Socialism, Tea Parties, Zombie Corporations

There is an unbelievable stream of rhetoric coming from everywhere these days on the U.S.and how socialism is taking over. I would like to be the first to say we are a long way from socialism. I just wish my in-laws would quit listening to Rush Limbaugh and his half truth or no truth rhetoric. I have also noticed the tea parties that are cropping up in different locations across the U.S. in protest of the latest Federal budget. Did the Republican party already forget how we got here? Eight years of tax cuts for corporations, reduced capital gains taxes, and tax cuts for all. You cannot have a balanced budget by spending more than you have coming in. Now, tea parties? C'mon, let's see some real protesting. Even those prissy Europeans know how to throw a good riot...something that is lost on those of us in the U.S. of A.

As U.S. citizens, no matter what your political leanings and your stance on anything from the stimulus package to the CEO of GM being forced out, stop being apathetic, stop listening to all the trumped up rhetoric. Most people in the U.S. need to grow a pair and educate themselves with facts. All the politicians want to do is get you whipped into a frenzy and feed you their party line. That is the real danger in the U.S., not the deficit, not socialism, it is IGNORANCE and being too APATHETIC to get the facts. We have to overturn this cultural drought if we hope to maintain our world leadership position.

We are spoiled and afraid of our own shadows when it comes to taking risks and living on the edge. That is why we are in danger of being overtaken by Chinese, Russians, and Indians. They know what being disadvantaged is, they know what pulling themselves up by the bootstraps is and they are not afraid. They embrace the challenge - all they want is opportunity. We have to be prepared to compete with this.

Zombie Corporations are companies that are basically on the verge of bankruptcy that are holding on by continuing to get funding from somewhere. The Financial Times this week warned of the high number of formerly strong companies that no longer have access to credit markets and are being propped up by their owners, by their parent firms, or by their creditors. All these attempts to keep the company afloat are desperate attempts to bridge the gap from last year to the next secure economy. Leverage used to be King, Now it is back to Cash is King....but I'd like to go further and say after this event we should say "Warchests are King". Because small firms that don't have a warchest are in danger of not even getting credit to carry them forward to deliver their next contracts, despite being able to make a profit. Anyway, the warning from the Financial Times is a harbinger of worsening conditions as firms will continue to cut staff and continue the downward spiral.

The fastest way out of this sluggish economy is for everyone to stand up and SACRIFICE a little, stop watching the doom and gloom news, and for companies to SACRIFICE a little, and for our leaders to stop taking cheap shots and LEAD for a change.

Smart Grid

I decided to investigate all the hoopla about SMART GRID and attend a workshop. It was put on at the American Public Power Association conference by Burns & McDonnell (engineering firm).

In a nutshell, smart grid is simply a way to even out the peaks and valleys of demand and production as well as improve reliability...remember the blackout in the summer of 2003?

Smart grid is not a solution in and of itself, it simply provides better information for utilities, homeowners, businesses, and producers to make decisions. To do this correctly will require software, decision systems, IT infrastructure, communications hardware, and a comprehensive strategy for entire regions and potentially the country to ensure that decisions made on a local scale do not have negative effects in other regions. Yes, not understanding the ramifications and tying everything together reminds me of the global financial meltdown and having a smart grid with too much data coupled with poor decision making by people could be a train wreck waiting to happen.

The potential risks aside, to build this smart grid infrastructure sounds like it should provide plenty of IT professionals along with telecommunications technicians work for quite a few years into the future. Business opportunities that evolve from this could be infinite.

Smart grid in the home will involve communications networks in your home that allow your electrical meter (smart meter) to communicate wirelessly to other devices in your home. It would also allow the utility company to segment the rate you pay based upon the time of day and appliance used.

For power producers, it would help regulate the peaks and valleys of power, especially renewables that are considered weather dependent (solar, wind, wave). First, understand that traditional power plants use large generators to generate constant streams of power. These can take hours or days to turn on, turn off, or adjust. On the other hand, a windmill produces exactly the power based upon how hard the wind blows. It is very uneven and inconsistent. In the midwest there are already power producers that "chase" the windmills because the windmills can produce more power than they need...only in spurts. So instead of installing large generators, the utilities are having to install small, quick to start and quick to shut down systems. In essence, they are chasing the power produced by the windmills with their generators.

