Showing posts with label Management. Show all posts
Showing posts with label Management. Show all posts

Tuesday, November 01, 2011

Corzine's MF Global Declares Bankruptcy

Last Thursday's post concerning Jon Corzine's bungling at MF Global evidently drew plenty of traffic yesterday, despite my being unable to post due to power outages.

Imagine my horror though, reading this weekend, pre-Chapter 11 filing, of- you guessed it- J. Christopher Flowers' potential bid for the firm's wreckage.

Did I not predict this one? I did, in this passage from that post,

"The only thing that could top this week's MF Global news is to learn that, as rumors swirl regarding the firm now being an acquisition target, we learn that Chris Flowers' private equity shop is involved in such an acquisition. I don't know what portion of MF's equity is owned by Flowers, but it's just possible that half the value of the rest of the firm, which would now not be paid to own 100% of the firm, might well be more than the losses Flowers has just taken on his share of MF Global.



That would be just too much, wouldn't it, if it occurred? Watching a private equity guy install a partner in a firm on the board of which one of his representatives sits as CEO of the company. Then seeing said CEO dramatically and quickly lop off half the value of the publicly-held firm. Followed by the private equity guy opportunistically buying the now-tainted firm for half of what it would have cost him last year."


What's curious is how silent all the cable news media are about this. Neither CNBC nor Bloomberg, nor even the Journal, bothered to note Flowers' original intrusion into MF Global's board to force Corzine's selection as CEO. Nor do any of them now note how Flowers must have been on board with Corzine's strategy.

Regarding that strategy, I heard it lampooned on CNBC last night as having basically gone all in on a specific European debt play. It's hard to believe Corzine would be so stupid, or Flowers would consent.

Funny, though, isn't it? All that silence on the original Corzine-Flowers connection? Even now they don't remind us that Corzine is a partner in Flowers' group.

Or is it more of being muzzled to power, because nobody with a network with hours of programming to fill wants to cross a private equity mogul like Chris Flowers?

Perhaps the Chapter 11 filing will take Flowers out of contention for swallowing the whole of MF Global on the cheap. We can only hope so.

Thursday, October 27, 2011

More Upward Failure- MF Global's Jon Corzine

Yesterday morning's Wall Street Journal featured an article in the Money & Investing section detailing MF Global's troubles stemming from newly-hired CEO Jon Corzine's drive to turn the firm into a replica of the old Goldman Sachs which he once ran.

Two days ago, on Bloomberg television, Corzine was described as stumbling at MF Global, and having lost his last gig as governor of New Jersey. That was before he led MF Global to a 48% drop in its market value after announcing the firm's quarterly loss earlier this week, as well as an out sized risk exposure to European securities for a paltry $12MM of related earnings.

But Corzine's been on an upward failure trajectory for much longer than that.

A one-time bond group head, Corzine was co-head of Goldman Sachs with the less-remembered Stephen Friedman. The latter has recently attained prominence for his alleged conflict of interests during the financial crisis of 2008, when he was chairman of the board of the New York Fed.

As I began writing this post, I remembered that I wrote about Corzine's arrival at MF Global early this year, and his connection with private equity mogul J. Christopher Flowers. In that post, I described the Wall Street Journal's sarcastic asides regarding Corzine's being run out of his job as co-head at Goldman Sachs.

His next post, which he bought, was the job of US Senator from New Jersey. For a Democrat, a veritable walk-in. But Corzine showed poor judgement, leaving the Senate just before the Democrats regained the majority which would have put the former fox in regulatory control of the financial hen house.

Perhaps Corzine had presidential ambitions, because he won election as New Jersey governor after leaving his Senate seat. But, as the Bloomberg anchor noted, Corzine only lasted one term before his poor performance caught up with him by way of Chris Christie.

Now, one imagines at the behest of Chris Flowers, Corzine's attempt to morph MF Global into a miniature version of the Goldman Sachs he and his backing partner once knew, has managed to chop half the market value from the firm.

If you are unlucky enough to be an MF shareholder, perhaps you are now wondering just how a private equity guy has managed to take control of your firm, then ruin it, within a calendar year.

The only thing that could top this week's MF Global news is to learn that, as rumors swirl regarding the firm now being an acquistion target, we learn that Chris Flowers' private equity shop is involved in such an acquisition. I don't know what portion of MF's equity is owned by Flowers, but it's just possible that half the value of the rest of the firm, which would now not be paid to own 100% of the firm, might well be more than the losses Flowers has just taken on his share of MF Global.

That would be just too much, wouldn't it, if it occurred? Watching a private equity guy install a partner in a firm on the board of which one of his representatives sits as CEO of the company. Then seeing said CEO dramatically and quickly lop off half the value of the publicly-held firm. Followed by the private equity guy opportunistically buying the now-tainted firm for half of what it would have cost him last year.

Perhaps people should be wary when a failed CEO of a financial firm is installed in the same job in their firm.

Upward failure- it seems more widespread than many people realize.

Friday, October 14, 2011

Great by Accident?- More Flawed Research by Jim Collins

Several years ago, after seeing multiple references to it, I bought a used copy of Jim Collins' Good To Great, published originally in 2001. I wrote this brief review in 2005 and, judging by the lack of subsequent pieces on the topic, didn't really find more of interest in the book to bother critiquing. Some of my key observations were captured in these passages from that post,

"Much of my work for the last decade has involved measuring the performance of publicly-held U.S. corporations. There is really only one body of work of which I am aware that sounds remotely similar to mine.

What I found upon reading Collins’ methodology was an odd mixture of quantitative and qualitative bases of analyses. There are a variety of problems with his methods, which I will address.....here ......."

I must admit, I was rather shocked that such slipshod and simplistic quantitative definitions of “good” and “great” performances would exist in a book so seemingly well-regarded in the business community. Perhaps it is yet another case of the broad class of mediocre managers and leaders being unable to distinguish “great” work when they see it.

Between his use of market value, rather than total return, and a simple point-to-point measurement, Collins' metrics in his original book left a lot to be desired. As did his mixing in of qualitative measures which tend to be so judgemental as to be nearly useless for interpretation or application in other contexts.

Unless, of course, you were using the book as a marketing tool for your consulting efforts. Which Collins does.

Thus, I was interested to read in this past Tuesday's edition of the Wall Street Journal a review, by longtime Journal executive Alan Murray, of Collins' recently-published book, Great by Choice. The review's title was Turbulent Times, Steady Success, which I found a bit of a reach, for reasons I'll explain later in this post. The highlight, or subheadline for the review read How certain companies achieved shareholder returns at least 10 times greater than their industry.

To start with, Collins uses cumulative returns over long periods of time to judge a company as “good” and/or “great.”

However, my own research on large U.S. publicly-held companies reveals that among companies which outperform the S&P 500 average total return over a period of years, firms which consistently outperform the S&P index, on average, create shareholder wealth at a much higher rate than companies which earn most of their total returns with a few years of outstanding performance.

