Archive for the ‘General Business’ Category.

What Musicians and ExxonMobil Have in Common: Both Get "Ripped Off" By Consumers

We have all heard that artists make very little money from their songs, and get "ripped off"by record labels and other folks in the chain.  I have always had mixed reactions to this.  I have no doubt that, with zero power and a burning desire to "make it big", young acts sign uneven deals with record labels.  However, I find it hard to believe that Beyonce is getting hosed in that negotiation.

I saw this chart in TechDirt about where the money consumers spend on music goes (I think this is for a CD sale):

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So the performers themselves get about 9% of the retail price after everyone in the chain is paid.  That certainly seems paltry -- after all, they are the owners and creators of the music.  Everyone else is just in the service chain to make sure the music reaches the customers, all the accounting is done, the legal documents are correct, etc.

But it turns out that they may not be doing that badly.  I am a shareholder of ExxonMobil (XOM).  I own a piece of all the oil that XOM owns and controls, along with all the other shareholders.  Think of us as the band, though a really big band with lots of players.   That oil we own, like the band's music, has a ton of value.  When sold as raw crude, it goes for $40-$60 a barrel nowadays.  When sold in pieces (such as gasoline, or asphalt, or lubrication oil) it can sell for hundreds of dollars a barrel.

But out of those proceeds, we have to pay people to help us.  We have to pay managers, and lawyers.  We have to pay oilfield services companies and equipment companies and transportation companies.  We have to pay retailers.  When all those payments are made, before taxes, in 2014 we were left with just under 8% of every dollar we sell.  We own all this oil and we are not even getting as much as a musician!

And XOM shareholders do pretty well.  Owners of Wal-Mart only get about 3% of every dollar they sell.   In my company, I get about 5% of every dollar I sell.   And those evil health insurers?  Their shareholders get just over 2% of every dollar sold (all based on 2014 full-year financials).

Does that mean that Exxon shareholders are getting "ripped off" by Haliburton and Burlington Northern?  Is Wal-Mart getting ripped off by Proctor and Gamble?  Is Humana getting ripped off by GE imaging?  No?

I will reveal the ugly secret:  There is one person who is "ripping off" all of these folks, from Exxon to Rihanna to me.  That person is.... the consumer.  Yep, there are certainly many examples of people signing bad contracts in all these businesses, but the only entity systematically and consistently ripping all these folks off is us.  Because in a capitalist economy, we have the ultimate power.  We drive down the street to get the gas that is 10 cents cheaper, we now shop for our books and TVs at Wal-Mart and Amazon rather than at Borders and Best Buy, and we buy 99-cent individual songs on iTunes instead of buying a whole CD of songs we don't want for $14.99.

Why Opposition to Workplace Discrimination Laws Doesn't Necessarily Make You a Racist

A while back I (for a short time) chaired an effort to get a ballot initiative in Arizona to change to Constitution to allow gay marriage.  In the process, gay rights advocates approached me for support of another law to add LGBT persons to the list of protected classes that are covered by workplace discrimination laws.

I refused to help, and these folks immediately labeled me a hypocrite.  To be fair to them, they honestly thought that workplace discrimination laws did exactly what they intended to do - ban workplace discrimination of an overt sort (e.g., "what, you're gay?  Well, you can't work around here any more").  But anti-discrimination law has a lot of other unintended consequences that are all bad for even the most fair-minded business owner.

Because most of the actual stories I have been through are (and should be) confidential, I will illustrate the problem from a story out of the national news.

Debbie Wasserman Schultz is Chair of the Democratic Party.  Several years ago various party members became dissatisfied with her leadership, a pretty normal occurrence for such a position, particularly after Congressional losses in several elections.  I compare the job to that of an NFL coach, who has job security only as long as he is winning (see: Jim Harbaugh in San Francisco).

Wasserman Schultz’s position as the head of the DNC has long been a source of contention among Democrats, and Politico has previously documented the issue. In September 2014, Wasserman Schultz’s gaffes caught up to her when a string of Democrats voiced their distaste for the way the Florida congresswoman had led the party.

That report found tension between Wasserman Schultz and Obama dating back to 2011 .... At the time, Wasserman Schultz had allegedly complained to Obama about not being able to hire a donor’s daughter to work for her at the DNC.

“Obama summed up his reaction to staff afterward: ‘Really?’ ” according to a source that was present.

So maybe Obama didn’t like Wasserman Schultz’s brashness or her propensity to spout gaffe after gaffe.

So, faced with threats of losing her position based on poor job performance, her response was this:

Democratic National Committee Chairwoman Debbie Wasserman Schultz was prepared to go full force against President Obama if he tried to replace her in 2013.

Wasserman Schultz, according to Politico, was going to accuse Obama of being anti-woman and anti-Semitic — apparently to cover all the bases — if he dared consider replacing her as chairwoman.

There is absolutely no rational reason to believe President Obama wanted to fire her because she was a woman.  Seriously, Valerie Jarrett practically runs the country but Obama doesn't like Shultz because she is a woman?  I would bet that in fact she was hired for the position in large part because she was a woman.  But she was perfectly willing to use the fact that she happened to be in some protected employment classes to try to head off a merit-based firing.

