Category: rants

Duly diligent

In an age of entitlement, we need to be careful of who we vote for, invest and do business with.

“Who would have thought our CEO didn’t have the qualifications we thought he had?” wonders the Yahoo! board.

“It seems we forgot to count the number of beds!” whines the cleaning contractor when challenged about a filthy hospital.

“We had no idea these people were corrupt,” growls the politician and former trade union official when confronted with proof its factional friends were misusing expenses.

An interesting phenomenon in the rise of the managerial classes over the last thirty years has been the group’s refusal to take responsibility for their failures.

Instead we see boards, investors, managers and politicians duck responsibilities that a reasonable observer would have thought is the reason for their healthy salaries, bonuses and perks.

One of the many conceits of 1980s thinking is the ideology of “personal responsibility” – to low paid workers and those at the bottom of society this mantra is applied ruthlessly.

The call centre worker who makes a mistake gets counselled or fired while the aboriginal kid who steals a can of coke is denied bail and goes to jail.

Let’s not mention the fines and sanctions that befall a small business owner who is too slow in submitting paperwork or forgets to pay one of the countless fees that make up today’s hidden taxation.

In boardrooms and Parliaments those doing the wrong thing rarely face any accountability; politicians caught misclaiming expenses are allowed to pay it back at their convenience while senior executives and captains of industry with a track record of mistakes continue to be employed in positions way beyond their abilities.

One exception to the that rule is former Tyco Chief Executive Dennis Kozlowski and his cohorts who looted their company through the 1990s. Eventually their excesses became so great that the CEO and his cronies ended up being jailed.

Not that this has rattled some of his cronies sense of entitlement. Former CFO Mark Swartz is suing the company for $60 million in retirement benefits and other monies.

I have a personal connection with Messrs Swartz and Kozlowski – I worked for their company in the mid 1990s and lasted nine months in a culture of cronyism and rorts where middle management enthusiastically aped the excesses of their senior executives.

One can argue I didn’t carry out my due diligence – a little bit of digging and more detailed asking around would have revealed Tyco’s institutionalised corruption and cronyism at the time.

I paid for this oversight by having my contract terminated in a public and humiliating way which drove me to set up my own business.

While working for companies like Tyco I saw them drive smaller businesses into the ground through slow, or non payment, of invoices. Strangely they always seemed to pay the corporate hospitality bills on time.

The weakness in today’s corporatist economy is that boards like that at Yahoo!, executives like Tyco’s in the 1990s and many of our business and political leaders have a sense of entitlement way beyond the value they add to their business, community or society.

Worse, the main lesson of 2008’s financial crisis is that massive government spending will protect these peoples’ bonuses and privileges regardless of their actions.

As investors, employees, suppliers and voters we have to do our due diligence on these people and organisations. We have the tools today to check the track record of those who want our vote, skills or products.

In today’s economy, we can’t afford to squander money or time on those who demand fat fees and salaries without delivering value.

At the cash register and ballot box, it’s time to do our due diligence.

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Depreciating the future

We’ve become used to not planning for necessary costs. Will it eventually hurt us?

When I wrote my first book back in 1998, one of the things my editor and I did was look at the cost of buying and maintaining technology.

Regardless of how we chopped the costs up, it came up consistently that the purchase cost of a personal computer was around a third of the Total Cost of Ownership (TCO).

The TCO concept is something forgotten by people – be it a minister announcing a billion dollar purchase of jet fighters, a CEO boasting how he’s opened a hundred new outlets this year, or a family buying an investment property.

It was bought sharply into focus for me when one of my kids claimed he couldn’t use his government provided school laptop because the IT guy didn’t have the repair software to fix a problem.

Despite millions being spent on providing these computers, little has been allocated to maintaining them.

This is typical of the public education sector, early in the adventure of building a computer support business I learned that services to schools and universities were fraught with difficulties as many would infrequently receive a fixed amount for capital expenditure but nothing for ongoing maintenance. You see this in the conditions of buildings on many campuses.

Forgetting operating and support costs is something we all fall for.