Just reading those few lines told me a few things about problems with Collins' latest work. In fact, Murray's review contains enough information for me to find significant problems with Collins' latest work without having to actually waste time reading the whole thing.

First, I'm suspicious of published work of this type because no sane, intelligent person in the business world has published complete information on any market-beating strategies for decades. Whether a business school professor, consultant or equity portfolio manager, it doesn't pay to tell all. You always save something so that your published work can't be totally replicated or reverse-engineered, and prospective customers have to engage your services professionally to really benefit from your research findings.

One thing I discovered in my own proprietary research on US corporate performance over many years is that there is a limited timeframe within which most companies can demonstrate superior performance. And it's not a sufficient length of time to typically exhibit "steady success" during "turbulent times."

But, let me get to Murray's review. He begins with this telling paragraph,

 'Great by Choice" is a sequel to Jim Collins's best-selling "Good to Great" (2001), which identified seven characteristics that enabled companies to become truly great over an extended period of time. Never mind that one of the 11 featured companies is now bankrupt (Circuit City) and another is in government receivership (Fannie Mae). Mr. Collins has a knack for analysis that business readers find compelling."

Murray may have written that with his tongue in his cheek, but it lays bare a serious weakness with that type of approach. One I mentioned in an email to Murray after reading his review. I likened Collins' work to that of long-ago consulting guru Tom Peters, of "In Search of Excellence" fame. As I explained to Murray in my note,

"But the other aspect of his work which I noticed, having the benefit now of being aware of two of his works, is how much it reminds me of the Tom Peters' old type of 'great companies' books. Being, like me, of that certain age, I'm sure you recall the book which launched Peters out of McKinsey. Sadly, only a few years later, his great companies were no longer so.

I'd expect Collins' companies are likely to experience similar fates, because both authors use fixed timeframes of specific companies to construct their measures of greatness, rather than observe statistically-valid large samples that include many different time periods.

Peters wrote before the era of cheap desktop computing and inexpensive, exhaustive corporate data. But Collins hasn't. Yet his work still smacks of that 'hit parade' style of spotlighting a few companies for specific time periods, then extrapolating their idiosyncracies into strategic wisdom, rather than the other way around."

Suffice to say, starting with Peters, and now continued by Collins, this type of misleadingly shallow analysis provides business execs with easily-consumable 'best practices' candy, without actually being rigorous or deep in its methodology.

Murray describes the book's objective next,

"Mr. Collins's new book tackles the question of how to steer a company to lasting success in an environment characterized by change, uncertainty and even chaos."

Unfortunately, the objective is a chimera. I'm not going to divulge my own proprietary findings, because, among other uses, they help drive my own equity portfolio management process. Let me just assure readers that 'lasting success' is a good deal shorter time period than you'd ever believe. If more boards knew this, they'd be radically restructuring CEO compensation over time.

But, to provide a little more insight, all truly exceptionally-performing companies fall victim, within a definable number of years, to one or more of three forces: adjusted investor expectations; competition, and/or; regulatory scrutiny and action. Between the three, no company succeeds for too long. Here's a brief list of the once-great, now-fallen: Home Depot, Microsoft, Dell, Compaq, and Wal-Mart.

Murray then provides the reader with some information on the data which drove Collins' latest book,

"The data set that Messrs. Collins and Hansen examine so carefully ends in 2002, well ahead of the change, uncertainty and chaos of the 2008 financial meltdown. The intervening years were spent conducting their research. Still, the lessons of "Great by Choice" are not meant to apply to a particular moment of economic turbulence but to a continuous condition—a business world "full of rapid change and dramatic disruption."

For their study, the authors chose a set of major companies that achieved spectacular results over 15 or more years while operating in unstable environments; Messrs. Collins and Hansen call them "10Xers" for providing shareholder returns at least 10 times greater than their industry. Then the authors compared those companies—Amgen, Biomet, Intel, Microsoft, Progressive Insurance, Southwest Airlines, Stryker—to similar, but less successful, "control" companies: Genentech, Kirschner, AMD, Apple, Safeco, PSA and United States Surgical. It is an indication of the volatile nature of today's business success that, using 2002 numbers, Microsoft came out as a "10Xer" while Apple was its less successful "control" company, a ranking now reversed. More on that below."

Right away, I find serious flaws with Collins' approach.

First, no company posts "spectacular results" for 15 years. Yes, perhaps "over" 15 years, i.e., from point to point, over 15 years, there were some spectacular periods. But consistency has a value beyond a mere endpoint to endpoint total return value.

I've seen this sort of simplistic apparent performance phenomenon many times. Consider the nearby price chart for Dell, Microsoft, Apple, Home Depot and Google. Taken over the right timeframe, early years of stratospheric performance can offset a full decade of subsequent flatlining, as Microsoft's curve demonstrates.

Further, Collins' industry-specific metric renders his whole enterprise useless- except for, well, someone who wants to consult with his results to rather mediocre senior managers who read his book.

Here's why.

Investors can choose from among all public companies in which to invest. Even among private companies, in some cases. So to be truly exceptional, a manager should perform at a level among the best of, say, a broad equity market average. Not just his own industry.

By the way, just what defines an industry, anyway? Some companies don't have directly-comparable industry competitors. Others do, but only a very few. Consider auto makers. Do you count three- Ford, GM and Chrysler? Or two, when Chrysler was privately-held? Do you count Mercedes, Toyota, Honda, BMW, et.al., although their parents and sizable operations are located outside the US?

And who believes Microsoft's badly-performing look-alike was ever Apple? Historically, Apple's integrated software and hardware competed with the Wintel combine of Intel and early PC makers IBM, Compaq or Gateway. Microsoft's Bill Gates was actually a guest at one of Steve Jobs' early Apple product debuts, as an example of a collaborative software publisher who appreciated having two platforms for which to create their products. Apple didn't do application software- just its proprietary operating system.

But that would make Collins' simplistic approach nearly impossible to use. So, instead, he opted for a comparison that has no credibility.

Having a point-to-point 15 year total return that is "10X" that of the average of three other firms in a poorly-performing sector like autos is hardly laudable. But if you plan to consult to Ford or GM, well, you could probably hoodwink those CEOs into at least listening to your sales pitch.

It's amazing how often people form impressions, a priori, on what constitutes a high-growth company. I've had some companies in my equity portfolios which few people would have thought would qualify if they knew the criteria for inclusion. Trust me, growth companies aren't just in technology sectors of the US economy.

