Archive for the ‘General Business’ Category.

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.

Customer Service Fail

I called Bank of America to stop payment on a check -- for some reason this seems to be one function that cannot be performed online.  I got right through to their business banking number.  However, they told me my account actually qualified for their special preferred, presumably premium, customer service number.  So they transferred me.  And I am still on hold, having waited now for over 10 minutes.  I have no idea why they couldn't solve my simple problem at the regular number without a transfer and long hold.

Making Money in a Declining Business

One of the lessons we learned at business school is that there can still be money to be made in a declining business.  Today's case in point:  AOL.  The butt of much Internet-related humor, did you know that AOL still has 3.9 million US subscribers?  To give a sense of scale, that makes its subscriber base about as large as Charter Communications, a not insignificant 6th place player in the cable TV market.  Its income statements are a total mess, cluttered with enough special charges and unusual income items to scare me off from touching the stock, but it looks like it is still making about $50 million a quarter on about $500 million in sales.  Not what it once was, but not an awful business either.

A company like this run for cash flow could do well for quite a while for shareholders.  Of course, companies like that are seldom run for cash flow -- that is not how corporate management incentives work.  Corporate managers are going to want to take the cash flow from the declining business and try to build some new kind of empire on the corpse of the old one.  Shareholders can reasonably ask why they are not just dividended the cash to make their own reinvestment, but insiders benefit much more if the cash is reinvested within the company.  And sure enough, AOL seems to be buying a ton of small companies.

A Note on 501(c)4 Corporations

This whole notion that  501(c)4 groups are receiving some kind of huge implicit tax subsidy whose use needs to be policed is simply absurd.  I am a board member of several 501(c)6 trade associations, which have roughly the same taxation rules as 501(c)4.

The largest tax subsidy, by far, available to some non-profits is the deductibility of donations to the group.  This is available to 501(c)3 groups (traditional charitable organizations) but NOT to  501(c)4 or  501(c)6 groups.  Whether the Tea Party of Cincinnati is a  501(c)4 or not, you cannot deduct your donations to them.

The one tax break that  501(c)4 corporations get is that they do not pay taxes on any surplus they accumulate in a year.  In general, non profit groups like this collect donations and spend them.  So in general, their outlays match their revenues, such that they tend to show very little income anyway, even if it were taxable.  The only thing the non-profit status brings to  501(c)4 organizations is that they don't have to spend a lot of time and effort trying to make sure, at the end of the fiscal year, that expenditures and revenues exactly match.  Basically, the one benefit granted is that these groups can collect money in November for expenditure in January without paying taxes on this money.  This is hardly much of a subsidy, just a common sense provision.  (By the way, at least in a  501(c)6, there is no break from the paperwork.  We will have to pay an accountant to file a tax return for the Feds and the state of California.

This actually comes up from time to time in my industry.  A couple of my competitors are actually non-profits.  My for profit competitors always complain that these non-profits have an advantage, arguing that they are really for-profit, but just paying their "owners" large salaries rather than dividends.  My general answer is, so what?  My company is a subchapter S corporation, and it does not pay taxes either -- I pay taxes on the profits as regular income in my personal tax return, exactly as if I had paid out all the profits as salary.  Sure, it would be nice to accumulate profits in the company tax free, but seeing the shoe-string way my non-profits competitors run, I don't think that is what they are doing.  It used to be that as non-profits, they considered themselves immune to certain laws, like the Fair Labor Standards Act and minimum wage, but the courts have disabused them of that notion.  So it is hard to see what advantage they enjoy, but folks love to complain none-the-less.

The only real business advantage I have ever found these non-profits have is in perception among leftish politicians -- they are considered "clean" while as a for-profit company I am considered "dirty".  Which is why in California, early laws allowing outside companies to operate public parks allowed non-profits but not for-profits, and almost every state who goes this route tries non-profits first for the same reason.  This no longer bothers me -- anyone who had ever been part of a non-profit can probably guess the reason.  They really are not set up to operate a 24/7/265 service business, and within a year typically fall short, and I, with a bit of patience, then get my chance.

