management | Paul Wallbank - Communications Professional

Google schmoogle – how one telco destroyed 9 billion dollars in shareholder funds

How one company blew nine billion dollars in shareholders’ equity is a lesson for every business on the value of timing and wise management.

How one company blew nine billion dollars in shareholders’ equity is a business lesson on the value of timing and wise management.

As a rule, telecommunications executives are an arrogant bunch and none are more so than Sol Trujillo – formerly of American West, French provider Orange and finally Telstra, Australia’s incumbent telecommunications operator.

History shows that Telstra’s board, largely made up of dim-witted political appointees, had little idea of what they were getting when they hired Trujillo in 2005 but they soon found out as the brash American’s less than diplomatic style quickly alienated politicians and industry commentators alike.

Trujillo though wasn’t particularly concerned about the sensibilities of passes for Australia’s business and political elites, he was happier to take on bigger players on the global stage and one of those was Google.

Google Schmoogle

Like telcos and media companies around the world in the mid-2000s, Telstra had a problem with its directories business as the World Wide Web was eroding the value of the Yellow and White Pages franchises.

At the time many analysts were agitating for Sensis, Telstra’s directory division, to be sold off as a separate business. In 2005 it was valued at ten billion dollars which was a tidy sum for the telco as it rolled out its Next G network.

Trujillo though had a better idea – Sensis would claw back the market by taking Google on with their own search engine.

Sensis Search was born in November 2005 and the Telstra CEO dismissed questions about the wisdom of taking on the search engine giant with the comment, “Google Schmoogle.”

Three years later, Telstra quietly accepted defeat with Sensis CEO Bruce Akhurst announcing a ‘commercial agreement’ with Google.

Nielsen NetRatings at the time showed Google search being used by 9.3 million Australians compared to just 184,000 users for Sensis Search.

In Telstra’s 2008 annual report, Sensis earned 2.1 billion dollars. On a 2.5x valuation, the division was worth five billion to Telstra’s shareholders at the time the search engine was closed down..

The Dying Yelp

Despite the setback, Sensis was able to struggle along for another decade on the back of its strong cashflow and legacy market position although income was steadily falling.

In a desperate attempt to shore up its declining revenues, the company picked up the failed digital ventures of Australia’s newspaper duopoly and licensed operations from overseas startups like Yelp!

Few of these acquisitions made sense and none of them were properly integrated into the declining directory media business.

Finally a year ago, Sensis admitted they live in a digital era with Managing Director John Allen admitting what most industry observers knew a decade earlier;

Until now we have been operating with an outdated print-based model – this is no longer sustainable for us. As we have made clear in the past, we will continue to produce Yellow and White Pages books to meet the needs of customers and advertisers who rely on the printed directories, but our future is online and mobile where the vast majority of search and directory business takes place.

But it was all too late, the market had been lost along with the bulk of shareholders’ equity.

Today Telstra announced a 70% sale of Sensis to US based Platinum Equity for $A454 million. The value of the entire business being $650 million – 7% of the division’s value nine years ago.With over nine billion Aussie dollars squandered on hubris and a failure to recognise a changed market place, Sensis stands as a good example of how valuable timing and good management are in business.Sol Trujillo though did very nicely, and the dim witted men who sat on Telstra’s board in 2005 will never be called to account for wasting so much of their shareholders’ money.

Big Data, retail and the 80/20 rule

Retailers are using big data to apply the 80/20 rule – or Pareto’s Law – to reduce returns and shrinkage

Sorting out troublesome customers is one of the major benefits that big data offers businesses, a profitable example lies in reducing returns to online stores.

One of the banes of online retail is dealing with returns, the industry pioneers overcame objections to shopping over the web through no-questions-asked returns policies that’s trained customers into expecting they can send items back regardless of the reason.

The Frankfurt School of Finance and Management’s Christian Schulze surveyed nearly six million internet transactions and found returns are effectively costing online retailers half their profits, as The Economist reports.

Leaving that sort of money on the table is painful for any business and online retailers are trying to find ways to reduce those return costs by sacking their customers;

But this risks a backlash: rejected shoppers are likely to rush to the newspapers or social media to complain—and their gripes may turn other, more profitable customers against the firm.