Strangely motor vehicles are the only area we consistently factor in maintenance and running costs, probably because we get the fuel price shoved in our face every time we take the car for a drive.

While computers are becoming disposable items just like fridges and TVs were maintenance isn’t so much an issue given most last five to ten years before needing expensive repairs, its still true for many capital items.

There’s another aspect to forgetting costs – depreciation.

Depreciation allows us to factor in the declining value of our business assets yet I keep meeting people who treat depreciation as income or even an asset in itself. This is particularly true among real estate investors who prefer to buy newly built apartments for the higher depreciation deductions they can claim against tax.

Bizarre stuff and true bubble thinking where people think operating losses will be offset in the medium term by capital gains.

One of the aspects of 1980s thinking is that business costs like training and maintenance can be palmed off elsewhere or infinitely deferred. That isn’t the case.

In society and business, we’re seeing the effects of pretending these costs don’t exist. Somewhere in there lies opportunity.

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Cargo cults and your business

Do you think the government, China or big business is going to save you?

“We need an interest rate cut” thunders the business media.

“Give us GST relief” plea the big retailers.

“China will boom forever” assert the government economists.

“Big corporations will buy us out for a billion dollars” pray the hot new start ups.

“I’ll win the lottery this week” thinks the overworked cleaner.

We’re all waiting for the big saviour that’s going to rescue us, our business or the economy.

It could be a big win, a big client or a big government spending program to rescue us.

Sadly, should we lucky enough for that saviour to arrive, it may not turn out to be all we expected.

There’s many lottery winners who curse their win while many disaffected founders who watch their startup baby fade away neglectful new owners.

For a lumbering department store, tax changes will do little to save them from market changes their managements are incapable of comprehending.

Interest rate cuts are great for business when customers are prepared to take on more debt but in a period where consumers are deleveraging a rates cut will do little to stimulate demand.

The clamour for interest rate cuts are a classic case of 1980s thinking; what worked in 1982, 1992 or 2002 isn’t going to work the same way in 2012.

What’s more, the Zero Interest Rate Policies – ZIRP – of the United States and Japan are a vain attempt to recapitalise zombie banks saddled with overvalued assets rather than an effort to help the wider economy.

China is more complex and there’s no doubt the country and its people are becoming wealthier and there are great opportunities.

The worry is most of what we read today could have been the wishful thinking written about Japan thirty years ago. Lazily selling commodities to the Chinese while they create the real value is not a path to long term prosperity.

In business we have a choice, we can pray for luck or we can make our own luck.

Some choose to join the cargo cult and pray, or demand, that someone else does something. Others get out and do it.

John Frum gravesite image by Tim Ross through Wikimedia Commons

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Taking care of our own

Our governments can’t fix every problem or address our every need. We need to take matters into our own hands.

“The council ought to do something” growled a friend who’d been stuck in a peak hour traffic jam.

That innocuous comment illustrates the fundamental challenge facing the developed world’s politicians – that we expect our governments to fix every problem we encounter.

In the case of the local traffic jam, the cars creating gridlock are parents driving their children to two nearby large private schools.

Despite the problem being caused by the choices of individuals – those decisions to send their kids to those schools and to drive them there – our modern mindset is “the government aught to do something” rather than suggesting people should be making other choices.

Socialising the costs of our private decisions is one of the core beliefs of the 1980s mindset.

Eventually though the money had to run out as we started to expect governments to solve every problem.

We’re seeing the effects of this in the United States where local governments are now having pull up black top roads, close schools and renege on retirement funds as those costs become too great.

As a society we have to accept there are limits to what governments can do for us.

Increasingly as the world economy deleverages, tax revenues fall and the truth that a benign government can’t fulfill our every need starts to dawn on the populace, we’ll realise that expecting politicians and public servants to save us is a vain hope as they simply don’t have the resources.

Bruce Springsteen puts this well in his song “We Take Care Of Our Own.”

The truth today is the cargo cult mentality of waiting for governments or cashed up foreigners to come and save us is over.

