GM Tries Hiding Plane

The big three auto makers received scathing publicity when they used private jets to travel to Washington, D.C. so they could ask Congress for a public bailout of their companies, driven to the brink of fiscal death by inept management.

Representatives at the Nov. 19 House hearing, including Gary L. Ackerman, Democrat of New York, faulted Mr. Wagoner; Alan R. Mulally, the Ford Motor chief; and Robert L. Nardelli, the chief of Chrysler, for taking private jets to Washington to plead their case.

“Couldn’t you all have downgraded to first class?” Mr. Ackerman asked.

Critics of a federal aid package for G.M., Ford and Chrysler spotlighted the private jets as an example of why the companies did not deserve a bailout.

To keep such wasteful and arrogant activity from hitting the public spotlight happening again, General Motors for one decided to ... block the public's ability to track a plane it uses. Good lord, these people really will never learn, will they? Any bets on what they would do with bailout money? Do I hear waste it?

We Don't Solve Problems Because We Don't Look At Them

The Wall Street Journal in an article on an upcoming Senate probe into bond-rating firms had what I think is a telling quote:

Sen. Carl Levin (D., Mich.), who heads the investigations subcommittee, has called attention to financial derivatives known as credit-default swaps, which he calls "one of the prime culprits responsible for this financial disaster." Investigators are expected to look into how those derivatives were marketed and used by banks.

Consider that language carefully for a second: one of the "prime culprits" for the current financial debacle is the category of financial derivatives called credit default swaps.

When disaster hits and we as a people look for answers, we tend to point to the simplest and most obvious causes we can cite. These, however, are not causes. They are simply mechanisms that allow individual and collective weaknesses of greed and lying to act with increased effect. Derivatives of any type are nothing more than a legal fiction, a business arrangement between two parties that may or may not be based on quicksand. It is the behavior and willingness to ignore sense on the parts of the people involved that is the problem. You might as well say that cars cause automobile accidents, not their drivers.

I've lately been working on some articles about how executives pull their companies out of difficult economic times and otherwise manage risk. According to the experts I asked, the biggest problem companies have is when top managers refuse to see reality. They pretend that the worst cannot happen. They create one excuse after another for why the company must operate as it does. When bad things happen, they look for people to blame and don't think about the further unintended consequences of their actions. On BNET, I recently covered how high tech lay-offs were generally bad management. That was nothing more than a specific instance of a more general case. The problem is bloated staffing for the business that is here. But who is responsible for that level of hiring? The executives who then lay off the employees with no control over how the business runs. It is those top managers who are responsible - and who execute the innocent.

That's a practical example of finding someone else to blame, and of not noticing the problem as it developed. How long has GM had to see and fix its problems? Instead, management blames the high cost of employees, not the lack of understanding customers and providing what they would want. Until managers overcome the baser parts of their human nature, or at least struggle with them a bit, nothing will change, none of us will learn lessons, and the same behaviors that got us into trouble will shortly restart and then continue as though nothing happened. What a pity.

Microsoft Won't Take No For Answer

According to at least a story in the Financial Times, Microsoft has proposed to Yahoo something between a partnership and full buy-out. The subject of speculation is whether Microsoft is trying to buy Yahoo search.

Even though Google is huddling over what to do, as they find the combination threatening (and want to partner with Yahoo themselves), I don't see why. They might lose the revenue opportunity that advertising on Yahoo search might bring, and that would be a pain. But there is nothing that Microsoft would add to Yahoo search to make it particularly enticing. They can't integrate it into Windows because of their past anti-trust dealings, and if they had something compelling for users, you'd think it would have come out on MSN already.

Microsoft continues to push only because it doesn't know what else to do, and management there isn't willing to encourage real innovation because, well, it's not guaranteed to be a blockbuster. Here is where Microsoft could learn a whole lot from the old IBM. Not bloated bureaucracy - the Redmond company already has that in spades. No, it's the concept of a research lab that can hit on not just innovation, but out and out new concepts. They could even do it in software alone and fund it for what would be a song to them. The current state of affairs is management by fear. Perhaps the company could use someone at the top who is a little bolder. It will take some daring to move in some direction, because change is inherently threatening to the old order, and so far the company has communicated that it wants to stay exactly where it is.