Much of this comes down to Pareto’s Law, that 80% of your problems will come from just 20% of customers, and a key imperative in business is to get the troublesome, high maintenance customers buying from your competitors without being too obvious.

Identifying those troublesome customers is where Big Data comes into play, coupled with intelligent analytic tools businesses are able to identify who is more likely to return a product or dispute a bill before the sale is made.

As the Wall Street Journal reports many online retailers are exploring ways they can reduce the return rates using Big Data and analytics.

By giving buyers access to their purchasing history stores are able to suggest when a customer is buying something that isn’t appropriate or the wrong size.

The WSJ cites fashion retailer Rue La La, which lost $5 million in returns last year, as an example.

For instance, a customer who has continuously bought the same brand of dress shirts in both a small and a medium might see a note pop up saying: “Are you sure you want to order the small? The last five times you ordered both sizes, you only kept the medium,” Chief Executive Steve Davis said.

Another tactic for retailers is to discourage frequent returners from buying high margin goods through targeted vouchers and offers. One point the WSJ article makes is how differential pricing is going to be applied – if you regularly return goods then expect not to be offered the best discounts when you visit the retailer’s website.

Many returns though are the result of genuinely dissatisfied clients and this is where improving customer service kicks in, the WSJ describes how some retailers are now providing video tutorials for their products and increasingly smarter customer service can be used to avoid returns.

With the increased sophistication of customer analytics and support tools, we’ll see online retailers squeeze more profit out of their businesses as well as look after their most profitable clients.

The problem for ‘bricks and mortar’ retailers not deploying new technologies is they won’t have the tools to compete with their savvier online rivals.

A good example of legacy managers struggling in the face of chronic under investment are Australian retailers and this week the Myer department store chain had to shut down its online outlet after the system collapsed.

There is no timeline on when Myer’s website will be back up. It’s a tough time for those retailers that haven’t invested in modern system and an even tougher time for companies with legacy managers like those at Myers.

The use of big data in analysing shopping behaviours is one area where well managed retailers will out perform their poorer rivals, it’s hard to see how companies like Myer will survive in the modern era of business.

The myth of celebrating failure

Embracing failure isn’t all it is cracked up to be

“We should celebrate failure!” One of my friends said over a beer. “If so, I have a lot to celebrate but don’t have a lot of money to dot it with.

Like many business mantras ‘celebrating failure’ is nice to say until you’ve actually experienced it.

Failure tastes pretty bitter and it isn’t pleasant when you encounter it. For some, it could kill their careers.

When you hear business gurus and snake oil merchants expounding the mantra of embracing failure it’s worth considering survivor bias when you hear the case studies

It’s also worth looking at the state of their suit and how desperately they are selling their box set of inspirational DVDx or books.

Bernie Brookes’ Blues – the inability of managers to learn from failure

Business leaders need to accept and learn from failure if their organisations are to survive.

One of the notable aspects of modern corporations is the inability of executives to identify failure.

A good example of this is the Australian department store industry. Like most Aussie industries it’s dominated by two major players, Myer and David Jones, both of whom have struggled with the realities of modern retailing.

David Jones is notable for deciding the web was too much hard work in 2001 while Myer’s management whines about sales taxes despite struggling with antiquated point of sales systems and an inadequate online presence that still lags its international competitors.

This week illustrates both companies’ state of executive denial, yesterday Myer’s CEO Bernie Brookes blamed falling profits and escalating costs on the GST and labour rates – the idea that management should take some of the blame for increased overheads didn’t seem to occur to Bernie.

One telling comment of Brookes’ are his comments about productivity and global competitiveness.

“The sector would benefit from reform to help drive productivity and become more competitive in an increasingly global marketplace,” said Brookes.

Brookes’ comment illustrates just how the Australian corporate sector has flubbed the transition to operating in a high cost economy.

At the same time Bernie Brooks was bemoaning the state of the world, David Jones CEO Paul Zahra was opening a new small format store and – like all champions of free enterprise – blamed the government for slow sales.

David Jones’ new store is interesting in itself, notably this comment in the Sydney Morning Herald story;

Mr Zahra said the store had been especially catered to the wealthy demographics of the Malvern area with a focus on high margin items.

“Higher margin categories are what we have focused on and low margin categories are available in store but in the online system so we can get it shipped directly to people’s homes.

