I have nothing but admiration for Mayor Mike Bloomberg as a successful entrepreneur, builder of a global business and as Mayor of one of the world's most ungovernable cities; but in his third term as Mayor, he has stayed on too long and appears to have lost any enthusiasm for the shin whacking necessary to exert leadership in Gotham.
Inviting the Occupy Wall Streeters to be our guest and see New York on "$10 a day" was irresponsible. The dynamics since then mirror what happened on the Columbia campus during the strikes of 1968-69. What then began early as a quasi-student protest quickly got taken over by professional agitators with no investment in the University and loyalty only to their political agendas. Columbia College, its professors and students, and the City picked up the tab, while the "movement" got its legitimacy.
Demonstrations in New York require lots of overtime for the Police and Sanitation Departments. How is a strapped municipal budget going to absorb this expense? Now that the OWS crowd has expanded to include professional agitators, their supervisors and videographers, municipal expenses are going way up, and since there's no deadline for clearing out the demonstrators, the sanitation expenses will be ongoing.
The choice of Zucotti Park as a focal point for the demonstrators now brings in Brookfield Properties as another target, since Zucotti is not strictly a municipal park. The brain trust for OWS made a good strategic choice, as the City and Brookfield will now be pitted against each other to see who bears what costs.
The Mayor's debacle with his Schools Chancellor and one of his top aides demonstrates that he has gone off his game and lost interest, and it's perfectly understandable. However, passing the buck on dealing with this Sixties-style demonstration is an unnecessary affront to NYC residents, taxpayers and property owners.
As Wall Street execs arrive at work in their livery cars, I don't think they are giving OWS any thought beyond how to make a good trade on the news stories.
Monday, October 17, 2011
Thursday, October 13, 2011
Steve Jobs and The Engineering Culture
A previous post tried to put a damper on the Jobs hagiography in its most quasi-religious version. I had to laugh when I saw a blog posting that the Jesuit journal La Civita Cattolica had compared the late Apple CEO to St. Ignatius Loyola and Pope Piux XI. As Johnny Carson often said, "I kid you not!"
True engineering cultures are often inimical to running product businesses with fickle, demanding customers. I'm not talking about engineering services firms, but that's another story. When I was growing up, I got to meet quite a few IBM engineers and executives through our family's network in Westchester County. One of them gave me a gift of a leather note pad, inscribed in gold leaf with Watson's motto, "Think!" There's no doubt that their engineers were the best and brightest of their breed.
Fast forward to the time before Lew Gerstner was brought on as IBM CEO in 1993, when market pundits were calling for the company to be sold off in pieces. Coming from Amex and RJR Nabisco, the engineers in IBM were dismissive about what a non-engineer could do to help their business. One of them said, "His biggest decision at Nabisco was probably to decide the new colors on a box of Shredded Wheat." A bit arrogant, don't you think?
IBM could always afford to be arrogant because in much of their product business, they had a quasi-monopoly and they shoved price increases down their customers' throats. As technology and new competitors buffeted them, the engineers got further entrenched in their own ideas and lost touch with what customers in changing markets wanted from IBM. Among the many other dimensions of Gerstner's turnaround, he managed to change this engineering culture to a customer-centric culture, while also funding basic research which had really put the company on the map in the first place.
COMPAQ too had an engineering culture, and their products were known for their extremely rugged construction. "Unbreakable," we were told as Merrill Lynch paid their high prices to get average performance and lots of ruggedness. I had the pleasure of having to carry the first portable computer in the economy cabin to a client location for some forecasting work. It worked fine, but it was unbelievably heavy and unwieldy to carry. There was no thought about design beyond basic functionality. Here's a picture in case anyone else had to deal with this elephant:
HP has a legendary engineering culture going back to the earliest days of Silicon Valley. Imagine when the two engineering companies were merged. Then investors had a company that was truly out of touch with the fickle and demanding consumer markets. Carly Fiorina and her successors failed to change the engineering culture at HP.
Engineers believe that customers should buy products based on the spec sheets. They also like to endlessly tinker with product designs and specs, in the guise of seeking perfection which also kills product launch timetables. They also believe in their hearts that product design reflecting consumer ergonomics and user experience is something that they can do also, because "it's easy, not like engineering."
