The Ethics of Loyalty

If you’re a Dodgers fan (and heaven knows I’m not suggesting anyone should be after this year), you’ve probably been hearing a lot lately about how the team’s veteran players are blaming this season’s collapse (from the best record in the Major Leagues two months ago to 4th place in their division today) on the younger players and the mistakes, poor cooperation, and attitude being given off by the younger players. Meanwhile, those same younger athletes are pointing out that the complaining veterans have all struggled this year, turning in lackluster performances while the team has tried to cope with injuries and other problems. It would be nice to dismiss all of this on a bunch of grown men making millions of dollars to play a kid’s game – and then whining about it. Unfortunately, the situation is all too similar to a problem every manager will face sooner or later.

Let’s suppose for a moment that you need to promote one of your people. The new position will offer more responsibility, more money, and generally be seen as an advancement of the person selected. You would think that this would be simple: just select the person best suited to perform these new duties and promote him or her. If there is one person who is clearly the best choice (e.g., most experienced, best leader, best at doing their job, best at teaching others how to do the job) this should in fact be relatively simple; if not, you will have to figure out which of your people is the best in which of these areas, and try to select the best of the lot. If it’s a very close decision, you might even want to “interview” these people, and ask them how they would handle the new position. Unless you’ve been living in a cave somewhere for the past thirty years, however, you already know better than to favor people of a specific race, gender, ethnicity, age, height, size, weight, sexual preference or style of dress, so we will assume that you don’t.

Where things become murky is when you attempt to factor length of service into the equation. Some companies actually do consider seniority as a factor in promotion, holding that a person’s years with the company indicate their stability, maturity and loyalty in addition to familiarity with company policy and experience on the job. Other companies have a strict policy of “merit only” promotions – promote the best person for the job, even if that person has been around for a few months and everyone else in the department has decades of experience on the job. A company-wide policy may take the heat off of you, or at least give you something to blame for the choice you are being forced to make, but it does nothing to solve the underlying ethical problem.

Does the company owe its long-term employees anything in particular? Assuming they have been paid fair wages and given decent working conditions (including reasonable hours and livable benefits), does management owe them special consideration when issuing promotions? Or, perhaps more to the point, does the company’s obligation to support, reward and advance its loyal employees supersede its obligation to promote the best possible managers, thus maximizing performance and shareholder value? Especially when you consider that if your senior people believe they are being deliberately passed over for promotion (because the younger people will require lower salaries, for example) they are likely to leave the company seeking advancement elsewhere?

Of course, this same issue by definition touches on problems such as recognition (people see promotion as a public acknowledgement of their performance and abilities), security (people believe – often quite incorrectly – that higher-level people are less likely to be laid off or fired), morale (it’s demoralizing at best to be passed over; it can easily be insulting, depressing or infuriating, depending on whom you were passed over for) and employee retention (if the only way to obtain promotion and the attendant increase in responsibility, power, reputation and money is to change employers, people certainly will), but those issues will exist no matter how carefully we select people for promotion, and we can almost guarantee that someone will feel unjustly passed over no matter what we do. The question we as managers have to ask is where to draw that line between rewarding loyalty to the company and doing what is best for the company, on those (hopefully rare) occasions when these are not one and the same…

What’s in a Package?

I noted with some interest an Internet story proclaiming this week as the 20th anniversary of the launch of Star Trek: The Next Generation, or ”Next Gen”, as the fans invariably call it. It’s hard to believe that 20 years have passed since the second regular series launched; it’s even harder to believe that the second series was able to generate even more support than its legendary predecessor, spawning three more “Star Trek” series and four movies staring the new cast. Even more amazing is that an idea Gene Roddenberry threw together in the 1960’s (“Wagon Train to the Stars” was Gene’s original pitch for the show) still has legs 20 years later – at least, if you count DVD sales.

I should come as no surprise that there’s a 20th Anniversary Edition boxed set coming onto the market this coming week featuring all 176 “Next Gen” episodes and lots of bonus material on 49 DVDs. After all, recent years have seen the introduction of boxed sets of hundreds of “classic” television shows, from early series like “The Honeymooners” and “I Love Lucy” to series still on the air today. The boxed set featuring the complete series of “Sex and the City” was on the market less than three months after the series wrapped (before the start of the next television season), and current hit shows usually have the previous season available before the current one starts.

Back when “Next Gen” was still on the air, I was working in cable television, and the boogeyman at that time was what we called “Video Dialtone” – television service provided over fiber-optical telephone lines (what is today called “broadband”). We were concerned about the advent of cable deregulation, the appearance of tiny satellite dishes that could fit on any roof, cable signal being made available via microwave, and of course, television over the Internet. Somehow, though, we never thought that entire television series would ever be made available in convenient forms the size of a paperback book. But we should have.