For businesses, this means two things

  1. It typically takes much longer to terminate someone in a protected class, because businesses want to make sure they have an absolutely iron-clad case if the termination is later challenged.  For a service business like ours, this sometimes means tolerating dangerous behavior or really bad customer service longer (with all the risks that entails) from someone in a protected group rather than from, say, a white male.
  2. A large number of employees in protected groups will file grievances to the state, or even sue, over even the most well-documented and justified termination.  Even when employers win such cases, each one take tens of thousands of dollars in legal fees to win.  As interpreted by courts and state civil rights agencies, anti-discrimination law seems to create burden of proof on the part of employers to prove they did nothing wrong, rather than the other way around.

Sort of Sad, But Inevitable I Guess

CBE is closing its open outcry pits (e.g. the type of trading portrayed in the movie Trading Places).  Time to short the manufacturers of brightly covered jackets (from my very very limited experience observing the pit in Chicago, one unreality of Trading Places is that the traders are all wearing fairly normal business attire).

What, No Bailout?

I wish we saw this attitude more often, particularly among large corporations (from an article discussing aftermarket ticket prices for the Super Bowl).

"This is really something we never anticipated," said Will Flaherty, director of growth at SeatGeek. "The cheapest seat on SeatGeek right now is $8,000, but no site seems to have any inventory." Flaherty believes speculative buying is behind the spike. Ticket brokers frequently sell "air" to their customers, taking orders before they have tickets in hand. "We've noticed significantly more speculative selling activity than in recent years," Flaherty said. "Over the last few days, those sellers have been scrambling to buy up tickets to fill their orders, resulting in the Super Bowl ticket version of a short squeeze. Brokers with tickets in hand have been taking advantage of their leverage, raising prices dramatically and arbitrarily withholding some of their inventory."

Ety Rybak, co-founder of the high-end brokerage Inside Sports & Entertainment Group, has spent more than anticipated this time around to fulfill orders before the game. "I can tell you some ugly horror stories about what I have had to pay. But that’s part of the business," he said. "If I sold you tickets for $2,500, and I have to pay $7,500 to do it, unfortunately that’s the world that I chose to live in." The flip side to the high costs is a brisk business in late orders.

Maybe the US sugar cartel, among many other groups, could discover this approach to individual responsibility.

Quantitative Easing and the Left's Relationship to the Rich and to Large Corporations

The Left spends a lot of time railing against the rich and large corporations.  But in practice, they seem hell-bent on lining the pockets of exactly these groups.  Today the ECB announces a one trillion plus euro government buyback of public and private securities.

Between Japan, the US, and now Europe, the world's central banks are printing money like crazy to inflate securities values around the world -- debt securities directly by buying them but indirectly a lot of the money spills over into stocks as well.  This has been a huge windfall for people whose income mostly comes from capital gains (i.e. rich people) and institutions that have access to bond and equity markets (i.e. large corporations).  You can see the effects in the skyrocketing income inequality numbers over the last 6 years.  On the other end, as a small business person, you sure can't see any difference in my access or cost of capital.  It is still just as impossible to get a cash flow loan as it always was.

I Believe the Trend Was Caused by All the Things I Believed Before I Investigated the Trend

This is so common that there ought to be a name for it (perhaps there is and I just don't know it):  Writer does a story or study on some trend, in this case the downfall of the enclosed shopping mall.  In each case, the writer discovers that such malls died because of ... all the things the writer already holds dear.  If the writer hates American consumerism, then the fall of such malls is a backlash against American consumerism.

It is interesting to note that all of the ideas quoted are demand-side explanations, e.g. why might consumers stop going to large enclosed malls.  And certainly I find the newer outdoor malls more congenial personally, but this can't be the only explanation.  Here in north Phoenix, I can see the dying enclosed Paradise Valley Mall out my window, but just a few miles away is the Scottsdale Fashion Square, a traditional mall that appears to be going great guns.  Ditto the Galleria in Houston.  Perhaps part of the answer is that enclosed malls were simply overbuilt and that people are willing to drive a bit to get to the best enclosed mall in town rather than a smaller version closer to their home (certainly Mall of America made a big bet on that effect).

But it also strikes me there are supply side considerations.  The mall out my window is a huge waste of space, surrounded by parking lots the size of a small county.  And it's just retail.  Modern outdoor malls allow developers to mix shopping, living, and office space in what looks to my eye to be a much denser development.  All these malls have stores on the ground floor with condos and offices up above.  To my not-real-estate-trained eye, this would seem to increase the potential rents in a given piece of land and provide some synergies among the local businesses (e.g. office workers and residents eat and shop in the mall shops).  In some sense it is a re-imagining of the downtown urban space in a suburban context.  This is ironic because it is something urban planners have been trying to force for decades and here comes the free market to do it on its own.

People also like going to newer facilities.  Just ask hotel owners.  If owners do not totally refresh a hotel every 20 years or so, people stop visiting and rates fall.  The same is true of gas stations and convenience stores.  When I worked at Exxon briefly, they said they budgeted to totally rebuild a gas station every 20 years.  So it is not impossible there is a big supply-side explanation here -- if people are reluctant to go to establishments over 20 years old, then visitation of enclosed malls should be collapsing right about now, 20 years after they stopped being built.  A shift in developer preferences could be a large element driving this behavior.  I don't insist that the supply side and real estate incentives are the only explanation, but I think they are a part of it.