We’re going to have to rely more on our own businesses, families and communities to support us in times of need.

The existing institutions of the corporate welfare state are beginning to collapse under the weight of their own contradictions.

Joe Hockey knows this, but as a paid-up agent of the establishment he doesn’t dare nominate the massive cuts to middle class welfare and big business subsidies that are necessary to reform those institutions.

Waiting for the council to fix the local roundabout is nice but it doesn’t address the bigger problems.

It’s up to us to build the new institutions around our local communities and families. This is not a bad thing.

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David Jones’ wasted decade

Poor decisions by unaccountable management are killing industry icons

In 2001 Australian retailer David Jones shut down their website.

Back then, the future was clear; profits were in financial services and certainly not in online sales or investing in improved stores and service.

Today the company released their strategic review that looks forward to financial years 2013 and beyond. You can downloaded it from David Jones’ investor website.

On Page 13, they show just how far David Jones has fallen behind their international competitors. Less that 1% of DJ’s sales are online compared to 4.5% of the UK’s House Of Fraser and 13% of John Lewis.

Australian executives claim they are in a global market for their talents which is why they deserve world standard remuneration. David Jones’ results show how hollow that mantra is.

The problems start with the board, five of the eight current David Jones directors were with the company when that decision was made in 2001.

None of them have been held to account.

David Jones illustrates the weakness in Australia’s business sector – largely unaccountable boards answering only to institutional investors who themselves have grown fat and lazy on clipping the compulsory superannuation ticket.

One hopes the some of the competitors who are displacing flaccid incumbents like David Jones are based in Australia or the locals may soon find that many of these sectors, not just in retail, will go offshore to better run companies.

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Milking the dead cow

How Sensis killed itself and the lessons for Australian business

Many big Australian businesses seem untouchable as they dominate their markets to degree almost unknown in most other developed countries. As the story of Sensis shows, Australia’s big duopolies may not be as strong as they appear.

The last few months have been tough for Sensis; revenues last year fell nearly 25%, the once strong business was folded into the latest incarnation of Telstra Digital Media and now the CEO Bruce Akhurst has departed after seven years.

What could have been a dynamic business is now shriveling away, what went wrong?

Milking the revenue cow

Bruce did a good job of keeping revenue coming in during a period that the then owners, the Federal government, wanted to maximise the book value of Telstra before its sale.

Year upon year Sensis could be relied upon to squeeze more money out of the businesses advertising in it.

Management were focused on extracting revenue from the existing client base rather than responding to the obvious threat from online search.

Expensive distractions

When senior management decided to respond to the online world, they were sucked into unnecessary and expensive distractions; the most notable being the 2005 launch of Sensis Search where the then Telstra CEO – the disastrous Sol Trujillo – famously sneered “Google Schmoogle”.

Three years and hundreds of millions of dollars later, Sensis admitted defeat. By then the small business advertisers who were the life blood of the directory market had woken up to the reality their customers weren’t using the Yellow Pages anymore. Sensis had missed the boat.

Clunky processes

Whenever I spoke to small businesses about Sensis through the 2000s there was the same complaint, “I don’t have time to deal with their sales people, just let me tick a box on a web page or send a fax!”

Purchasing space was difficult for customers, their 1950s Willy Loman sales model should have been automated in the 1990s and never was.

Instead Sensis was locked into a high cost sales model and added friction for advertisers which they shouldn’t need, not only were they expensive but they actually made it difficult for their customers to place orders.

Should Sensis have been sold?

At its peak in 2005, Sensis was valued at between 8 and 10 billion dollars as a stand alone company.

Many, including myself, believe that breaking Sensis away would have been the best result given Telstra were at the time focused on protecting their fixed line copper wire monopoly and the directories business was not getting the management attention or capital investment it needed.

History shows though that we might be wrong.

Commander Communications was spun off from Telstra in 2000 and like Sensis had inherited an almost monopoly position in the small business communications market.

By 2007 Commander was out of business thanks to a combination of incompetence, management greed and an inability to recognise the changing communications marketplace.

