Tag: management

Throwing your problems over the fence

Outsourcing, subcontracting and securitisation often shift costs and risk from those responsible. Usually the bill ends up with the taxpayer or shareholder.

I first heard the term “throwing the problem over the fence” from a telco project manager a few years ago, it describes how modern organisations shift risk to others.

Throwing the problem over the fence usually involves contracting out a task, the philosophy is once the contract is signed delivery is no longer management’s problem, it’s now the responsibility of the contractor. Once the job is over the fence it’s out of sight and out of mind.

Governments, financial institutions and most corporations have become very good at throwing their problems over the fence.

Contracting away your worries

A core tenet of 1980s management thinking is contracting out; freeing executives from the tedious task of actually doing their jobs lets them focus on the important things in life, like securing performance bonuses.

Of course you can’t contract out risk – risk is like toothpaste, squeeze it in one place and it oozes out somewhere else.

Unlike toothpaste, risks have a habit of growing if they are ignored. Which becomes a problem for whoever is unwittingly on the other side of the fence.

Railways and risk

In “The Crash That Stopped Britain” author Ian Jack looked at the causes of the October 2000 Hatfield train accident which threw the nation’s railway network into chaos.

Jack correctly predicted that no-one would be found responsible as the tangle of rail operators, maintenance companies, financiers, labour hire firms and regulators made it almost impossible to determine exactly where responsibility for a fatal failure lay.

Diffusing responsibility is partly by design although originally the idea was to save costs, the theory being that tendering work previously done in house to the lowest cost provider would save money.

Instead its caused an escalation in costs as contracting out meant an increase in middlemen as financiers, lawyers, project managers, contract administrators – of which I was once one – and many others are drafted in to manage the outsourced contracts.

Throughout the Anglosphere – the US, UK, Canada, Australia and New Zealand – the results of embracing this mentality has meant skyrocketing costs and delays in public work projects, a good example being the Southern Sydney Freight Line which was three years late and 250% over budget.

Naturally no-one is held responsible for the delays, cost over-runs or lousy initial planning and estimating on that project, which is a happy result for everyone except the taxpayer who foots the bill.

The Global Financial Crisis

While the cost of building railways, schools and motorways is a chronic problem, a far more bigger issue is the role of “throwing problems over the fence” in the financial industry.

Securitisation was seen as a magic bullet for the banking industry in the 1990s, the Basel Accords allowed banks to bundle up their entire home loan portfolios and throw them over the fence to fund managers and their unwitting investors.

When the inevitable happened with the Global Financial Crisis in 2008, it was difficult to attribute exactly who held the mortgages, let alone who was responsible for the losses among the mass of brokers, ratings agencies, fund managers and bankers who’d profited so well from the boom.

The only thing we could be sure of was that it was the taxpayer – you, your children and grand-children – who ended up holding the problem when the GFC’s bills were hurled over the last fence.

On the other side of the fence

Risk isn’t something that can be thrown over a fence, eventually it comes back in a bigger and nastier way. The question is who ends up dealing with it.

The genius of political and business leaders in the last 30 years has been in how they’ve thrown their responsibilities over the fence while retaining the perks and privilege of holding responsible positions.

Generally it’s taxpayers and shareholders sitting on the other side of the fence who have to deal with the costs and they aren’t getting cheaper.

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Towards the post car society

Is the era of the automobile coming to an end as our society adapts to new technologies?

We don’t often think about it, but the design or our cities reflect the technologies of the day. Right now the way we live is built around the motor vehicle, but are we moving into a new era?

After a visit to Ford Australia’s Centre of Excellence For Design and Engineering, Neerav Bhatt has some thoughts on the role of the motor car in an era where people don’t have to travel to their workplaces.

One of Neerav’s points is that car use is falling among younger workers, a trend that’s happening across the western world.

Much of this is put down to the generations of Millennials and Gen-Ys being more interested in technology purchases rather than cars along with changing work patterns.

A more fundamental reason could be that we’re reaching the end of the motor car era.

If there is one technology that represents the Twentieth Century it is the motor car; the automobile has shaped our cities, our lifestyles and our culture.

However we are now in the Twenty-First Century.

The three eras of motoring

Roughly speaking, we could break the Twentieth Century’s love affair with the motor car into three phases; development, consolidation and dependency.