Spam Masquerading as Official, Important Mail: Paramount Merchant Funding

It's been a while since I have received a fake "check" whose cashing obligates me to a four year contract, or a deceptive yellow pages solicitation, or even my favorite, the board minutes services that masquerade as an official government form.  So I will highlight Paramount Merchant Funding for this over the top message on the front of their envelope they sent me, again in an apparent bid to masquerade as some sort of official mail that must be opened.

paramount-merchant-funding

The scam here is clever -- I don't have time to bother looking it up, but my guess is that this message is literally true - for all mail sent through the USPS.  But it is obviously meant to virtually force someone to open it thinking it is official, which I was dumb enough to do.

They seem to have a perfect 1-star review record over at Yelp, a fact I could have called in advance sight unseen.  They have more BBB complaints in the last year (5) than my company has in our whole history (0).

NPR on the Obamacare-Driven Shift to Part-Time Work

I don't have time to excerpt but, as I predicted, the media is finally catching up to the enormous shift (mainly in the retail and service sector) to part-time work.    I had a long article on this at Forbes last week.

Never Miss A Good Opportunity to Shut Up

It strikes me that a service business model that relies on frequently suing your customers is not really sustainable.

My folks out in the field operating campground face far greater problems with customers than any of these petty complaints that Suburban Express is taking to court.  My folks have drunks in their face almost every weekend screaming obscenities at them.  We have people do crazy things to avoid paying small entry fees.  We get mostly positive reviews online but from time to time we inevitably get a negative review with which we disagree (e.g. from the aforementioned drunk who was ticked off we made him stop driving).

And you know how many of these folks we have taken to court in 10 years?  Zero.  Because unless your customer is reneging on some contractual obligation that amounts to a measurable percentage of your net worth, you don't take them to court.

Yes, it is satisfying from an ego perspective to contemplate taking action against some of them.  There are always "bad customers" who don't act in civilized and honorable ways.   But I  tell my folks that 1)  You are never going to teach a bad customer a lesson, because by definition these same folks totally lack self-awareness or else they would not have reached the age of fifty and still been such assholes.  And 2) you are just risking escalating the situation into something we don't want.  As did Suburban Express in the linked article.

The first thing one has to do in the customer service business is check one's ego at the door.  I have front-line employees that simply refuse to defuse things with customers (such as apologize for the customer's bad experience even if we were not reasonably the cause).  They will tell me that they refuse to apologize, that it was a "bad customer".   This is all ego.  I tell them, "you know what happens if you don't apologize and calm the customer down?  The customer calls me and I apologize, and probably give him a free night of camping to boot."  In the future, if this dispute goes public, no one is going to know how much of a jerk that customer was at the time.  Just as no one knows about these students in the Suburban Express example - some may have been  (likely were) drunken assholes.  But now the company looks like a dick for not just moving on.

This is all not to say I am perfect.  It is freaking amazingly easy to forget my own rule about checking one's ego at the door.  I sometimes forget it when dealing with some of the public agencies with which I am under contract.  One of the things you learn early about government agencies is that long-time government employees have never been inculcated with a respect for contract we might have in the private world.  If internal budget or rules changes make adhering to our contract terms difficult, they will sometimes ignore or unilaterally change the terms of our written contract.

And then I will get really pissed off.  Sometimes, I have to -- the changes are substantial and costly enough to matter.  But a lot of the time it is just ego.  The changes are small and de minimis from our financial point of view but I get all worked up, writing strings of eloquent and argumentative emails and letters, to show those guys at the agency just how wrong they are.  And you know what?  Just like I tell my folks, the guys on the other end are not going to change.  They are not bad people, but they have grown up all their lives in government work and have been taught to believe that contract language is secondary to complying with their internal bureaucratic rules.  They are never going to change.  All I am doing is ticking them off with my letters that are trying to count intellectual coup on them.

To this end, I think I am going to tape these two lines from Ken White's post on the wall in front of my desk

  • First, never miss a good opportunity to shut up.
  • Second, take some time to get a grip. You will not encounter a situation where waiting 48 hours to open your mouth will destroy your brand.