That's how you release a product like that pictured above. Steve Jobs was able to talk with engineers and get to the kernel of their issues, and he had their respect because of this ability. I don't believe that he tried to be a product designer, but he really looked at product design as a sort of consumer ombudsman.
So when a button came back and he used it the way a consumer would, he would say, "It's too big. Make it smaller!" This wasn't imperious or micromanaging, but he was a proxy for the Apple customer, and a good one. There's no doubt too that he had some visionary insights about how businesses could work, as in electronic music distribution. I really believe that his eventual taming of Apple's engineering culture saved them from depending on products like LISA, shown below, to products that redefined consumer experiences like the iPod and iPad.
True engineering cultures are often inimical to running product businesses with fickle, demanding customers. I'm not talking about engineering services firms, but that's another story. When I was growing up, I got to meet quite a few IBM engineers and executives through our family's network in Westchester County. One of them gave me a gift of a leather note pad, inscribed in gold leaf with Watson's motto, "Think!" There's no doubt that their engineers were the best and brightest of their breed.
Fast forward to the time before Lew Gerstner was brought on as IBM CEO in 1993, when market pundits were calling for the company to be sold off in pieces. Coming from Amex and RJR Nabisco, the engineers in IBM were dismissive about what a non-engineer could do to help their business. One of them said, "His biggest decision at Nabisco was probably to decide the new colors on a box of Shredded Wheat." A bit arrogant, don't you think?
IBM could always afford to be arrogant because in much of their product business, they had a quasi-monopoly and they shoved price increases down their customers' throats. As technology and new competitors buffeted them, the engineers got further entrenched in their own ideas and lost touch with what customers in changing markets wanted from IBM. Among the many other dimensions of Gerstner's turnaround, he managed to change this engineering culture to a customer-centric culture, while also funding basic research which had really put the company on the map in the first place.
COMPAQ too had an engineering culture, and their products were known for their extremely rugged construction. "Unbreakable," we were told as Merrill Lynch paid their high prices to get average performance and lots of ruggedness. I had the pleasure of having to carry the first portable computer in the economy cabin to a client location for some forecasting work. It worked fine, but it was unbelievably heavy and unwieldy to carry. There was no thought about design beyond basic functionality. Here's a picture in case anyone else had to deal with this elephant:
HP has a legendary engineering culture going back to the earliest days of Silicon Valley. Imagine when the two engineering companies were merged. Then investors had a company that was truly out of touch with the fickle and demanding consumer markets. Carly Fiorina and her successors failed to change the engineering culture at HP.
Engineers believe that customers should buy products based on the spec sheets. They also like to endlessly tinker with product designs and specs, in the guise of seeking perfection which also kills product launch timetables. They also believe in their hearts that product design reflecting consumer ergonomics and user experience is something that they can do also, because "it's easy, not like engineering."
That's how you release a product like that pictured above. Steve Jobs was able to talk with engineers and get to the kernel of their issues, and he had their respect because of this ability. I don't believe that he tried to be a product designer, but he really looked at product design as a sort of consumer ombudsman.
So when a button came back and he used it the way a consumer would, he would say, "It's too big. Make it smaller!" This wasn't imperious or micromanaging, but he was a proxy for the Apple customer, and a good one. There's no doubt too that he had some visionary insights about how businesses could work, as in electronic music distribution. I really believe that his eventual taming of Apple's engineering culture saved them from depending on products like LISA, shown below, to products that redefined consumer experiences like the iPod and iPad.
When Apple had too many new products on its strategic plan menu, Jobs was able to cut through the knot of empire building and engineering egos to say, "Give me that phone and that music player." He used his own passion, ego, market intuition and business savvy to prepare the market place for these products in a way that catapulted Apple from a niche player in the education and graphic design PC markets into a true technology leader. It's a great story.
Sunday, October 9, 2011
Steve Jobs: He Wasn't John The Baptist
With the recent passing of Apple CEO Steve Jobs, the financial press has gone into paroxysms of religious fervor in writing about this refreshing and iconoclastic business leader. The blogosphere is flooded with Tweets of ecstatic reverie, calling him a "prophet." Here is the ridiculous, pandering headine from the online Wall Street Journal:
The analogy with the apple in the Genesis story is sophomoric, and more fitting for the Onion than the Journal. "No," he is not a religious icon, and "No" salvation can't be downloaded. As long as we're entertaining outlandish theories, what if the apple in Apple comes from Magritte's "Son of Man" painting that figures in "The Thomas Crown Affair?"
