Adapting to Disruption: AI, Housing, Geopolitics, & More with Global Head of McKinsey Bob Sternfels

Michael Marks: Today, I'm particularly pleased to welcome a friend of mine, Bob Sternfels. It's almost embarrassing to read his accolades, but he's the global managing partner of McKinsey and company. He's been a partner at McKinsey for more than 30 years, has served as the firm's global managing partner and board chairman since 2021.

Bob is also an active board director and member across a number of extremely influential organizations, including the African Leadership Group Advisory Board. The U S China business council, the New York jobs council, and the council on foreign relations to name just a few in these roles, Bob has an incredible front row seat to the economic geopolitical and technology trends, shaping industries and markets.

I'm excited to get his take on some of the rapid shifts we're seeing across business and investment today. So Bob, thanks for taking the time to join us.

Bob Sternfels: Well, Michael, it's, uh, it's great to see you. If I only got such nice, uh, introductions all the time, that would, uh, that'd be great. And I think I can still say it happy new year.

I know we, uh, we haven't caught up yet, so it's just, uh, it's good to catch up and I'm excited to be here.

Michael Marks: Well, thank you. I really appreciate that for, and for the listeners who've, who've, uh, heard a number of our podcasts. It's really fun to do this with people that you know, and are friendly with. And Bob and I have known each other now for many years.

We've had an opportunity to have lots of interesting conversations. We'll cover some of that today, but it's just a hoot to have you. So let's just, let's just jump right in. Let's do it, uh, before we're going to talk about, you know, about housing and AI and insurance and all that kind of stuff. But before I jump into that, I think it would be interesting.

You've been very innovative in your views about how McKinsey can work with the venture community. And I thought maybe you would just address how you think about that, how the practice has changed in regards to these earlier stage companies like we represent.

Bob Sternfels: Yeah, uh, happy to. And, and, um, you, you and I have had many chats on this and I, I guess it's, um, If you back up, what's it all predicated on a couple of things, um, a conviction that at least, um, I and the, uh, fellow partners at McKinsey have about the transformative potential of the decade that we're looking into, uh, you know, if we, if we look at the rest of this decade and beyond.

You could make a real case that the pace of change will be faster than what we've seen, uh, arguably in the last hundred years or so, how that change will come about by and large will be through some form of accelerated disruption, both disruption of disruptor scaling, and we'll get to that around venture.

Um, but I think equally we've seen when you have more disruptors. Incumbents disrupt themselves faster and that's a good thing for, uh, for economies that, that duality. So we believe in that, um, we also from a McKinsey point of view, we're about, um, to turn a hundred. Uh, so we were the, we were the first, first firm in, in, uh, management consultancy.

We invented this profession. And we're about to turn 100 and as we go through this, we're going through some soul searching about how do we need to also reinvent our model going forward to actually be a principle in accelerating this change, not, um, you know, not somebody that sits on the side and advises.

And one of the biggest things that we're landing on is, is we think that the future of our profession. Is moving from advisor to partner and what that entails is still a lot of the things that some of you all may think of when you think about management consultancy, you know, uh, great insight, you know, helping with framing strategic direction, all that stuff remains.

But when you move to partner, you add on this notion of underwriting the same outcomes, putting skin in the game, longer journeys. Where you are vested in a way that traditional advisory never had, if you start to think about that, and we've been on this change journey, about 25 percent of our revenues now are in some form of these partnership based models, I'd like to for that.

Take that to over half during my time as, as global managing partner, it starts to lead you into places that historically we've had trouble engaging and venture is one of them, right? So to come to this, this notion, we believe in the power of venture investing a full on to drive some of the disruptions that I started this answer with.

Um, but we've also seen some of the imperfections in the model. And you know, Michael, you've been front row seat on some of this stuff, but, um. I think venture does a lot of things phenomenally well, but it also has some gaps in its model and, and, and one of the gaps is, you know, what, how do you change the odds of an investment really getting to scale and hyperscale because the odds still aren't great, uh, for the industry as a whole.

And, and some of those are bringing known methods to those enterprises as they hit. Stress points in their growth journeys. So from conception to trial, then trial to starting to scale, then scale what the global business model is. And well, and guess what? The kind of stuff that we have built in our own DNA has a lot of those competencies that we can offer.

Um, so we're pretty convinced we could help change the odds around venture, but the model needs to change because as you know, well, these companies, you know, can't afford an old traditional McKinsey arrangement because. Cash is precious and and they also don't need an army of McKinsey folks descending.

It often has to be much more surgical. And so we think one of the unlocks is rethinking this model to say, look, let's partner with some great vehicles in very different ways and actually underwrite outcomes by putting skin in the game. And I think if we do that, maybe we could help catalyze some of the growth.

And then maybe the last part, Michael, is I actually think one of the byproducts that maybe the venture folks won't like, but, but we like it is I think there'll be some rub off to then spur incumbents to disrupt themselves faster as the disruptors get better themselves.

Michael Marks: So thanks very much for that answer, Bob.

