by Isaac Cheifetz, Minneapolis Star Tribune, July 12, 2004

In his famous essay "Notes on Nationalism," written at the end of World War II, George Orwell outlined the realities that various nationalist groups denied, as these contradicted their goals.

His examples included English pacifists living in a free society only because others were willing kill Nazis and British traditionalists whose empire had nearly dissolved and who now depended on the United States for security against the Soviet Union.

This concept applies in the business world as well. There are often contradictions "in front of your nose" (the title of another great Orwell essay from that period), which we resolutely ignore until too late.

Perhaps the biggest impact of our knowledge economy and networked society is the increased speed at which conflicted business models shatter. This is a broad trend, manifesting itself in society and business.

By conflicted models, I am not referring to Monday-morning quarterbacking, using the benefit of hindsight to point out how obvious the winners are. In 1990, who would have predicted that IBM, Dell and Microsoft would be dominant, and that Digital Equipment, Compaq and Novell would be shadows of their former selves?

No, I am speaking of true oxymorons, businesses whose reality contradicted their very purpose.

For example, consider Arthur Andersen's laxity in intertwining audit and consulting services in its final years, before its involvement in the Enron scandal and subsequent implosion.

The Securities and Exchange Commission (SEC), established by Congress after the financial meltdown of 1929, mandated that all publicly traded companies have annual independent financial audits.

Arthur Andersen in particular made its reputation by the rigorous probity of its founder and his successors. Their audits often challenged corporate executives. The auditing firm's name, and the names of some of Andersen's competitors, became synonymous with trust.

Over the next 50 years, the leading accounting firms grew into global powerhouses. These "Big Eight" had a de facto monopoly on the auditing of public companies worldwide.

Increasingly, as computers became central to financial management, these accounting firms grew into consulting firms as well, intertwining business strategy, software integration, and a host of other services. By 1990, all had multibillion-dollar consulting practices spanning the globe.

Until about 1990, the conflict of interest between auditing and consulting seemed negligible. Big audit clients had often been with a firm for decades, and audit partners were loath to do anything that threatened those relationships and the "annuity" they represented.

But software integration consulting began to dwarf the annual audit in revenue. Arguments arose between the accountants and the consultants over how to split the revenue -- the consultants wanted to keep their larger share; the accountants felt it was built on their relationships -- and how aggressive the corporate culture should be.

The firms began to see a split between the consulting partners, who could make millions of dollars annually, and the accounting partners, who had to "get by" on the $250,000 or so that their auditing services produced.

In 1989, Arthur Andersen, the largest and most prestigious of the firms, spun off its consulting divisions into Andersen Consulting, although it took a decade of acrimonious negotiation to conclude the terms of separation. Andersen Consulting, now called Accenture, continued to grow rapidly during the 1990s, becoming a $9.5 billion firm by 2000. It handled only the largest projects of the Fortune 500, leaving plenty of room for Arthur Andersen, the accounting firm, to regrow a consulting division.

As the 1990s bull market expanded, accounting firms became much more aggressive -- enabling the financial manipulations of rogue CEO's at Sunbeam, Waste Management, Enron and others and playing an active role in pressuring Congress and the SEC to lightly enforce accounting regulations.

In retrospect, Arthur Andersen spent its final 10 years squandering the trust and moral capital the firm had built during the previous 70 years.

Is there any way to recognize these conflicted dynamics before they crash and burn? Look for what I call the Six Stages of Business Oxymorons:

A + B = D. The core mission of the organization or process is contradicted by its current actions. If your life depended on it, you could not create a flow chart or software program describing logically, step by step, how these actions fulfill your stated mission.

Complexity. These dynamics tend to arise in esoteric, niche domains that are overseen by specialists. For example, think of Enron's energy-trading operations and the California power shortage.

From exception to critical mass. Often these contradictions grow slowly over time. They might begin as unregulated behavior appropriate in exceptional circumstances, and slowly grow until they become the norm, even though they now violate the very purpose of the organization. For example, the "special purpose entities" whose abuse ultimately sank Enron are a valid tool when used sparingly to mitigate risk, rather than to hide losses.

Stakeholders in denial. In the short term, most of the people or organizations affected benefit from avoiding the unpleasant conflict.

Cushion of boom. An economic boom creates a state of mass euphoria in which pointing out the contradiction is derided as pessimism or negativity.

Crisis. As in the Roadrunner cartoons, when the coyote looks down and sees the abyss, he plunges into it.

Business oxymorons have surfaced in the equity analysis industry, the mutual fund industry and are at play in the debate over expensing stock options.

"People can foresee the future only when it coincides with their own wishes," Orwell wrote in another essay. "And the most grossly obvious facts can be ignored when they are unwelcome."