The solution to that problem, besides utilizing smart grid technology and being able to control some of your appliances, is to have an ability to store excess power. Progressive companies like Austin Energy have looked into this and don't see the need to have huge battery packs for storage. (This reminds me of the Soviets burying fuel tanks all across East Germany so they could easily supply themselves in the event of a ground war). Nobody would want large battery packs buried all through the countryside. Instead, plug in cars, air conditioning units, and other grid connected options are being considered to both store as well as potentially provide power to the grid when not in use. It is much like a heat pump running one direction for cooling and the other for heating.

The bottom line with the smart grid is that it is a huge potential impact for jobs, especially IT, and prosperity in new businesses, even though we are still years away from perfecting the technology and its use.

Targeting the Utility Industry - Power

Here is how I picture the current economy. Imagine seemingly strong companies as World War II bombers flying through the flack being thrown up by the Nazis (the economic storm) and - if you remember the old war movies - the planes are dodging and weaving, trying to make the right adjustments to get through the hailstorm of shells...then one by one, as the damage builds or they take a direct hit, they sputter, drift, people bail out - some with and some without parachutes - and slowly go into a death spiral as they hurl towards the earth. The planes that actually get through the hailstorm have a combination of luck and skill, most have some kind of minor damage, but at least they make it back to the safety of the English airfields.

For most firms, getting through to the other side of this economic storm involves making the right moves and having a great deal of luck. In our brainstorming of what industries should be somewhat recession proof, we hit upon public services including utilities. Utilities provide a public service and have some insulation since they must provide a service to the citizens. So we decided to hang out with potential customers at one of their conferences.

The American Public Power Association (APPA) hosted an Engineering and Operations conference in Austin from March 20-26 this year. Not being overly scientific, we saw the word operations, got a list of past attendees, and decided that Operations Associates should be at this meeting. We do have some experience working for power companies including Keyspan and National Grid, so we have experience in this industry. What we did in the past is help consolidate operations, including yard and warehousing, so that they improve customer service levels while reducing inventories and warehousing footprints. What utility doesn't like saving money in these areas?

On the agenda for the conference are four smart grid sessions, a host of renewable energy sessions, and a few sessions addressing the future of the industry. One of the most eye opening sessions was about most of the country wanting to improve energy efficiency - except for the Southeast. He actually named Duke Energy as a firm lobbying hard AGAINST energy efficiency, renewables, and green power. For those of us that live in the southeast, we understand their interests -- nuclear power. Funny that General Electric's wind energy unit has a large operation in Greenville, SC - right in the heart of Duke Energy country. In stark contrast to Duke Energy is Austin Energy. Austin Energy (Austin being the liberal hotbed in Texas as well as the state capital) was present in force at the conference showing off all the things they are trying out including plug-in hybrid cars, free electronic thermostats, solar energy rebates to home owners, long term green energy contracts to commercial and industrial users, smart meters, wind programs, and ABOVE ALL - consumer education programs. They are not hiding and hoping all this "green stuff" is just a passing liberal trend led by Al Gore and a bunch of hippies - a hoax according to one lawmaker. They are leading the way in a number of areas - and they say it is paying dividends both economically as well as getting them in front of the curve - this from the lips of their Chief Strategy Officer.

Overall, the conference was good for us in that we now have a better understanding of our potential customer base and what they are thinking about.

Less Selfish Capitalism

Ghandi believed that any economic system had to have a moral compass - "that economics is untrue which ignores or disregards moral values." During the Great Depression just as now, people are questioning their personal and business values - "keeping up with the Jones" and "maximizing shareholder value" - questioning how well they hold true or should they be changed. Even Trustbusting in the late 19th and early 20th century was about fairness in competition and fairness for consumers. In Thursday March 12th's The Financial Times newspaper was an article written by Richard Layard of the London School of Economics entitled "Now is the time for a less selfish capitalism". You could probably read it online in its entirety, but I wanted to provide the Cliffs notes version here:

"What is progress? According to the Anglo Saxon Enlightenment, progress means the reduction of misery and the increase of happiness. It does not mean wealth creation or innovation, which are sometimes useful instruments but never the final goal. So we should stop the worship of money and create a more humane society where the quality of human experience is the criterion. "

"Despite massive wealth creation, happiness has not risen since the 1950s in the US or Britain..So accelerated economic growth is not a goal for which we should make large sacrifices. We should not sacrifice the most important source of happiness, which is the quality of human relationships."