And for the listeners, I want people to know that Bob and I met a few years ago and started brainstorming about how to make, how to put into practice the things that Bob just said. And, uh, we tried some innovative stuff. Some of it works, some of it didn't, uh, we made some adjustments, but right now I just think that both organizations are thinking we're, we're doing some good stuff.

So the McKinsey people have been very good help to some of our portfolio companies, and I think we've been a good partner. So thanks for that.

Bob Sternfels: I still think a lot of learning to go, Michael, you know, we're committed to figuring this out. We got to do more in the venture space.

Michael Marks: All right. So let's jump into a few of these topics that we've served up.

It must be an amazing time to be at McKinsey because there's just so much important stuff happening in the world. We'll touch on a couple of them. It would be ridiculous to start off and not get your point of view on what's going on in the AI world. You know, there's so much hype, everybody's talking about it.

There's a lot of not very honest assessments of where some of the technology is, but everybody's talking about it. And there's this AI and then there's generative AI. And now there's a gentic AI kid. Can you make a little sense of all of this for our listeners? I mean, where we are, what these things are, how they're working.

Bob Sternfels: Well, I don't, I don't know about that, but I'll, I'll give it a, I'll give it a shot. You know, I might start though, with, with what you just said. I was in San Francisco this week because of the JP Morgan healthcare conference that I was seeing a bunch of our, our clients up and down the healthcare space.

But we also had a, um, a new induction class in the San Francisco office going through their first day at McKinsey. And I, I think I surprised the heck out of the, um, the person leading the class because I just popped in and said, you know, Hey, can I, can I say some things? And, uh, Uh, you know, what I, what I told our new joiners was, is I'm just, I'm jealous of them and I'm jealous because Michael, to your point, they have more time, uh, to do what we do than I do.

And, and when I look at both the opportunities and challenges over these next couple of decades, they're A class problems to lean into and the kind of folks that, you know, we attract and go into many of the industries that listeners listen to here. You know, they want to solve really tough problems. And I think we're looking into into some of those in a way that we've never seen before.

And, and I think the broader AI topic is one of those. And look, you know, I'm with you on, you know, this is the, the buzzword of the day. And so anytime something becomes a buzzword, you get overhyped and, but I might say a few things on this and I come at it much more from a, from an enterprise point of view than an individual consumer point of view, because our world is working with enterprise, you know, we, we work with, with companies.

And. And we did some work and we still stand behind it that there's a lot of value to be had here. And, and our, our estimates from our global institute were, were three to 4 trillion U. S. dollars of revenue improvement per year, um, through today's versions of, uh, of, of, of AI we still think that's a pretty good, pretty good number.

The exciting part was the value was really across all sectors, you know, so from, from banking to mining and everything in between. And we could talk more about that. Um, but the problem, if I fast forward right now and, and, and Michael, you know me, I, I try and talk to, um, at least two CEOs every day around the world.

And I, if I were to do the. Bob's simple summary of this, you know, right now for a non tech CEO, what I hear is, Hey, Bob, do I, um, do I listen to my CFO or do I listen to my CIO? And I said, you know, what do you mean by that? I said, well, you know, the CIO is saying all the things you let off with. This is the moment in time.

We got to go all in. And this is the time. And my CFO is like, I'm not seeing any return from this yet. So why do we need to be the edge or can we be the fast follower? And so is my tech spend as a percent of revenue is too high. And so as we entered 20, 25, should I dial that back a little bit? Who do I listen to Bob?

Right. Who do I listen to? And I hear that across geographies and across sectors. And, and I think part of the reason you're hearing that when you get to brass tacks of deployment of AI, um, folks are getting some things wrong. You know, the, the whole notion of, well, let's, um, Let's try a bunch of pilots all across the organization and see what works.

Is it yielding a lot of value right now? Um, you know, I'm, I'm not getting a broad adoption from my employees. Um, you know, they're not changing their core workflows when I introduce this technology. That's what the CEOs are telling you.

Bob Sternfels: These are what they're saying if they don't, not realizing value. I did a thousand flowers bloom.

I'm not getting worker adoption. I'm not thinking about how to change my org models to get enough tech talent to help on this. And I really haven't figured out a way to work with my technology partners in a way that's productive. So that, that's the, that's the side of listen to the CFO because I'm not getting returns here.

What we have seen on the other side, though, is some folks are figuring this out. And, you know, what, what they're doing is value is not equal across my enterprise. Where are the three or four largest domain areas that are going to really double my market cap? Do I know those places? And am I disproportionately putting resources there?

Second is, am I mixing, call it tech talent and line talent into combined teams to go after this, not a tech organization and a business unit organization or a functional organization, but we're going to do combined teams around this. Um, and then a whole aspect of spending time rewiring worker, the workflows and work practices so that there's worker adoption here.

And in some ways. How does this help drive wage appreciation and promotion? So, you know, I was working with one client in the telecom space. I said, look, if you adopt gen AI, you want back to agents, you all get an agent. So you all get a promotion. So you get a pay bump up in this. It creates an incentive for adoption.