Letter to Nitin Nohria, Dean of the Harvard Business School

I wrote Dean Nohria in response to this story

Ben Edelman is an associate professor at Harvard Business School, where he teaches in the Negotiation, Organizations & Markets unit.

Ran Duan manages The Baldwin Bar, located inside the Woburn location of Sichuan Garden, a Chinese restaurant founded by his parents.

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

Here was the letter I sent, which was significantly more mature in tone for having waited 24 hours before writing it

My wife and I are both HBS '89 grads.  We own and actively manage a small to medium size service business.  I was encouraged at our last reunion to hear a lot of the effort HBS seems to be placing on small business and entrepreneurship.

However, I was horrified to see an HBS professor (prof Edelman) in the news harassing a small business over a small mistake on its web site.  I don't typically get worked up about Harvard grads acting out, but in this particular case his actions are absolutely at the core of what is making the operation of a small business increasingly impossible in this country.

Small businesses face huge and growing compliance risks from almost every direction -- labor law, safety rules, environmental rules, consumer protection laws, bounty programs like California prop 65, etc.  What all these have in common is that they impose huge penalties for tiny mistakes, mistakes that can be avoided only by the application of enormous numbers of labor hours in compliance activities.   These compliance costs are relatively easy for large companies to bear, but back-breaking for small companies.

So it is infuriating to see an HBS professor attempting to impose yet another large cost on a small business for a tiny mistake, particularly when the proprietor's response was handled so well.  Seriously, as an aside, I took service management from Ben Shapiro back in the day and I could easily see the restaurateur involved being featured positively in a case study.  He does all the same things I learned at HBS --  reading every customer comment personally, responding personally to complaints, bending over backwards to offer more than needed in order to save the relationship with the customer.

As for the restaurateur's web site mistake -- even in a larger, multi-site company, I as owner do all my own web work.  Just as I do a million other things to keep things running.  And it is hard, in fact virtually impossible, to keep all of our web sites up to date.  Which is why Professor Edelman's response just demonstrates to me that for all HBS talks about entrepreneurship, the faculty at HBS is still more attuned to large corporations and how they operate with their enormous staff resources rather than to small businesses.

Large corporations are crushing smaller ones in industry after industry because of the economy of scale they have in managing such compliance issues.  If the HBS faculty were truly committed to entrepreneurship, it should be thinking about how technology and process can be harnessed by smaller businesses to reduce the relative costs of these activities. How, for example, can I keep up with 150+ locations that each need a web presence when my sales per site are so much less than that of a larger corporation?  This is not impossible -- I have learned some tools and techniques over time -- and we should be teaching and expanding these, rather than spending time raising the cost of compliance for small business.

An Unexpected Roadblock to Some of Our HR Automation

We are trying to use some of the available tools out there to better automate our application and onboarding process for employees.  Though we are not a huge employer (about 350 part-time people) we hire and fire them all every year, so there is a lot of burden for our size on the HR system.

We are running into a frustrating issue.  Most of our employees are older and often have limited computer skills, but we are getting past that.  But we tend to hire couples, and it turns out in the over-50 set that couples often share the same email address.  I can't even imagine having the same email address as my wife and having to filter through all of her business, but there it is.  Unfortunately, in the world of web accounts, must vendors use the email address as the one reliable unique identifier for a person and thus use it for the user name or expect it to be unique.

This is throwing us for a loop.  It is less of a problem in the application system because most of our couples just want to submit a single joint application anyway.  But for onboarding, they  each need their own W-4, I-9, etc.  So they need separate user accounts.

The question then comes down to this for us:  I can require them to get a second email address, but that is likely going to flummox some folks and require my manual intervention to help them.  Do I thus cause more tech support issues for myself than I save from the automation itself?

No point here, just venting on a problem I have not figured out how to fix.  And no fair saying stuff like "gmail is free and easy to sign up for, just make them get another gmail account."  I have managers who do a fabulous job for me that it took me days to teach how to log into and use Gmail.  A better and fairer comment would be "you have 20,000 applicants, make the application process require separate emails and even make it a little technically challenging so you limit your hiring pool to people who are better suited to using modern computer tools."  And yes, that may in fact be our solution.

I Understand the Concern, But....

I think folks are rightly concerned that "disparate impact" logic run amok is leading to a lot of questionable practices, like this one in Minnesota:

The good: Minneapolis Public Schools want to decrease total suspensions for non-violent infractions of school rules.

The bad: The district has pledged to do this by implementing a special review system for cases where a black or Latino student is disciplined. Only minority students will enjoy this special privilege.

That seems purposefully unconstitutional—and is likely illegal, according to certain legal minds.

The new policy is the result of negotiations between MPS and the Department of Education's Office for Civil Rights. Minority students are disciplined at much higher rates than white students, and for two years the federal government has investigated whether that statistic was the result of institutional racism.

I understand the concern here, and I don't think it is unreasonable to demand that a public institution make this review process applicable to all suspensions, not just to those of black and Hispanic kids.

