How much business travel is really necessary? Wednesday, May 9 2007 

Uncategorized buscom 8:05 am

Lucy Kellaway wrote an article in the Financial Times a few months back arguing that most business travel served only to make the traveling executives feel important.  I found this facile and annoying. What on earth does she know about leaving for Asia on Saturday to be there for work on Monday morning, which I do several times a year?   A plant manager who spent all the time holed up in an office would rightly be considered ineffective and removed.  Spending all my time at the corporate headquarters and not seeing customers, employees and plants is exactly the same.  

However, travel has high direct and indirect costs, and the question is not entirely unreasonable.

What influences how much travel makes sense?  The biggest factor is the way the company is structured.  Organizational design drastically affects the amount people have to travel.  When a business is organized regionally, where everyone in a region reports to one person then the regional heads will need to be in others areas from time to time, but everyone else will tend to travel locally.  On the other hand if each business segment is organized globally then people at many levels will find it difficult to avoid a lot of time on the road. If people report to you in Asia, Europe and North America, you have to be in each region fairly often. To manage people effectively you need to see them in their environment and you need to be available for their people to meet you.  This is tough to do over the phone.

Most substitutes for travel, phone, vide conferences and so on, work if you already have a relationship with the people you are talking to.   It is not easy to talk to a stranger on a video conference.   If you have a business that is generating a lot of new contacts: customers, suppliers, government officials and new employees you need to meet these people, and have an opportunity for conversations at various levels.  

There are admittedly some more subjective reasons for travel.  If you run a segment of a business, and you report to a CEO, around the corporate office you are just one of a team.  Out in your sector’s facilities you are the top dog.  It can also be an excellent  substitute for action.   If you in business class on the way to somewhere distant it is pretty easy to persuade yourself that you are adding value.  

 

Outlook junk mail rules Tuesday, May 1 2007 

Uncategorized buscom 8:32 pm

It’s hard to predict all the ways a good plan can go wrong. I recently typed a list of words and phrases into my Outlook options under “Rules and Actions”, to filter junk email. Much junk aims to sell drugs online, so I entered all the drug names I could think of on the Outlook forbidden word list, plus the usual range of obscenities and medical terms that I am unlikely to need. The procedure works well and catches almost all of the true junk mail I receive. Occasionally, though, a valid email ends up in my junk file. This can be a problem if I am traveling because I don’t see the junk folder on my Blackberry and so sometimes I miss something important. The misdirection occurs because Outlook is detecting a forbidden word inside another legitimate word. You can prevent this by listing allowed exceptions, such as “cockpit”, which otherwise causes misdirection for obvious reasons.

Recently an entire chain of emails was junked, and it took me a while to find the cause: the word “specialist” contains the word Cialis, a brand of pharmaceutical that competes with Viagra. The same problem reared up, if I may use the phrase, today when I sent a facetious email to a colleague in France wishing him a good holiday on this day of left-wing celebration. His acknowledgment above my original email was junked for including the word “socialism”. (Yes, I tried putting in “cialis “, with a space after it, but this doesn’t seem to work). Frankly, I don’t often use the words “socialism” and “socialist”, so maybe I will leave things as they are.

 

Share buy-backs and the 13,000 Dow Thursday, Apr 26 2007 

Finance and Uncategorized buscom 8:25 pm

The stock market has done well recently and some commentators have ascribed this, in part, to the influence of share buyback programs. This is puzzling on the surface, because in theory this is not an effective use of a company’s cash. If you assume that the cash is simply an asset that is factored into the stock price completely, then a buy-back should make no difference. In many cases the shares fall, suggesting that the objective of trying to raise the stock price may not easy to achieve. However the enduring popularity of these programs suggests deeper explanations.

One way to look at share repurchases is that company management is sending a signal to the market that inside information (which by definition is not in the price – one assumes), would value the stock at a higher price. Given that, the sellers would ask for more than the existing price to sell their stock, so bidding up the price to a sustainable higher level. Most repurchases are indeed at higher than market price. Maybe, though, the managers are bluffing, and are sending a false signal, since it is in their personal interest to get a higher share price.

A second approach is to consider what the company is signaling about its interest rate expectations. Share buybacks make sense if the interest rate is low and is expected to remain so for the immediate future, i.e. before the cash pool can be refreshed by more profits. Maybe the stock market views this as a generally bullish sign. More subtly, managers might see a large cash holding as a sign that the company expected a decline in its credit rating and a subsequent increase in borrowing costs, against which it needed a cash hoard.

Possibly the market sees this as a positive sign that the company is not going to make foolish cash-financed acquisitions. Since most of these schemes are wealth-destroying, investors may see this as a positive signal.