Murray then provides his meatier treatment of the newly-published book,


"Messrs. Collins and Hansen draw some interesting and counterintuitive conclusions from their research. First, the successful leaders were not the most "visionary" or the biggest risk-takers; instead, they tended to be more empirical and disciplined, relying on evidence over gut instinct and preferring consistent gains to blow-out winners. The successful companies were not more innovative than the control companies; indeed, they were in some cases less innovative. Rather, they managed to "scale innovation"—introducing changes gradually, then moving quickly to capitalize on those that showed promise. The successful companies weren't necessarily the most likely to adopt internal changes as a response to a changing environment. "The 10X companies changed less in reaction to their changing world than the comparison cases," the authors conclude.


The book's organizing metaphor is built around the story of Roald Amundsen and Robert Falcon Scott, the two men who set out separately, in October 1911, to become the first explorers to reach the South Pole. Amundsen won the race by setting ambitious goals for each day's progress but also by being careful not to overshoot on good days or undershoot on bad ones, a disciplined approach shared by the 10Xers, according to Messrs. Collins and Hansen. Scott, by contrast, overreached on the good days and fell apart on the bad, mirroring the control companies in "Great by Choice."


If "Great by Choice" shares the qualities that made "Good to Great" so popular, it also shares some that drew criticism. The authors' conclusions sometimes feel like the claims of a well-written horoscope—so broadly stated that they are hard to disprove. Their 10X leaders are both "disciplined" and "creative," "prudent" and "bold"; they go fast when they must but slow when they can; they are consistent but open to change. This encompassing approach allows the authors to fit pretty much any leader who achieves 10X performance into their analysis. Would it ever be possible, one wonders, to find a leader whose success contradicted their thesis?"

Not content to critique the book generally, Murray fortunately, and shrewdly, provides an accidental example to which he referred earlier in his review,


"Which brings us back to Apple. Messrs. Collins and Hansen had no way of knowing, when they began sifting through their data in 2002, that Apple would become one of the most stunning turnaround stories in business history, soaring past Microsoft in market value. The late Steve Jobs accomplished that turnaround with a run of boldness, innovation, visionary thinking and egotism that might seem counter to the studied conclusions of "Great by Choice" as well as those of "Good to Great," in which Mr. Collins found that one of the leading attributes of the best business leaders was "humility." Steve Jobs?"

All of which satisfies me that Collins hasn't changed his approach much at all. He's still mixing hard-to-define qualitative assessments with quantitative ones. And applying them with, as Murray notes, considerably less than the precision one would wish.

Mr. Murray is not in the business of offending either an author who may advertise his book in the Journal, nor his readers. So he isn't about to land hard punches in his review by concluding that Collins' work is so vague and flawed as to be practically meaningless.

But I don't share Murray's constraints.

As I noted earlier, Collins' recent effort is perfect if what you hope to do is sell a book, for profits, that becomes a resident sales tool in many C-suites. And it even has an impressively-titled co-author from an equally-impressive university. But that doesn't make it valid or profound.

On that note, here's anecdote I learned years ago when I worked for Accenture's predecessor, Andersen Consulting. I had been chatting with Bob Gach, then a partner in the financial service group whose clients included Morgan Stanley and a few other investment banks. Since then, Bob has risen to become a very senior global partner in Accenture's financial services practice.

Back then, Bob was fretting because of the difficulty he was having closing a consulting contract with a Morgan Stanley executive.

As we discussed the firm's, and executive's behavior, Bob enunciated a principle which I've found to be pretty much universally true ever since. To paraphrase his remarks,

'This guy at Morgan Stanley really frustrates me. He's smart enough to force me to keep giving him enough examples of our work in his area, and to sign small pieces of work, that he keeps me from selling him the larger, more profitable interpretative and application modules.

When you think about it, the worst consulting customers are executives who are either really smart or really stupid. The smart ones know how to cherry pick a consultant's work and do the high value-added application of results to the rest of his businesses or operations.

The stupid ones are so thick they don't even understand why they need the consultant.

A consultant's best prospects are in the middle. Smart enough to know they need help. Dumb enough not to be able to get ahead of you in the thought process and rein in the scope of the project.'

Collins' work strikes me as designed to hit that middle group. It's too simplistic and flawed to sell to really intelligent business leaders. And the really slow ones will just never realize where to start to fix their problems.

But I can imagine quite a few middling companies with average executives jumping on Collins' rather shallow analyses as the answer to their prayers for some path out of mediocre performance.

And the beauty of Collins' approach, as Murray so deftly illustrates, is that there's always some other qualitative variable to blame when a CEO pays Collins for a lengthy engagement, follows his advice, and his business still doesn't outperform his peers.

I actually thought through all these issues when I was actively marketing the consulting application of my proprietary research on corporate performance. I even sold an engagement to the current chairman of the NYSE when he ran State Street Bank. Suffice to say, my consulting approach, as well as the research methods underpinning it, remains proprietary. But I will divulge that it is all quantitative, with no qualitative wiggle room.

Wednesday, August 03, 2011

McGraw-Hill's Slide Into a Possible Break-Up From Outside

I read with interest the recent headlines that two investment funds have bought comparatively large stakes in McGraw-Hill with the aim of forcing it to break the firm up. It couldn't happen to a nicer plutocratic empire.

I've written several prior posts concerning the firm here. I recalled that I wrote this piece, noting the brief inclusion of the firm in my equity portfolio, but not that it was almost five years ago.

The intervening years have not been good to or at the firm. Thanks to Terry McGraw trying to pump growth at S&P's ratings unit on the cheap, the firm's fortunes soured in the immediate aftermath of the late-2008 equity markets collapse.

Since then, it's about paced the S&P, but that leaves it with a -20% return over the five year period, while the index has finished flat.

With its largely unrelated ratings, educational and other publishing unit, and equity data subscription business, the firm has been an unwieldy conglomerate for decades. Much like GE, it has long since lost any reason for its integrated nature.

Except, of course, the ability to employ various McGraw family members and fuel their increased wealth.

My own experiences with S&P's equity data unit have exposed that business as poorly run. Customer support from the technical people is superb, but the sales and administration are abysmal, with those employees rarely knowing what's going on with customer accounts.

A few years ago, I mentioned a particularly vexing problem to a senior executive who is also a McGraw family member. There was never a reply, indicating, evidently, a sort of supreme disconnect between the family member employees and the real operations of the firm.

It doesn't surprise me that some outsiders have detected an opportunity to buy the firm's shares now, at what they believe to be a lower value than that of the pieces of the firm, once separated. Nor does it surprise me that Terry McGraw issued a typical corporate-speak response.

But, again, like GE, non-performance is a tough sell. GE has finally begun to unravel, with the entertainment properties that Jack Welch mistakenly acquired having been sold to Comcast.

For McGraw-Hill, it's not a stretch to see the publishing pieces sold to larger competitors, or just split off, while the ratings and financial data units also go their separate ways. Leaving, I suppose, the McGraws to count their money as they gather in either the compound up in Connecticut or their place in the Adirondacks.

Like many companies long-identified with a family still involved in the firm, McGraw-Hill looks like it may be at that point where saner, smarter heads prevail and relieve the family members from making more management mistakes.

