$700 billion for what?

By now, everyone knows the story.  After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive - in the range of $300million to $600million - the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more - even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds. 

So what does the taxpayer get for this?  So far, all the taxpayer is told is "it'll stave off an even worse crisis."  I'm reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money."  This is a lollapalooza of a bunch of money - and yet no one seems interested in saying what the taxpayer gets.  The proposal is pinned on "things will be worse if you don't", without much talk about how things will ever get better.  There's no talk about how this will create more jobs, create rising incomes, or improve asset values.  Just "it can get a lot worse." 

So, put yourself in the role of CEO.  If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out."  After you get back up, what would you ask?  How about, "what's this for?"  To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back."  Nothing about how your business will be better for having done it.

Now, it might occur to ask, "if I do this, how do I know it won't happen again?"  And that's the question you really should be asking today.  Have you heard before about this problem, and told your previous actions would stop the problem?  If yes, wouldn't you say "hey, I'm a bit tired of running around this tree and getting these recurrent bad news meetings.  Seems like every Monday is something of a 'here's the newest crisis' environment.  What's your plan to adjust to the market requirement?"  And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you'd be pretty smart to say "if the previous actions didn't work, why should these work?" 

In the end, this $700billion to $1.6trillion isn't changing anything.  It's just putting the proverbial "finger in the dyke."  Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn't the size of a finger - it's the Holland Tunnel!  Clearly, what was tried hasn't worked.  Yet, this is asking more of the same.  So, in the legislation the person who's been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally - and no controls over what actions I might need to take - in order to finally stop the flooding problem."  Uh, right.  Since everything you've done before didn't work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.

When do you say "no"?  Confronted week after week with crisis after crisis, when do you say "I don't think this is working?"  It's so easy to go along.  It's so easy to say "this has been the way we've always done it.  Things haven't worked so far, so clearly all we need to do is do more of it.  Possibly more than any of us ever dreamed imaginable - but surely if we do enough, do more, eventually it will work." 

Now, more than ever, we need White Space.  The financial markets have shifted.  Competition has shifted.  The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor.  Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less.  Whether that is the production of shirts, or software code.  Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases.  Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.

At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution?  If I have $1.3trillion to buy the problem - either by giving up the money or by printing more - and I forego all other expenditures (like health care, or defense against competitors) to put the money here - I deserve to see some money spent on developing a new solution.  One that is built upon the new market characteristics."  This is not the S&L crisis again, nor is it the failure of a single big bank.  We are seeing the results of a market shift which the industry was not prepared for.  And the only way to come out successful is to have White Space to develop a new solution.

So far, no one has asked for permission to develop a new solution - nor has anyone even proposed it.  No one has even asked for resources to develop a new financial system.  All the money is going to attempt propping up the old system - and the more we dig, the deeper we get. 

At the very least, for $700billion, we need White Space.  We don't need hedge fund managers who are salivating to buy up beaten down assets.  We don't need regulators trying to roll back the clock.  Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system."  We are in the information age - not the industrial age.  We are in a global economy - not a U.S.-led international economy.  We are facing new competitors, with different advantages, doing very different things.  And we need new solutions.  Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don't address by simply throwing money at it.  We have to find a way to move beyond "more of the same."

Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same.  He's ready to spend money Americans don't have (since there is a negative U.S. government budget and huge deficit.)  This means either higher taxes, or turning on the printing press and creating inflation.  That's a bet he's willing to take.  Are you?  Or would you like to see some options?  Some new solutions?  Or even some teams that are working on new solutions? If he's your V.P., your CFO, do you approve his recommendation, or do you ask for something more - some White Space to develop a solution that does more than stave off future crisis.  Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?

Fearing Cannibalization versus White Space

Sometimes management behavior can cause outsiders to think the industry and company leaders fear growth.  Take for example a new book about innovation in the movie business Inventing the Movies by Scott Kirsner (see at Amazon here or read a review in Forbes here.)  As the author points out, after Edison invented the first Kinetiscope movies - which were small viewer-based single person devices - he saw no reason to move forward with a projection system.  Why advance the innovation when multiple audience members appeared to risk the revenue?  To Edison, he could assure each and every viewing created a payment with his single-viewer technology, but the audience viewership meant he would lose control and possibly see revenue cannibalized.  Fear of cannibalization caused him to avoid new innovations which would grow total demand, and considerably grow the revenues of his fledgling movie business.