So, if a buyback succeeds in raising the share price it is more because of a change in investor sentiment than any reality in corporate finance. Why do these then sometimes fail, being followed by a fall in the share price? Well, to start with, the market capitalization will logically fall following a purchase, since there is a certain asset, cash, that has been taken out of the company and given back to former shareholders. Earnings will also fall, because whatever interest income the cash yielded is no longer available to the company. This, as I said earlier, should theoretically be compensated completely for by the reduction in the number of shares outstanding, leaving price unchanged. My point is that there is no law that says the price should go in any particular direction.

One can certainly think of negative messages the market might infer from a company’s share purchase. “They have nothing better to spend their cash on…” or “If they think they are going to throw off cash regularly, why don’t they just increase the dividend”

Maybe the deciding research would be to examine all share repurchases both announced and unannounced and determine the results some time afterwards. My bet is that unannounced, stealth buybacks have little impact on the price. Programs announced with much fanfare, involving a large proportion of the shares outstanding will have the most impact, especially if there is rather less stock actually purchased than the company announced originally.

 

Incentive Programs for Managers Wednesday, Apr 25 2007 

Uncategorized buscom 1:36 pm

We all want to be involved in an incentive program.    These programs represent our opportunity to participate in the success of the enterprise (the downside, after all, is seldom our fault).   We also (naively) believe that incentive programs are good because they align the interests of the company with those of the individual employee.    However, almost any incentive system devised by mankind, is strongly subject to the law of unintended consequences (LUC).   Here are just a few LUC effects that will kick in for some incentive measures: 

  • EPS.   If you measure executives on Earnings Per Share, there will be a sudden massive interest in buy-back schemes.  If we can’t raise E let’s reduce the number of shares.     At best it will probably bias the business towards other sources of equity than issuing new share capital.
  • ROTC.   Return on total capital seems logical.   However, the equally logical executive will tend to under-invest in response.    A range of investment opportunities will be ranked by expected return, and although this may not always correspond to reality, it will be approximately correct.   To raise ROTC he or she simply avoids investments that are below the objective.   If you set an objective of 25% and your cost of capital is 8% then you can forget about all those possibilities between 8% and 25% that would make your company wealthier because these will reduce the average ROTC.  The effect is to have a much more conservative investment policy than would be the case.  The higher you set the objective, the worse the problem.
  • On-time Delivery.  OTD is a favorite measure that is supposed to show how good plant managers are.   Good plant managers are experts at gaming the system.   Typically an ERP system will report OTD by comparing actual ship dates against the planned ship dates.   Changing how the plant operates to make it more flexible and customer-friendly is a lot of work.  Much easier to push lead-times out so that we can make sure that we don’t disappoint customers by late shipments.    The ERP system will only register a late when something is actually shipped, so if a date is missed, an enterprising plant manager will call a customer and ask him to cancel the order and resubmit it under a slightly different part number (maybe there might be a discount involved for the new part), so that it will appear to go out on time.
  • ROI.   Return on investment is usually measured at a point in time.   The R is probably operating income for the trailing twelve months, but the I is most likely to be an instantaneous reading at the end of the reporting period.  Under-investing will help here (see under ROTC), but so will deft management of working capital.   The easiest way to reduce WC is to stop paying suppliers for a month, and really pound on receivables.  (Inventory is harder to control).  You can let it rip again the month after the bonus is calculated.
  • Revenue per employee.    This is easy – just outsource swathes of production and revenue per employee will surge.
  • Gross Margin percentage.    Brace yourself for a rapid slowdown in growth as lower margin products get dropped.   In the worse manifestation you will find that gross margin (and revenue) will actually fall, as managers drop lower-margin products (or raise prices, thereby killing demand) and find that plant fixed costs are under-absorbed, causing aggregate margin to fall.  This scenario is particularly painful because not only do managers make poor decisions but they don’t even get the bonus they are aiming at.

 All this isn’t to say that one shouldn’t have an incentive program.   Overall, they probably are good.   Just don’t be unrealistic about its effectiveness.  Be alive to the gaming of the system, and be ready to change the criteria regularly.   Also, referring to an earlier posting, don’t make closing a specific number of acquisitions an objective.   Remember, people will respond, and will meet the objectives.  After all, that’s the idea, isn’t it?

 

The bias towards big events Tuesday, Apr 24 2007 

Uncategorized buscom 4:38 pm

The Economist has a leader about the massacre at Virginia Tech, pointing out the scale of gun violence in the US. The article makes a point about the overall level of gun violence:

“some 14,000 routine killings committed in 2005 with guns, to which must be added 16,000 suicides by firearm and 650 fatal accidents (2004 figures)”


Two points occur to me. One is that this is truly a staggering number of deaths. The article does acknowledge that the vast proportion of suicides would take place anyway. Nevertheless, we are talking about close to eighty fatalities per day!

