Increasing Liquidity and the Joy of Small Things

A question that is often asked in my presentations and discussions on liquidity is "Does the industry affect a firm's liquidity?" Our research suggests that the answer is overwhelmingly yes. Firms in competitive industries with thin margins tend to become more liquid to survive. We provide examples from two industries—the small-scale electric tram industry and the large-scale airline industry. The electric tram industry is typically owned by the government, has no competition, runs on specific tracks, requires dedicated infrastructure, has employees that focus on a single firm (most cities have only one tram service), and is not liquid. In contrast, the airline industry, with extensive competition and thin margins, is a good representative of a liquid industry. Airlines lease airplanes, personnel, reservation systems, food services, and maintenance staff, which enables them to quickly and rapidly start and stop services in a city, i.e., change directions. As an example of airline industry liquidity, Portugal’s EuroAtlantic Airways, Latvia’s SmartLynx Airlines, and Lithuania’s Avion Express rent out planes with pilots, cabin staff, fuel, and insurance coverage to fill short-term demand or charters. Similarly, British Airways and Iberia have business class cabins in Europe that can easily be expanded or contracted based on demand. Even within an industry, we find that sectors with heavier regulation have lower levels of liquidity. For example, in the financial services industry, heavily regulated retail banks have lower liquidity than lightly regulated credit card firms.

On June 7, 2019, I presented the concept of the liquid organization to more than 30 attendees at the CEO Club at WorldCity . An interesting subject that was raised in the discussion was how to make firms built on individual expertise (e.g., physicians, lawyers, tax accountants) more liquid. These firms are characterized by deep expertise or specialization, and a focus on one-to-one relationships—factors that reduce liquidity. I think that specialist firms can become more liquid and I demonstrated this using physician practices as an example. Traditionally, physicians with specialization (e.g., pediatricians, interventional cardiologists) practiced alone. However, like-minded physicians started group practices where doctors saw any patient (not just their own), and patients had access to multiple doctors with similar expertise. Patients at a group practice could see a doctor quickly, as they did not have to wait for an appointment with a specific doctor. Similarly, doctors in a group practice could have a more flexible schedule and reduce some of the time they spent on paperwork and calls (being available in case of need). The results were very encouraging. Once patients had used a group practice, they preferred it to visiting an individual physician. Also, insurance firms and hospitals preferred to work with group practices rather than individual physicians. It is estimated that the majority of physicians in the U.S. currently belong to a group practice, and less than 17% of physicians have a solo practice. Our research finds three characteristics of successful physician group practices. The first characteristic is that although each physician in a group can have super specialization, they need to be able to see 90% of the patients that come to the practice; in other words, they need to be generalists first and specialists second. The second characteristic is heightened attention to patient data: physicians need to provide detailed notes on patients, allowing other physicians to quickly understand patient history. The third characteristic is culture: successful group physicians like working with their colleagues, and have a transparent culture and robust process improvement focus. As an example, successful group practices examine each adverse incident transparently, do a root-cause analysis, and take corrective actions. Specialist firms (e.g., legal and accounting firms) can become liquid by following the same principles. First, firms need to hire and promote specialists that can address 90% of their clients’ needs. The second change, which is more difficult, is to create a process of capturing client details so that other specialists can work with the client. Most firms will need to develop a customer data capture process, which will be disruptive to current processes and requires patience and an implementation focus. The third and most important change is to develop a culture of cooperation, transparency, and continuous focus on process improvement. The cultural focus needs to come from top management, and recruitment and promotion decisions need to incorporate culture.

I was in Stockholm and observed two examples of liquidity on the water. When lighthouses could not be built in waters that were too deep or unsuitable for lighthouse construction, or needed to be moved depending on the season (frozen ice), a lightvessel, or lightship, was used (a ship that acts as a lighthouse with a light mounted on its mast). We provide a picture of Finngrundet, a lightvessel that was built in 1903, which increased the liquidity of lighthouses. Similarly, when large cruise ships anchor in areas that do not have the facilities to disembark passengers, they use tenders to transport passengers to land. This allows cruise lines to anchor in the middle of a river or bay, allowing ships to go to more locations and be more liquid, as shown in the picture.