Thursday, May 26, 2011

Private Equity & Dunkin' Donuts' Impending IPO

Several months ago I wrote this post describing some awful customer experiences I suffered at a few Dunkin' Donuts franchise locations. The events involved a bungled new product introduction which DD's corporate unit, currently a private equity property, had poorly executed.


Some weeks later, I was informed of this post/comment on a franchise-oriented blog. A bit later, I was directed to this post on the same blog, in which the role of private equity firms, such as Bain, in franchiser buyouts such as Dunkin' Donuts, was discussed. An additional example of private equity behavior in buyouts of restaurant businesses was forwarded to me, as well, in the form of the filing of a suit involving a private equity firm and one of its acquisitions.


I"m not focusing on the detailed dynamics of franchising in this post, nor the particular details described (far better) in that second linked post from the franchising blog.

But what does seem reasonable to assume in the matter of private equity deals is that the private equity group(s) take fees and special dividends out of the acquisitions, further leveraging them up beyond what leverage they already had.

It doesn't take a genius to consider what this sort of cash siphoning by the private equity firm can do to the long term viability of the acquisition, once it has been prepared for an IPO.

Which brings me to Dunkin' Donuts.

In recent weeks, business media have begun to anticipate the return of DD, the franchiser, to public capital markets via an IPO.

Prior to the information I received regarding my post's reference in the franchise blog, I didn't really give much thought to any connection between DD's product launch issues and its franchiser's private equity status.

Since then, I have. Specifically, what the risks are to franchisees of buying into a system, the franchiser of which is vulnerable to takeover by a private equity firm.

Just a few days ago, in the Wall Street Journal, there was a positive article regarding McDonalds commencement of a physical overhaul of up to half of its franchised stores. Being as large and reasonably well-managed as it is, McDonalds seems to be in no danger of being taken private, so its franchisees are pretty safe from uncontrollable damage being inflicted by a new owner.

However, I've learned that this was far from true in the Dunkin' Donuts case. For example, DD, upon going private, engaged in a practice by which they receive extra fees by exercising clauses in franchisees' agreements to essentially take units from current owners and resell them, for more money, to other parties.

Known as "refranchising," this allowed the franchiser, DD, to selectively break up smaller, multiple-unit franchisees who were profitable, but whose stores would be more valuable to slightly larger franchisee groups.

Further, as some of these franchisees who were being, in effect, driven out of business, litigated these moves, resulting fees from the resale of the units became income to the franchiser, or private equity group. Through a process that is rather murky to those of us not in the business, the private equity groups were able to fund such a program from the franchisees' own marketing expenditures, but keep the gains for the corporate unit.

The larger point of all of this is that what has been transpiring at DD under private equity ownership may well be considered activities which aren't exactly "business as usual." Thanks to the magic of IPO accounting, the imminent spinning of DD, the franchiser, back into public hands, seems, well, rather like a pig in a poke.

Given the remarks in one of the franchise blog posts regarding extra leverage being applied to DD during its private equity ownership period, one wonders how capable the newly-independent corporate franchiser will be to fully service its franchisees, its announced expansion into India, and, generally, growth activity, if its laboring under a large debt load.

It's an interesting story for me, as it started with a simple observation of a product launch gone wrong, and ended with my learning more about the mechanics of private equity management of franchisers, just as Dunkin' Donuts is about to go public again.

My own equity portfolio selection process would not see DD as a candidate for some time, if ever. But I wonder how much the average investor, even on the institutional side, really comprehend about what may have been done to and with DD, the franchiser, during its tenure as a private equity-owned acquisition.

Wednesday, March 30, 2011

Larry Page's New, Speedier, Leaner Google- Will It Really Recapture The Old Magic?

This past weekend Wall Street Journal edition had a page-one article concerning Lary Page, Google co-founder's aim "to clear red tape." Good luck with that!


Will Google return to the good old days? For some perspective, take a look at the firm's equity price history as compared to the S&P500 Index.

Google, according to the Journal article, had 200 employees in 2001, when Eric Schmidt became CEO. Ten years later, it employs some 24,000, or two orders of magnitude greater.

No, Larry, you're not in Kansas anymore. And trying to get an idea-themed internet sofware and services behemoth to be as prolific and successful a decade and so many more employees later is, truthfully, likely to be a futile task.

Page is doing what sound like sensible things, i.e., requiring short project descriptions from each manager, making himself and other senior managers physically available during afternoons "on small couches outside a board room in Building 43 at Google's headquarters."

However, a member of a leadership consulting firm is cited in the Journal piece observing that Page is attempting to foster more innovation by adding controlling processes to a very large organization. She describes it as "antithetical."

I agree.

In terms of the average amount of time during which companies' total returns can consistently outperform the S&P, Google may well have already seen its time in the sun come to an end. Let's be candid. Page and Brin are late 30-something engineers who, as far as I'm aware, have zero managerial education or background. Originally exploiting some technological search innovations and combining them with ad sales, the two spawned a successful startup and profited handsomely.

Now, however, Google is in a very different place as a company. The firm's ability to succeed, as evidenced by its recruiting Eric Schmidt ten years ago, will be more a function of management than sheer innovation. Its size dictates that, because the sheer weight of people and activity means that the few breakthrough ideas which occur at Google may not be seen in time to matter or, if they are, may not be capable of carrying the overhead of the rest of the firm.

Management is as much art as it is a discipline or science. That a 37-year-old software engineer, albeit a billionaire, now thinks he can, without any training in the field, simply step in and recreate Google's early days of success is sort of laughable. Chances are better the firm has simply grown and morphed into something that's never going to be capable of recapturing the early days and successes which made it into what it now is.

Monday, March 14, 2011

My Hate/Love Relationship with Dunkin' Donuts

I've written in prior posts of how much I admire and respect companies or employees who provide an excellent service experience.

By contrast, I typically feel equally passionate, but negative, when a company or its employees or franchisees deliver poor service.

Unfortunately, one of my usually-favorite retail firms, Dunkin' Donuts, has earned a place in the second category. Twice in one week.

Last week, I visited the nearest DD franchise outlet, at the foot of Morris Avenue in Summit, New Jersey, one evening. I ordered several donuts and a small cup of coffee. Very simple. And there was nobody else in the shop. Not only did I have to coach the counter employee on finding the right items, but he didn't pay attention, resulting in my leaving with less than my full order of pastries.

But that was a minor gaffe compared to what I experienced on Saturday morning.

As background, it's worth noting that DD has begun having monthly themes to spur customer visits. For example, February was chocolate lovers' month. They baked and sold a few special varieties of chocolate-filled donuts and pastries which are no longer available.

Right on cue, beginning in March, the chain began promoting, via televised and radio spots, its Big N' Toasty Breakfast Sandwich (hereinafter BNT). Here's the prose describing it:

Start your big day with 2 fried eggs, 4 slices of Cherrywood smoked bacon and American cheese on thick Texas Toast.