Now, all of a sudden you have an agent reporting view. It's a virtual agent, but you have an agent reporting view. And those folks were actually getting to it. So all of a sudden now uptake, you know, scaled through the organization. And so You know, I, if I pull back, right, I think there's this, what we're seeing in the enterprise, but enterprise spaces, some are in this category, a lot, a few are in this category.

We get more doing this, we'd actually really create value from the deployment of, um, of today's version of, uh, of AI. I don't know if that helps, you know, as

Michael Marks: well. Look, thank you. It's a very complicated subject. So I guess I'd ask this question. Are you finding that there's, that there's an uptick in adoption or is there some pullback because some of this hasn't worked out very well financially?

Bob Sternfels: You know, it's, it's, it's both. Um, I think in general, there's still an uptick in adoption. That's why it's the kind of buzzword. I think what you're starting to see though, is this re questioning and a slowing down and, you know, I think there's a real worry. Um, it take the, um, take the wave from cloud, right.

And, you know, kind of the last wave that we saw around tech adoption, there was a massive move across enterprise to move. Everything to the cloud, um, those growth rates for the company is starting to slow down. And one of the reasons it started to slow down is once you moved all these workloads, it didn't drive increased usage in the enterprise because people weren't doing new things with that, with that data that was in the cloud or with those applications that were in the cloud.

It just got more efficient. But it didn't actually start to create value on top of the efficiency. And there's a bit of the same worry with this gen AI stuff. It's great, put in agents and things, but unless you're actually changing how you do the workflows, you're not going to create value. And so it'll get adopted.

There might be some efficiency savings, but it won't have that real enterprise unlock. And I think we're right at that moment right now.

Michael Marks: Well, that's fascinating on a related subject. It just reminded me of something I wanted to ask you, which is. Are you seeing much of a move away from the cloud back to on prem because there's so much data that people are worried about being available?

Bob Sternfels: Well, you know, this, this becomes another really complicated question as you think about both opportunity and enterprise risk. I think what folks are seeing is that data strategy becomes a board level discussion and it's central and it's, there's no easy answer to this, Michael. Right. You know, on the one hand, some of it is just compliance driven, you know, for any of the, um, uh, enterprises that operate in Europe, they're like, there are a lot of restrictions.

around data. And and so there aren't necessarily as many degrees of freedom or choice about where data resides, et cetera. Some others have actually started to say, Look, um, I need different solutions that I have much more control. Uh, you know, and it's not just control in terms of access, because most of the hyper scalers can provide that, but it's actually all the way through from a risk management point of view and a competitive intensity point of view.

That is starting to say, what's the mix of on prem versus cloud. And so we are seeing a much more segmented approach around this. Some of it's rooted in regulatory, some of it's rooted in geopolitics. You know, if you got China and then some of it's rooted in strategy of where, you know, where am I going to leverage now back to the, where am I going to leverage a large language model that may not be mine from part versus where do I have a small language model that I developed myself?

And I'm going to leverage my own proprietary data on this. And so how do you think about small language models versus large language models links to your data strategy?

Michael Marks: And are you seeing more of a move then towards people doing their own LLMs and using their own data?

Bob Sternfels: Well, not necessarily more LLMs, but I, you know, one of the things I think you're seeing just even in the last 12 months is, you know, this stuff moves so fast, right?

And, uh Um, the efficacy of small language models relative to large language models, that gap is starting to close and it's why folks like, um, you know, Mistral in France have been so successful is a small language model can't do everything a large language model can do, but our understanding of how far a small language model can go has changed in the last 12 months and it can do more than what we thought.

So what we are seeing is people start to push the boundaries of Should I have a combo model, a combo architecture where I have some of my own small language models that do application specific things, and then I still leverage large language models that I can't compete on from a capital intensity.

Michael Marks: We could spend the whole period talking about this.

I mean, we, we had Celesta to do a lot of, you know, application specific AI work, which is, you know, I mean, uh, artificial intelligence to read mammograms or to process, you know, Images for the military or to manage patent portfolio. So we're doing a lot of that stuff, which is more into the sort of small language model approach, but these things are moving so fast.

We'll just have to have this conversation like every other week. Exactly.

Bob Sternfels: Well, and, and I think maybe that is one of the, one of the, the key questions from an enterprise point of view is how are you changing your org structure to stay agile enough? Um, you know, to keep adopting, right. And, and, uh, and are you rewiring fast enough around these things?

Because this pace of change is so quick.

Michael Marks: Yeah, well, that's kind of a good segue into just talking about geopolitics a little bit, particularly with regard to supply chains. You know that in my background, I have quite a bit of knowledge and information about supply chains and people ask me, and I listened to all this stuff, you know, are people going to just separate, there's going to be a Western set of, of supply chains and a Chinese supply chains and all of that, my personal view is it's impossible to really separate these things, no matter what you want to talk about, because when you look at the suppliers to the suppliers to the suppliers.