The Follies of Portfolio Theory in Risk Management

As the price of gas starts to approach that of cheap wine, foreclosures hit a record, and companies find themselves unable to get the loans necessary to do business, I think again of portfolio theory in corporate risk management. I mentioned this a while back as a response to an article by Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable. But today I started doing some rough calculations. One of the problems with complex mathematical models is that they have to simplify to make things easy for most people to understand.

However, sometimes there are simple calculations that can show you the potential folly of your ways. Assume for a second that in the financial world, there are, at any given time, 20 things that could go horribly wrong and wreak havoc. Say that the chance of any one of them occuring is only half a percent. Pretty low odds, right? Yes, for each given event, there is only a 0.5 percent chance in a year that it could happen. But remember that there are 20 of them, and because they are independent, they have a multiplicative effect. But 0.5 percent chance of going wrong is the same as 99.5 percent chance of going right. But when you multiple 99.5 percent by itself 20 times, you end up with about 90.5 percent. We've just gone from the psychology of safety in only a half percent chance of disaster to a more sobering 9.5 percent chance. Take that over a decade, and you see numbers that would make you bet the financial world would implode to some degree.

You can quibble with the percentages, or the number of disaster factors, even though I'd say I'm being pretty reasonable. So change some of the percentages, or the number of disaster scenarios. You're still left with the fact that, over time, the world will periodically drive itself into a brick wall at high speed.

I remember interviewing ChevronTexaco CEO David O'Reilly a few years ago. At one point I asked about geopolitical factors, as those are a problem in the oil business. He said that over time, there's always some war or political unrest that affects their business. The company just assumes there will be one at any given time and figure out how to live with it. If more companies should take that attitude, the world might be in far more secure shape.

Marsh & McLennan To Replace CEO

Insurance broker Marsh & McLennan has decided to boot its CEO, Michael Cherkasky, according to the Wall Street Journal:

Chairman Stephen Hardis said the insurance broker's 2007 results have "fallen far short of our expectations. The board has taken this performance into account, and listened to concerns raised by some of the company's largest shareholders in recent quarters, in making this change."

But, in a stunningly insane move, the board is keeping Cherkasky on until a successor is found. Am I purely stupid, or is this one of the more foolish things a board could have done? When an employee is being fired, rarely does the company keep the employee on, at least in a functional role, until the replacement is in. The action creates enormous resentment in the employee (who may be tempted to cause havoc), it's disheartening to the rest of the company, and potential replacements have to be thinking not just twice, but three times whether it makes sense to join a company that would do something so screwy. When the position is that of the CEO, this rises to a potential fiasco.

According to the same short report I received by email, Cherkasky first came on in 2004 when then-NY state attorney general Elliot Spitzer sued the company:

alleging the company steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.

Was the board irritated that the new CEO couldn't get the same results as conniving could? Or did it figure that major credit upheavals weren't interesting enough, and so it would keep as an interim CEO the person it thought should be sent packing for poor performance?

US Versus European Managers

The Financial Times has a story today about a report from executive search firm Heidrick & Struggles:

Chief executives of large US companies have far less international experience than their UK counterparts, a sign of corporate America’s struggle to balance the lure of globalisation with the needs of its large domestic market, new research will reveal on Tuesday.

According to the study, only a third of US CEOs at Fortune 100 companies have lived or worked abroad for at least a year, compared to 67 percent of chief executives at the FTSE 100.

I find it interesting that with such an emphasis on globalization, so few US firms have international experience in their CEOs. Some in the US, including Intel's chairman, Craig Barrett, say that visiting markets can be enough. Excuse me, but that seems like arguing that someone experienced in a service business can understand a manufacturing corporation by visiting some factories. Granted, companies often find it useful to recruit people with backgrounds in industries different from that of the company, but it then takes a pretty long time to get up to speed, and that is with having all the information and in-house experts at hand.

There have been so many glaring errors that US companies have displayed when doing business overseas that you'd have to wonder why anyone would think that visits would be enough. That doesn't let you understand the dynamics of other cultures, business atmospheres, or political systems. No, you won't gain experience in all the places that you'd ideally want as CEO, but at least you'd have had your nose rubbed in the typically problems that will occur when doing cross-cultural business, and you'd hopefully have learned some of the principles that help you navigate the waters.