With such an onslaught of expensive media, and no mention of a date on which the food item would be offered, it seemed reasonable to assume it is already available. Especially considering that, upon walking into any DD location in the past week, it is already prominently featured on POP display signs and on the permanent menu board located high on the back wall. It's even priced, so you know they are serious about selling it.

In short, all the advertising and marketing cues point to its widespread availability.

So on Saturday morning, I drove the short distance to the Morris Avenue DD to buy a few donuts and take home a BNT sandwich. With 2 eggs and four slices of bacon, plus cheese, it's not the sort of thing I want to consume all at once.

Imagine my dismay when, upon ordering it, I was told, in very broken English-well, actually, I'm not exactly sure what I was told. The first employee babbled incoherently, so I repeated my request. He babbled some more. I caught the word "Friday," and asked if he was saying it was only available on Friday?

Then his colleague babbled with a different accent, letting loose with a stream of words, the only ones of which I initially understood were 'don't have it,' and something about 'that's corporate.'

At this point, I turned to the man in line behind me, offering to let him go ahead of me, as it was becoming clear my order would be neither simple, nor fast. He declined, evidently wanting some free entertainment.

For the next minute or so, I was put through more pigeon English, while three of the store's employees, none of whom spoke clear English, apparently attempted to tell me that DD, the parent, had initiated a media campaign for a new breakfast sandwich which was not yet actually physically available in the stores.

It seemed, if I understood the extremely-poor communications of the employees, that the first items don't hit the retail outlets until this coming Friday.

Can you believe the ineptitude of DD's corporate management? It's owned by a private equity firm, so there's limited machinery to easily contact the firm. I tried once before, when another DD store refused to sell me a bag of espresso beans, although they admitted to having them to make espressos, cappuccinos and lattes. At that time, I emailed the parent on their website, giving them my contact information, but never heard back at all.

Now, the same management team is committing one of what is, to me, the most egregious mistakes a retailer can make- spending heavily on promotion of a new product which isn't yet available in its stores.

That's why I have such a hate/love relationship with DD. I find their atmosphere, usual service, and espresso-based coffee products to be better and less expensive than Starbuck's. But screwups like the BNT sandwich introduction are a real pain.

Just in case, however, the franchisee of that one outlet was at fault, I tried another DD store in a nearby town on Saturday evening. I walked in at 10PM to a mostly-empty shop. There was nobody in line, so I stepped up to the counter immediately. What happened next just cemented my recent sense of DD as having declining service levels.

In this case, at the store on Valley Road in Stirling, an employee looked directly at me, only a few feet away, then continued to talk on his cell phone and walked through a door into the back of the store, deliberately leaving me unserved, and no employees in sight.

Now I'm not sure when I'll return to one a DD store to try the new food item. Or anything else, for that matter. I guess you can characterize me as a formerly loyal DD customer whose patience with the firm's product introduction policy and store service has just about worn out.

Thursday, December 09, 2010

Jeffrey Kindler Leaves Pfizer

Jeffrey Kindler's recent departure from the CEO position at Pfizer has drawn fresh attention to the company's recent performance.

As the nearby chart comparing Pfizer's, Merck's and the S&P500 Index's prices indicates, the story hasn't been a good one for Pfizer shareholders.

Kindler took over as CEO roughly 4 1/2 years ago. Back then, based on initially-equal notional starting points in January of 2006, the firms' share prices were comparable.

Not anymore. Merck has handily outperformed Pfizer, and the S&P. So it's not as if Kindler's firm is in a sector where such performance is impossible.

The Pfizer CEO was described as under immense pressure and unable to cope. Given that even the S&P500 has outperformed it, Pfizer's board is taking reasonable action.

One wonders why Kindler was the choice for CEO back in 2006 and why, as Merck pulled away by early 2008, the company's board wasn't responding with more alacrity?

Now, the board not only has a senior-level vacancy to fill, but its record in filling it for the past half-decade should give investors pause concerning whether the next CEO will be any better.

Monday, November 08, 2010

Scott Adams On Bad Management

Scott Adams, the creator of the comic strip Dilbert, wrote a hilarious piece in this past weekend's Wall Street Journal. He traced his own career from first part-time jobs to the one he held at Pacific Telephone, before finally relying on his published comics for financial independence.

What really struck me about his story was that, twice, he was told he could not be promoted because he was a white male, and his company's management(s) could not afford the risk of media criticism for more such promotions.

One of those companies was Pac Tel. I, too, was victimized in that fashion early in my career. At AT&T, of which Pac Tel was a subsidiary.

Adams writes that when informed of his second non-promotion, for reasons of race and gender,

"that was the day the "Dilbert" comic strip was born, although I had not yet drawn one. Let's call it a tipping point."

He then spends the rest of the piece discussing how those sorts of experiences create entrepreneurial motivations in otherwise-ordinary employees.

I'm just surprised that firms in back in that era couldn't comprehend the effects on morale, motivations and loyalty by simply notifying middle-management white males that they could forget being promoted.

There may not be as many EEOC lawsuits and as much interference in the promotion policies of corporate America, but I think management is, on balance, as deaf and blind as ever to what motivates their employees.

Tuesday, September 28, 2010

Jamie Dimon's "Halo" Effect

It never fails to amaze me how many people ascribe unique managerial powers and skill to Jamie Dimon, despite any significant evidence that he's ever been anything but a cost-cutter trained at Sandy Weill's knee.

In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.

"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.




Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."

Really?

Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.





That BofA and Citi are the worst two performers is no particular surprise, is it? While it's not crystal clear from the chart, one can deduce that Goldman and Chase performed roughly the same, while Wells Fargo and the S&P500 did a little worse.

Much of Chase's milder value loss during the recent financial crisis stemmed, as I've written in prior posts, from it's simply being slower and less agile in getting into the mortgage-backed game in the first place. Thus, the bank's traditional stodginess and slow execution accidentally saved it from becoming another Citigroup or BofA. It was an error of omission, not commission.

Regarding the acquisition of various wrecked investment and commercial banks, I think Broughton wrongly gives Sullivan a pass on incomplete understanding of the situations.

Bear Stearns was the smallest of the publicly-traded investment banks, and Chase only rescued it with assurances of loss guarantees from the government. Maybe that counts as Dimon's skill, maybe not. At that point, with mortgage-backed instruments having caused tens of billions of write-offs on bank balance sheets beginning in late 2007, only an idiot would not have required such guarantees when agreeing to purchase a bushel full of them by way of taking over the failed Bear Stearns. It surely wasn't rocket science.

By the way, Lewis did the same thing with Merrill Lynch, even to the point of trying to walk away from the deal, only to be basically blackmailed by the Treasury and Fed.