A couple of things to note. In Rakesh Khurana's book on corporate leadership, he notes that the most frequently occurring post-graduate credential among CEO's has been the MBA from the Harvard Business School. Against that background, the story of Mr. Jobs dropping out of Reed College and taking the path less travelled to corporate leadership of an iconic company is refreshing and worthy of study.
Talk about a diverse background! Steve Jobs describes taking a course in calligraphy as giving him the eye and the insight to realize the importance of unique typefaces to the first Mac. I suspect an interest in Zen informed a lot of his insights. He helped create, was defeated by, and ultimately remade the culture of Apple, defining it through his unique, personal lens. It gives anyone interested in business a lot to think about, but it's business not messianism.
"Steve Jobs turned Eve's apple, the symbol of fallen humankind, into a religious icon for true believers in technology. But can salvation be downloaded?" (Wall Street Journal)
The analogy with the apple in the Genesis story is sophomoric, and more fitting for the Onion than the Journal. "No," he is not a religious icon, and "No" salvation can't be downloaded. As long as we're entertaining outlandish theories, what if the apple in Apple comes from Magritte's "Son of Man" painting that figures in "The Thomas Crown Affair?"
A couple of things to note. In Rakesh Khurana's book on corporate leadership, he notes that the most frequently occurring post-graduate credential among CEO's has been the MBA from the Harvard Business School. Against that background, the story of Mr. Jobs dropping out of Reed College and taking the path less travelled to corporate leadership of an iconic company is refreshing and worthy of study.
Talk about a diverse background! Steve Jobs describes taking a course in calligraphy as giving him the eye and the insight to realize the importance of unique typefaces to the first Mac. I suspect an interest in Zen informed a lot of his insights. He helped create, was defeated by, and ultimately remade the culture of Apple, defining it through his unique, personal lens. It gives anyone interested in business a lot to think about, but it's business not messianism.
Monday, October 3, 2011
The Big Issues for Risk Managers
AON Risk Solutions released its 2011 "Global Risk Management Survey," which covered 960 respondents worldwide, about equally divided between public and private companies. The Top 10 Risk Issues for the managers were:
The AON sample companies are 89% from the Americas and Europe. In total, 31% of the respondents say that they have a position of Chief Risk Officer (CRO), and these tend to be regulated industries, including banks and insurance companies. 69% of the respondents have a dedicated risk management department.
Interestingly, in Asia the #2 concern of risk managers is the attraction and retention of talent, which falls to #7 in the total survey sample.
Less than 40% of the companies responding to the survey monitor their Total Cost of Risk. These include, according to AON's framework:
Much of the literature written for NACD members is written as if ERM could apply to smaller companies, and it seems clear that this not cost effective.
- Economic slow down
- Regulatory/legislative changes
- Increasing competition
- Damage to corporate reputation/brand
- Business interruption
- Failure to innovate and loss of customers
- Failure to attract and manage talent
- Commodity price risks
- Technology/system failures
- Cash flow and liquidity risk
The AON sample companies are 89% from the Americas and Europe. In total, 31% of the respondents say that they have a position of Chief Risk Officer (CRO), and these tend to be regulated industries, including banks and insurance companies. 69% of the respondents have a dedicated risk management department.
Interestingly, in Asia the #2 concern of risk managers is the attraction and retention of talent, which falls to #7 in the total survey sample.
Less than 40% of the companies responding to the survey monitor their Total Cost of Risk. These include, according to AON's framework:
- Risk transfer costs (premiums paid for insurance coverages)
- Risk retention costs (retained risks and claims adjustments costs)
- External costs (brokers, consultants, regulatory compliance)
- Internal costs (personnel and systems)
Much of the literature written for NACD members is written as if ERM could apply to smaller companies, and it seems clear that this not cost effective.
One Way Out for the Eurozone?