You just can't separate them all. What do you guys say? What are you saying? What are your clients talking about? You know, there's all kinds of noise in the, you know, in the political arena, but this is a real event. I mean, where we get our, our materials.

Bob Sternfels: This is a real, a real event, uh, to your point, Michael, and, you know, the one thing I would say is, um, you know, sadly, fact based and, um, and, and true, um, underpinned analytics, et cetera, aren't always entering into the equations when decisions and policies are being made, and I think there's a real opportunity for more informed fact based just as we look at the options, and one of the things we've been cooperating and With the world economic forum for the last couple of years is a, um, a global cooperation index and we break down in McKinsey fashion.

I think it's 41 variables like how well the world's cooperating and, and we've gone back to, to 2010 and, and track this every year and what you, what you saw was. The world increased its cooperation from 2010 to 2020, and it's been flatline ever since. Um, not decreasing, but flatline. That's helpful. With some areas that are decreasing.

So you look at, at cooperation around global, uh, security and, and defense and those that they're decreased cooperation. You know, data flows, even though we talked about data, continue to rise. Cross border data flows continue to go up. Trades and services have continued to, uh, to go up. Um, and global FDI flows have continued to go up, right?

Um, so we're, we're sharing some of this fact based and I, as we go through these things, the implications are pretty big. The world trade organization came out with an estimate that if you went all the way to the full decoupling and you just took China and the U S you would reduce global GDP by seven points.

So now most people are like, Oh, that's 7%. Well, well, when the world only grows at two to 3%. That's not just recession. That's probably something worse than recession. If you really just took an ax and separated these economies and still some people don't really kind of understand what that means. Well, maybe put it in different terms.

There's 750, 000 jobs in America that depend on exports to China. These are soy, right? You know, it's like, it's core stuff that that's a lot of jobs. And on the other hand. I would make maybe two points. One is I am not naive to increasing national security issues. And, um, you know, this is a real issue and wherever you sit, you may like it, may not, but, but national security matters and it matters to every sovereign country and thinking about where national security concerns, you know, surface.

And that's when there was the original thinking about this idea of small garden, large walls, a little while back, you know, and seven nanometers or less, and I mean, semiconductors, et cetera. You know, you start to get your head around, all right, there are places where it's truly a national security interest.

The other thing, uh, that I think COVID taught us, not geopolitics taught us, you know, Michael, you knew this a long time ago, but, um, our supply chains weren't that resilient to certain kinds of shock. So all of a sudden we have a pandemic and boom, like the whole thing craters. And so there is a case to be made on the other side of this, which is.

There's an economics to be made for more resilient supply chains, which actually will lead to more diversified supply chains, even lead geopolitics out of this. That's probably a good thing for the world. And by the way, it may drive inclusive growth in a lot of the countries that I remember you used to spend a whole bunch of time in, you know, you go to Vietnam or you go to Mexico or Morocco and Europe.

And, and so this will drive economic growth there. And we'll think about a more diversified model. But I think at the heart of this, you know, you take us China, we need to figure out some version of saying just totally disconnecting doesn't make sense. Let's figure out the places that are in national security interest and let's figure out the rest.

Um, and with the rest, I think there's a benefit in connecting versus, you know, versus not connecting and the math, you know, kind of bears that out, right?

Michael Marks: Well, I hope that's where we wind up. I mean, on a personal level, you know, I had 200 plus thousand, you know, plus employees in China. I loved working in China for all those years.

I mean, you know, I mean, we, we were the Chinese, we had operations all over the country. And now it's just so politically unfeasible to work in the ways we used to, and I'm just sad about that. That's neither, you know, good nor bad, but I guess in some ways it leads to another issue I wanted to raise, which is we're doing a lot of work in India ourselves.

There's not the same level of infrastructure in India as there is in China, but there seems to be a lot of will in the government and, and, you know, financial institutions in, in India to support real investment in some of the manufacturing. Obviously we've had software in India for a long time, but it seems to be more effort around, around creating manufacturing and more of this resilient supply chain you were talking about.

So what are you seeing in that?

Bob Sternfels: I think it's a great question. You know, I, uh, I've, I've been in this role of, uh, of global managing partner now for a little over three and a half years. And I made a point to, to get to India at least three times every, every year, even brought the board there. Um, you know, and I've been on record, uh, that it's, um, it's India century.

And, and I, I, I stand by that. And, you know, as you know, um, India turns a hundred and, uh, in 2047, you take anybody's estimates, it's not crazy to see a pathway of certainly north of seven, maybe even north of 8 percent GDP growth every year between now and then.

Michael Marks:  Um, and then you're like, wow, okay, that's pretty, well, how.

Bob Sternfels: And when you peel it back, there are a couple fundamentals and I'll get to, I'm not naive to some of the challenges that you laid out, but there are a couple fundamentals that get you pretty excited. You start with talent base and India has been the workforce of the world. And at least for the next two decades, we'll likely continue to be that at a time.