Regarding Chase's WaMu takeover, it is positioned as more brilliant than it actually was. As a commercial bank, WaMu's dissolution was a relatively straightforward event. The FDIC handles these routinely, albeit on a smaller scale. But a bank like WaMu was, in comparison with Bear Stearns, a fairly simple 'acquisition.' Chase simply took over the deposits and branches, negotiating with the FDIC on various aspects of the assets. But it was a known business.

I see the difference between Lewis and Dimon as more a matter of different types of flaws. Dimon has never been a big-picture guy. Yes, he is probably very astute on details, because that's what his mentor, Sandy Weill, focused on as he acquired his string of brokerages to build Shearson Lehman. But every large-scale concept Weill pursued exploded in loss. Particularly....Citigroup. Nobody would ever accuse Dimon of having new, innovative strategic concepts, or implementing any successfully.

Lewis, on the other hand, evidently thought strategic acquisitions came with the executive suite he inherited from Hugh McColl. The missing acquisition mistake in the review, and perhaps the book, is BofA's purchase of the wreckages of Countrywide. As a mortgage bank, Countrywide's demise didn't really threaten the financial system, so Lewis' overpayment for it was a self-inflicted wound. There was no pressure for any bank to 'rescue' the troubled mortgage lender. It wasn't seen as a key financial institution in the fabric of the US economy.

The Merrill Lynch acquisition was more complex than Chase's of Bear Stearns. I see Lewis' mistake, again, as one of scope, rather than detail. And, frankly, both Lewis and Dimon, already heading firms that were among the largest five commercial banks in the US, did not really need any of these acquisitions to remain so. Consolidation is the dominant trend in the sector, but these two firms were already pretty much impervious, absent tremendous operating losses, to losing their positions as financial utilities, whether they bought any of the failed investment and commercial banks, or not.

Wells' successful digestion of Wachovia remains uncertain. Wachovia had unwisely overpaid for Golden West, which helped destroy the North Carolina bank.

To me, viewing the last five years of performances of these institutions, the lesson is that only the most and least aggressive two firms came out on top. Goldman maneuvered through the crisis, while Chase more or less hunkered down, with a few distressed asset purchases relying on government guarantees.

Perhaps the better lesson from Lewis' and Dimon's behaviors is that it's better not to operate beyond your capabilities in the first place. That doesn't mean Dimon is a better overall manager, but, in this case, that his particular skills in micro-management and small-picture thinking happened to dovetail with the brief era. The sort of skills, come to think of it, which are all one probably needs to oversee a lumbering, slow-growth, unexciting financial utility.

Monday, August 30, 2010

Operational Failure & Loss Of Consumer Trust

I periodically buy groceries at a local, smallish chain called Kings. It was, some years ago, acquired by Marks & Spencer of the UK, then sold again, to whom I don't recall. The chain is known for good-quality produce and an upscale selection of merchandise, as well as very good and pleasant service.

The chain used to encourage customers to use the chain's affinity card, but that stopped some months ago. Recently, perhaps to challenge Stop 'N Shop's policy of giving a 2 cent credit for each bag brought by the customer, Kings announced that, henceforth, they would give a 4 cent/bag credit.

Stop 'N Shop has self-checkout of two varieties, about one of which I wrote in that linked post. Thus, it's easy for the customer to enter the number of bags they have brought, and receive the credit.

Kings has no self-checkout. Only human cashiers.

Thus, it's been my experience over the past few months, that perhaps as often as 4 times in 10, the cashier won't remember to ring up the 4 cent bag credit. Typically, it's a teen-aged employee who neglects to do this, despite my prominent display of one of the chain's own distinctive mesh plastic bags upon checking out.

This has caused an interesting reaction in me. While realizing that we're only talking about 4 cents, I never the less find myself annoyed when the cashier fails to notice my bag and deduct the paltry amount.

In the past six months, my attitude toward the chain has gone from one of respect and overall positive image, to one of increasing annoyance at their inability to execute on their own bag credit policy.

Better, in my opinion, that they simply drop it, or assume you have a bag and just show a deduction, than cause minor disappointment by failing to implement a policy they chose to rather publicly trumpet.

Now, I feel like I'm being lied to by the chain, since the odds of the cashier correctly implementing the policy is not different than a coin toss, unless I start selecting older cashiers for a 4 cent payoff.

Hardly worth the effort.

But Kings' management has now, well, managed to make me believe they are becoming as inept as Stop 'N Shop's own management team. Only the latter is much larger, headquartered in another state, and more understandably incapable of sensible behavior.

Kings isn't.

It's clear that Kings' managers aren't making the bag credit policy important to cashiers, because they don't seem to pay much attention to whether a customer has a bag, or not. So it's a failure of training, monitoring and rewards for competent cashier behavior.

I wonder how many other customers are beginning to slowly, subtly change their opinions of the chain from this small but very noticeable failure?

Friday, July 30, 2010

Barnes & Noble Fails As Brick & Mortar Book Retailer

I had been ruminating on a suitable business topic for today's post, and was considering a macroeconomic topic.

Then I went to buy two books for a friend's birthday, and the topic presented itself. Poor retail bookselling.

I'll begin with this post concerning Barnes & Noble. You can see from nearby the five-year price chart of B&N and the S&P500Index that the former has been in free fall for the period. It now stands down more than 60% from five years ago.
Perhaps my experience is a partial explanation.
With little time before the birthday in question, and a recent Wall Street Journal review of two books by an author in hand, I figured B&N could supply me with the books instantly, due to its physical inventory, whereas Amazon might not come through in time (more on that in the next post).
The staff at the B&N help desk was polite, but couldn't make up for the store's deficiency. They had, he said, a single copy of the recently-reviewed volume, and none of the earlier work by the same author.
When I finally located the minuscule 'Nature' section, it took me more time than it should have to locate the book in question. I'm still not sure how the section was organized, but it didn't seem to be by title, as usual. In any case, in typical inventory management system fashion, there were three copies on the shelf, not the one predicted.
I took a copy and proceeded to the checkout counter to pay for it. Upon being asked for an affinity card, I handed my expired one to the clerk, who confirmed that it was no longer active.
But he didn't bother to ask if I wanted to renew it. Amazing! A $35 (if my memory is correct) add-on fee, and the guy didn't even try to resell me on the value of the card.
So much for choosing to give my custom to Barnes & Noble due to their physical inventory of books. Nowadays, the most visible display kiosk, upon entering the store, is the chain's Nook e-reader. Forget relying on them for an actual broad inventory of reasonably topical and popular books.
Not to mention sales skills.

Wednesday, February 24, 2010

General Growth Properties' Fall From Grace

I have read, with some dismay, the articles concerning Simon Properties' bid to take over the remains of General Growth Properties.

My own connection with the firm, though brief and passing, goes back to 2000.