But we all know this didn't happen.  Projection systems only caused more people to want to go to the movies.  Then when talking movies came about again the industry feared that investing in sound equipment would be a cost not recovered and they delayed and delayed.  But talking films again increased the audience.  And this cycle played out again with color movies.  And lest we not forget the wars that were fought over video tapes of movies, which all industry leaders feared would kill the business.  Yet, videos (and now CDs) have only increased the audience, and demand more. 

All businesses develop a Success Formula early in their life cycle.  That Success Formula ties the Identity of the business to its strategy and tactics.  So a tactic as simple as having a single-viewer kinetiscope becomes almost impossible to change because it gets linked to the identity of the business (and often its founder - in this case Edison).   Thus it takes a new entrant, often from outside the industry, to parlay the new technology into the market.  This new entrant, not afraid of controlling the business through administration of an old Success Formula, is able to bring forward the new technology/solution and build the new audience/demand.  And often we see the old industry leader far too late to change - stumbling, fumbling and failing.

Businesses need not follow this course, however.  If they are willing to invest in White Space they can test new solutions.  They can figure out new Success Formulas.  They can evolve, and they can grow.  Doing so isn't really hard, it just takes a willingness to accept the requirement for White Space to take advantage of market shifts.  White Space allows you to migrate forward, rather than constantly fall back into Defending & Extending what you've always done. 

As we all know, each innovation in the movies has grown the industry, not been its doom.  And that's true in all industries.  Yet, the largest players are rarely the ones who lead these shifts.  Look at how it took Apple to bring about the revolution in digital music, rather than Sony.  Lock-in gets in their way.  If we want to avoid being pummeled by market shifts that create great growth opportunities for the new competitor we have to be vigilant about implementing and maintaining White Space that can provide our beacon for growth.

Where's your organization's White Space?

Metric motivation

Do you ever wonder how people get so locked in to doing something that they end up doing the wrong thing?  Do you think they are all bad people?  My experience has shown me that rarely do people do things because they have no internal moral compass.  Rather, it's the systems we use to Lock-In behavior which causes behavior to end up creating negative "unintended consequences."

Take for example compensation for attorneys.  As everyone knows, attorneys charge by the hour.  As do plumbers, electricians, retail store clerks and a raft of other occupations.  On the face of it, this makes complete sense.  But, as the Chicago Tribune recently reported (see article here), when you couple this simple billing process directly to compensation, you can get some pretty bad outcomes.  By "promoting" what is seen by top management as a key success factor, your Lock-in can lead well-meaning people to do things which are less than...... shall we say..... positively correlated with customer success?

As the Tibune reported, by Locking-in on the metric, billable hours, what starts to happen in law firms is people "fudge" their billing.  What appears to be a good thing, tieing compensation to a key firm growth metric,  leads everyone up and down the firm to do unnecessary work, take longer time to do work than is necessary, utilize resources on projects that are hard to justify, and even outright exagerate the time spent on client efforts.  As a result, some clients are finding they need to challenge their attorney's bills - not an activity you want to spend time doing with someone who is supposedly your advocate, hopefully looking out for your best interest.  And some judges have been considering attorney's bills too high, and refusing to force the payment of those bills.

I don't mean just to pick on attorneys here.  More than a dozen years ago I took a leading position with the consulting firm of Coopers & Lybrand (later merged with Price Waterhouse and then later acquired by IBM.)  I had worked at the firm only 6 months when I was in a meeting with the top officers of the firm to discuss "firm direction."  As the meeting droned on, talking about nothing but billable hours per type of project, I finally said "you know, I'm getting the sense that no one here cares what kind of work we do.  I could have armies of MBAs operating jack hammers and no one would care as long as it generated thousands of billable hours at market  hourly rates."  One of the top 5 firm officers turned to me and said "you know Adam, now you're starting to get it."

What we all have to be careful about is Locking-in on metrics which can lead to behavior that does not serve our customers well.  This Lock-in, often a key sign of good implementation of strategy or quality (locking-in metrics is a cornerstone of Six Sigma), can become deadly when disassociated from market conditions and customer needs.  Yes, billable hours are good - but only when those hours are serving the client's best interest. 

