I once participated in the negotiation of a decently large franchisee renewal. The franchisee was solid enough and was renewing its contract with corporate to continue operate in a few smaller countries. However, the negotiations got hung up on one crucial point. The franchisee was not willing to assume unlimited currency risk. Or, let me put it another way, the corporation was insisting on having a minimum annual guarantee in a currency foreign to the region where the franchisee operated. By the time I got involved both sides were issuing ultimatums and unwilling to back down. I was embarassed of my employer and the vice-president refusing to budge on an issue in which he was clearly out of his element (his primary experience was US only operations). After failing to convince this executive how... imprudent... the position was, I decided to subtlety cut down his position by explaining to and convincing some of the executive's colleagues that this decision was "unwise to pursue at this juncture." At the end of this process, there were two key lessons for me: 1) be willing to be wrong and solicit the feedback of those more knowledgeable than myself, and 2) a lack of understanding of a simple concept (an unforced error, as I like to call them) can consume significant amount of time at all levels of the organization.
Tuesday, April 29, 2014
Thursday, April 17, 2014
Show Me the Money II - Statistics
I wrote a couple weeks ago on short-sighted corporate cultures. However, 20/400 near-sightedness is not just a "some corporate cultures" type of problem. It's a human problem. We see it when those who eat the marshmallow now seem so cool, exciting, and hip as they munch that delicious morsel and get invited to all the parties. I would take a swipe at politicians, but that's too easy, so I'll go one step above and go for myself -- those of us who rely on aggregated statistics and believe that they are comparable and assume everything else we haven't included in our models isn't very significant anyway. I'll use GDP as an example.
Besides GDP being an estimate of economic well-being, it's also an accounting identity. GDP = C + I + G + (X-M). Just add up consumption, gross investment, government spending, and net exports. There are many criticisms (most of them are marginalized) of GDP. I'll focus on just one: G, or the government spending component.
GDP is supposed to accurately depict the economic well-being of a society. Voluntary transactions, consumption, even the (quite subjective in my opinion) human development index can be a gauge of well-being. Government spending, however, is not. Here are a few examples:
1) A government spends $10M developing a new bomb. That money is now added into GDP. The economy is supposed to be better off by $10M.
Some people erroneously believe that war helps the economy (e.g., "World War II got us out of the Great Depression!"). Large amounts of spending on war simply manipulates GDP to no longer represent the economic well-being of a society. People producing large amounts of tanks, bombers, and guns don't make a society "richer" than when those same people produce butter, hair cuts, and buildings. Now, of course survival makes one better off than death and defense is a crucial part of this. However, GDP equates bombs with corn flakes. I'd prefer to not need the bomb and eat my corn flakes, but GDP states that I'm just as well off if I have no corn flakes and the bomb is made. Of course I prefer survival, but survival and corn flakes is even better than survival and no corn flakes. GDP doesn't make this distinction.
2) A farmer receives a $5M subsidy to plant nothing. The economy is supposed to be better off by $5M. The result is higher agriculture prices and a deadweight social loss that comes from the transfer of money through government There also might be secondary effects as savings drop as more income is spent on food. The economy is better off according to GDP.
3) A state spends $15B on the biggest public works project in the state's history. It's the biggest public works project in history because it went triple over budget and time. Let's call it a Dig that is Big. The fact that it went over budget is a plus for GDP, not a minus. Cases like this beg the question, "How much quality am I receiving per dollar spent?" Tyler Cowen makes the convincing case in The Great Stagnation that the marginal dollar of government spending is very important. The first 10% of GDP in government spending of GDP is generally spent on courts, police, and preventing starvation. The final 50-60th % of GDP in government spending is spent on subsidies, four year unemployment benefits, bike paths, and free stuff. When GDP is calculated, involuntary transactions are weighted equally with voluntary transactions. We then take these GDP numbers and compare them across countries with very different levels of government spending and assume that they are equivalent.
And, yet, I turn around and use the metric because... what else do I use? What else is available? I use the tools that I have even though my results are likely systematically biased. This is the principal reason why I love to dive, without the narrative of others, into the random minutiae in a process or among operational or "line" teams. I have the chance to see some of the ways it can all go wrong when we aggregate it up and take decisions. It forces cluelessness, and, hopefully, humility.
Besides GDP being an estimate of economic well-being, it's also an accounting identity. GDP = C + I + G + (X-M). Just add up consumption, gross investment, government spending, and net exports. There are many criticisms (most of them are marginalized) of GDP. I'll focus on just one: G, or the government spending component.