The capital markets have Eurozone fatigue. Day after day, hour after hour, we await the same news: an answer is forthcoming from the next meeting of EU finance ministers. There's a Monty Python sketch in which the characters play around with an innocent question, "How big is it?" Well pundits at the IMF conference have suggested a rescue/bailout/fiscal equalization fund of 1.4-4.0 TRILLON euros would solve the problem. There is no answer to "How big?"
A facility of that size is out of the realm of possibility, for a union in which the strongest member has a GDP of 2.5 trillion euros. Eventually, Germany will have to deal with the reality that its interests diverge not only from the weaker members of the union, but from those of France as well. Then, Merkel and Sarkozy will no longer be able to pose as figurative, "Brothers in Arms."
Greece has announced that its austerity measures will not enable it to meet its budget targets in today's WSJ. So, really we are moving, like a slow motion train wreck, towards a default of some kind, semantically within or outside the euro. We wrote way back in June about the likely fate of the euro and about the attractiveness of Treasuries despite all of our fiscal management issues.
A country's exchange rate is the most effective market price for adjusting imbalances in merchandise trade and external capital accounts. With the euro, Greece or Italy don't have an exchange rate for the market to devalue until their economises adjust to a new equilibrium. Playing with tax and fiscal policies are not primary tools for these adjustments, as Greece is finding out. Italy is waiting in the wings, and I don't believe that the Berlusconi government would have any inclination to drive itself down a path as Greeece has done.
Thinking back to the Lehman crisis, one of the justifications for the absurd bailout concocted by Treasury was the fact that nobody could really map out the complete counter party network for Lehman/AIG/Bear Stearns and the other SIFI's, along with the amounts at risk. Nobody knew how bad it would get and whose hands would get blown off. So we implemented a really bad deal.
Likewise, the structure of the EU and the obligations of its members were built without contemplating the alternatives we're now facing, namely an exit from the euro. However, if one member exits, the utility of the entire common currency mechanism is mortally wounded as an economic construct. I'm not sure anyone really knows how the default//exit scenario would play out in practice. Markets need to adjust and move one, but that means a paralyzed Europe has to come to terms with the failure of the notion of their common currency union.
It doesn't matter how many times the finance ministers meet and where they meet, there may only be "One Way Out."
"Ain't but one way out, baby,
Lord, I just can't go out that door.
Ain't but one way out baby,
Lord, I just can't go out that door.
'Cause there's a man down there,
Might be your man, I just don't know."
(Holland/Dozier/Holland) EMI
A facility of that size is out of the realm of possibility, for a union in which the strongest member has a GDP of 2.5 trillion euros. Eventually, Germany will have to deal with the reality that its interests diverge not only from the weaker members of the union, but from those of France as well. Then, Merkel and Sarkozy will no longer be able to pose as figurative, "Brothers in Arms."
Greece has announced that its austerity measures will not enable it to meet its budget targets in today's WSJ. So, really we are moving, like a slow motion train wreck, towards a default of some kind, semantically within or outside the euro. We wrote way back in June about the likely fate of the euro and about the attractiveness of Treasuries despite all of our fiscal management issues.
A country's exchange rate is the most effective market price for adjusting imbalances in merchandise trade and external capital accounts. With the euro, Greece or Italy don't have an exchange rate for the market to devalue until their economises adjust to a new equilibrium. Playing with tax and fiscal policies are not primary tools for these adjustments, as Greece is finding out. Italy is waiting in the wings, and I don't believe that the Berlusconi government would have any inclination to drive itself down a path as Greeece has done.
Thinking back to the Lehman crisis, one of the justifications for the absurd bailout concocted by Treasury was the fact that nobody could really map out the complete counter party network for Lehman/AIG/Bear Stearns and the other SIFI's, along with the amounts at risk. Nobody knew how bad it would get and whose hands would get blown off. So we implemented a really bad deal.
Likewise, the structure of the EU and the obligations of its members were built without contemplating the alternatives we're now facing, namely an exit from the euro. However, if one member exits, the utility of the entire common currency mechanism is mortally wounded as an economic construct. I'm not sure anyone really knows how the default//exit scenario would play out in practice. Markets need to adjust and move one, but that means a paralyzed Europe has to come to terms with the failure of the notion of their common currency union.
It doesn't matter how many times the finance ministers meet and where they meet, there may only be "One Way Out."
"Ain't but one way out, baby,
Lord, I just can't go out that door.
