Alaric Bourgoin, doctoral research at the Center for the Sociology of Innovation and visiting fellow at the Department of Sociology of Harvard University, will be defending his doctoral work, titled Le conseil en management à l’épreuve de sa mise en valeur (“Valuation processes in management consulting”), on December 12, 2013, at Mines ParisTech. This thesis has played a crucial role in the formation of PERFORMABUSINESS‘s insights on the performative condition of management consulting.

The thesis explores the fabric of the “value” of management consulting. Getting around the classic opposition between a functionalist (rational-technical) and a critical (psycho-social) approach, the thesis understands to the practice of management consulting as a performance geared toward a practical efficacy. Based on lengthly participant observation in a large French consulting firm, the thesis scrutinizes specifically five processes that aim at prompting a sense of “added value”: the singularization of service, the rise in competence, the production of authority, the graphical presentation of assessment and the signaling of activity. The empirical study of such mechanisms fuels a pragmatist theory of value as a practical attachment and furthers understanding of the issues of business culture in contemporary capitalism.

A PDF version of the thesis shall be available soon on-line.

I had the opportunity to present research on Discounted Cash Flow (DCF) conducted as part of PERFORMABUSINESS at the Annual Meeting of the Society for Social Studies of Science (4S) that was held on October 9-12 in San Diego, California. I talked about DCF and drug development (“What’s a molecule worth? Discounted cash flows and drug development”), drawing on a paper presented last month at the Congress of the French Sociological Association. My talk was part of a session on “Calculability and performativity” which explored processes of making things calculable through case studies in natural resource management, corporate social responsibility, risk modeling, and drug development. Kathrine Tveiterås from the University of Tromsø showed how marine systems are economized to be made manageable, through the 2009 Norwegian Marine Resources Act which broadened the scope of regulation from commercially interesting stocks to include all living marine resources. Laure Cabantous from Cass Business School discussed how the implementation of new European insurance regulation (Solvency II) induced changes in risk management practices in insurance companies. Jean-Pascal Gond from Cass Business School described the construction of the French responsible investment market, highlighting the role of calculative infrastructure and uncertainty displacement. The discussions, opened by Peter Karnøe’s comments on truthfulness, contestations and dynamics in processes of calculability and performativity, raised issues relating to the interplay between tool-supported calculations and professional judgment, the different forms and roles of uncertainty, and the effects of responsible investment practices.

From my paper’s abstract:

Research and development of new drugs increasingly relies on partnerships between pharmaceutical companies and biotech start-ups. The latter are, in most cases, new ventures founded to commercialize results originating from public research. While the ability of biotech start-ups to translate scientific knowledge into knowledge that “the market will value” has been emphasized in the literature, little is known about this valuation process in practice. The paper examines how the market value of scientific knowledge is demonstrated and measured in partnerships between pharmaceutical companies and biotech start-ups, by focusing on a calculative device that is central in this process: the discounted cash flow formula (DCF).

DCF calculates the value of a project by estimating the future cash flows that this project is likely to generate, reducing them by a certain factor due to their distance in time and their probability to occur, and adding them up to obtain the project’s “present value”. Faced with drug development projects, and their considerable length and uncertainty, the formula produces puzzling results: seemingly strategic projects turn out to have insignificant, or even negative, value. In order to account for the widespread use of a seemingly false, or even dangerous, formula, the paper adopts a performative approach and examines the effects that DCF induces in practice. Building on interviews with managers and consultants involved in project valuation, as well as on the analysis of scholarly and practitioner publications, we highlight two “felicity conditions” for the formula’s performativity, which pertain to its network and its affordances.

PERFORMABUSINESS team member Alvaro Pina-Stranger has being recruited as an assistant professor at the Université de Rennes 1. His new position include teaching at the European Institute of Innovation and Technology and research at the Centre de Recherches en Economie et Management. Alvaro is still affiliated with the  Center for the Sociology of Innovation at Mines ParisTech, and will continue to carry out his research in the context of PERFORMABUSINESS (see previous post here with summary of ongoing work). Congratulations!