That's the problem with Lock-in, at first it seems like a really good idea.  You use a metric to help drive repetition of behavior which has proven to lead to success.  Locking in on the metric improves results.  It clearly is beneficial, and a good thing.  But these same locked-in metrics can prove problematic, even disastrous, if we don't regularly Challenge them in the face of market requirements.  We need to alter our metrics in order to keep ourselves aligned with customer needs.  Metrics must be seen as guideposts, not ends into themselves.  And all of them need to be viewed as flexible and alterable - before they lock us in to a tour of the Swamp and eventually failure.

Retirement in the age of Creative Destruction

Those of you familiar with The Phoenix Principle are familiar with our statistical review demonstrating the high failure rates of companies.  Company longevity is far shorter than most of us realize.  One significant impact of this phenomenon affects all of our company retirement accounts.

America largely depends upon private retirement.  Social Security is considered substistence funding, and we are expected to make up the difference with either private funds or a retirement plan.  For our parents, who expected near lifetime employment, these private retirement plans were their safety net.  They depended on "the company" to fund their retirement and health care.

But let's consider someone today who wants to retire at 65.  They need to work, and pay into, a corporate retirement plan for at least 10 years, so they have to start at age 55.  And they would expect to live until 80 (the current average).  So, they want that company retirement plan to be around for at least 25 years.  Yet, when we look at performance of the S&P 500 we know that only about 1 in 3 companies (yes, only 1/3) of the S&P 500 can expect to survive for 25 years.  So where does that leave your retirement plan? 

It's even worse if you start your retirement planning at 45.  Now you need your employer to stick around for you for 35 years.  The odds of that are no better than about 1 in 4 (25%).  So, where comes the funding for the retirement plan?

Now look at the problem from a large employer's viewpoint.  US Steel and GM are just 2 recent examples (out of several dozen) where the company has said they can't afford to maintain the retirement program.  Not surprising.  Their lock in to their old Success Formula has pushed them way out into the swamp.  So what happens to those retirees?  Or those near retiring that had planned on that pension?  They have gone along for 10, 20, 30 or more years believing in the Myth of the Flats, thinking that their employer would always be there for their retirement.  But that myth is about to implode on them with painful consequences.

In an age of Creative Destruction, corporate retirement programs are little more than a wish.  If the companies don't succeed long enough to support the programs they are of little use to retirees.

Perhaps this should be part of the current debate regarding the future role, and funding, of Social Security.  For sure  it should be part of your plans for retirement.

Belo's Embarrassing Misstatement

A colleague described his new employer, LRN, to me over lunch last week. LRN is one of a growing number of companies devoted to helping companies strengthen their ethical standards and compliance. In light of Sarbanes-Oxley and the post-Enron climate, businesses such as LRN are booming.

It is clear that setting standards, training people, and increasing attention on and visibility of ethics is making a difference in companies. However, I asked my colleague if there might be more to ethical breaches than just these factors. Could it be that performance pressures might lead even ethically aware people to bend or even break the rules?

We believe that the dramatic rise of ethical violations like that at Enron and others was in large part due to desperate people trying to meet their performance goals. Because the business isn’t giving customers what they want, the customers aren’t buying. As a result, desperate employees are resorting to desperate measures. This seems to be what happened at Belo Broadcasting.

According to articles published last week in Dallas Morning News, Belo Corporation, (publisher of the Dallas Morning News) has admitted to the inflation of circulation numbers that misled advertisers. Belo attributes this to “aggressive pursuit of goals set by former managers and inadequate monitoring of distribution and return practices.” Belo goes on to report that circulation for the six-month period ending today is down about 5.1 percent and 11.9 percent on Sundays compared with figures reported a year ago. A companion article reports that Belo is cutting 250 jobs due to a lag in the DFW market.

Instead of just thinking about this situation as a couple of bad apples who broke the rules, we would invite Belo to take a hard look at their business. It’s clear that their customers are going to other sources for their news. There are so many substitute providers for obtaining more timely daily news than just a newspaper. For a newspaper to compete, it has to offer something else, something different and better.

What can Belo do? Belo should turn this event into a disruption that would have them seriously rethink their business. How could they reimagine their business model to reinvigorate the business and jumpstart growth and restore profitability?

Unless Belo makes significant changes to its Success Formula, we predict that the company will continue to struggle. Perhaps they won’t have any other ethical breaches, but their problems will show up in other ways, like being forced to lay off employees due to slowing sales …