In the past I've interviewed Steen Kante, the former US head of IKEA during its heady growth years in the 1990s. "There were probably no land mines we could step on that we didn’t step on," he said. They made mistakes in a host of ways - not realizing that American cars, larger than European counterparts, didn't have to get a chair in a box, and that they didn't want to deal with the assembly. European beds were smaller and wouldn’t fit into existing American frames, so consumers here assumed that IKEA wanted to force the sales of new mattresses and box springs. "You’ve got to understand how the consumer thinks and adjust to them," Kanter said. "It took IKEA years. But when we finally got it, we got it." That was with someone living in the US.

Yet, if you asked American executives whether European counterparts could come in and start effectively operating in the US, I suspect they'd laugh. You have to know the market, the culture, the economic structure, the government ... all the same things you need to know when operating overseas. To be fair, the article, and study, I guess, suggests that Americans are concerned that they will be overlooked if out of sight for a significant period of time. The American market is also so large that it does take significant attention. But over time, I wonder if companies will come to see the need for overseas experience - and will that put US managerial jobs in jeopardy of "outsourcing," after a fashion.

Something that did surprise me was that American companies did far better than European counterparts in succession planning, with 86 percent of the Fortune 100 CEOs being promoted from within. There wasn't a number available for the percentage at the FTSE 100.

Good Story on Women in Senior Management and Performance

The Financial Times has an interesting piece on a new McKinsey study suggesting, at least in Europe, a correlation between having a high proportion of women in leadership roles and superior financial performance.

The report, launched at the Women’s Forum for the Economy & Society in Deauville, France, finds these companies do better than their sector in terms of return on equity, operating result and share price growth. The management consulting firm also reports that companies around the world where a third or more of the senior team are women score higher, on average, than those with no women on nine criteria of “organisational excellence”. These criteria include accountability, innovation and work environment.

Apparently, there has been research in the U.S. showing comparable results among the Fortune 500. McKinsey points out that this is an issue of correlation and not causality - there is no proof that senior women cause the improved performance. It could be that the presence of female senior managers helps change the corporate culture in ways that make higher performance more likely, or it could be that a culture that brings in a significant number of women happens to be the type of corporation that does better. I'd provide a link, but this is a subscription-only source.

GM and Faltering Leadership

On NPR last night, I was listening to the latest report on the negotiations between GM and the UAW. On the surface, leadership of the two organizations were claiming success, but it was interesting to hear the interviews with UAW members. One said that over and over managers had asked them how to make things work more efficiently in the plants and what they needed to do better - and management never took any of the suggestions. Another member was so very angry at having to give in to the degree they did as upper management continued to be paid millions, even as the company continued to falter. And although it's common to try and lay the blame for GM's problems at the feet of the union members, I don't buy it for a second. Yes, there may be some problems, but labor prices are only that high per car when a company loses as much market share as GM has over the years for not delivering what customers really wanted.

If you've ever had people working for you - or ever had a family or been involved in a volunteer organization - it's hard to ask people to sacrifice. The only way to gain the moral authority to do so is to to make sacrifices yourself. I think GM management has totally blown the chance of being leaders. You can't keep asking for concessions while protecting your own interests. Why not drop all management bonuses until the company can sufficiently turn around? Why don't the CEO and CFO take pay cuts? If you're already worth millions because of compensation in previous years, you don't have as much pressure. (And here's an interesting look Forbes took at Wagoner's compensation in 2005.) If Wagoner at least had done taken a cut, he would have gained enormous credibility among the very people who have to make work any plan he creates. Instead, GM, as has happened in so many other companies and industries, decided to stick with business as usual - as for concessions from employees and not match it to recognize that everyone is in the same boat. And so, I wouldn't expect anything other than business as usual in all other aspects.

RFID Implants and Cancer

In a rush to prove their concepts and make money, companies often overlook information that is bound to return and blacken their eyes. The Associated Press reported this weekend that animal studies from the 1990s raised questions of whether RFID chips, implanted under the skin, could cause cancer:

"The transponders were the cause of the tumors," said Keith Johnson, a retired toxicologic pathologist, explaining in a phone interview the findings of a 1996 study he led at the Dow Chemical Co. in Midland, Mich.