And we just came out today with a McKinsey MGI report that talks about increasingly challenging demographics around the world. And so there's an embedded asset there. Uh, there's an embedded asset. I think the other thing that people may not, you know, who don't go all the time, and I know you do, but how fast India digitized the country, when, when Nandan stepped down from ISS to say, I'm going into health, I have not seen a country digitize itself that quickly.

But you know, if you take a cab now in Mumbai, you can't pay in cash. If you do a small street vendor and. The benefit to this is not only moving the gray economy into But think about the savings rates, right? Think about women led small businesses, you know, who now the earnings from that small business goes straight into a bank account.

And we've already started to see that what that gets invested in is a higher percent than reinvested in things like education and healthcare, as opposed to consumable products, it's not in cash anymore, right? And, um, you know, and so you're starting to see some massive benefits of a highly digitized economy as maybe the second piece to this.

And then, you know, I think the, the future of this, we often talk a lot about IT services, et cetera, but think about the physical supply chains. And, you know, and you, you, you were at the cusp of this, but the acceleration of this in the last couple of years of India as a manufacturing center. And, and I'll, I'll say that maybe the last one, and I know this may not be popular in, in all parts of the world, but I think India's stance on saying, look, we want to connect with everybody.

And I just came back, I was in the, in the Gulf states last week. And you look at the connection between the GCC and India, Southeast Asia and India, India wants to connect with everybody. And I think that ultimately will be a net benefit for the, for the Indian economy. Um. So all those are on the assets now on the, on the liability side, if you will, um, physical infrastructure still has a long way to go.

And although they're moving fast, it's the largest deployment of, of physical capital infrastructure investments in the world for the next 20 years. And you know, better than anybody, the method for developing infrastructure is still pretty inefficient,

Michael Marks: right?

Bob Sternfels: And it is, and I imagine we'll get to that at some stage, but, um, you know, but infra.

And then some of the demographic change that has to happen to make this work. To make this happen, you need about 200 million people to move from farm to non farm jobs. That's a big transition. And you need about 220 million women to enter the workforce over this period. Now those are achievable, but those aren't easy social demographic changes to actually facilitate.

And then the last one I would tee up is, you know, India and I'm always educating India is not India. The regulatory landscape between federal and the states, uh, is complicated. And, you know, and so how to get last mile things done, particularly if you're a foreign direct investor into India is not easy. I, you know, I know you navigated all those in a while, but it's still complicated.

Michael Marks: And so those might be some of the barriers on the other side that that India is going to need to work through. I hope you guys are helping with these things because, you know, we're an investor in these early stage companies and, you know, we need more infrastructure there. And, and it's. That part's moving slowly.

You did hit on a point that I think a lot of listeners may not know. The, the demographics in the world are changing pretty dramatically and all the developed countries are, are, are having population shrinks, which is why we have migration, all the problems related to that. But in India, you have a very young population.

So you have a very big population, but it's also, uh, 10 or 12 years younger on average than in China. That's a really, really big benefit for them as they, as they go. So we're excited, but we're, we're investing in, uh, in a bunch of cross border stuff where some works on in India, some's on the United States.

You know, that's also really exciting. As the world's gotten smaller, we see a lot of capabilities around that. All right. Let's change this, change topics entirely. And now talk about one that you and I've talked about before. And, and I will admit we're doing some work together in this area. And that's to talk about housing.

And there's a bunch of, uh, of issues related to housing. I'm sure that you and your position and your teams. I've really dug into this issue. You know, we read every day, there's not enough affordable housing. I think a lot of that is, is a misunderstanding. Um, we can talk about the total cost of ownership, but just in general, what, what do you guys see in the world on this top?

Bob Sternfels: It's a fascinating topic. And one, I know you've, you've dealt pretty heavily with, uh, and kind of learned a whole bunch of different aspects, but I'd almost start one or two levels up, which is the, the, the importance of housing. And there's a lot of research that's being developed about social fabric and the tie to housing, to social fabric, to community.

Um, and I think the next set of research will also be around stability and access to housing and how does this actually contribute or not. And I think it might, my own hypothesis, potentially an antidote as we think about all the divisions in society. And so there's like a foundational import to this, even before you get to how do you make it more affordable, blah, blah, blah, that I think has been underappreciated as a positive externality in societies.

And when we get it wrong, you see a lot of these negative externalities pop. And so I'm very excited about some of the thinking there.

Michael Marks:  And just so, just so I understand what you said, are you saying that we need more housing in order to create more sort of better ecosystems, better societies? Is that, is that what you're saying?

Bob Sternfels: Yeah. Societies are better when the housing solutions are better. Got it.

Michael Marks: Okay.

Bob Sternfels: And beyond just, do we have houses and does that drive our own economic growth and what's the pathway for a family? But from a society point of view, is the fabric and society strengthened when you better housing solutions and there's some really good data.

That starts to show that the systems of government work better, collaborative solutions emerge better, et cetera. Those I think are underappreciated when we're just doing the math of, you know, how do we actually create housing solutions? So that was the idea there. There's positive externalities here that I think are, are, are being missed in this, in this equation.