But good God, if I found out, say, that Hispanics were getting laid off at ten times the rate as Anglo workers in my company, I would definitely do something different in the process.  I would not immediately assume it was due to discrimination but I would sure as hell insert myself into the process to make sure things were fair.  I could easily see myself at least temporarily demanding in such a case that all terminations of people of color be reviewed with me first.  Hell, I wouldn't have waited for two years to do it either.   Even if the terminations turned out to be righteous, I would  hopefully learn something along the way about why the disparity exists and what I could do about it in the future.

By the way, in today's legal environment, any private employer who says they don't put extra scrutiny on terminations of folks in protected classes, or don't increase the warnings and documentation required internally before firing someone in a protected class, is probably a liar.

This is Why Running a Service Business is Hard

This Starbucks story illustrates the hardest part about running a service business

"Pregnant woman denied Starbucks bathroom useage"

Of course, Starbucks did not deny this woman access to the bathroom.  Had the board of directors, CEO, and most of the management been at the store, they would have happily helped the woman use the Starbucks bathroom.  This woman was actually denied access to the bathroom by some knucklehead employee of Starbucks, one of the tens of thousands they hire, who likely thought they were doing the right thing.

I am sure Starbucks has a policy that the bathrooms are for customers only, and honestly in a lot of urban areas that is an essential policy or else one finds themselves spending a lot of money cleaning the bathroom and providing the public facilities that the city or shopping center developer chose not to fund.

However, in a service business, one of the keys to providing good customer service and maintaining a good reputation is, ironically, having your employees know when the rules need to be bent.  This is the number 1 thing in every training session we have in our company -- when the rules have to be enforced (safety, fires, quiet time at night) and when to back off and not act like the campground nazi ruining everyone's visit.

I have thought about why this should be for quite a while.  If rules exist, shouldn't they be enforced for everyone?  And if not, shouldn't they just be eliminated?

First, there simply are exceptions.  This is the same reason that mandatory sentencing guidelines in criminal law and no tolerance rules in schools always run to grief.

Second, even if there are not exceptions, there are people who really, really, really, strongly, aggressively believe that they are indeed an exception.  Call this modern entitlement, but we get this all the time.  Dog owners are a great example.  Every single one of them understands perfectly why everyone else's dogs have to be on leash but no one believes their little darling is a problem.  Dogs are in fact the hardest issue we often have to manage.  Ask someone to put a dog on leash and we get vitriolic complaints sent to our government partners, newspapers, etc.  Let them run around and we get vitriolic complaints sent other visitors who are bothered by dogs sent to our government partners, newspapers, etc.

Finally, the marginal cost of serving one or two exceptions is really low, practically measurable, while the cost of allowing everyone to break the rule is high.  Take the case of bathrooms.  Letting one non-customer use the bathroom costs zero.  But once word gets out that you allow public use of your bathrooms, everyone in a half-mile radius is lined up at the door every day.

 

It May Be Hard to Go Back To Full-Time Work

Back in April of 2013 I wrote about how Obamacare was increasing incentives for offering part-time rather than full-time work.   I warned at the time that once employers got used to scheduling based on part-time shifts, they might never want to go back because it could actually be cheaper and easier than using full-time workers

The service industry generally does not operate 8 hours a day, 5 days a week, so its labor needs do not match traditional full-time shifts.  Those of us who run service companies already have to piece together multiple employees and shifts to cover our operating hours.  In this environment, there is no reason one can’t stitch together employees making 29 hours a week (that don’t have to be given expensive health care policies) nearly as easily as one can stitch together 40 hours a week employees.   In fact, it can be easier — a store that needs to cover 10AM to 9PM can cover with two 5.5 hour a day employees.   If they work 5 days a week, that is 27.5 hours a week, safely part-time.  Three people working such hours with staggered days off can cover the store’s hours for 7 days.

Based on the numbers above, a store might actually prefer to only have sub-30 hour shifts, but may have, until recently, provided full-time 40 hours work because good employees expect it and other employers were offering it.  In other words, they had to offer full-time work because competition in the labor market demanded it.  But if everyone in the service business stops offering full-time work, the competitive pressure to offer anything but part-time jobs will be gone.  The service business may never go back.

The future American service worker will likely be faced with stitching together multiple part-time shifts.  Companies may partner to coordinate shifts so that workers split time between the companies, and third-party clearing houses may emerge in a new value-added role of helping employers and employees stitch together part-time shifts.

Today Virginia Postrel sees this effect in action

The worst thing about being on jury duty isn’t actually serving on a jury. It’s having to check in every day -- possibly several times a day, depending on your local system -- to see whether you’ll be needed. You can’t plan either your work or your personal life. Your schedule is unpredictable and completely out of your control.

For many part-time workers in the post-crash economy, life has become like endless jury duty. Scheduling software now lets employers constantly optimize who’s working, better balancing labor costs and likely demand. The process demands enormous flexibilityfrom part-time workers, sometimes requiring them to be on call all the time without knowing when they’ll work or how much they’ll earn. That puts the kibosh on the age-old strategy of working two or more part-time jobs to make ends meet. As my colleague Megan McArdle writes, “No matter how hard you are willing to work, stringing together anything approaching a minimum income becomes impossible.”