“And we get a better gross profit per square metre as a result.”

Welcome to the Twenty-First Century, Mr Zahra.

Both Zahra and Brookes’ statements show they learn nothing from failure, indeed they don’t even seem to acknowledge they have failed.

It’s understandable in modern corporate life not to acknowledge failure, in the alpha-male environment of the executive suite admitting failure is a form of professional suicide.

However not learning from mistakes is a recipe for making more errors – “those who fail to learn from history are condemned to repeat it.”

And that’s exactly what the hapless Myer and David Jones shareholders are condemned to, as are all the other businesses whose management doesn’t see its failures.

Building the post-agile workplace

Yammer founder Adam Pisoni believes the Microsoft owned business could be then next phase of the industrial revolution.

“I personally believe we haven’t seen a major change in how companies work since the industrial revolution,” says Yammer co-founder Adam Pisoni. “We’re, I think, on the brink of a change as large as that.

Pisoni was speaking at Microsoft’s Australian TechEd conference on the Gold Coast and gave an insight into how Yammer’s development philosophy is being implemented at Microsoft since the smaller company was acquired last year.

He believes all businesses can benefit from collaborative, cloud based tools like Yammer however software companies like Microsoft are the ones being affected the earliest from their adoption.

“We sometimes joke that Yammer’s development methodology is post-Agile, post-Scrum” says Pisoni. “Because they were not fast enough and don’t respond to data quickly.”

Understanding modern workplaces

This will strike fear into the minds of managers who are only just coming to understand Agile and Scrum methodologies over the traditional ‘waterfall’ method of software development.

“We focused primarily in the past on efficiency,” states Pisoni. “In many ways things like scrum attempt to make you more agile but still focus on efficiency. Everyone is tasked based and hours and burn down points and all that”

“The name of the game now is not efficiency, it’s how quickly you can learn and respond to information.”

“Yammer is less of a product than it is a set of experiments running at all times. We take bold guesses about the future but then we try to disprove our hypotheses to get there.”

“So we came up with this ‘post-agile’ model of a small, autonomous, cross-functional teams – two to ten people for two to ten weeks who could prove or disprove an hypotheses based on the data.”

“This lets us quickly move resources around to double down on that or do something else.”

Flipping hamburgers the smart way

Pisoni sees this model of management working in areas outside of software development such as retail and cites one of his clients, Red Robin burgers, where the hamburger chain put its frontline staff on Yammer and allowed them contribute to product development.

The result was getting products faster to market – one burger that would have taken eighteen months to release took four weeks. The feedback loops from the customer and the reduced cost of failure made it easier to for the chain to experiment with new ranges.

With companies as diverse as hamburger chains, telcos and software developers benefitting from faster development times, it’s a warning that all businesses need to be considering how their employees work together as the competition is getting faster and more flexible.

It remains to be seen if this change is as great as the industrial revolution, but it’s now that can’t be ignored by managers and entrepreneurs.

Paul attended Microsoft TechEd Australia as a guest of Microsoft who paid for flights, accommodation and food.

Why do executives see romance in the startup culture?

Many managers think startups are romantic – could it be because of the corporate lives they lead?

One of the fascinating phenomenons of the modern era is how corporate managers have appropriated the startup culture.

At the announcement of the Australian Centre for Broadband Innovation’s Apps For Broadband prizes, Foxtel’s CIO Robyn Elliot described her experience of working in a startup.

“Foxtel was once in the category of startup itself,” said Elliot at the start of her speech.

Apples and Oranges

Comparing Foxtel to a scrabbling startup in the modern sense is bizarre given the company was a well funded joint venture between News Limited and Telstra – the company being a good example of modern Australian crony corporatism rather than a risky undertaking by daring entrepreneurs.

This conceit about startups isn’t unusual among corporate executives, in the early days of Australia’s National Broadband Network it was quite common to hear NBNCo managers talk about their startup ethos – this from a company backed by around 30 billion dollars of government funding.

At one stage I interviewed for a job at NBNCo and I struggled not to start giggling when the “startup ethos of the organisation” was earnestly emphasised to me several times during the meeting.