Ain't but one way out baby,
Lord, I just can't go out that door.
'Cause there's a man down there,
Might be your man, I just don't know."
(Holland/Dozier/Holland) EMI
Thursday, September 29, 2011
HP Hires Goldman: The Best Defense Is a Good Offense
HP's embattled board hired Goldman Sachs to assist it with anti-takeover defenses in wake of its unparalleled streak of value destroying activities. In a very limited sense, the board does have a duty to be prepared for the appearance of an activist investor, and so the move could be regarded as a good defense. They have certainly hired the best to help them, but that's as far as it goes.
We wrote in our last post, "Without some fresh air in the board room, it's hard to see how HP becomes anything other than a value trap." I really believe that the company won't be able to move forward and realize its potential without changing the way it does business both in the market and in the board room. Putting a poison pill into place, for example, is a knee jerk, mindless alternative usually associated with companies whose fundamental options for creating value are limited. A pill would also deter some high quality, traditional institutional investors, which are just the sort of investors the company needs now.
The best defense can be a good offense. In this case, the good offense would focus on fundamentals, such as definitively changing the company culture, changing the way an alternatively meddling and disengaged board works, rationalizing the company's strategy and portfolio, resetting the business model to focus on customers, raising the hurdles for returns and use of assets, and communicating in an entirely different way with stakeholders. This is the only place where the company board and management should be focused, and not on trying to head off an activist investor. HP is big enough that there are few activist investors who would be able to acquire a big enough stake and risk dead money while a turnaround takes place; it could happen, but it will take time, and in that time, the board and management should roll up their sleeves and focus on fixing the culture and the business model.
Hearkening back to my analyst days and thinking about Fluor's decision to put off buying HP computers for its global organization, I decided to talk to some tech repair people about what they thought of HP computers. Several years ago, I noticed that a lot of tech savvy users carried HP laptops, in preference to Dell and IBM/Lenovo. The latter manufacturers were classified as "junk," referring to everything from design, to component quality, to assembly and finishing.
Today, the situation seems to have reversed itself in my survey. HP laptops and desktops were the ones marked "avoid," or "junk." Meanwhile, Dell and Lenovo have become highly regarded for volume purchasers. One repair tech was kind enough to take me on a tour of a desktop's guts that he had repaired. It was a gaggle of cables, some of which were harnessed and some not. He tried to harness a big clump of cables in the interest of allowing better air flow and accessibility for service. Slots were poorly designed for boards and cards, which then resulted in poor fit and more heat. The HP units look like someone built them in their garage. Talk about fundamentals!
If this business is to stay within the corporate portfolio, then it needs to be an industry leader, and not an object of ridicule. This kind of turnaround requires hard work, as opposed to a press release about hiring Goldman Sachs. Let's hope that HP gets down to business soon.
We wrote in our last post, "Without some fresh air in the board room, it's hard to see how HP becomes anything other than a value trap." I really believe that the company won't be able to move forward and realize its potential without changing the way it does business both in the market and in the board room. Putting a poison pill into place, for example, is a knee jerk, mindless alternative usually associated with companies whose fundamental options for creating value are limited. A pill would also deter some high quality, traditional institutional investors, which are just the sort of investors the company needs now.
The best defense can be a good offense. In this case, the good offense would focus on fundamentals, such as definitively changing the company culture, changing the way an alternatively meddling and disengaged board works, rationalizing the company's strategy and portfolio, resetting the business model to focus on customers, raising the hurdles for returns and use of assets, and communicating in an entirely different way with stakeholders. This is the only place where the company board and management should be focused, and not on trying to head off an activist investor. HP is big enough that there are few activist investors who would be able to acquire a big enough stake and risk dead money while a turnaround takes place; it could happen, but it will take time, and in that time, the board and management should roll up their sleeves and focus on fixing the culture and the business model.
Hearkening back to my analyst days and thinking about Fluor's decision to put off buying HP computers for its global organization, I decided to talk to some tech repair people about what they thought of HP computers. Several years ago, I noticed that a lot of tech savvy users carried HP laptops, in preference to Dell and IBM/Lenovo. The latter manufacturers were classified as "junk," referring to everything from design, to component quality, to assembly and finishing.