Anachronism

Apparently, Google is building a huge a showy hub for its corporate aircraft.  Does this strike anyone else as an anachronism, from the folks who bring us Gmail and Google groups?  It's like the Fedex having a Pony Express account.

By the way, if anyone read the fabulous book "Barbarians and the Gate," they** will remember RJR Nabisco's construction of a corporate aircraft palace in Atlanta marked the beginning of the end of that company's fiscal extravagance.

 

** I know this is grammatically incorrect, but I am exhausted with English's lack of a third person singular gender-neutral pronoun and hate saying "he or she."  English is a language built bottom up from actual usage, so lacking any better idea, I support "they" as the solution.

KFC and China

Apparently YUM Brands stock is falling because investors are worried about KFC's prospects in China.  I am not a YUM supporter particularly, nor am I a patron of KFC, but from some exposure to China I can say that KFC in China is like Taco Bell in the movie Demolition Man.  They own the market.

Unlike All Those Passive People, I Am Waiting to Be Handed My Big Break

This is an amazing and self-refuting cry for help by Kate MacKay (via Maggies Farm)

By and large, my friends and my friends’ friends are all intelligent, educated, gregarious, and creative. They’re insightful and thoughtful. They’re critical and ambitious. So why do so many employers put them in positions that don’t take full advantage of what they’ve got to offer?...

But this is really bad talent management on the part of our employers. If you have ambitious, smart young people who actually want to do more work and use their talents to the maximum – so that they can grow as people and employees – then you’re an idiot as an employer to not take advantage of this....

The places that we work for are chock-a-block with people who are contented in their positions; they’re sitting low in their saddles, riding out the last miles toward the sunset of retirement. They’re not interested in changing horses any more, the way we are, and so those saddles that we want to have remain full, often by people who have lost more than just their ambitions for new jobs. They’ve lost the drive to get things done quickly, they’ve lost creativity, and they’ve especially lost the outsider’s perspective on the job they do and the company they work for. They’re entrenched in the corporate culture of the place, and nothing kills innovation or ambition faster than people dedicated to the status quo....

This is where I am, and many of my friends are in this position too, just hoping and waiting for either the next better job outside, or some radical shift inside. I’ve thought seriously about changing my LinkedIn profile blurb to something like, “My career goal is to gain a position that energizes, excites, challenges, and values me, so that I can continue to develop my skills and talents, and grow as a person.” I wonder if that would catch anyone’s eye?...

OK, stay with me, I am saving the good part for last, but it is important to get this background.  This person is seriously confused.  Companies do not exist to give one jobs that match one's skills.  In fact, they do not exist to provide jobs at all.  They exist to serve customers and thereby generate surpluses for the owners.  They hire people to do specific jobs that are part of a process to serve these customers and owners.

I am sympathetic to the notion that there is lost value in my employees, that they can do things that might be useful to me that I do not tap.  But I have 500 employees.  I have time to customize like maybe two of those jobs to the talents of individuals, and these are high level jobs where the benefit of that time commitment on my part is worth it.  For the rest of the employees, I have to be satisfied I am missing some value, because at best I don't have the time or resources to customize jobs to every employee's unique snowflakeness.  And at worst, such customization would mess up our customer service process.  At some level, I don't want every front line employee inventing his or her own imagined customer contact or cash management process.

But I promised you the best is yet to come. and here it is:

All of them wonder when their break is going to come, when the thing they’re doing will finally spill over from ‘just making it work’ to ‘making it.’ And I wonder that too, because this risk-taking group of determined individuals should be rewarded by the universe, I think, for their innovation and dedication. The other group, sitting undervalued at their desks, should be likewise rewarded for their abilities and ambitions.

My overall sense is that we’re all in the same place, sitting together in a kind of employment purgatory, waiting for something to happen. We keep working – we’re not sitting idle. We apply for jobs, we network, push for promotions or projects, advertise ourselves, and keep our eyes on the horizon. We are striving, ever striving, for the thing that we want that we know we can do. Economists be damned, we’re all just waiting for our big break, and we won’t be satisfied with a comfy saddle riding toward the sunset.