Not surprisingly the job went to an ex-telco staffer, as did most of the team’s roles. No doubt their corporate experience was far more suited to the company’s ‘startup ethos’ than that of actually having worked in four startups. Giggling in the interview probably didn’t help either.

The romantic dreams of executives

Given most corporate staffers would curl into the fetal position and weep after two weeks of working in a real startup, why do executives indulge in the conceit that their business is ‘just like a startup’?

The answer could lie in “The Consequences to the Banks of the Collapse in Money Values” written by John Maynard Keynes in 1931.

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men.

So it is for the modern corporate executive who has spent their working lives fighting for the corner office having met their KPIs and spending years cultivating their network of like minded managers.

After two decades spent writing stern memos on the use of paper clips and climbing the corporate ladder, it must be tempting for a middle aged executive to look at those funky youngsters getting billion dollar payouts after a couple of years grabbing three hours sleep a night among the pizza boxes under the desk and get pangs of what might have been…..

A harmless startup fantasy

In some many ways the executive startup fantasy is touching and largely harmless, even if it does attract sniggers and giggles from the unwashed and underpaid who’ve actually been there.

The real risk is when a senior executive tries to shoehorn a Silicon Valley startup culture into an organisation.

While most large companies could do with some of the hunger and flexibility found in smaller businesses, there’s many ways that could go terribly wrong – particularly when driven by a starry eyed romantic manager.

For most executives though, the dreams of being in a startup will remain a fantasy – and that’s probably best for everybody.

Cutting the middle management fat

Cutting middle management is an imperative for business as markets change quickly.

No-one can say life is comfortable at Cisco when every two years the company engages on a round of job cutting that tends to keep employees on their toes.

While this year’s job cuts are relatively mild – only 4,000 as opposed to nearly 13,000 in 2011 – it’s notable the focus on culling middle management positions.

“We just have too much in the middle of the organization,” the Wall Street Journal reports Cisco CEO John Chambers as saying.

One of the challenges for businesses is become more flexible when markets are rapidly changing. Having ranks of middle managers makes it harder for organisations to respond.

John Chambers and Cisco are reducing their middle management head count to respond to that need. Many other companies are going to have to do the same.

Politics, business and leadership

Google’s hiring processes raise some important points about leadership.

I’ve covered the New York Times’ interview with Google’s senior vice president of people operations, Laszlo Bock previously in describing what the business has learned from its scientific method of hiring people.

One striking aspect of that story that deserves further discussion is Bock’s thoughts on leadership;

We found that, for leaders, it’s important that people know you are consistent and fair in how you think about making decisions and that there’s an element of predictability. If a leader is consistent, people on their teams experience tremendous freedom, because then they know that within certain parameters, they can do whatever they want. If your manager is all over the place, you’re never going to know what you can do, and you’re going to experience it as very restrictive.

This is something that applies in all walks of life — whether you’re coaching a kids’ football team, running a corporation or leading a nation.

Sadly in many of these fields we’re lacking the consistent leadership Laszlo Bock describes. That could turn out to be one of the greatest challenges for the 21st Century.

Re-inventing management with social media

Is social media changing how management works? It could be the case at Telstra.

Yesterday I went along to hear Telstra’s Paul Geason speak at the American Chamber of Commerce lunch in Sydney.

Geason, who is Group Managing Director for the company’s Enterprise and Government division, was speaking on some of the findings from Telstra’s Clever Australian program along with some of the technology trends he’s encountered in big business and public organisations.

The bulk of Geason’s presentation I reported in an article for Comms Day, and much of his observations about enterprise technology trends wouldn’t surprise keen observers of the industry or regular readers of this blog.

What did stand out though were his comments on how social media is changing management behaviour at Telstra where over 25,000 registered users of the company’s Yammer platform have direct access to the company’s CEO, David Thodey.

Social media is just going crazy. Within Telstra now we have over 25,000 of our staff registered on Yammer. It has been a phenomenon. It’s playing this really interesting role of breaking down the hierarchy in our organisation.

Which is not just because of the technology but it’s also got something to do with our CEO.

He is on Yammer just about every single day of the week. There is not an issue that hits that site that he won’t pick up and direct to the right place to get it to the right place and have it dealt with.

Our people love it, they would never have imagined they could get that level of access and input and intervention from the CEO.