In the first period, the automotive industry was developing with thousands of manufacturers experimenting with the technology and production methods. At the same time governments were beginning to build road networks and communities were demanding improved links.

By the beginning of World War II, the motor car was an important part of life but ownership was largely restricted to affluent households and business.

Following World War II governments made huge investments in road networks and automobiles became cheaper to own.

This gave a generation a new taste of freedom as you could go anywhere with a tank of gas. It also changed the layout of our suburbs as people could now travel further to work, allowing them to move into bigger houses on the fringe of town.

As government investment was focused on road building, passenger train and tram networks were starved of capital with many cities abandoning their transit systems altogether.

Suburbs built in the early to mid Twentieth Century had evolved around trams and the legacy of that can still be seen today. However customers no longer wanted to fight for parking spots on crowded streets designed for horse drawn carriages and trams.

Responding to this developers started building supermarkets and shopping malls which became popular largely because they offered easier parking. Cheaper goods made available by improved logistics systems – another effect of the motor car – was the other main reason.

The beginning of dependency

With the advent of the 1970s oil shock, the role of the motor car turned from being a tool of liberation into one of dependency. The suburbs of the 1960s and 70s had been built around the assumption of universal car ownership and cheap fuel. When fuel ceased being cheap, then households budgets were affected.

Not coincidentally after the oil shock the reversal of ‘white flight’ – the movement of the middle classes to outer suburbs – started with the gentrification of inner suburbs that had been abandoned by the working class.

Through the 1970s and 80s the cost of owning a motor car became more expensive as governments stopped externalising the costs of maintaining roads and saw car use and petrol taxes as a revenue source.

At the same time the obvious effects of saturating society motor cars became obvious as roads increasingly became choked and planners began to realise that building more roads only attracted more traffic.

Times of decline

By the turn of the Twenty-first Century technology had also started to move away from centralised offices and factories. Today technologies like the internet and increasingly 3D printing mean that workers don’t have to commute vast distances. Automation also means many levels of management are no longer necessary.

Changing work patterns is also affecting incomes, with car ownership being expensive many employees – particularly young workers – don’t want to buy automobiles.

This all means that the era of the motor car is coming to an end, it’s not going to vanish quickly but the decline has started.

For business, this means the post World War II assumptions that saw the rise of the supermarket, shopping mall and big box discount store are no longer valid.

Some managers, most notably those of doomed department stores, won’t learn these lessons and will pass into history like the stagecoach companies.

Just as the end of the horse and carriage era saw the demise of buggy whip makers and blacksmiths, the rise of the motor car saw an unprecedented rise in wealth, employment and productivity. Not only were the lost jobs created elsewhere, but many more were created.

While the motor car isn’t going to disappear overnight, the decline has started and our society is adapting. For business and government leaders, the task is to understand those changes and adapt.

Image courtesy of a Norwegian motorway by Ayla87 through SXC

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Australia and the Dutch Disease

Australia’s greatest management challenge is dealing with the country’s dose of the Dutch Disease

This week sees the launch of the annual G’Day USA festival where Australian exporters and various celebrities extol the virues of the country across the United States.

One of Australia’s success stories of the last decade has been Yellowtail Wines which carved a niche for Australian wines in the US in the same way Jacob’s Creek did a decade earlier in the UK.

Today the Australian Financial Review reports that Cassella Wines, the maker of Yellowtail, is in breach of its banking covenants due to the high Australian dollar.

Cassella Wines is another victim of Australia’s Dutch Disease infection.

Dutch Disease owes its name to the Netherlands’ gas boom of the 1960s. By the early 1970s the strong Guilder damaged the rest of the Dutch economy which didn’t profit from extracting natural gas.

Having sleepwalked into the Dutch Disease, it’s fascinating how Australia’s electorate, policy makers and business leaders are in denial about the effects as successful exporters like Cassella Wines struggle with a high dollar and accelerating costs.

When commodity prices and the dollar turn, and they always do, its going to be tough for the economy to adapt as much of the industry capacity that was competitive at lower rates won’t be available to take advantage of the lower costs and to pick up the slack from a declining mining sector.

For Australian businesses, the onus is on managers and proprietors to protect their organisations from the short term effects of a high currency and the medium term effect of a falling dollar pushing up the input prices of imports.