Did you get that?  This risk-taking and proactive group is determined to sit on their ass and wait for someone in the universe to appreciate them, for some organization to create a perfect job that gives each employee snowflake his or her perfect work experience.

Jeez, I have had a series of sucky jobs over time.  So as advice to those that think a proactive job search encompasses seriously considering a new Linked-in profile blurb, I did two things:

  • I changed jobs, and eventually went to work for myself.
  • I stopped defining my total-life fulfillment by what I do for a paycheck, and took on other tasks outside of work (blogging, writing, building) that brought me satisfaction but for which people have been as-yet unwilling to pay me.

Best Buy: We Focus on Items People Don't Buy from Walmart or Amazon

Well, that is not exactly what they said, but this confirms some earlier casual observations of their stores I have written lately:

Shoppers typically associate Best Buy with TVs and computers, but the retailer plans to dedicate more floor space to appliances in the coming months as the housing market continues to improve.

Here is my translation:  Half of our floor space has gone digital (DVD, CD, games) and the other half has items where Amazon and Walmart are killing us.  But we are locked into long-term leases we can't break for a bunch of freaking large stores so we need to put something out there.  So we will try appliances.  Next up, mattresses?

Problems at UPS

I continue to have shipments lost - badly lost - recently at UPS.  After 10 years of not a single foul-up, UPS has now lost or mis-routed five important shipments of mine in just 3 months.  In several of these cases, shipments that were supposed to be overnight did not get delivered for 4 or 5 days.  More worrisome, the packages seemed to sit (according to the tracking) in random locations until I called and forced something to happen -- there did not seem to be any sort of automatic intervention to save or reroute them.  In the most disturbing case, a woman in Arizona called our office to tell us that our Florida payroll had just been delivered by UPS to her house.

This is particularly worrisome because most of our shipments are date critical - payroll that has to be somewhere on a particular date or bids that must be delivered by a certain time or be voided.  Recently we have taken to paying extra and shipping everything one day faster than we need to give UPS room to screw up - ie overnight when we actually have two days to the due date.  But even so, UPS has fouled two shipments up so badly they were late even with an extra day to spare.

My statistics memory is rusty, but my guess is that my very few samples of a very large system don't necessarily indicate a process problem to any significance.  Still, we are worried.  The problem is I don't know who to switch to -- we left Fedex when they screwed up two of our first three shipments.

On Purchasing in Bulk

My son ordered a book from my Amazon account (the Way of Baseball by Shawn Green) and accidentally had it sent to my house rather than to his dorm.  Looking at my shipping costs on UPS to get it up to him, it was cheaper to buy a new copy for him and have Amazon ship it for free with my Prime membership than it was for me to ship the other copy to him.  I would love to see what Amazon pays UPS.  This is a $24 list price hardback book that Amazon sells for $9.60 and then packages and ships for free.

Statements I Believe Unequivocally

"Everybody with half a brain is coming to California"

-- Governor Jerry Brown

Portents of Doom at Local Barnes & Noble Store

I visited B&N the other day -- tellingly not to buy anything but as a way to kill time while my daughter was shopping.    What I saw gave me a serious case of deja vu -- where the book store used to be all, you know, books, there were now large sections dedicated to toys and games and collectibles and other such stuff.

This totally reminded me of the last days at CompUSA, when floor space originally all dedicated to computers and software was being used for DVD players and appliances and all kinds of odd stuff.  I see the same thing now at Best Buy, with workout equipment and other oddball products.  I told my son on a visit a year ago to Best Buy to expect to see the a larger appliance selection next time we visit.  He asked why, and I said "because Wal-Mart does not generally sell them, and not a lot of people buy their large appliances at Amazon."  Sure enough, you see more appliances nowadays.

I don't think that converting your over-sized book store into an under-sized department store is going to work.  It is hard to shift a retail chain's positioning, though it is possible (anyone remember when the Gap was just a Levis store?)  But things like leases and locations are really sticky, making it hard to change fast if your new concept needs more or less space or different locations.