The development of DVD releases of old television shows is one of the best examples of re-packaging a product to have appeared in the past decade, and possibly the last century. To the companies that own the rights to these shows, the cost of producing a boxed set is minimal; production of the actual disks is trivial, and the printing of the boxes and liner notes isn’t much more expensive. In most cases, they already own the rights to all of the images, logos and likenesses they will need, as well as the property the disks will contain. There is probably a contractual obligation to pay the actors and creative people involved, but giving up a (usually tiny) percentage of the money you are raking in has never been much of an obstacle.

What may not be clear in all of this is how these sales are generated in the first place. There’s an impulse to dismiss this type of product sales as merely a fad, particularly in the case of Star Trek series or other programming with a cult following. But in point of fact, what gives these products their appeal is a combination of Convenience and Value Added. It would be relatively simple to record all of the episodes of any syndicated show, particularly one like Star Trek, which will be on cable at some time every single day. But these boxed sets feature all of the episodes, in their original broadcast order, all neatly recorded and labeled. Much more convenient than trying to record them yourself, or (worse yet) trying to find an episode you want to watch at the moment you want to watch it. The boxed sets also include bonus material (commentary, cast biographies, promotional items) in an attempt to provide value added; sometimes this makes the difference in the sales figures.

What we as business people can learn from this example is simple: never assume that just because public interest in your product has faded your product no longer has value. If disco music, 1970s fashions and “classic” television sitcoms can all continue to generate revenue in the 21st Century, your product probably can, too. It’s just a matter of finding a market that wants to purchase your product – and then finding a way to include convenience and/or added value in your packaging…

Big Brother in Chicago

What do the city of Chicago, the IBM Corporation, and the guided-missile frigate U.S.S. Stark all have in common? Probably not very much at the moment, but that’s likely to change according to the article from the AP this morning about the new security surveillance system being installed in the Windy City. Basically, it’s a set of video cameras hooked up to logic units that can be set to look for specific images and react to pre-set events – such as spotting a specific license plate, or noticing that someone dropped a backpack in the park and then ran like heck. Here’s a link to the story on Yahoo News if you want to take a look at it.

Now, I’m not going to address any of the privacy vs. public safety issues in this space; I’m sticking to business issues. But somehow this reminds me of what happened to the Stark. In May of 1987, the Stark was on patrol in the Persian Gulf when it was attacked by two sea-skimming Exocet missiles fired by Iraqi warplanes. Here’s a summary of those events and their aftermath. In the investigations that followed, the question everyone wanted answered was why the ship had failed to defend itself. Inherent in this question is how a generic anti-ship missile costing less than $1 million at the time could inflict $142 million in damage on a front-line Navy vessel, kill 37 crewmen, and nearly sink the ship, especially giving the Stark was equipped with the best same-generation point defense systems.

It turned out that the missile defense system had been malfunctioning for weeks, and the crew had eventually turned it off because they were tired of dealing with almost constant false alarms. Now, I know it’s twenty years later, and the state-of-the-art has changed beyond recognition. In 1987 a 20-megabyte hard drive would have been hot stuff; today you might easily have 50 TIMES that much storage in a little gizmo attached to your keychain. But by the same token, a large urban center like Chicago has more activity going on – by several orders of magnitude – than the open sea in the Gulf. Programming the system to look for specific license plates (if it can actually do that) might be helpful if the police are actually looking for someone, but if the system summons the authorities every time someone puts down a backpack for 30 seconds (that’s the time frame given in the AP online story) that would be thousands of alerts every single day.

From a financial standpoint, the idea of spending large amounts of public money for a system that may or may not be able to do what you need it to do is questionable. From a social standpoint, the idea of anyone with access to the system being to track any imaginable person, group, or activity within the system is a bit frightening. Orwell himself never imagined such a system, although American author David Drake did (in the ”Lacy” stories ). In any case, I have to question the effect this will have on police deployments, invasion of privacy lawsuits, and loss of business from people avoiding the affected parts of town.

The simple fact is, people don’t like being monitored. They are even less fond of spending time in places where the authorities know everything you are doing, and are likely to appear at the drop of anything resembling a suspicious action. And they will sue anyone and everyone involved if they feel any of their rights are being violated, including their right to privacy. If any of this surveillance data falls into the hands of the IRS, for example, or allows one business to gain any advantage over another, the city is in for a huge storm of trouble, and who’s even mentioned the fallout from people who get no response to 911 calls because all available units are busy checking out people who have set down their backpacks?

I’m not objecting to the public scrutiny; I was raised to believe that any time you are in public, you must assume that someone is watching you. And no one will be happier than me if this new system can manage to overcome the vast information overload and actually spot potential hazards on the streets of Chicago. But as a business decision, I’m not sure the city has really thought this one through…

Bank Fees and Democracy

I’ve been reading (and watching) a lot of commentary lately about how terrible it is that banks are raising fees, and in particular, the ATM and checking account fees that have the greatest impact on the poorest members of our society. This dovetails with the common perception of bankers as old, rich, white men who don’t care a fig for the public good, and only want to increase their own personal fortunes. Many commentators are even calling for government regulation to prevent this sort of thing.