"Increasingly we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down."

"Our society has become too individualistic...we idolise success and status and thus undermine our mutual respect...the Scandinavians have managed to combine effective economies with much greater equality and mutual respect. They have the greatest levels of trust (and happiness) of any countries in the world."

"We need a trend away from excessive individualism and towards greater social responsibility. It happened in the early 19th century. For the next 150 years there was a growth of social responsibility followed by a decline in the next 50. ...it is often in bad times (such as the 1930s in Scandinavia) that people decide to seek a more cooperative lifestyle."

"Three ideas taught in business schools have much to answer for. One is the theory of "efficient capital markets", now clearly discredited. The second is "principal agent" theory... which involves aligning interests through performance compensation and the third is continuous change, which goes against the need for humans to have stability.

"We do not want communism - as research shows, the communist countries were the least happy in the world and also inefficient. but we do need a more humane brand of capitalism, based not only on better regulation but on better values." END

I am sure my Republican friends are screaming "Socialist!" over this article. My Democrat friends are nodding in agreement with parts of the article.

I disagree with his "ideas taught in business schools" comments. He picked up the sound-bite, or perhaps is playing to popular misconception. In business school we learned that efficient markets would also have to be clearing markets, which they are not. We also learned that market pricing, if it were efficient, would exactly eliminate all profit. In fact, the reason people can make money in markets is that asymmetries of information allow profit taking. Completely free and efficient markets in theory would mean everybody would exactly break even (no profits) and sell everything available for sale exactly meeting all demand. Strangely enough, communist central planning attempted to manage and mandate ultra efficient markets like this - which it failed at because economies are immensely complex.

He also takes a swipe at consultants striving to make companies more efficient, which is exactly what Operations Associates does. We help firms continuously improve. Hopefully that translates into those companies being able to pay staff more or invest in new equipment - and the money continues flowing through the economy.

So while he makes good points about people needing to be trained to be more considerate, ethical, and focused on increasing happiness (not just through wealth generation), I think he missteps in applying popular misconceptions about business training (yes, it could use more diverse and compassionate viewpoints - not just Anglo Saxon standards) and in what business consultants are actually trying to achieve with efficiency (it isn't all about cutting staff). Businesses exist to serve people's needs , not the other way around. So when people adjust their needs (like in Scandinavia), businesses can and will respond as efficiently as possible.

Peering into the CFO's Mind III - Final

Day two ended with tearing down the Operations Associates booth in the exhibit hall and going to dinner with the competition.

Day three began with a slow exit from bed and a change of clothes. I had worn our chosen uniform for the last two days and it was time for a change. By the time I got showered and downstairs, my subjects were already being enthralled by another morning keynote speech from another academic. From the lineup of presentations, day three appeared to be addressing softer issues for CFO's such as decision making, human resources, and how to talk to your board and bankers during these turbulent times.

The first presentation was by Sydney Finklestein, Professor of Business at Dartmouth's Tuck School. Again, it seemed like anyone with an MBA would have already had this presentation of biases in decision making and understanding how no decision is ever made with perfect information and that decisions, despite logic, are more emotional than logical. So much for free and efficient market theory. Unfortunately, like most academic evaluations, a large portion of it seemed like Monday morning quarterbacking - hindsight is always 20/20. But he did recap why it is important to avoid making purely gut decisions - because you use shortcuts to decisions and the world is much more complex than that. Here's a recap of the major points from his new book Think Again:
1. People base decisions on emotion - even those complex decisions by groups come down to emotion
2. Redflag conditions are early warning signs of suboptimal decisions including: your past experience base misleads you; self interest (conflicts); misreading situations due to pre-judgements; and having inappropriate attachments.
3. In order to safeguard to reduce vulnerability of biases in decision making you can: Avoid yes man trap by seeking out dissenters and engaging them; monitor decisions in real time and change the decision as the situation changes; and ensure there is proper oversight and governance designed into the decision process