At the time, a prominent hedge fund manager and former Salomon Brothers partner offered to assemble a hedge fund around my equity strategy. His anchor investor, as it were, was GGP's then-chairman, Matthew Bucksbaum. At the time, Bucksbaum was a billionaire, thanks to his personal investments in GGP. The firm had been built by his family over decades, then gone public as a REIT, providing substantial, liquid wealth for them.

As part of the process of securing Bucksbaum's investment, the partner assembling the hedge fund asked me to do some analysis of GGP's competitors, and GGP, using the consulting version of my research. It was to be a threefold activity: a chance for Matt Bucksbaum to evaluate me and my work; a good faith provision of free analysis, and; a formal reply to a question Bucksbaum had regarding GGP's valuation relative to his company's peers. Vornado, Simons and Rouse were among the REITs which I analyzed.

It didn't take me long to do the analysis, nor identify a probable cause of GGP's relatively lower valuation, particularly when compared to Vornado. Put simply, GGP had a bad habit of selling properties when they had accrued substantial gains, providing shareholders at those times with extraordinary gains. Thereafter, investors knew such gains would be years in coming.

Consequently, GGP's earnings were more volatile than Vornado's, and its valuation was lower, due to this lack of consistency. I provided some guidance as to how GGP could improve its earnings consistency, and offered to provide additional presentations to the firm's management team.

Bucksbaum understood my analysis, conclusions, and recommendations, though he evidently declined to pursue them further.

However, he agreed to back our hedge fund.

When I read of GGP's sudden spiral toward bankruptcy in the last year or so, it took me back to my meetings with Bucksbaum in the spring of 2000. I can't, of course, estimate how much of GGP's troubles were due to the operating policies which I identified as probably depressing the firm's value to investors. Articles in the Wall Street Journal suggested that, like investment and commercial banks, and many hedge funds, GGP had unwisely used too much short term borrowed funding. Adding to that problem, the firm's COO, Matthew's son, John, had apparently borrowed heavily against family-owned GGP shares. When margin calls came due during the 2008 financial debacle, the firm's and family's fortunes began to rapidly unravel.

Last I read, Matthew Bucksbaum was reduced to being worth only tens of millions. Still more money than most Americans will see at his age. But something like 1% of his peak net worth.

A good lesson in how fleeting business success can sometimes be.

Tuesday, December 22, 2009

Brian Moynihan New CEO of BofA- Who Cares?

Late last week's business news was abuzz with BofA's selection of Brian Moynihan to replace Ken Lewis.

Really, who cares?
Look at the nearby chart of major surviving US bank equities since the late 1980s versus the S&P500 Index.
For all of Hugh McColl's acquisitions, and Ken Lewis' continuation of that approach, the average investor would have been much better off simply holding the index.
This isn't an isolated phenomenon. Chase and Citigroup are in the same boat. Only Wells Fargo, for years truly primarily a consumer and asset management bank, broke with the pattern.
Even since 2005, almost a full four years ago, the pattern holds. Wells about equalled the index, while the other three fell by more.
Moynihan made some forgettable comments about leaving the vaunted BofA business model intact.
Again, who cares? The bank has been stuck in underperformance mode for decades. Moynihan is just the latest caretaker of a bank so large as to impede its own ability to offer reasons to own it, instead of the S&P.
It's very unlikely Moynihan will do anything to change BofA's historic equity price trajectory. Especially when he's announced he doesn't plan to do anything significantly different.
Unless these large bank CEOs do something horrendously bad, such as, oh, buying a failing mortgage bank or retail brokerage, the best they can tend to do is tread water below the S&P's performance level.
I doubt Moynihan will be any different during his term as CEO of BofA.

Monday, November 16, 2009

The Chaos At J&J

I recently had the opportunity to speak at length with a Johnson & Johnson employee concerning the recent massive layoffs at the firm. Some 7-8,000 employees were shed from the 117,000-person workforce at the large, diversified pharmaceutical firm.

Reading through the article which was the first result of a Google search on the term "J&J layoffs," I was struck, humorously, by this passage,

"J&J has long been touted as being one of the best-managed companies in the S&P 500. It's no surprise then that Chairman and CEO William C. Weldon is trying to maintain that image. "Johnson & Johnson has long adhered to a broad-based operating model and set of sound management principles that have driven our success," Weldon said. "Today, we are announcing a series of actions and plans designed to ensure that our company remains well-positioned and appropriately structured for sustainable, long-term growth in the health care industry." "

According to a friend with whom I recently discussed J&J's recent job cuts, this is all myth.

The conversation began when I commented that I assumed, given her silence on the subject, and general upbeat attitude, that she was unaffected. She confirmed that, while she had escaped, her secretary had not. For rather obvious reasons, I'm not going to divulge any details sufficient for a random senior J&J executive to identify her.

Suffice to say, though, that when I asked about the nature of the cuts- surgical vs. indiscriminant- she confirmed that it was the latter.

The layoffs were, in classic large-corporate fashion, sprinkled throughout the hundreds of operating units at the sprawling health care-related giant. To give some sense of the inanity of the company's actions regarding treatment of its research staff, she related the following tale.

A researcher of her acquaintance had her original area of study curtailed, but was offered the chance to remain with J&J by totally changing her field of study, and moving to a nearby state. Despite the woman's husband being on the faculty of a well-respected university, she consented, and they moved. The woman's husband managed to secure another faculty position in a nearby city in the new location.

Just six months later, the woman's new research assignment was also terminated. This time, they offered her another, unrelated job in the same geographic area. In order to maintain some stability for her and her husband, the researcher took the new position.

It, too, was eliminated, within the year. With no other option at J&J on offer this last time, she was dismissed from the company.

My friend bemoaned the generally harsh treatment of the company's research talent. Modest salaries and no bonuses, while senior executives not actually involved in value-adding positions received lush bonuses.

She mentioned that, only a few months ago, a recently-hired woman who had been given a multi-million dollar bonus retired at age 50.

When I related some stories from my earlier career, at AT&T and Chase Manhattan, my friend began to see the recent J&J moves as just average corporate incompetence.

I used the phrase "endemic," and she immediately seized on that, lamenting that the company just seemed schizophrenic in its management style. A senior level executive would say one thing, while the reality of what was occurring two levels below was in direct contradiction.

Then there was the discussion about budget padding. She opined that, while she was quite busy, her boss, who is talented and competent, has little to do. One of them, she mused, is redundant.

I offered that this is common practice in corporate America. A senior executive keeps redundant people on staff for several reasons. One is Hay points. When your own compensation depends upon the size of your group, you fight for budget and staff, regardless of your actual need.

Then there is forward-looking protection. If you run too lean, and have to cut staff, your performance is imperiled. If, however, you keep a few extra people around with important-sounding titles, then you always have at least one staffer to offer when everyone has to "give at the church" in mass layoffs.

My friend nodded her head energetically in agreement.