In other words, getting costs down without becoming too reliant on offshored labour or suppliers. The companies that manage this are going to be very strong after the initial adjustment, but it’s a tough management task.

While that task can, and will be, done by smart and hardworking leaders no-one should expect any recognition of the scale of this task from governments, media or business organisations who seem to be in denial of reality.

The Dutch and Australian flags image is courtesy of Emilev through SXC

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Saving Hewlett Packard

Bloomberg Business week looks at the big challenges facing Meg Whitman as she tries to rebuild Hewlett Packard.

This site has previously looked at the massive task facing Meg Whitman as she tries to rebuild Hewlett Packard and undo the mis-steps of the company’s previous managerial failures.

Bloomberg Businessweek goes further with a deep analysis of what went wrong for HP over the last two and Whitman’s challenges in rebuilding the business.

HP’s decline starts with the biggest mis-step of Carly Fiorina, one of Whitman’s predecessors, in selling off HPs instrumentation business in 1999.

Power in the instruments

Industrial instruments were the core of HPs business, generations of engineers and scientists knew and trusted the HP brand which was synonymous with high quality, cutting edge technology.

The proof of the instrument arm’s strength is in the subsequent share performance of the spun off company – today Agilent trades at $43 while HP wallows at $15, half of what it was worth in 1999.

Making matters worse for HP was buying into the personal computer industry just as Dell and Gateway were commodifying the market. Fiorina’s high spending ways left Hewlett Packard incapable of competing against the lean operations of their nimbler competitors.

In many respects Fiorina’s successor Mark Hurd is the IT sales guy from central casting; aggressive, an excellent eye for numbers, intolerant of (other peoples’) wasteful spending and an ego the size of Uranus.

For HP he had some good points, making executives directly responsible for their division’s performance and cutting out management consultants. Anyone who shows Bain & Co or McKinsey’s the door, is not a wholly bad guy.

Cutting costs in the driver business

In cutting costs Hurd was ruthless – the Bloomberg story tells of how he cut HP’s driver division from over 700 to 64 staff. This in itself was not a bad thing.

Those who worked on HP products remember that period well. The software that came with Hewlett Packard equipment was buggy and overblown and Hurd’s reforms bought in a real improvement as drivers went back to being simple and effective.

Cost measures though also showed in HPs products and after sales support – increasingly the company resembled Dell during the dark days of Dell Hell where buyers of shoddy equipment found themselves dealing with poorly trained support desks over low quality phone lines. Customers started to flee HP products.

The perils of stack ranking

At the same time Hurd was using the crudest management technique of all – stack ranking, the practice of culling the bottom ten percent of workers each year.

Vanity Fair’s 2012 expose of Microsoft’s decline infamously blamed stack ranking for much of that company’s woes. The problem being that defining the bottom 10% of a team invariably involves politics and staff become more obsessed with currying favour with their managers than shipping good products.

People like Steve Ballmer and Mark Hurd like stack ranking because they thrive in that environment. The paradox is that characters like Steve Jobs, Bill Gates and Mark Zuckerberg tend to be culled.

HP, and Microsoft, needed more geeks focused on shipping new products than political animals like Hurd and Ballmer but that’s not what they got.

While Hurd met his financial targets, HP’s position was becoming more fragile as cranking up margins on services and printer cartridges while slashing costs on PCs and hardware can only go so far. His implosion over his royal lifestyle was probably one of the best timed exits in corporate history.

It’s worth reflecting on Hurd’s management excesses as he slashed expenses for the lesser beings in his company, you can browse a list of his expenses at The Street. In this respect alone, Hurd personified the entitled managerial culture of modern western society.

Replacing Hurd with the quiet Leo Apotheker made sense in that the new CEO was the opposite to his predecessor, but just as he didn’t have Hurd’s ego he was also a dud who made strategic mistakes and let costs begin to slip.

In replacing Apotheker Meg Whitman has massive job ahead of her, an important part of getting HP on track is slimming down management ranks to make the company more nimble. That in itself is a big task.

The biggest task of all though is to recapture HPs position as being an innovative leader with high quality products. Over the Fiorina and Hurd years that position was squandered and replaced by companies like Cisco and Apple.

Right now it’s hard to see where HP can re-establish itself in the marketplace but the goodwill towards the company from a generation of engineers who were bought up believing Hewlett Packard means quality means the company has a chance.