There’s a certain transparency that has come to our organisation that didn’t exist previously which is really great for the levels of engagement of our people and very challenging for us as leaders in having to deal with that level of visibility that was not there before.

I think it’s really changing how organistations are operating.

Paul Geason’s comments are a good example of changing management structures. Not only does it bring accountability to executives, it also means organisations can respond quickly to changing marketplaces – something covered in the Future of Teamwork presentation back in 2010.

A few years ago, no-one would have thought of Telstra as being an open, collaborative organisation yet today it’s gone quite a way down the path to becoming one.

The key though to this is having senior management buying into the process. Without that leadership many companies might be facing a tough future.

Google’s simple recipe for management accountability

Does keeping things simple help Google’s managers?

One of the big challenges for larger organisations is giving managers the feedback they need to do their jobs properly. The New York Times interview with senior vice president of people operations at Google, Laszlo Bock, covers some interesting aspects of how accountability in the workplace helps executives.

Google surveys its staff twice a year on how they think their managers are performing in a Upward Feedback Survey that pulls together between twelve and eighteen different factors which the company then uses to measure how their leaders are performing.

That bottom-up, data driven approach has proved to be successful as Bock told the New York Times.

We’ve actually made it harder to be a bad manager. If you go back to somebody and say, “Look, you’re an eighth-percentile people manager at Google. This is what people say.” They might say, “Well, you know, I’m actually better than that.” And then I’ll say, “That’s how you feel. But these are the facts that people are reporting about how they experience you.”

You don’t actually have to do that much more. Because for most people, just knowing that information causes them to change their conduct. One of the applications of Big Data is giving people the facts, and getting them to understand that their own decision-making is not perfect. And that in itself causes them to change their behavior.

Accountability matters – who’d have thought?

The other thing that Bock and Google’s HR team have learned from their measuring management performance is just how effective consistency can be.

We found that, for leaders, it’s important that people know you are consistent and fair in how you think about making decisions and that there’s an element of predictability. If a leader is consistent, people on their teams experience tremendous freedom, because then they know that within certain parameters, they can do whatever they want. If your manager is all over the place, you’re never going to know what you can do, and you’re going to experience it as very restrictive.

Sometimes we make things too complex – and Google’s experience with managers shows that simple accountability and consistency are far more effective than complicated KPIs.

Image by ulrik at sxc.hu

When Venture Capital meets its own disruption

Falling barriers to entry are disrupting Venture Capital investors as much as incumbent managers.

Tech industry veteran Paul Graham always offers challenging thoughts about the Silicon Valley business environment on his Y Combinator blog.

Last month’s post looks at investment trends and how the venture capital industry itself is being disrupted as startups become cheaper to fund. He also touches on a profound change in the modern business environment.

Graham’s point is Venture Capital firms are finding their equity stakes eroding as it becomes easier and cheaper for founders to fund their business, as a result VC terms are steadily becoming less demanding.

An interesting observation from Graham is how the attitude of graduates towards starting up businesses has changed.

When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there’s a third: start your own company. That’s a big change. In principle it was possible to start your own company in 1986 too, but it didn’t seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn’t seem possible to start a company that would become big.

That isn’t true – people like Michael Dell, Bill Gates and Steve Jobs were creating companies that were already successes by 1986 – the difference was that startup companies in the 1980s were founded by college dropouts, not graduates of Cornell or Harvard.

In the current dot com mania, it’s now acceptable for graduates of mainstream universities to look at starting up business. For this we can probably thank Sergey Brin and Larry Page for showing how graduates can create a massive success with Google.

One wonders though how long this will last, for many of the twenty and early thirty somethings taking a punt on some start ups the option of going back to work for a consulting firm is always there. Get in your late 30s or early 40s and suddenly options start running out if you haven’t hit that big home run and found a greater fool.

There’s also the risk that the current startup mania will run out of steam, right now it’s sexy but stories like 25 million dollar investments in businesses that are barely past their concept phase do indicate the current dot com boom is approaching its peak, if it isn’t there already.

Where Graham is spot on though is that the 19th and 20th Century methods of industrial organisation are evolving into something else as technology breaks down silos and conglomerates. This is something that current executives, and those at university hoping to be the next generation of managers, should keep in mind.