I then made a generalized statement, from my own experience of some 25 years, that many companies, from the outside, look omnipotent, well-run and unstoppable. Then you get inside and, within months, realize that their successes were mostly accidents. That management is the same as in other large, ponderous, blundering entities. Good results are a product of enough lucky occurrences among many groups to appear as seamless, superior management.

She again agreed, adding that this was pretty much her own experience at J&J. Having worked at smaller competitors in the past, she has seen the varied faces of risk as an employee.

She remarked,

'In a smaller pharma company, you are more at risk to the company's success, but at least you always know exactly where you stand. It's run leaner, so everyone knows just what is happening.'

Now, as is typical in a large corporate environment, she feels powerless. Though dedicated, intelligent and, from what I gather, quite competent, she knows that continued employment at the firm is, in large part, a matter of luck.

The recent job cuts were in no way reasoned nor calculated, other than the topline number. Down in the trenches, it was like a lightning strike or tornado. Capricious and sudden, with no obvious basis for selection of the victims.

Sorry to say, her stories made me feel a bit more comfortable. Large corporate America is the same, some 15 years on, as it was the last time I wrestled with such issues.

In my case, a very productive and interesting position at then-named Andersen Consulting was changed overnight from a research directorship focusing on the performance of financial institutions into an internal finance/accounting job.

Needless to say, I immediately began looking for another job.

Despite the outward signs of steady, calculated and focused management at J&J, with the recent layoffs as evidence of a focus on containing costs while maintaining performance, the internal reality seems much different.

Saturday, November 14, 2009

Russ Ackoff's Split Personality

I read Russ Ackoff's obituary on Veteran's Day in the Wall Street Journal with great interest. The management guru died at the end of last month, so the notice was a little late.

The Journal's review of Ackoff's professional accomplishments was downright reverent. They discussed Ackoff's legendary "big picture" view, his rule-breaking graduate program at the Wharton School, and, of course, his big life-long meal ticket, the Anheuser-Busch account relationship.

It seemed odd to me that, in three columns spanning half the height of the page, there was absolutely no mention of the two things for which I feel Ackoff was justly famous.

First, he was generally acknowledged as the first practitioner of "management science," in that he ran around corporate America in the 1950s successfully and effectively applying the "80/20" rule.

If that is what various pundits mean by his big picture focus, so be it. But as I heard it explained by some refugees from his original Busch Center at Wharton (more on that in a bit), he got a lot of managers in the early days of the professionalization of the field to address the things that accounted for 80% of their problems or opportunities, and not sweat the 20%.

The other, companion accomplishment, was his co-founding, with C. West Churchman, of the first operations research department at Case Western, then Case Institute of Technology. I actually met and, mercifully briefly, worked with a guy who claimed to hold the very first PhD in OR from that program. And thus, he alleged, the first operations research PhD in the country.

Regardless of that detail, Ackoff's initial signal contribution was in operations research.

I knew several people at the Wharton Applied Research Center, where I worked while completing my MBA, who were escapees from Ackoff's Center. There had been a major philosophical schism, and one of Ackoff's bright young disciples, a former McKinsey consultant named Jim Emshoff, had bolted with a handful of staff and students to found the competing WARC.

One of my close friends and fellow student/employees at the center related the major flaw of what Ackoff's degree program was then called, Social Systems Science.

As Dave put it, after hearing Ackoff wax eloquently on the holy grail of multidisciplinary approaches to business problem-solving, he'd ask how to solve some particular problem.

He related that Russ would then reply that you would use (depending upon the nature of the problem) various existing functional approaches, e.g., stochastic modeling, statistics, EOQ modeling, etc.

Ackoff's big money client, and substantial underwriter of so much of his work, was, indeed, Anheuser-Busch. But at Busch, Ackoff was known mostly for advertising efficiency work. Not some puffed-up 'systems' solution.

And Ackoff's Center's staff and students were, according to the WARC people who had fled the group, known for management approaches and theories which couldn't be very easily implemented.

One has to wonder how ultimately useful and valuable an holistic approach to management, per Ackoff's Center, has been, if, after some 40+ years, it still is largely unknown among major business graduate programs.

Friday, October 16, 2009

Misplaced Hero Worship: Morgan Stanley's John Mack on CNBC

Yesterday afternoon I happened to catch Bill Griffeth's fawning, softball interview with Morgan Stanley retiring CEO John Mack.


I find myself unable to disguise my total disgust with CNBC's continued glorification of inept CEOs, including sympathizing over how, in this case, Mack struggled to avoid his firm's demise, while carefully avoiding any question over Mack's responsibility was in leading his firm to that brink of disaster.
In his questioning of Mack, all Griffeth could do was look on in reverence as Mack regaled him with tales of seeking Asian funding to avoid being closed down by the feds.
If you look at the nearby price chart of Morgan Stanley, Goldman Sachs and the S&P500 Index for the past five years, you can see that Mack had spent the better part of his tenure since mid-2005 mismanaging the investment bank onto an index-trailing path.
Much ink has been spilled over Mack's mistakes since his return to the firm at which Sears/Discover Card's Phil Purcell outmaneuvered him after the 1997 merger of the two firms.
If I recall correctly, Mack installed poor risk managers, then had the firm go for broke by diving into trading and underwriting mortgage-backed securities. Then held back in the last nine months while risk taking actually began to pay off again.
In contrast, better-led and -managed rival Goldman Sachs was performing far better even before the crisis of last fall.
So, instead of asking Mack questions about how he managed to lead his firm to the brink of insolvency and possible government takeover or enforced sale to a rival, Griffeth painted Mack as some sort of late-hour hero, beset by forces outside his control, desperately fending off Hank Paulson and Tim Geithner as he rescued Morgan Stanley with funding from new outside investors.
It makes me want to throw up when I see such shallow, gullible, misleading reportage. Much like Wall Street Journal veteran Peter Kann noted in an editorial on which I commented in this post, CNBC is rapidly heading down the road that led to the demise of printed newspapers.
Yesterday's interview of John Mack contained several aspects of that demise, e.g., shallow questions from Griffeth and a biased, flattering treatment of the subject, rather than hard-nosed questions that an intelligent, informed viewer would have posed.
Rather than champion capitalism and free markets, this sort of softball journalism at CNBC contributes to the weakening of our economic system. Griffeth breathlessly spoke about how narrowly Mack avoided Morgan Stanley going out of existence.
Guess what? Few financial service companies from thirty years ago are still around and independent. Poorly run investment banks and brokerages, such as Lehman- twice-, First Boston, Kidder Peabody and Salomon Brothers get taken over. Or perish.
Bill Griffeth needs to get a better sense of the reality of financial markets and the life-and-death cycle of those firms engaged in the rough-and-tumble world of securities underwriting and trading.
If a live televised interview on CNBC of the CEO of one of the less-well run investment banks doesn't feature questions about how Mack could have caused such massive, self-induced damage to Morgan Stanley, what will?