The second point is our complete inability come up with any rational response to statistically unconnected data. A large set of unrelated events is hard to bring any meaning to, so it isn’t discussed. We look to aggregations to try to find meaning. Place crashes are highly newsworthy, as are tragedies such as last Monday’s.

This is not to say that we shouldn’t report on and examine what makes someone go on a killing rampage and what we can do to prevent it. Merely that the remaining 14,000 gun murders in any year also deserve some consideration.

 

The Cost of Homeland Security Tuesday, Apr 24 2007 

Uncategorized buscom 4:15 pm

I fell to wondering the other day about the total cost to business of the lines at airport security. Forget about the average person going on vacation, just think about the business traveler.

You can think about this two ways – one is to think about the amount of time spent actually going through the security line, which is probably around fifteen minutes extra per trip. Another is to look at the injunction to be at the airport much earlier than before because these lines can occasionally be very long. Let’s ignore the second case, because at least some of this time is on the employee’s tab – if I have to get up half an hour earlier for the Monday flight to Boston this isn’t really a reduction in my productivity. Also when people are waiting at the airport they can often work (although quite evidently not always). Just consider the 15 minutes extra every trip. If the average business traveler makes two trips a month, this is fifteen minutes a week (one security line in each direction). Say he costs his employer $100 an hour (probably a low estimate), and that there are 10 million such travelers in the country:

$25/week * 50 weeks * 10 million = $12.5bn

Even if I am out by a factor of two, which I could accept, or even by ten, this is a huge cost on top of the other costs to the economy. These include buying the equipment, paying the people in the TSA (the acronym really means “Thousands Standing Around”), training, administration and so on. You would think that this would be some incentive to put the regular traveler on to a pre-cleared system. (I freely acknowledge that this isn’t original).

What would a pre-cleared system offer? A separate line with the ability to go through quickly, based on a fingerprint ID, retinal scan etc. No special searches, just a brief walk through the scanner. One could presumably imagine a scanning protocol that would be adjusted to the lower risk profile of the pre-screened traveler, i.e. laptops in briefcases, liquids allowed in suitcases, faster belt speeds… If we cut the average wait by 50% you would, in theory have an extra $6bn or so or productive economic activity. Now whether the business traveler would do anything productive with that time is a separate question…

 

Introducing Myself Sunday, Apr 22 2007 

Uncategorized buscom 12:50 pm

This blog is going to include some comments about working for a large corporation, so I need to remain anonymous and discreet. If I get very specific I am going to reveal things about my employer that would at best complicate my position, so I will keep my thoughts as general as I can, while, I hope, being relevant enough to be interesting.

To introduce myself: I am in a fairly senior position in a European company, working out of a divisional headquarters in the US Mid-West, close to a medium-sized city. I have P/L responsibility for a portion of our business that operates globally, so I have plants in all major regions, and I have a particular involvement and interest in the M&A world.

I plan to write about management, corporate life, finance and economics, news and anything else that crosses my path that vaguely relates to the above. This blog may do little more than flush my mind of what is buzzing around in it, but I hope it provides some food for thought for anyone interested in these topics. At least it is an insider’s view. You may make of it what you will. I am, however, interested in any and all comments.

 

The Sub-Prime Mortgage Market Sunday, Apr 22 2007 

Uncategorized buscom 11:40 am

This story is interesting on a couple of fronts. Firstly, because the general public knew very little about the existence of the sub-prime market, or even what the term meant before the stories started breaking about write-downs and defaults. It is a bit like going to the doctor and being told you have cancer of an organ that you didn’t know you had. Secondly, the ruthless willingness of the people involved in extending credit to people who had no real hope of getting out of debt is remarkable. People tend to think that if a bank lends them money then they must be a good credit risk, in other words they will be able to pay it back. Being credit-worthy simply means that the lender believes that he is going to be able to recover his principal in the event of a default. Big difference. That said, the people who operated at the fringe of this market must have had to be curiously unsympathetic and unscrupulous to have done as much damage as they appears to have. A significant number of of these sub-prime loans must have been written by lending professionals who absolutely knew that that they were getting the borrowers into a situation where they would almost inevitably default.

A commentator on NPR a few days ago made the interesting point that this sub-prime market may never have increased home ownership even when the default rate was low. Much of the lending is equity loans extended to people who already own homes, and since it carries a higher risk of default because of the high rates, the market could actually be forcing people out of the home ownership category.