Michael Marks: That's one thing I didn't know. So that's helpful. Thank you.

Bob Sternfels: Well, and then you get into it and one of the things you, I quite frankly, I'm humble enough that I think you've helped me understand it's very rare that somebody looks at this problem in a holistic enough way. And, um, you know, we've talked a lot about the TCH here, right?

The total cost of housing. Um, because almost inevitably when somebody is looking at solving this problem. They're looking at a slice of the problem and, and the reason I tee this up is, um, when you take this total cost point of view, because often it's, um, well, what's the cost of housing? Um, what's the ability to finance those tend to dominate the equation.

And what you start to see with some of the other threads that we had highlighted is there's some other lifetime costs that actually start to dwarf those two things. So when you start to think about energy use of a house over time and some of the projections of energy. This becomes material, you know, when you start to think about maintenance costs over the lifetime of a house, this starts to become material.

And then, you know, let's make it contemporary. I know there's a lot of buzz on this, given the horrific fires in L. A., the cost of not just financing it, but insuring it. And can you insure it, right? I mean, it just becomes impossible in some places. So I think one breakthrough as we solve this problem is arraying all of these components and starting to talk about housing, not at the cost of housing, or you, or you mentioned available housing, but it's what's the total cost of housing, total cost of housing.

Michael Marks: And how do we tackle each one of these levers as we, as we go? Well, you know, I've talked about this before. We all read these articles every week. There's not enough housing. The housing's not affordable. And all anybody talks about is the, is the cost to get into a home. And what you just touched on. Is really the bigger issue over, over the 30 year period that a family has a mortgage is if the AI data centers are going to drive up demand for energy and utility costs are going to go skyrocketing, that's kind of a big impact on the cost of ownership and something that we need to pay a lot of attention to.

Bob Sternfels: What I wonder, Michael, is can that thinking yield to some creative solutions? So, you the forefront. There are already some creative solutions that are emerging to parts of these problems. Um, You know, uh, home home construction, et cetera, and you know, that stuff far better than me. But if you start to model out that if I am underwriting you, Michael, who wants to actually get into this home for an extended period of time, not to flip it, but to stay in it for, you know, 10 to 30 years, I need to understand not just the value of the house to how to finance it.

I need to understand the cost of maintaining this house. I need to understand the insurance in this house and understand you. Well, then you start to say, are there unique financial products that would actually marry to this products that might merge insurance and financing? Right. It might actually have a whole bunch of other criteria to this.

Well, how was the house built? What are the relationships with the utility providers? How long would you stay and do the rates change based on how long you stay in this home, et cetera. Right. And I think if we could get there. We might start to solve some of the problems that we have, particularly around insurance and finance, which, um, which exists today.

But those innovations, like, I think there's a wave of innovations on the financial side of this that might actually come if we start thinking about total cost of housing. 

Michael Marks: Well, this is a obvious segue to the most important issue about this. And one of the things, you know, we have a, we have an investment in a home building business called our Ibsen.

And you know, we've both spent some time on this. I would like to see a situation where houses come with insurance because insurance is such a mess now that people are looking at their houses and go, if I buy this house, am I going to be able to get insurance? And the last couple of weeks has, has obviously put this in the forefront and it's just a horror show.

But when you and I talked about insurance for the first time, you know, a couple of months ago, you said there were difficulties with insurance around the world and all kinds of insurance. Maybe you could touch on that and then come back to what happens to, to insurance and houses in America. I mean, this is a real problem now.

Bob Sternfels: You know, I, I think it's a problem in America. I think it's a problem around the globe. I think one of the sad things I was talking to a CEO of one of the largest insurance companies and he was lamenting, he said, look, if you go back to the roots of insurance, and there's a bit of a debate of, is it, uh, is it London or Amsterdam, but it's somewhere in, in Europe, it was, um, People coming together to pool risk, to be able to do something new.

And, and so the, the Dutch version of this is, you know, folks in Dutch villages would come together and they say, look, none of us can afford to fund a ship going to Indonesia, but if we all kind of pull it together, it won't kill any of us if the ship sinks. But we all might make it, and this was the first versions of insurance products, right?

And everybody kind of comes together, but it enabled, right? It didn't, it didn't kind of say, Oh, it's a burden. I got to do this to own a home or, and then, but it wasn't enabled, you know? And then he fast forward. He said, well, look at us today. You know, I'd said often we're a cost of doing business or a product that then you're afraid to use it because then once you use it, you may not be able to get it again, or the rates change radically.

And the only way we've been able to make money is to uninsure the least profitable parts of our business. So we've been going through and paring back a whole bunch of things, you know, paring back homeowners in risky areas, you know, certain demographics. Uh, and he's like, look, unless we find a way to come back to our roots and make insurance about two things.

Insurance about enabling people to do stuff. So can you now go buy a home because you have this product? Does it actually allow you? And can we make insurance inclusive, not exclusive, because it's increasingly becoming unaffordable to most Americans? Yeah, then we're dead as an industry. And I think that in some ways, Michael, is the challenge.

