bank that “only a year ago was considered one of the most financially sound institutions in the world,” as David Williams, a London-based stock analyst, observed.12 Or as Marcel Rohner told investors, with some gnomic Swiss understatement: “I understand if some of you [investors] are surprised and frustrated with this change in outlook . . . there has been serious dislocation.”13

  The dislocations—and shocks—worsened. In February, the bank revealed another wave of mortgage losses, taking the total hit to almost $19 billion.14 UBS tapped its shareholders for 15 billion Swiss francs of new funds, a sum equivalent to around $15 billion.15 But even that was not enough to plug the gap: by October 2009 the damage was so bad that eventually the Swiss government itself was forced to use 6 billion Swiss francs (or $6 billion) of taxpayers’ money to help it clean up its operations.16 Swiss taxpayers and politicians were appalled—and angry. So the Swiss federal banking commission, the main regulator, demanded that UBS write a report to “name names,” and explain who was to blame. After all, losing almost $19 billion—nineteen billion dollars—was not a trivial matter. Most observers assumed that someone at the bank had done something criminal and told some lies, and would go to jail.

  The bank produced a neat report, on time; Switzerland is a land where bankers, voters, and politicians alike have a strong sense of duty. But this report was not what the regulators had expected. Instead of naming the individual or individuals who had created the losses, such as a rogue trader, the report argued that the entire system had gone wrong. Somehow a collection of supposedly boring, conservative bankers had gone mad and taken some crazy bets on the housing market, which none of the 3,000 or so risk officers inside the bank had spotted.17

  Was this a cover-up? Were the bankers lying? Most politicians and journalists thought so, particularly since a few months later a second scandal erupted at UBS when the U.S. authorities accused the bank of helping wealthy Americans evade American tax laws.18 The Swiss government demanded that the UBS management try harder and write a second report on what had gone wrong. Once again, UBS produced a precise document. But this tome was equally baffling. On its second attempt, the bank asked independent outsider experts to comment on the scandals. They hoped this would give the conclusions more credibility. But these did not offer what the politicians wanted either.

  “Ever since the size of the Bank’s losses—going into the billions—and the nature of its legal violation [about U.S. tax evasion] have become known, the public has queried the true causes of the UBS crisis,” Tobias Straumann, an economics history professor at Zurich University, wrote. “It [seems] simply inconceivable that a large international bank with a reputation for its conservativeness, would suddenly incur such huge losses,”19 Straumann continued, pointing out that most observers assumed that the “top management at UBS [had] behaved like gamblers at a casino, constantly taking greater risks a
s their profits and their bonuses increased, until they finally lost everything and almost landed in prison.”20 However, the professor rejected the idea that this was a plot. He did not think that the leaders of the bank had taken deliberate gambles, or knowingly concocted a plan to fool everyone else. They genuinely believed that the bank was healthy and safe, and that it had “first-class subprime mortgage securities” on its books. So did the auditors and regulators. “Its image as a conservative bank was not made up to deceive the public,” Straumann argued. “It corresponded fully with the picture that the bank had of itself.”21 Or to put it another way, the terrifying thing about UBS was not that dastardly bankers had lied to everyone else; it was that the banking gnomes at UBS had collectively fooled themselves. “This [story] is more than just an accident involving a single large bank . . . [it] fits perfectly into a pattern that has repeated itself again and again in the past. In reality, the biggest losers in a financial crisis are not those who have exposed themselves to major risks with their eyes wide open, but rather the ones who believed [they had] their affairs well under control.”22