Leading cancer specialists reviewed the research for The Associated Press and, while cautioning that animal test results do not necessarily apply to humans, said the findings troubled them. Some said they would not allow family members to receive implants, and all urged further research before the glass-encased transponders are widely implanted in people.

Share prices in VeriChip, which is in the business of creating microchips for identifying people, fell more than 11 percent yesterday, according to a New York Times article. What is amazing, to me, is the following section:

VeriChip said that it had not been aware of the studies cited in the report, according to the article, but both the company and federal regulators said yesterday that animal data had been considered in the review of the application to implant the chips in humans. They said that there were no controlled scientific studies linking the chips to cancer in dogs or cats and that lab rodents were more prone than humans or other animals to developing tumors from all types of injections.

Let's set aside, for the moment, the question of whether the RFID chips are actually dangerous or not. (I'd think that a cell phone would generate similar radio signals at significantly higher power levels.) Either VeriChip is lying about not having seen these studies, or it was grossly incompetent in not researching thoroughly enough to find them and consider how they might affect the company's strategy. In either case, this is a major business screw-up at the highest levels, and the ones paying for it are currently the investors.

Even if management decides to can a few people for not having turned up the information, did it commission an external review to find every potentially problematic study? If not, why not? If it did, will the company make that report public? The only way out of such problems is to come clean, and quickly. It will be interesting to see how VeriChip's management handles this. So far, it hasn't looked promising.

US Outsources to India, Which Outsources to US

This is just too peculiar for words. According to a story in Fortune, an Indian outsourcing company has set up a call center in Ohio

The phenomenon has a name: "insourcing," the term experts are starting to use when foreign multinationals open offices on U.S. soil and hire Americans, at a higher price, to do the very jobs they once lured overseas. In this case the center in Reno is targeted toward companies willing to pay a premium - its workers there cost up to 40 percent more than their counterparts in India - to give their U.S. customers a more culturally fluent, less frustrating 1-800 experience. (No more hearing someone read from a script ten time zones away.)

So, let me get this straight. A US company's management trumpets to shareholders how it has a Bright Idea: outsource because, well, hey, everyone is doing it so it must save money, right? And then you can keep your core competencies and outsource the unimportant ones, like maintaining good relationships with your customers.

The US firm contracts with an Indian firm that immediately gets beaten up over the difficulty Americans have in understanding non-native speakers reading off scripts and maybe providing technical support for things they don't really know, like the US company's products. Now the outsourcing firm has a Bright Idea - pay more to Americans to do the same work (it's apparently called insourcing). They trumpet this to the Americans as a benefit (even though they'll obviously charge more for the service) and American management goes to shareholders with the latest Bight Idea. The final irony would be if it were the same group of Americans who got laid off to outsource the jobs in the first place. (Did Joseph Heller write modern management textbooks?)

So, we've got the base costs of American employees (because their time is controlled, so you're talking fully loaded with benefits as well) that then get the mark-up of the Indian firm's infrastructure costs and then profit percentage, then add the management costs in the US of making sure everything happens ... and you're telling me that this is actually cheaper than hiring people in the States? Given that the true savings overall of outsourcing a function, if done intelligently, is about 20%, and that the big expense here is the staffing, and I'm wondering if the US comapny isn't now paying more to outsource than it would to have staff. Oh, wait, I forgot a cost - the bonus to management for coming up with this hare-brained scheme in the first place.

Managers See Top Take-Home Pay in Surprising Places

Where do you think managers make the best money? The US? Germany? The UK? According to the Hay Group, a management consulting firm, if you take into account cost of living and taxes and look at the what the effective buying power is, Saudi Arabia and the United Arab Emirates top the list. There are seven European countries in the top 20 and the US at spot 24. According to the press release with the information:

“Companies are operating in an increasingly open and competitive global economy, and emerging markets are offering managers higher disposable incomes than established countries –which is making these locations an attractive prospect for management talent,” said Iain Fitzpatrick, Director Reward Information Services for Hay Group North America.