The Australian disease

Commander’s biggest problem was it saw its customers as cash cows, just as Sensis did. This exposes a much deeper problem in Australian industry and management culture.

Over the last thirty years Australian government policies have seen duopolies develop in almost every key sector of the economy.

All of these duopolies share the same “customer as a milk cow” philosophy which, along with the rampaging Australian dollar, has dragged Australia into being a high cost economy.

The banking industry, while not a duopoly for the moment, is an even more debilitating example of the cash cow syndrome where small business has been crippled by excessive interest rates and fees – particularly since the 2008 crisis.

Sensis’ demise is systemic of a culture that fixates on extracting maximum revenue from customers; concepts like innovation, R&D or adapting to market trends don’t have a role in this mentality.

Milking cows is a fine business, but sometimes you have to think about the health of the herd.

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Does small business need government support?

Can governments provide business assistance?

The New South Wales State Government’s decision to axe their long standing small business programs raises the question of whether small businesses need government support at all.

Last week’s announcement the NSW Government are abandoning their business education programs and replacing them with a previously announced network of local business advisors shows where small business lies in the state’s list of priorities.

Taken at face value, the changes appear to be moving back to the face-to-face business advice model of a decade or so ago that was common before the winding back of small business programs and local enterprise centres by then Federal Liberal and state Labor governments under John Howard and Bob Carr.

On closer examination, it’s a cut to business support and an effective withdrawal of NSW government assistance to small business. The remaining services will be outsourced to the same local business centres that have been starved of funds for over a decade.

A concern with the individual advisors will be how many businesses they can reach, according to the NSW Trade & Investment annual report 2010-11 the axed events had an audience numbering over 5,000. It’s difficult to see how the advisor network will match that and makes one wonder how the more important events couldn’t have been streamed or podcast across the Internet.

Putting aside the pros and cons of this restructure, the bigger question is should small business expect any government support at all?

The record of Australian government support for industry is not good. We only have to look at repeated visits to the trough by what remains of the Australian car making industry, the bipartisan debacle of assistance to the renewal energy sector or the support given by the Keating Labor government to Kodak to see how well schemes have worked out.

Most of Australia’s economic success stories have happened despite, not because of, government’s pouring money into industries. For example, the first five years of the current mining boom was completely missed by the political classes along with the Canberra press gallery and the media economic commentators.

This is where small business steps in – rather than relying on access to the ministerial suite to protect their industries, the little guys and the startups compete on price, service and innovation. Aspects that organisations in protected industries or those dependent on taxpayer largess struggle with.

Indeed many small business owners and entrepreneurs struck out on their own because they felt stifled by bureaucracy. So offering them programs wrapped up in paperwork is counter intuitive.

Where the government can help is with keeping busy business owners up to date with new developments in business, markets and technology which was exactly what the events programs like Small Business September and Micro Business Week did.

It’s difficult to see how the individual business advisors employed by local Business Enterprise Centres will keep up with their clients up with changes regardless of how skilled or well intentioned they are.

All of the changes are justified by the report from the Small Business Commissioner’s listening tour. Apparently she was told businesses didn’t want events like Small Business Septtember

I certainly didn’t hear any complaints at the breakfast fourm I attended at the Northern Beaches, most of the concerns seemed to be from cafe owners arguing about council outdoor seating permits. If the commish wants to get involved with that nest of vipers, I wish her the best of luck.

Overall, small business can’t expect much from government; particularly in the modern corporatist society where Big Government does Big Deal with Big Unions and Big Business while Big Media selectively reports what suits it.

Probably the best thing for small business is stay nimble and avoid being stepped on the Big Dinosaurs as they dance obliviously to the major changes that are happening in the world around us.

Big dinosaurs look after their own, don’t expect them to give you anything except a big shower of dung.

Disclaimer: I’ve been hired by Trade & Investment to host various events on the now axed programs and worked for 19 months at what was then the Department of State and Regional Development. I wish all of those former colleagues who now find their positions abolished the best of luck in finding another role.

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