Beware of Scam Calls From (816) 420-4632 or (866) 680-8628

I post this not because the odds are high any of you readers have had this issue but I want these numbers to be found on an internet search.

Both numbers were leaving a message saying they were from "Citi" or "Citicard" calling about my account (and that it was not a sales call).  Since I have no Citicorp credit cards or accounts of any type, and since they were calling a Google Voice number that I would never have put on an account (in fact don't even really use), I was totally suspicious.  When I called them they asked for my account number.  I said I did not have one but was calling to see what kind of scam they were running.  They said they were from Citicard and don't do scams, but could I give them my phone number.  I said I had to look it up, because they were calling a Google voice number I never use.  The moment I said that, they hung up on me, the universal indicator of a scamster giving up.

Update:  There is a legitimate Citi group with the same name.  It sounds to me that these folks at the numbers above are recording the legitimate Citi greeting replaying it on their lines.  But then their physical operator answers the phone completely differently than does the legitimate Citi operator.  The Citi group being spoofed is this one.

Hiring Conundrum -- The Obama Employees

For some reason I do not fully understand, the people who pester me the hardest for jobs tend to work out the worst as employees.  I cannot think of a reason this should be true, so perhaps this is just an artifact of having only a few data points.   But yet again we recently had another person we had to terminate who pursued me literally for years for a job, only to be unproductive and ineffective in the job from day one.  For some reason energy and enthusiasm in the job hunt do not translate to energy and enthusiasm in the job.

I have come to think of these as Obama employees -- people who are brilliant and energetic in seeking a job, but ineffective and oddly unmotivated once they have the job.

Postscript:  Last year, we had about 300 seasonal employees.  Of these, perhaps 50-75 will choose not to return or will not be asked to return the following year, opening up that many positions for new hires.  For these 50-75 spots, we had over 22,000 applications last year.  And since many of these applications are for a couple, we really had well over 30,000 applications.  This makes us more selective than Harvard, lol.

Wherein I Have Another Great Product Idea Too Late

We increasingly use VRBO to find rental houses when we go on vacation.  The key transfer process seems to be the most awkward.  Either the owner or their representative has to meet you (a hassle for them) or they have an old style mechanical lockbox where a fixed combination opens the box and gives you the key.

All of this strikes me as both a hassle and tremendously insecure.  Most folks do not change their lockbox combinations very often, so I could probably go back to most of them today and get back in the house.  Also, since the owners tend to leave only one key, and my wife and I prefer to have two or three for us and the kids, we tend to go immediately to the local hardware store to make copies.

It would make a lot more sense to have an electronic combination lock whose combination changes automatically, over the Internet, with each rental.  I figured developing such a thing would be pretty easy and the first step I would take would be to try to cut a co-branding deal with VRBO, AirBNB, etc.  You can imagine something like "VRBO Secure" where a home owner would buy the lock via VRBO and would then get a little icon on their listing.

Unfortunately, as is usual with my product brainstorms, someone is already there.  But no one yet seems to have cut a co-branding deal with VRBO or airBNB.  Seems like that would be a win-win for both the lock company and the rental agency.go.

Small Homage to Ayn Rand -- Exiting A California Business on September 2

Today I gave notice that I was exiting another park operations contract in California.  This location has always been marginal, but we kept holding out hope of improving it.  But with rising CA minimum wage, the PPACA, and onerous CA labor and liability laws, operating in CA is so hard that I have to make good money or get out.

I had to pick a termination date at the end of the summer.  I was going to choose Labor Day but looking at the calendar, it gave me a smile to slip the date to September 2, a date that should be familiar to anyone who is a real Atlas Shrugged geek.  It is an inside joke guaranteed not to be recognized by any of the government agency managers we work with there.

Two Business Realities I Underestimated in My Youth

1.  Its all about having the right people.  When I was in b-school, I honestly laughed at statements like this.  I thought it was new age bullsh*t.  I was totally enamored of quantitative analysis and business strategy.  After running a business for 10 years, I now know that people are everything.  Everything - our ability to grow, to handle difficult compliance issues, to work safely, to reduce costs - relies entirely on my finding the right people in the right spots.  Everything else is a rounding error.

2.  There is only a very limited number of things you can deploy to the field at any one time.  It took me a really long time to realize that my mind - in fact, any manager's mind - likely works way faster than the bandwidth that exists to actually deploy new things to the field.  Putting customer initiative X on hold because compliance issue Y needs to be deployed first is really frustrating, but trying to do too much means nothing gets done.

I would observe relative to #2 above that over the last few years the combination of the Feds + legislatures like in CA are generating new compliance issues faster than we can deploy solutions and train for them.   In California, we have put most all new customer initiatives on hold because we are simply overwhelmed with management and employee training relative to various local government mandates.

Yet Another Reason I am Short Facebook


via Maggies Farm

In addition, some smart people are saying the WhatsApp acquisition for a bazillion dollars makes sense, but I can't help feeling like it is the late 90's all over again.

update:  Apparently unlike most all other major online advertisers, Facebook terms and conditions do not allow 3rd party click audits.