GDP is supposed to accurately depict the economic well-being of a society. Voluntary transactions, consumption, even the (quite subjective in my opinion) human development index can be a gauge of well-being. Government spending, however, is not. Here are a few examples:
1) A government spends $10M developing a new bomb. That money is now added into GDP. The economy is supposed to be better off by $10M.
Some people erroneously believe that war helps the economy (e.g., "World War II got us out of the Great Depression!"). Large amounts of spending on war simply manipulates GDP to no longer represent the economic well-being of a society. People producing large amounts of tanks, bombers, and guns don't make a society "richer" than when those same people produce butter, hair cuts, and buildings. Now, of course survival makes one better off than death and defense is a crucial part of this. However, GDP equates bombs with corn flakes. I'd prefer to not need the bomb and eat my corn flakes, but GDP states that I'm just as well off if I have no corn flakes and the bomb is made. Of course I prefer survival, but survival and corn flakes is even better than survival and no corn flakes. GDP doesn't make this distinction.
2) A farmer receives a $5M subsidy to plant nothing. The economy is supposed to be better off by $5M. The result is higher agriculture prices and a deadweight social loss that comes from the transfer of money through government There also might be secondary effects as savings drop as more income is spent on food. The economy is better off according to GDP.
3) A state spends $15B on the biggest public works project in the state's history. It's the biggest public works project in history because it went triple over budget and time. Let's call it a Dig that is Big. The fact that it went over budget is a plus for GDP, not a minus. Cases like this beg the question, "How much quality am I receiving per dollar spent?" Tyler Cowen makes the convincing case in The Great Stagnation that the marginal dollar of government spending is very important. The first 10% of GDP in government spending of GDP is generally spent on courts, police, and preventing starvation. The final 50-60th % of GDP in government spending is spent on subsidies, four year unemployment benefits, bike paths, and free stuff. When GDP is calculated, involuntary transactions are weighted equally with voluntary transactions. We then take these GDP numbers and compare them across countries with very different levels of government spending and assume that they are equivalent.
And, yet, I turn around and use the metric because... what else do I use? What else is available? I use the tools that I have even though my results are likely systematically biased. This is the principal reason why I love to dive, without the narrative of others, into the random minutiae in a process or among operational or "line" teams. I have the chance to see some of the ways it can all go wrong when we aggregate it up and take decisions. It forces cluelessness, and, hopefully, humility.
Tuesday, April 1, 2014
Show Me the Money - Corporate Cultures
As a friend was engrossed in reviewing the execution of a failed initiative, an executive walked over to his desk, mentioned a few things, then stated "It's the 25th and we need to find more money for the month. I'm heading to Accounting." ... Let that soak in. The first time you hear it, the alarm bells should start going off. The twentieth time, you think it's funny and laugh about it with some colleagues. The hundredth time? You might be responding, "How can I help?"
“Vice is a monster of so frightful mien, As to be hated needs but to be seen; Yet seen too oft, familiar with her face, we first endure, then pity, then embrace”
-Alexander Pope
Short-sighted corporate cultures don't focus on value creation. Managing by the quarter (or month) is like driving a car with the top two-thirds of your windshield blacked out in a snowstorm. Once you get to the point that executives have no fear of reprisal and say it out loud, you realize that everyone else on the freeway had their windshield blacked out as well. Some of your top-performers end up heading for the exit lane. Some potential top-performers never become such because they're stunted or take the exit as well. Others find a niche of the company where hopefully they can hide out until after the massive pileup. It's a culture where, like political dictatorships, the worst tend to make it to the top. Is the ensuing crash inevitable? Will it be public? Who will make it out? If you're asking the question, your answer will probably be, "I'm not going to wait around to find out."
“Vice is a monster of so frightful mien, As to be hated needs but to be seen; Yet seen too oft, familiar with her face, we first endure, then pity, then embrace”
-Alexander Pope
Short-sighted corporate cultures don't focus on value creation. Managing by the quarter (or month) is like driving a car with the top two-thirds of your windshield blacked out in a snowstorm. Once you get to the point that executives have no fear of reprisal and say it out loud, you realize that everyone else on the freeway had their windshield blacked out as well. Some of your top-performers end up heading for the exit lane. Some potential top-performers never become such because they're stunted or take the exit as well. Others find a niche of the company where hopefully they can hide out until after the massive pileup. It's a culture where, like political dictatorships, the worst tend to make it to the top. Is the ensuing crash inevitable? Will it be public? Who will make it out? If you're asking the question, your answer will probably be, "I'm not going to wait around to find out."
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