Hopefully Meg Whitman is the right person to seize those chances and undo fifteen years of bad management.

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Privacy is not someone else’s problem

Modern technology tools have made privacy an issue for everyone

Early this year a storm broke out about privacy in the United States when a computer rental company was caught spying on its customers.

Technology website Ars Technica has an excellent story describing what the company was doing and the software they were using.

What the story of PC Rental agent shows is that even small businesses have the tools to run serious surveillance on their customers and some will do so simply because they can.

The days when privacy could be dismissed as the concern for a few sensitive celebrities, sports people and politicians with something to hide are over – privacy is now your problem.

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Are executives taking privacy seriously?

Executives and boards need to start taking privacy seriously before their businesses’ reputations are damaged and restrictive laws enacted.

In an article for Business Spectator on Lord Justice Leveson’s Sydney speech last week, I looked at the commercial aspects of privacy, an area that was overlooked in the reporting of the two Australian lectures by the British jurist.

Privacy is a serious issue which is also being overlooked by boardrooms, possibly because it’s often conflated with IT security and so it’s seen as a technology problem and, to be honest, executives see it as being a bit ‘soft’ and airy-fairy.

Sony’s humiliations in 2011 with a series of embarrassing privacy breaches that left the company’s reputation in tatters show the real and embarrassing risks in not taking privacy seriously.

The UK prank phone call scandal is another example of poor privacy policies which have real world impacts on both the hospital’s patients and staff, whether the management there is held to account or even learns any lessons remains to be seen.

In California, the US state with the strongest privacy laws, Delta Airlines is being sued over its smartphone app’s policies however the state itself isn’t immune from serious breaches.

Giving away social security numbers opens up all sort of identity theft opportunities although any privacy breach exposes the victims to potentially serious consequences, some of that pain is going to be passed onto those who give the information away.

The worry for businesses is that in the absence of serious action by governments and the private sector, the evolution of privacy law is going to take place in the courts with unpredictable and inconsistent results.

As we now have the tools to gather, store and process huge amounts of data about our customers and staff, we also have an obligation to protect it. This is something managements need to understand and take seriously.

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Blind faith in the algorithm

Putting too much faith in computer programs may cause problems for the unwary.

It’s fairly safe to say Apple’s ditching of Google Maps for their own navigation system has proved not to be company’s smartest move.

The humiliation of Apple was complete when the Victoria Police issued a warning against using the iPhone map application after people became lost in the desert when following faulty directions to the town of Mildura.

Mapping is a complex task and it’s not surpising these mistakes happen, particular given the dynamic nature of road conditions and closures. It’s why GPS and mapping systems incorporate millions of hours of input into the databases underlying these services.

Glitches with GPS navigations and mapping applications aren’t new. Some of the most notorious glitches have been in the UK where huge trucks have been directed down small country lanes only to find themselves stuck in medieval villages far from their intended location.

While those mishaps make for good reading, there are real risks in these misdirections. One of the best publicised tragedies of mis-reading maps was the death of James Kim in 2007.

Kim, a well known US tech journalist, was driving with his family from Portland, Oregan to a hotel on the Pacific Coast in November 2006 when they tried to take a short cut across the mountains.

After several hours driving the family became lost and stuck in snowdrifts and James died while hiking out to find help. His wife and two children were rescued after a week in the wilderness.

Remarkably, despite warnings of the risks, people still get stuck on that road. The local newspaper describes it the annual ritual as find a tourist in the snow season.

Partly this irresponsibility is due to our modern inability to assess risk, but a more deeper problem is blind faith in technology and the algorithms that decide was is good and bad.

A blind faith in algorithms is a risk to businesses as well – Facebook shuts down accounts that might be showing nipples, Google locks people out of their Places accounts while PayPal freeze tens of thousands of dollars of merchants’ funds. All of these because their computers say there is a problem.

Far more sinister is the use of computer algorithms to determine who is a potential terrorist, as many people who’ve inadvertently found themselves on the US government’s No Fly List have discovered.

As massive volumes of information is being gathered on individuals and businesses it’s tempting for all of us to rely on computer programs to tell us what is relevant and to join the dots between various data points.

While the computers often right, it is sometimes wrong as well and that’s why proper supervision and understanding of what the system is telling people is essential.

If we blindly accept what the computer tells us, we risk being stuck in our own deserts or a snowdrift as a result.

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