While I was filling out the paperwork for the evaluation of the conference, I noticed a particular name on the list. It was the CFO I had been looking for the entire meeting. She appeared on a panel right after the Think Again presentation. Her name is Eileen and she is the CFO for a Rollup of roofing contractors called Tecta America. Once I saw this I thought, ok, she must be here somewhere. Keep in mind that the auditorium seats over 300 people, but my keen eyesight and determination to find her in the mass of people ensured that I spotted her quicker than an owl on a mouse. Just like the owl, I wasted no time in rushing over - business card in hand - to say hi, mention that I had done strategic planning with one of their firms and got to know their CEO. She responded politely, said a few words, then took my card, and was whisked away onto the stage for her panel discussion. Mission accomplished, sort of, although I really wanted a few minutes to talk with her about how the firm was doing. She did mention that they were heavily into the green roofing movement and they were looking forward to the stimulus package and federal green roofing projects. That's one of the few firms I have heard looking forward to the stimulus package actually meaning anything.

Then it was off to the airport, not to head home but to head to New Orleans to meet with a utility company. Somebody has to be spending money in this economy and I will find them.

Peering into the CFO's Mind - Part II

On day two of my observation, I got an earlier start to see what CFO rituals occur just after sunrise. I half expected to see Pagan rituals to some God of Forecasting and Cashflow or even more exotic gods of Credit Default Swaps and Sovereign Fund Money Repatriation. I even expected to see some self flagellation for failing to foresee one of the biggest long tail events in a lifetime (CFO code for "low probability, catastrophic event"). I was disappointed that I didn't see any sort of CFO rituals or voodoo. Instead, it was more like watching the ant farm you had as a child - it was the same thing as the day before. There was a lineup at the starbucks coffee stations, some chose the cold white ceramic mugs, others chose the paper disposable cups. When it came to food, they tended to migrate towards the pastries first and just look at the fruit. The way they passed over the fruit, I wondered if CFOs had some ultra olfactory senses warning them that something was wrong with the fruit. I decided to test the fruit myself. I eased over to the table, trying to look inconspicuous and tested the fruit by actually eating it. No psychedelic episode ensued, so I think the fruit was safe and it was simply a cultural fruit phobia issue.

Have you ever attended a casual event and everyone showed up wearing black tie but you? Well dressing down for CFOs seems to mean French cuffs WITHOUT the monogram - or at least switch the diamond cufflinks out for the onyx ones. The dress code is business casual but de rigueur is coat and tie for more than half of the attendees and ties for 90% -- dresses and suits for most of the women. Perhaps CFOs don't own anything that isn't Brooks Brothers, Jos. Bank, or DKNY. That would actually mean they have a better sense of designers than Joe Six Pack and perhaps a better sartorial sense than other professionals.

The first session was the CFO of Bank of America that I hoped was going to impart some wisdom to the crowd. Perhaps he would paint a rosy picture of the banking industry and tell us that credit would be flowing like water through the Trevi fountain in Rome. Instead, he READ a very scripted recap of how we got in this situation. He encouraged companies to take control and not feed the downward spiral (in other words stop laying off people), and he touted the Merrill Lynch deal as adding strength to the bank (even though BofA asked for more money to cover Merrill losses just last week - around $16 billion?). Overall, he lacked any foresight...or perhaps his legal department warned him of prognosticating in public? We don't know, but there was speculation.

I continued throughout the day in my quest to track down targeted attendees, staking out positions where I could get a good vantage point while maintaining some camouflage (sink into the couch in the long hallway, peering around my paper cup of coffee) as to not scare any CFO's away. By now I was getting a handle on their patterns. They were in sessions, then out for coffee, then out on the patio for cell phone reception, then by the bathroom and back into the sessions. They tended not to talk much and didn't look directly at you unless they recognized you already, but most could be approached if you are quick, make direct eye contact, and smile. You might have to run an occasional one down and block their egress, but those were the exceptions.