The company used its own proprietary data to make the comparisons. Here's the table of results:

Hay Group's Management Buying Power

Rank	Country	Disposable Income
1	Saudi Arabia	229,325
2	UAE	223,939
3	Hong Kong	203,947
4	Russia	157,348
5	Turkey	154,762
6	Mexico	152,283
7	Ukraine	149,118
8	Thailand	147,547
9	Singapore	142,655
10	Argentina	138,188
11	Poland	128,537
12	Spain	128,197
13	Switzerland	127,732
14	China	126,281
15	Greece	126,102
16	Malaysia	126,026
17	Brazil	123,766
18	Lithuania	122,941
19	Germany	122,427
20	Ireland	117,010
21	Portugal	116,678
22	Romania	115,280
23	Austria	112,906
24	United States	104,905
25	Netherlands	103,823
26	Australia	103,578
27	Japan	102,604
28	Italy	101,487
29	South Africa	100,257
30	New Zealand	100,136
31	France	98,117
32	South Korea	97,867
33	Latvia	97,409
34	Czech Republic	97,352
35	Egypt	97,001
36	India	92,750
37	Hungary	91,358
38	Belgium	89,632
39	Slovakia	86,632
40	United Kingdom	86,367
41	Denmark	82,697
42	Canada	81,613
43	Estonia	80,908
44	Norway	77,202
45	Sweden	75,581
46	Finland	74,038
47	Indonesia	71,839

Study Suggests Key Ways for IT to Drive Competitive Advantage

Last month the results of a study done by the Hackett Group, a strategic advisory firm, suggested that IT really can be a strategic tool to companies and isn't just a commodity. Based on benchmark data from over 2,100 companies, those that led in IT operations spent more 7% more per end user than the average company. For the average Fortune 500, that would mean an additional $29 million a year.

However, the investment seems to pay off with lower average operational costs of $134 million a year, with IT playing a critical role in attaining the gains, so the total savings is significant. There are five key strategies that the best in class companies use:

• Streamline the number of ERP and other applications and standardize data so you don't spend too much time and money trying to get everything integrated.


• Do risk/reward analysis to find the areas where the greatest gains exist. Be ready to implement process reengineering at the same time if you don't want to simply pave over the cow path.


• Maximize value at the lowest achievable cost rather than simply cut costs across the board. If you just spend less, you might also end up sending less in the areas that can provide real return.


• Make data available in a coherent way to those who aren't computer experts. Let management have access to information that they can use to direct better performance.


• Outsource only to improve effectiveness, not to increase efficiency. In other words, outsource IT systems and functions to increase how well you do something, not how inexpensively you do it.

According to Hackett, these principles can keep executives from seeing IT as nothing but a cost that needs to be trimmed without regard for wht it can provide. If you're interested in more details of teh study and don't mind putting yoruself on a mailing list, use this link.

Cisco Tries New Business Model

The Financial Times has an article (which seems to be publicly available, at least today) about Cisco's efforts at a more entrepreneurial approach to develop new business units, rather than just acquiring them. Some of the important lessons are:

• The company wanted to "create a sustainable long-term growth model."


• Use proven managers to make success more likely.


• Use a "free agent" employee model, where after a certain number of years at the same job, an employee could look for another opportunity within the company. That reduces fighting when someone is transferred between divisions.


• Make use of the enterpreneurs who joined the company through acquisitions because "[t]hey don't stop being entrepreneurs."


• Offer incentives like pay bumps when a venture is successful.


• Create an atmosphere where failure is acceptable, because new ventures are inherently risky, and you don't get breakthroughs by playing it safe.


• Innovate in business models, not just technology.

If you're in a large company, this article should be a must-read. One reason acquisitions generally do so poorly is that one corporation essentially pays a premium for a revenue stream - like giving someone a ten dollar bill for a five - and then has the additional costs of trying to make everything work together. When you innovate from the inside, the costs are far smaller, you get the full benefit of real success, and it's easier to make the fit work.

One thing that does seem to be missing is dealing with moderate success. Tigns that lose money you can drop and reassign the people involved. But what if a new venture is reasonably successful, yet not so profitable as to make managing it finacially worth the time of the parent corporation? They could sell the group to someone else, but lose access to the personnel who were involved. So, create a separate holding company that manages smaller ventures. That way there is still return on the investment, you don't need the involvement of the main management team other than looking at the holding company as it would an investment in a third party, and you can still bring someone necessary back and, should one of the small ventures suddenly hit on something big, the parent corporation can reap the benefit.