The Provoked Economy: Economic Reality and the Performative Turn is not published yet, but it has a publisher — Routledge — and is to appear soon, sometime in early 2014, as part of the CRESC Series (first in hardback, then in a more affordable paperback edition). The book demonstrates the performative condition of economic reality, and renews its understanding through a set of theoretical proposals and empirical studies.

The latest issue of the Journal of Cultural Economy is devoted to “The Device”. The special issue, edited by John Law and Evelyn Ruppert, explores a number of aspects of performativity and materiality in social-scientific methods. The concerns explored in PERFORMABUSINESS are indirectly present in the special issue through “Provocative containment and the drift of social-scientific realism”, a piece in which Javier Lezaun, Fabian Muniesa and Signe Vikkelsø develop some insights from their conversation on the methodologies of realization — a conversation that played an inspirational role in the establishment of PERFORMABUSINESS’s research agenda.

There was a quite successful and competitive response to the call for contributions to the AOS Workshop on “Performing business and social innovation through accounting inscriptions”, Galway, Ireland, 22-24 September 2013, a workshop sponsored by Accounting, Organizations and Society, organized by Cristiano Busco (NUI Galway), Paolo Quattrone (University of Edinburgh) and Fabian Muniesa (Mines ParisTech) — see a previous post here.

The organizers had the chance to read quite some excellent submitted papers, but had to make some difficult choices in order to accommodate the unfortunately limited conditions of the workshop (some proposals had to be put aside). The workshop will take place at the School of Business and Economics of the National University of Ireland in Galway. Participants are looking forward to what looks like an excellent opportunity to renew the social-scientific repertoire of performativity in and of business.

The discounted cash flow formula (DCF) is of major interest for the social inquiry of capitalization into which the PERFORMABUSINESS team has proposed to delve. Since the 1950s, DCF has become the key tool that equips practices of economic valuation, aids firms and governments in their investment decisions, orients the allocation of resources, and shapes the management of projects. DCF carries a peculiar theory of valuation. It derives the value of a thing from the cash flows (revenues and expenses) that this thing is expected to generate in the future. It also reduces these flows by means of a discount rate, which reflects the idea that the future is worth less than the present, and that uncertainty is worth less than certainty. By doing so, DCF grants greater value to projects whose returns are proximate and predictable. As a consequence, DCF has been blamed to systematically undervalue innovative projects and hence impede their pursuit. Some have further argued that the formula actually misrepresents managers’ practices by failing to take into account the flexibility and learning they are capable of. Others have even suggested that the use of DCF is responsible for managers’ focus on short-term returns and their unwillingness to undertake the kinds of projects that help the organizations — and nations — to which they belong survive and prosper in the long run.

Since the 1980s, a few scholars in corporate finance, economics, strategy, and engineering have proposed to address such criticism by replacing DCF with another approach. Inspired by advances in financial theory (namely the work of Fisher Black, Myron Scholes and Robert Merton), they have attempted to extend options reasoning to the world of “real” (i.e., non-financial) assets and investment decisions within firms. The idea was to envisage an investment made by a firm (e.g., purchasing a lease for coal land, spending in research and development, building a new factory) as an option, in so far as it gives the firm the right, but not the obligation, to take action (mine coal, market a new technology, expand production) at a later stage. This view had two advantages. First, if an innovation project could be thought of as an option, its value would become greater than what DCF would compute — because the capacity of management to adapt and take optimal decisions becomes part of the equation. And, second, the value of the project could be calculated thanks to the tools that had been recently developed for the purpose of pricing of financial options.