I forgot to mention that Rafael, one of our VPs, made an outstanding presentation yesterday. CFOs showed up en mass to listen to him pitch "Turning Working Capital into Cash". Note that it had at least one of their hypothetical gods in the title (Cash), so in CFO terms we played on a religious angle to bring them in to "worship". For those non-CFOs, the presentation involved driving out waste and thus costs using continuous improvement techniques. Compared to a number of other presentations that I saw, Rafael's was relevant, direct, and tangible, while some others were either sales pitches or very light on any tangible, actionable content.

Towards the end of the day, the salesman in CFO camouflage from yesterday dragged even more people to the bar. Before drinks started flowing, the group had shared more insight on this economy with each other than any of the sessions. Good story telling really conveys a tremendous amount of information. We talked about businesses that were up (post grad education) businesses that were down (real estate), about conditions in LA, Phoenix, Vegas, Florida, Atlanta, The Carolinas, and Middle New Jersey. We hit upon issues that had not been discussed at the conference including the credit card debt buildup and home equity defaults that have yet to hit (those are likely the next shoes to drop). In Florida, courts are supposedly backed up 15 months on foreclosures and they have implemented a quick trial format. In LA, supposedly only 40% of the foreclosures have reached the market for resale, which means the pricing bottom is still a long way away...and they already have more than a year's inventory in homes for sale.

Back to my targeting. As I am still tied to the construction industry through my interests and our parent company, some of my targets were from the construction industry. I was able to reach three out of five construction industry targets that I had set for myself. Unfortunately a primary one that I simply could not locate was one that I had done strategic planning for in the past.

We closed out the night over dinner with a partner, marketer, and consultant from a Big 5 competitor of ours. We compared notes about the show and people we met along the way, then spent a couple hours just chatting about families, travel, sports,...and of course the elusive CFO.

Tomorrow I still have the morning for observation and perhaps I might find the CFO. I expect the CFO herd will be thinned out tomorrow as they return to their normal environments (the golf links outside) making it easier to single out one or two that actually stay for workshops.

Peering into the CFO's mind

From a CEO's perspective, CFO's just aren't much fun. They put the brake on spending, they put the brake on a CEO's whim of the day/week/month, and they are usually contrarian. That said, they are an interesting study for a CEO, who must work with the CFO constantly and depends upon his CFO to keep him out of trouble.

To further my study of CFOs, I am attending the CFO Rising Conference in Orlando this week. Unfortunately, social settings and large gatherings are not the natural setting for a CFO, therefore my study could be fatally flawed. Having received an advanced attendee list, I targeted specific individuals and researched them using Linked in, zoom info, and - of course - facebook.

On Monday morning, I observed my subjects (roughly 250 of them) milling about, drinking coffee, eating pastries, and mostly avoiding eye contact with those they did not instantly recognize. Then I sat through a presentation where a Yale professor talked about the current economic crisis and laid out what he thought the plan should be. The audience lobbed a few softball questions his way, then politely applauded and went back out for coffee. The points the Yale professor made were:
> The average joe has a limted financial vocabulary and the government should subsidize financial planning for individuals.
>Business Schools should move away from teaching only "Free Market" theory, because there really are no free markets, nor are there efficient markets. (otherwise every company in a free market would exactly break even, never earn a profit)
>There needs to be an improved risk market (futures, options) on such things as home equity, credit card debt, etc., to protect against drastic market corrections
>Individuals should be treated more like companies when their financial situations change (in other words banks should freely renegotiate with individuals on terms)

During the afternoon, I watched a passionate presentation on stochastic modeling and a software tool named Crystal Ball. Basically, predicting the future of your business and thinking in probabilities instead of best, likely, and worst case scenarios.

Later, I tried another experiment. I wanted to know what would happen if I introduced myself, regardless of how quickly he/she tried to scurry away. Surprisingly the person would stick around for a while...small talk being a little difficult, but mostly cordial. As the afternoon wore on, I got sidetracked by a salesman hiding in a CFO title. He convinced me that it was time to have a beer and dragged me (kicking and screaming of course) to the bar, where we talked about the economy and how companies were coping.

The day ended with my head of business development talking me into having dinner with the controller and a couple assistants of a large division of a Fortune 100 company where we enchanged more political views than business views. But it was a good end to the day.

So much for Monday. The study and targeting continues Tuesday.