A Really Bad Deal

In Obamacare, it was mandated that health insurance companies spend 85% of premiums on care (vs. marketing, profits, and overhead) or else they owe their customers a refund.  So if the same standard was applied to unions, how much of their dues would they have to refund?

For example, according to the most recent federal filings, the Michigan Education Association — the state’s largest labor union — received $122 million and spent $134 million in 2012. They averaged about $800 from each of their 152,000 members.

According to union documents, "representational activities" (money spent on bargaining contracts for members) made up only 11 percent of total spending for the union. Meanwhile, spending on “general overhead” (union administration and employee benefits) comprised of 61 percent of the total spending.

The union appears to have spent nearly the entirety, or $119 million of their $122 million in dues, just supporting their leadership  (and various politicians) in grand style.  They actually had to borrow $12 million to do their job of representing their members.

By Obama's standard of good management (core activity costs = 85% of total customer dues paid) then the union should have taken only $17.4 million from their members, and owe them a $104.6 million refund.

People Constantly Amaze Me

My company has an email list folks can join to get emails if we have jobs available.  We have about 15,000 people on the list and get hundreds of applications whenever there is a new job, even though we probably have fewer than 20 openings a year.   I got this email today from someone I suppose must have added his name to the list:

Do you know that since I signed up with youI have not recieved ONE e-mail from you about jobs ???  Are you holding out jobs for friends ? Do you just get people to sign up then forget them for fun ??  Or is it that you have no job leads ???
Why did I waste my time signing up with you ????????????

Certainly this man's willingness to turn the smallest frustration into an enormous imagined slight with hints of conspiracy is EXACTLY what we are looking for in our customer service staff.

Corporate DNA

Almost exactly seven years ago (amazing how long I have been blogging) I wrote an extended piece about how hard it is to change corporate DNA.  I was writing about GM but also used Wal-Mart as an example.  Part of this piece read:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

Megan McArdle makes some very similar points as I about Wal-Mart and how hard it is to change corporate DNA.  I recommend you read the whole thing.

The Biggest Economic Story of 2013...

Sorry, but it is not the fiscal cliff.   It is the complete shift in the US labor model, at least in the service sector, due to Obamacare.

Here is what I am doing for the rest of the year -- working with every manager in my company so that as of January 1, 2013, none of our employees are working more than 28 hours a week.   I think most readers know the reason -- we have got to get our company under 50 full time employees or else I am facing a bill from Obamacare in 2014 that will be several times larger than my annual profit.  I love my workers.  They make me a success.  But most of my competitors are small businesses that are exempt from the Obamacare hammer.  To compete, I must make sure my company is exempt as well.  This means that our 400+ full time employees will have to be less than 50 in 2013, so that when the Feds look at me at the start of 2014, I am exempt.  We will have more employees working fewer hours, with more training costs, but the Obamacare bill looks like about $800,000 a year for us, at least, and I am pretty sure the cost of more training will be less than that.

This will be unpopular but tolerable to most of my employees.  The vast majority of them are retired and our company is merely an excuse to stay busy, work outdoors, and get a little extra money.

But this is going to be an ENORMOUS change in the rest of the service sector.  I have talked to a lot of owners of restaurants and restaurant chains, and the 40-hour work week is a thing of the past in that business.  One of my employees said that in Hawaii, it was all the hotel employees could talk about.   Many chains are working on mutli-team systems where two teams of people working part-time replace the former group of full-time employees.  2013 is going to see a lot of people (who are not paid very well to begin with) getting their hours and pay cut by 25%.  At the same time that they are required, likely for the first time since many are relatively young, to purchase health insurance.

It will be interesting to see what solutions emerge.  My bet is that it will become standard for people in the service sector to work two different jobs for 20-25 hours each with two different companies.  This will be a pain for them, but allow them to keep their income up.  The hard part may be coordinating shifts between companies.  For example, a company that divides their shifts into mon-tue-wed vs. thu-fri-sat cannot share employees with one who divides their shifts between morning and afternoon.  If given time, I would guess that just as the mon-fri workweek emerged as a standard, companies may adopt standard ways of dividing up the work weeks for part-timers, making it easier for schedules to mesh.