Administrative Bloat

Benjamin Ginsberg is discussing administrative bloat in academia:

Carlson confirms this sad tale by reporting that increases in administrative staffing drove a 28 percent expansion of the higher education work force from 2000 to 2012.  This period, of course, includes several years of severe recession when colleges saw their revenues decline and many found themselves forced to make hard choices about spending.  The character of these choices is evident from the data reported by Carlson.  Colleges reined in spending on instruction and faculty salaries, hired more part-time adjunct faculty and fewer full-time professors and, yet, found the money to employ more and more administrators and staffers.

Administrative bloat is a problem in every organization.  It would be nice to think that organizations can stay right-sized at all times, but the reality is that they bloat in good times, and have to have layoffs to trim the fat in bad times.

The difference between high and low-performing organizations, though, is often where they make their cuts.  It appears from this example that academia is protecting its administration staff at the expense of its front-line value delivery staff (ie the faculty).  This is a hallmark of failing organizations, and we find a lot of this behavior in public agencies.  For example, several years ago when Arizona State Parks had to have  a big layoff, they barely touched their enormous headquarters staff and laid off mostly field customer service and maintenance staff. (At the time, Arizona State Parks and my company, both of whom run public parks, served about the same number of visitors.  ASP had over 100 HQ staff, I had 1.5).

This tendency to protect administrative staff over value-delivery staff is not unique to public institutions - General Motors did the same thing for years in the 70's and 80's.  But it is more prevalent in the public realm because of lack of competition.  In the private world, companies that engage in such behaviors are eventually swept away (except if you are GM and get bailed out at every turn).  Public agencies persist on and on and on and never go away, no matter how much they screw up.  When was the last time you ever heard of even the smallest public agency getting shut down?

I would love to see more on the psychology of this tendency to protect administrative over line staff.   My presumption has always been that 1) those in charge of the layoffs know the administrative staff personally, and so it is harder to lay them off and 2) Administrative staff tend to offload work from the executives, so they have more immediate value to the executives running the layoffs.

Business Model Ripped From the Pages of My Book BMOC

Apparently, a company named "Sumpto" has adopted a business model right out of my novel BMOC (written about 7 years ago).  This is a scene where entrepreneur Preston Marsh is interviewing and trying to recruit the protagonist Susan out of business school.  They are discussing the business model of his company called BMOC.  Half of its business model was that companies paid BMOC to place their products in the hands of influential high school students.

[Marsh:] The real innovation, though is… do you know what a product placement is?”

[Susan:] “Sure. It’s when a company pays to get their product into a TV show or movie – like when Reese’s pieces were used in the movie ET or I guess if you showed Seabiscuit eating Purina Horse Chow.”

“Exactly! And product placements are particularly effective. They act like an ad but they can’t be ignored like an ad. Anyway, we have taken product placements one step further: We get paid by major manufacturers to place their products not in movies but in the hands of the most popular kids in high school, the ones who really lead opinion as to what’s cool and not cool who we…”

“Who you happen to have on retainer anyway.”

“Exactly. But be careful how you think about ‘on retainer.’ The natural reaction is to assume this means money, but in our case it’s not. We keep the most popular people on retainer merely by …”

“Giving them free products,” Susan interrupted again, with growing excitement, “that manufacturers are already paying you to put in their hands.”

This is from Sumpto's web site.  (You will have to click through, for some reason even copying it as text is crashing my site, not sure why).

A big hat tip to reader Don, who not only found the site but paid me the indirect complement of having remembered my book.  Thanks!

Yet another case when I was 7-10 years too early (at Mercata were were about 10 years too early to cash in on social media as Groupon did with a similar model to ours).  But honestly, I was trying to make up quasi-outrageous business models.  For god sakes the other two major business ventures in the book were building fountains to harvest the coins thrown in them and selling musical tones for elevators.  I had no idea I should have been getting venture funding.

By the way, for the dozens of my literary fans, I am almost done with my next book, which is  really going to be good.   This novel writing thing really is about practice.  Teasers to follow...

Best Buy Says It's Not Afraid of "Showrooming". Really?

Best Buy says it is not afraid of showrooming, the practice of testing products at a physical retailer and then buying it online.  Best Buy says it is confident it can convert visitors into buyers, even if their intent was to buy online.

Well, that is a brave front.  And I wish them luck -- I certainly like having bricks and mortar retailers around when I need something fast and can't wait for the UPS truck.  But it probably was no accident that the article was illustrated with this picture:

MK-CH537_SHOWRO_G_20131103185606

 

What don't you see there?  CD's, DVD's, speakers, DVD players, computer games and most of the other stuff that used to make up a lot of Best Buy's floor space.  Because they have already been demolished by online retailers in those categories.   The picture above is of appliances, one of the few high dollar categories that has not migrated to the web.   Go to Best Buy and you will see appliances, health equipment, and TV's, all categories where bricks and mortar stores have some advantages over online.

This makes perfect sense, but don't tell me Best Buy is ready to take on the online retailers.  They are bobbing and weaving, ducking this competition wherever they can.