In the 1990s, the real options approach sprinkled enthusiasm among scholars, consultants and a few practitioners. But it also raised numerous questions. To what extent can a formula be transposed from the world of financial markets to that of corporate investment decisions? Doesn’t it require too big changes in the ways firms are structured and projects are managed? Isn’t it too complex for users other than MIT-trained financial officers? Do its assumptions — namely, that managers are flexible and capable to make and exercise optimal decisions — eventually hold true?…

We believe that the controversies around DCF and real options provide us with an insightful viewpoint on the performativity of valuation formulas, that is, the worlds that they require building in order to function and the effects that they induce when put in practice. The PERFORMABUSINESS team has hence engaged in an analysis of these controversies. Our methodology relies on two sources of data. First, we are carrying out interviews with academics and practitioners who have been involved in the development of real options. Second, we are conducting a quantitative study of the literature on real options, experimenting with a novel approach which should enable us to account for relations not only between publications (by following citations and hyperlinks for example) but also within them (by looking for the entities that publications figure, and the ways in which they depict and connect them).

The PERFORMABUSINESS project has just reached the middle of its official lifespan (this four-years project started in April 2011). The brief Mid-Term Report that has been transmitted to the European Research Council recaps on the main investigative directions that have been elaborated so far. The report is available here.

The role of business schools in the formation of business reality is today an acknowledged topic in the social-scientific exploration of the cultural elements of entrepreneurial capitalism (see, for example, the work of Rakesh Khurana, in particular his book From Higher Aims to Hired Hands). It’s also part of our project’s agenda. One particularly relevant fieldwork site is of course the Harvard Business School. Part of my current research activities include fleshing out a few directions that were already exposed in “A flank movement in the understanding of valuation”.

Among the treasures of the Baker Library are a few collections with materials from faculty members from the early days (the 1910s, 1920s, 1930s): people that played a pivotal role in the development of both the case method (a very experiential method for the formation of the business mind, quite performative in a theatrical sense of the word) and the crafts of financial valuation (a critical set of capitalization techniques, with potentially performative effects in the repertoires of valuation in business conduct). My preference goes to Arthur Stone Dewing, professor of finance at Harvard, author of widely-read manuals, philosopher and fervent advocate of case-based business education. The papers of Cecil E. Fraser, which I had the chance to examine in April 2012, contain very interesting materials on the methods, sources and ideas of Fraser himself but also on other faculty members, Dewing in particular. Analysis of these, in combination with more contemporary sources, should translate shortly into something readable.

How are new business beings born?  A paper by Liliana Doganova, member of the PERFORMABUSINESS team, and Martin Giraudeau, lecturer in accounting at the London School of Economics, proposes to study the populating of markets by looking at the very place where new firms are formulated and formed: the business plan. Research on business planning has tended to focus on consequences, with conclusions indicating that while business plans certainly help entrepreneurs learn and gain legitimacy in the eyes of external parties, they have little impact on the performance of the future firm. Our paper, instead, chooses to open the plans, to analyze their contents and to describe their uses. This method allows us to observe directly what they do, both in terms of visual formulation of the new venture and of its actual formation as a new business active on its markets.

In January, we presented a first draft of this paper, entitled “Entrepreneurial formulas: business plans and the formation of new ventures”, at a seminar at Centre de Sociologie de l’Innovation. The paper identified different techniques through which the future firm is put together in a business plan, and proposed to call them “formulas”. The business plan, we suggested, acts as a literary, chemical, financial and magical formula as well: it tells a story, made up of a limited set of characters and plots; it lists and bonds the resources that constitute the future firm; it transforms them into a stream of future revenues; and, in doing so, it helps bring into existence that which it describes.

The discussion of the paper raised interesting questions and opened new research paths. Isn’t it misleading, some colleagues asked, to envisage the business plan as a magic formula? How to describe the business plan – a peculiar object which is made to make do, which is addressed to a valuating agency (the investor), which is both inventively playful and rigidly standardized? What is the singularity of the business plan, as compared with, say, a project proposal, a scientific article, or an annual report? And, finally, if the business plan is a site to observe new business beings in the making, what does it tell us about the theory of the firm? We are currently incorporating these comments — new version of the paper will be made available sometime soon.