Today, the situation seems to have reversed itself in my survey. HP laptops and desktops were the ones marked "avoid," or "junk." Meanwhile, Dell and Lenovo have become highly regarded for volume purchasers. One repair tech was kind enough to take me on a tour of a desktop's guts that he had repaired. It was a gaggle of cables, some of which were harnessed and some not. He tried to harness a big clump of cables in the interest of allowing better air flow and accessibility for service. Slots were poorly designed for boards and cards, which then resulted in poor fit and more heat. The HP units look like someone built them in their garage. Talk about fundamentals!
If this business is to stay within the corporate portfolio, then it needs to be an industry leader, and not an object of ridicule. This kind of turnaround requires hard work, as opposed to a press release about hiring Goldman Sachs. Let's hope that HP gets down to business soon.
Friday, September 23, 2011
HP Sum of Parts Valuation Is No Guide
Analysts who claim that a "sum of parts" valuation of HP at $37 per share justifies a "buy" are whistling in the wind, putting forward numbers without a reasonable basis. Projections for sales, earnings and cash flow are all contingent on a capable management team, a motivated organization in tune with the strategic plan, and on a board that is itself of one mind and supportive of management and the plan.
As far as I can see, none of these things are in place at HP. The new CEO comes from a consumer focused company into a technology company trying to refocus on the enterprise business, as different as night and day. She will be learning on the job. Who knows what the management team will look like after defections and reshuffling? An organization that leaks information so consistently, thereby hurting their own share price is dysfunctional and clearly not motivated to focus on the business.
The sales teams are having their heads handed to them by customers demanding answers, and they have none because the former CEO was so absurdly out of touch. How can they maintain and grow their sales relationships? Sell the PC business: yes or no? The new CEO has to study the issue, although she was a board member that supposedly signed off on that decision. What if she comes to a different conclusion upon further reflection? The Autonomy deal can't be broken without major financial damage and loss of focus working on court actions. How will that deal add value?
The same board is in place, with the same unhealthy dynamics and deeply flawed visions. Board chair Lane's public flip flops on former CEO Apotheker don't give any comfort about temperament or judgment, and there's the continuing question about how much his position as Oracle's #2 is an asset to HP or a liability. Oracle's poke in the eye to HP by hiring Mark Hurd was great PR grandstanding.
This kind of strategic, communications and governance debacle at HP is usually reserved for micro cap companies or for companies that are quasi-public, i.e. controlled by a family, an entity, or by an uber CEO. For a company of HP's size, this should generate years of business and law school case studies.
Value investors looking at HP won't get an extra reward for being early, because so many of the risks are unknown at this time. Technicals and noise trading should dominate the stock in the near term, Time is the friend of a new, fundamental investor looking at this stock.
As far as I can see, none of these things are in place at HP. The new CEO comes from a consumer focused company into a technology company trying to refocus on the enterprise business, as different as night and day. She will be learning on the job. Who knows what the management team will look like after defections and reshuffling? An organization that leaks information so consistently, thereby hurting their own share price is dysfunctional and clearly not motivated to focus on the business.
The sales teams are having their heads handed to them by customers demanding answers, and they have none because the former CEO was so absurdly out of touch. How can they maintain and grow their sales relationships? Sell the PC business: yes or no? The new CEO has to study the issue, although she was a board member that supposedly signed off on that decision. What if she comes to a different conclusion upon further reflection? The Autonomy deal can't be broken without major financial damage and loss of focus working on court actions. How will that deal add value?
The same board is in place, with the same unhealthy dynamics and deeply flawed visions. Board chair Lane's public flip flops on former CEO Apotheker don't give any comfort about temperament or judgment, and there's the continuing question about how much his position as Oracle's #2 is an asset to HP or a liability. Oracle's poke in the eye to HP by hiring Mark Hurd was great PR grandstanding.
This kind of strategic, communications and governance debacle at HP is usually reserved for micro cap companies or for companies that are quasi-public, i.e. controlled by a family, an entity, or by an uber CEO. For a company of HP's size, this should generate years of business and law school case studies.
Value investors looking at HP won't get an extra reward for being early, because so many of the risks are unknown at this time. Technicals and noise trading should dominate the stock in the near term, Time is the friend of a new, fundamental investor looking at this stock.
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