Postscript:  Best Buy is hoping that having "trained" sales people to help customers will garner business.  There are two problems with this.  One, the training of their sales staff has always been spotty, and likely will not get better as their financials go south.  And two, I find that Amazon.com reviews are far more helpful, and often more knowledgeable, than most in-store sales staff.   But on the positive side, who doesn't enjoy getting hassled for an extended warranty at checkout?

Liberal Douchebag vs. Liberal Douchebag: Google Employees Invade San Francisco

This is an article a reader described as being from the "screw them all" category, and I am inclined to agree.  There are many funny bits in the piece, but I particularly liked the San Francisco lefties arguing that these new Google millionaires should act more like the Rockefellers and the Vanderbilts.  LOL for sure.

Incredibly, no one asks the obvious question -- why is home supply in San Francisco treated as zero sum, such that a Google millionaire moving in by necessity kicks some  poor people out.  The reason is that no place in the country does more than San Francisco and the Bay Area to make it impossible to build new housing.  San Francisco has some unique geographic constraints but you don't hear people complaining about this in Houston (which is in fact a much larger city).  In fact, I am trying to imagine Houston complaining about too many rich people moving in.  I just can't seem to focus that image in my head.

Actually, the article does very briefly consider the supply side of the equation, but of course no one mentions government development and zoning restrictions -- its the fault of capitalist speculators!  My reader highlights this paragraph:

Though he doesn’t much care for the start-up douchebags, Redmond blames not individual tech workers for the current crisis, but property speculators and the lawmakers who have let them take advantage of their precious commodity: space. “If we had a major earthquake in San Francisco, the water mains all broke, and some guy showed up with a water truck and started selling water for $10 a gallon, people would be pissed,” he says. “That guy would be ridden out of town; he’d be attacked with sticks and pitchforks. But that’s what the real estate people are doing right now – and they’re getting away with it.”

Memo to speculators:  If I have lost all access to water and am dying of thirst, you are welcome to come to my house and sell water to me for $100 a gallon.  I promise no pitchforks at my house.

PS-  One thing I did not know is that tech companies seem to be running large private bus systems

The Google buses, which often stop in spaces supposedly reserved for public transport, are a particular point of contention. This growing fleet of unmarked luxury coaches carries some 14,000 people on their 35-mile trip from the city to Silicon Valley and back. Since the search giant introduced the buses a decade ago, Facebook, Apple, eBay and almost 40 other companies have followed suit. Each new route quickly becomes a corridor of hip clothing stores and restaurants.

This is an interesting exercise in privatization.  For riders, it certainly would be nice to have routes custom designed to match your needs (ie exactly from your origin to your destination without changing trains or busses), something that is often an issue with public transport networks.  Als0- and this is going to sound awful but it is from many public surveys and not my own point of view - these private bus networks get around the social mixing issue that turns a lot of middle class riders off on bus systems.

This is obviously expensive but I understand why some companies do it.  As someone wrote a while back, no one in their right mind would put Silicon Valley in California today if it were not already there.  It is absurdly expensive to do business in CA and it is expensive to live there as an employee.  However, tech companies have found that  a certain good called "access to San Francisco" is quite valuable to the types of young smart employees they want to hire and can overcome these negatives.  So the bus system is a way for companies to better provide this good.  The irony of the article is that as so many tech companies are selling this good (ie access to San Francisco) they may be changing the character of San Francisco in a way that makes the good less valuable over time.

Blackberry Handset Business Apparently Valued at Zero

I don't really have a horse in this race, but I found it interesting to look at the deal Blackberry has made to sell itself to a Canadian insurance company.  The part of the business we all know and used to love -- the famous Blackberry handset business -- apparently is worth zero.

In a WSJ article, they cite the following valuations:

  • Cash on hand:  $2.6 billion
  • Patent portfolio:  $1 billion +
  • Blackberry secure phone network:  $1 billion

Given that the price for the transaction is $4.7 billion, that implies the handset / smartphone business is worth zero.  Which comes as no surprise, given Blackberry's eroding position over the last 5 years or so.

The last item on the list above seems to cause a lot of debate.  I don't know enough to participate in that debate, but it appears to me that Blackberry's one last market bastion is the enterprise market where their enterprise servers and more proprietary network gave enterprises more control over their employees devices and how they used them.  Which made their decision in 2012 to apparently obsolete their installed base of enterprise servers with Blackberry 10 all the more bewildering.

I have wondered why Microsoft didn't try to use the enterprise market as a way to get into the tablet and handset market.  It would seem to play to its strengths and neither Android nor iOS are particularly enterprise-friendly.

Scam Alert -- US Telecom

We get literally (as they would say on the TV show Archer, literally literally and not figuratively literally) hundreds of paper bills to pay each month in our business.   We can barely keep up just with paying them all, much less vetting every one.  Which is what scam artist marketers count on when they craft fake bills they spam to businesses in hopes that some percentage, in their hustle and bustle, will pay the bills without knowing they are fraudulent.

These letters really, really tick me off.  They are sent by people who apparently cannot sell a product or service on its own merits and so must trick harried business people into accidentally sending them money.  I get these most frequently from companies that send me letters that look just like a government agency requiring yet another fee (the corporate minutes fraud).