Twinkies Going Galt

Via Fox News

Hostess Brands — the maker of iconic brands such as Wonder Bread and Twinkies — is shutting down and firing 18,500 workers after one of its unions refused to end a strike even after being warned it would kill the company.

The privately-held company had reached a deal with the Teamsters, but a smaller union representing bakery workers refused to agree to concessions, prompting the mass layoffs and closing down of hundreds of plants, bakeries and delivery routes. That prompted harsh words from both the company and from Teamsters officials.

"We deeply regret the necessity of today's decision, but we do not have the financial resources to weather an extended nationwide strike," Chief Executive Gregory Rayburn said in a statement. "Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders."

I suppose Michelle Obama and Michael Bloomberg are celebrating

Something I Was Reminded of Today

The world's most unproductive task is attempting to enforce self-awareness on someone else.  Keeping this one truism in mind, while shelving one's ego, seems the best approach to solving conflicts in my business, whether it be with partners, employees, or customers.

Bid Rigging for Municipal Asset Management

Rolling Stone Magazine has an good story on the conviction of a number of banks and brokers on charges of bid-rigging, specifically on contracts for short-to-medium term management of municipal bond cash accounts.  Apparently brokers were paid by certain banks to be given a look at all the other bids before they made their final bid.  The article focuses mainly on the ability of winning bidders not to bid any higher than necessary, though I would suppose there were also times when, given this peek, the winning bidder actually raised its bid higher than it might have to ace out other bidders.

This is classic government contracting fraud and it's great to see this being rooted out.  I am not wildly confident it is going to go away, but any prosecutorial attention is welcome.

But I am left with a few questions:

  • It seems that government contracting is more susceptible to this kind of manipulation.  Similar stories have existed for years in state highway contracting, and the municipal bond world has had accusations of kick-backs for years.  Is this a correct perception, or is the rate of fraud between public and private contracting the same but we just notice more with the government because the numbers are larger, the press coverage is greater, and the prosecutorial resources are more robust?
  • If government contracting of this sort is more susceptible to fraud, why, and how do we fix it?

The latter is not an academic question for me.  I run a company that privately operates public recreation areas.  I bid on and manage government contracts.  Frequently, a major argument used against the expansion of such privatization initiatives is that past government outsourcing and contracting efforts have been characterized by fraud and mismanagement.  The argument boils down to "the government has so many management problems that it can't be trusted with contracting for certain services so it needs to operate those services itself."

The only way to reconcile this view is to assume that private actors are more likely to act fraudulently and be dishonest than public employees.  If this were true, then the public would be safer if a public management process of questionable ability were applied towards public employees rather than outside private contractors, because those who were being managed would be less likely to take advantage.  And certainly there are plenty of folks with deep skepticism of private enterprise that believe this.

However, I would offer that only by adopting an asymmetric view of what constitutes fraud would we get to this conclusion.  Clearly, banks colluding to shave a few basis points off municipal asset returns is fraud.     As the author of the Rolling Stone piece puts it several times, the crime here is that the public did not get the best market rate.  So why is, say, elected officials colluding with public employees unions to artificially raise wages, benefits, and staffing levels above market rates not fraud as well?  In both cases insiders are manipulating the government's procurement and political processes to pay more than the market rates for certain services.

This is Bastiat's "seen and unseen" of the privatization debate.   Yes, the world is unfortunately littered with examples of government procurement fraud.  This is often cited as a reason for maintaining the status quo of continued government management of a diverse range of services.  But what we miss, what is unseen, is that these government services are often run with staffing levels, work rules, productivity expectations, and pay rates that would constitute a scandal if uncovered in a division of a corporation, particularly if the workers were spending a lot of money to make sure the manager handing them this largess was able to keep his job.

Yes, the public lost several basis points on its investments when it did not get the market rate of return from cheating bankers.  But it loses as much as 50% of every tax dollar sent to many state agencies because it does not get market rates (and practices) for state labor.