What I like to link it to this housing thing is I don't think insurance is going to figure that out themselves. If you could create new bundles, for example, the travesty with, with a lot of the homes in LA is, um, you know, they were tinderbox. Exactly. And, you know, and, and some of that is through that housing policy, right?

But if you kind of said, look, these are different materials, this thing won't burn, but by the way, it's not that it won't burn, but you also have to look at the risk of this person not being able to afford the house, et cetera, that it's got lower maintenance costs, et cetera. Well, then you start leaning forward as an insurer and then you can start saying, well, this house comes.

Pre bundled with an insurance offer. And then all of a sudden, then from the seller's point of view, well, that's a source of differentiation because a buyer, one of their worries is, okay, maybe I get into this house, but then I can't get insurance for it. And then I'm super exposed because all I just put most of my home, my family assets into buying this house.

Michael Marks: Those are some of the unlocks, Michael, I think we could get into. And I hope we're able to work on this stuff together because this is a serious issue. I mean, you know, friends of ours, friends of yours lost houses in LA. Some of them didn't have insurance. They don't know if they can get insurance again and, and the homes were built the wrong way.

And, and, uh, so this is a, this is a big problem. Thanks for your thoughts on that. Okay. I have a last question for you. Um, this has been a kind of a cool, wide ranging interview. Oh, we're, we're all over the topic. So here's my last one for you. You recently wrote about the idea of 21st century leadership, quote unquote, and that the role of executives is fundamentally shifted today.

You noted that CEOs and executives used to typically focus on five or five priorities at a time And in today's world, it's more than double that. So I'd like to hear from you. What are your findings about this? Something fundamentally changed about what it takes to be an effective leader. You know, should training be different?

What, what are the attributes of an effective leader today? I mean, just go on a rip here.

Bob Sternfels: Yeah, you, you know, you're a student of this too. I think on the one hand, you know, you look at it and leadership's always been hard and figuring out a way to lead. And I. You know, I remember there was a great quote from, uh, General MacArthur, uh, you know, on brave leaders.

And he said, look, it's the age old problem. You know, you have the roar of the crowd on one side and the voice of your conscience on the other. You know, who do you, who do you listen to on these things? And it's hard to listen to your conscience when the crowds roar in one way. And, and so in some ways it's evergreen.

I do think though. Things are changing right now, which puts both more of a premium on the need for leadership, but also makes leadership a lot harder. And, um, the premium are all these tough problems that would be once in a generational problems that are all happening at the same time. We talked about technology, world order changing.

Demographics changing faster than ever we thought, you know, this nexus of um, we need resilient and cheap and affordable energy, but we also want to hit our climate goals. I mean, you pick it, there's like four or five of these that are all, but they're all coming at the same time. It's an A class portfolio of leadership challenges.

Married though, with this notion that societies are more divided than they ever have been, and that replicates in a workforce armed with social media technology, that means everyone has a pulpit. And so, you know, that tees you up for some really delicate dance. And, um, and, and so one of the things we've kind of burrowed into is what are folks doing on this?

And, you know, and as you think about just a continuum, we've even seen recently of. Well, where do you draw the line between as the world changes, adaptation on one side, do I change my point of views versus I got convictions and you know what, I'm going to stay true to my convictions. And how do I, how do I sort that out?

Because we've seen some leaders go hard on adaption, conviction, and you know, where do you find the balance? And so we did some research, you know, we're McKinsey. So we do some research on this and yeah, and we tried to then highlight, what are some attributes. Of folks who seem to be doing disproportionately well through these times.

And it was interesting, there was some characteristics that I'll just flag for you and then we can kind of, you know, open it up for discussion. One is the notion that leaders need to radiate energy, that to drive change, you have to impart energy into others. And so there's some whole notion under all that, which is, how do you have your own personal operating model that you're constantly able to create energy and impart that to others?

It's not an easy thing to do, but, and my son who was doing chemistry, he's like, oh, dad, leaders need to be exothermic. And I'm like, okay, you know, so thank you, the 17 year old helped me out. But there is this notion of, of radiating energy. The second is the era has moved. It seems from a notion of the CEO taking credit to really leadership that actually rewards and recognizes the team.

We call it the servant leadership model where you're really celebrating the others around you. We've seen evidence that you get a lot more out of the team. By celebrating a team of stars versus the, the kind of iconic CEO image. 

Michael Marks: So, so let me stop you there. Is that new, Bob?

Bob Sternfels: I don't know if it's, if it's necessarily new, but what you're seeing just from a brand and a positioning and all this is much more democratization of credit in enterprises.

And that was different than a couple of the past previous decades where you'd have much more of the hero CEO celebrated. So whether it's different or not underneath that, I don't know, Michael, but what you are seeing is the manifestation of it change and, uh, kind of dampening down the hero CEO, if you will, and kind of, Hey, this is what we're doing as a team, or this is what the product stands for, et cetera.

And kind of a little bit back out of the limelight.

Michael Marks:  So in your practice, do you counsel CEOs on that subject?