Some Consumer Information Database Companies Allegedly Help Con Artists

The New York Times article about database company compilers of consumer information actively helping con artists was incredibly shocking. Great reporting and angle. Here's one example:

InfoUSA advertised lists of "Elderly Opportunity Seekers," 3.3 million older people "looking for ways to make money," and "Suffering Seniors," 4.7 million people with cancer or Alzheimer’s disease. "Oldies but Goodies" contained 500,000 gamblers over 55 years old, for 8.5 cents apiece. One list said: "These people are gullible. They want to believe that their luck can change."

According to the story, Wachovia Bank and database company InfoUSA (one of the major compilers, as I remember from my direct marketing days) kept "working with criminals even after executives were warned that they were aiding continuing crimes, according to government investigators."

I've got an idea. The executives can completely empty their pockets and reimburse the victims. I do hope some zealous prosecutor or class action attorney decides that this seems to be a case of collusion, where the companies and their executives directly profited from illegal activities. RICO, anybody?

When Cleaning House Isn't Reform

The New York Times article about executives being fired for outrageous behavior may seem like the beginning of a new responsibility in corporations, but I don't think that it is. If it were, you'd see more executives sent packing when their bahavior came to light internally. But these are always high-profile scandals - that is to say, the corporations are always in reaction to public rebuke. Individuals are, of course, to blame for their own actions, but what sort of business culture permits or even, at times, encourages such behavior? Boards of directors should be setting the tone, instilling values, and insisting on them, even if no one else is looking.

Cocaine Energy Drink Un-Shelved

Redux Beverages, makers of the energy drink Cocaine, is withdrawing the product from the market, at least until it can devise a new name and packaging, according to the New York Times. This is the sort of business story that makes you wonder what in the hell these people were thinking. Ah, yes, here's what they were thinking according to Clegg Ivey, a partner in the venture:

“Of course, we intended for Cocaine energy drink to be a legal alternative the same way that celibacy is an alternative to premarital sex,” Mr. Ivey said. “It’s not the same thing and no one thinks it is. Our product doesn’t have any cocaine in it. No one thinks that it does.”

“We like to think we have a great sense of humor,” he said. “And our market, primarily folks from ages 20 to 30, they love the ideas, they love the name, they love the whole campaign. These are not drug users.”

Sure they love the campaign. They probably also enjoy the red and white design of the can with the quasi-printed looking logo running vertically, a clear take-off on Coca-Cola. But, again, what in the hell were they thinking? Of course a business wants to make money, but people do have responsibilities beyond financial gain. Generating to the backslide of the collective mentality does no one any good in the long run. We've seen this recently in talk radio with Imus getting booted for racist remarks. There's plenty of criticism of the more destructive and misogynistic practicioners of hiphop and rap. We have so-called teen television channels pouring forth an alarming amount of sex, drugs, and other uncontrolled behavior, all to garner ratings and higher advertising prices. There should be some thiings that people are ashamed to do for money, and such activities are at the top of the list. By trading on sex or drugs, for example, they are simply legal forms of prostitution and drug dealing, except not as straightforward and honest.

Blackberry Outages and R.I.M. Points the Finger

R.I.M. has finally blamed insufficiently tested software on the Blackberry outage that cause such executive outrage. You'd think that the managers would have been happy to have a short period in which they didn't have to jump through hoops. But the story may be a bit more complex. I heard an albeit second-hand explanation/rumor that R.I.M was warned the that software wasn't ready to go live, but that no one listened.

How Do You Judge CEO Pay as Fair or Not?

Reuters has a story today about NASDAQ's CEO Robert Greifield getting $18.4 million for 2006. Stock value fell, and yet the exchange's profits more than doubled. And recently I had an executive compensation consultant make the same point about Robert Nardelli, who was forced out as CEO of Home Depot. As people bemoaned the level of his compensation, this consultant said that Home Depot's actual financial performance improved - and others have pointed out as much. So how do you value a company? Is it the stock price? I can remember one company in the semiconductor business that steadily increased their profits quarter after quarter with little interest from investors because it was in an "unexciting" segment of the industry. But what else can happen? So long as investors expect to see the big pay-off from increased stock prices regardless of what the business fundamentals do, there will continue to be a split between how CEOs are paid and how companies perform, because too often the firms will do well from one point of view and badly from another.