So here is the most recent bill my accounts payable person questioned and put on my desk.   It is from a company called US Telecom, and despite the remission address on the letter it is apparently based in California.  You can click to enlarge the letter -- it is in very high resolution, which we will need to find the small print that they use to try to cover their butts.

Click to Enlarge US Telecom Scam Letter

 

Does this look like a regular bill to you for some service we have contracted for?  It did to me.  Note the "Due upon Receipt" at the top, the calculation below with previous balance and new balance and "pay this amount."  No reasonable person in this country would say it looks like anything but an invoice for service received.

But this is not a bill.  It is a solicitation for services.  If you send the money, then you are committed.  And by the way, per the terms below, once the agreement is in place, it cannot be terminated or amended (or likely refunded) without a signature from both parties, which means only if they approve it.  If they don't, congrats, you are stuck in this contract.  I have no idea if you actually paid, whether you would receive any services or not.  Since they priced this service without even knowing what assets I have that would be serviced (note no equipment or equipment location is listed in the bill, the first "tell" to me this was a fraud) I am not sure how they would ever provide any service.  (we were really saved by Quickbooks on this one, because my payables person flags any bill from a vendor not set up in our system).

They attempt to cover themselves, in the same way the corporate minutes scamsters do, with the small print in the last two lines at the bottom.   Can't read it?  LOL, I could not read it myself, even full size, without my glasses.  You can click through if you wish to see it on the high rez version.  But it says that it is not a bill, it is a solicitation, and that I am under no obligation to pay unless I accept the offer, which I do by paying.  But by the language, once paid, I have accepted the offer and cannot get out of it without a signature from an authorized officer of their company.  I bet that would be easy to get.

That last fine print may keep them out of jail or even let them sleep at night, but no legitimate business with a valuable product sells its services this way.

Update:  Apparently there is a legitimate US Telecom and they are understandably pissed.  They have set up a page on this billing fraud, and apparently the Attorneys General in a number of states are investigating.

Update #2:  Talk about waddling in late on a story!  These guys' registered corporate name is UST Development, run by a guy named David Bell.  Ken White of Popehat has been on these guys for years.  LOL, I even linked Ken's post a while back.  You sleazy folks out there can f*ck with me all you want but you do not want to mess with Ken White.

Update #3:  Good God, Ken did 14 posts on these guys.  Enjoy.

Mergers and Acquisitions for Entrepeneurs

The original purpose of this blog nine (eek!) years ago was to share lessons learned in my foray into entrepreneurship.   I still try to post some things on this topic, though we obviously have moved a bit away from this original concept.  But to this end, I wanted to link Walt Lipski's new small business M&A web site.  I think of Walt as a entrepreneur who happens now to do investment banking.   He was the one who helped me  ten years ago get into this business (the entire business acquisition and start-up process described here), and I still go to him from time to time for advice.  He is as straight forward and as trustworthy as anyone I have met in the M&A business.

Do Reporters Even Look At Their Own Charts?

A Wall Street Journal article today looks at problems at Sears in their critical appliance business.  I have no problem believing that Sears is in trouble, and at various times over the past decade (full disclosure here) have held small short positions in Sears.  The author argues that the Sears appliance business has had a number of missteps, and is contributing to Sears growing losses, propositions with which I cannot argue, in part because there is no data provided to confirm or deny the connection between problems in the appliance business and Sears' profitability woes.

The other theme of the article is that recent missteps in the appliance business, particularly the 2009 switch from Whirlpool to Samsung and LG to manufacture its in-house Kenmore brand, is hurting its market share in the retail appliance business, and leading the the growth in market share at Home Depot and Loews.   But the author's own data belie this conclusion.  Here is the market share chart she includes:

MK-CF765_SEARS_G_20130822175404

 

While Sears may have lost a couple of points of market share since 2008, and 2013 does not look like a particularly good year so far, the vast majority of its market share loss occurred from 2002-2008, long before most of the recent problems profiled in the article.  In fact, its more likely that the loss coincided with Sears reorganization with Kmart a decade ago, events referred to only briefly in the article.

Look, I have no insider knowledge here, just a pet peeve that trends referenced in an article should match trends in the data.  But Sears is a tired old retailer.  Many of its peers from the same era are dying or dead.  People are shifting their shopping away from the malls where Sears is located.  Lowes and Home Depot were both juggernauts during this period.  I would have said that a story could equally well have been written that despite all the confusion in their business, they have done a pretty descent job arresting the decline in their market share over the last five years.  Of course they are likely dead in the long run.

Postscript:  Oddly, I witnessed a similar Sears private label fracas when I worked for Emerson Electric over a decade ago.  For years and years, Emerson (not the folks who make the cheap radios and TVs) manufactured many of the Sears Craftsman hand tools and power tools.  Sears got tough one year, and negotiated a better deal of some sort with someone else, and an entire division of Emerson saw its sales basically going to zero.  So Emerson bought a bunch of orange paint and plastic, went to Home Depot, and cut a deal for a private label tool line at Home Depot (Emerson separately owns the Rigid tool company, so a lot of the items were branded Rigid).  Emerson ended up in potentially better shape (I did not stay long enough to see how it turned out), partnered with a growing rather than a declining franchise.