Bob Sternfels: We do, we spend a lot of time on what are you doing to make others stars? What does that actually mean? Um, you know, the next one is this idea of, uh, and this has been talked about a lot lately, but and it even manifests where we started with the speed of AI.

What are you doing to ensure continuous learning and in particular? What we're seeing great CEOs do is figure out alternate sources of new information because one of the downfalls is you drink your own Kool Aid and particularly if you've come up through a particular industry, your whole team's come up through the industry.

Where are you getting new sources of information? And that's at much more of a premium now because how you got there, your company's probably not going to look the same in five years as it does today. So this external source of input and information, massive premium, you know, for, uh, for a CEO and it's hard to do, right?

You got to. Kind of work at it and figure out where do you get new sources of insight one that, you know, hopefully isn't, isn't too counterintuitive resilience, you're going to get knocked down a lot. And one of the amplifications of more stakeholders, both within company, governments, et cetera, means that no matter what you do, somebody is going to come after you hard.

And how do you not get knocked down by the noisy tail, right? And stay focused on the center, but that takes resilience because you're going to get. And probably more visibly hit in the modern version of CEOs than ever before in the past. And so how do you build a thick skin on this? And by the way, one of the things we're playing that back to is, are you hiring people who have resilience as one of their intrinsics?

And so we've been talking to a lot of CEOs about what are your hiring criteria? You know, do you, do you take the kid who's at a perfect record the whole time? Or do you take the kid who's gotten knocked down and recovered from it? Because I'll tell you, one is a much better predictor of resilience than the other.

And so there's a fascinating, you know, bit of science there, Michael. And the last one I would hit, and this one may be counterintuitive, but the use of humor as a leader. And I learned this and I'll give a shout out to a good friend of mine, Rear Admiral Wyman Howard. So Weinman just retired from the Navy a little while ago, and his last post was he was in charge of Special Warfare Command.

He came up through the SEALs, and he transformed the culture of the Navy SEALs. That was his last mission, and part of it was to pivot on what are the attributes that make a successful SEAL? And one of them was, was levity, humor. And I said, Weinman, like, Navy SEALs, you know, being humorous? He's like, Bob, there is a lot of data.

That humor saves lives and put it in the Navy SEAL context. And I'll talk about why it's CEOs. He said, when things are really going wrong, if you introduce humor into that situation, it's the fastest way to democratize problem solving. So people get more comfortable speaking up. And he went back and said, look, historic figures have done this.

When Churchill went into a command room, he always found the youngest person and he cracked an off color joke. Everyone laughed. And then he's like, all right, what are we going to do about this situation? And so we've started to track this in how to make better decisions with teams and as leaders, particularly in hierarchical environments and enterprise has hierarchy.

CEOs that do this, and often if it's self deprecating, create relaxation, which then drives better creativity. So I found that really counterintuitive, Michael. And, um,

Michael Marks: you might enjoy that. No, I did. You know, I used to always, to people always ask me what I think the characteristics are of a good leader. And I've always said curiosity, because if you're not curious, it's what you talk about reinventing yourself.

If you're not curious, you're not looking at how the world's changing and all that. But I have to admit, you gave me some new ones to think about. About right there, I think about, you know, I thought the research was pretty creative. Oh, that's fantastic. I love, I love levity. That's a good way to come back to the venture industry.

One of the things you said is that one of the reasons Silicon Valley has been so successful as you know, is there's been so many failures. And here, when people fail, it's a badge of honor. You know, we interview people and you go, well, have you been anywhere where you fail? You know, I grew up in the Midwest and in the Midwest, if you failed once, you were out of business and over here, if you don't fail a couple of times, nobody's interested in you.

And that's one of the reasons we have such a robust environment of disruption here. Yeah. I think it's one of the defining attributes and wrapping this up. I'm just going to say out loud, you said at the beginning for the listeners, I asked Bob, if there were any questions off. Of limits. And he says, you know, when you're testifying in front of both houses of Congress, go take your best shot.

Bob Sternfels: This is a lot more fun than that, Michael.

Michael Marks: I'm sure this has been completely fascinating. I think everybody will agree. We're very fortunate to have had you, Bob. You have so, so much experience and your organization is so highly regarded in so many areas. And so taking the time to do this is just wonderful.

So thanks for coming.

Bob Sternfels: Well, I appreciate it. And it's, uh, it's good to catch up with you. And, you know, as I look forward in 20, 25, I know we just went through a lot of things, but I think it's a lean forward time, you know, this is time to like, let's lean

Michael Marks: forward and go after that. I certainly do. I tell people technology used to be a small little area and now it's everywhere.

It's in every discipline. It's in every, it's in every geography. It's just, it's just wonderful. Listen, thanks for tuning into the Tech Surge podcast from Celeste to Capital. If you enjoyed this episode, feel free to share it, subscribe, or leave us a review on your favorite podcast platform. We'll be back every two weeks with more insights and discussions of all things, deep tech.

And I hope we have lots of more wonderful conversations like we did today. Thanks again.

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