Well, the fact is, bank fees are rising – you can read the CNN online story about that here if you want to. But the rest of these stories are more rabble-rousing attempts to generate readership (or viewership) than anything relevant, and the calls for government action are preposterous. Certainly, the increased checking account fees would be harder for someone making less money to afford, and someone working a low-income job would be less able to come up with the minimum balance to have their monthly fees waived by the bank. Lower-income customers would also have a harder time affording the fees charged to use an ATM from a bank other than your own. The point is, there is no need for anyone to put up with either class of fees.

In a free market economy, finding a way to eliminate expenses paid by a customer is just as effective as selling products at a lower price – and often easier to market, as it can improve the company’s image for literally no effort at all. In the case of bank fees, many smaller institutions have noted the consumer discontent with these charges and started offering “free” accounts, in order to draw more customers and increase the assets they have on deposit. This has enabled many smaller corporations to compete successfully in markets where they should by rights be out of their league, as well as forcing larger institutions to become more customer-friendly – or risk becoming much smaller companies as a consequence.

In any market where a type of fees are considered standard, the one company that does not charge them will gain a huge competitive advantage over the rest. Government regulation of this sort of problem is unnecessary, as customers will simply “vote with their feet” – taking their business to the competition. With the rise of credit unions and online banking companies, traditional banks can not afford to maintain the “take it or leave it” attitude they are (incorrectly) famous for, and any bank that behaved like the ones in the Washington Mutual commercials (charging people – by the word! – for speaking with a teller) would be lucky to have ANY customers within a week.

Like the atomic fixation of the post WWII era (nuclear power was going to solve everything from communism to bad posture), consumers today seem to fly off the handle and demand government regulation to solve every issue that disturbs them. Fortunately, there is a lot of good data on government-controlled economic systems over the past 100 years. All things considered, I’d rather have bank fees…

Says Who?

An interesting sub-point in the ongoing Sub-Prime Lending crisis came up the other day: several different groups are blaming the credit rating agencies for giving their blessing to companies whose participation in sub-prime mortgage transactions led directly to the developing crisis. The rating companies are, in turn, saying that they never told anyone that their ratings were a guarantee of success, or failure, or anything else, and that people are free to ignore them. You can read the CNN story about it here until they take it down. Congress is apparently looking into it, with executives from Moody’s and Standard and Poor’s due to be questioned on Wednesday of this week.

Now, it’s certainly true that Moody’s and S & P have a very large influence in the world of commerce; they are the ones who issue the ratings commonly used for bond issues, which has an enormous impact on the world of debt financing. If you’re not familiar with the terms, debt financing refers to any company raising money by borrowing it (as opposed to selling partial interest in the company, usually through shares of stock, which is called equity financing). Some of this involves bank loans, and some of it involves the issue of bonds, which are essentially the company’s IOUs to anyone willing to lend them the money, but in either case, a company’s rating controls the amount they have to pay to get the money (what interest the bank will charge them for a loan or how much interest they have to pay the private investors on the bond issue).

Naturally, the bond market is extremely complicated, with all sorts of different offers and potentials ways to make (and lose) money. In theory, anyone with a financial calculator and a few weeks of business school training (or the equivalent) should be able to determine a corporation’s book value, and based on that and its income, how likely that company is to be able to pay back a loan. The person making the calculations then adds an appropriate amount to the Prime Rate to compensate for how much less likely the company is to repay the loan as opposed to the Federal government. All of these are standard factors, available to anyone who really wants to look them up.

The point is that most people don’t want to look them up, or spend the time calculating the risk factors to determine if a company is taking on too much debt or is too unlikely to ever pay it back. These calculations aren’t beyond the abilities of anyone who ever passed algebra, but they are time consuming and there are thousands of bond offers available at any given moment. So many people turn to the Moody’s or S & P index to get the current ratings of companies they might want to invest in. Here’s what Standard & Poor’s says about their global index, for example. A high ranking on this system tells investors that it’s relatively safe to lend money to the company in question; a low ranking means you are much more likely to lose your money. The very lowest ranks are sometimes called “Junk Bonds” and are often regarded as being nothing more than a more reputable form of buying lottery tickets.

None of this would be much of a scandal by itself, but now several groups are claiming that the rating agencies were paid off to issue higher ratings to sub-prime lenders than those institutions really deserved, and they’re calling on Congress to pass laws requiring the SEC to start overseeing those ratings. It’s doubtful that much can be done about these companies – they all issue the proper legal disclaimers before they make any ratings, and any finance professional knows that these rankings are made by people working for a for-profit research service, not handed down from on high. Even more to the point, a company whose total profits are only $10 million per year has no reasonable chance of paying back $12 million in interest payments each year, and no high-priced rating firm is necessary to figure that out. Congress can’t pass a law requiring people to stop being greedy, gullible, or foolish with their money.

What all of this does mean is that investors are going to have to start paying more attention to the actual financial health of the companies whose bonds they buy, and not just taking the bond ratings as gospel. So the next time somebody tells you that a given company is a “can’t miss” investment, you might want to reply, “Says who?”…

What Value?

In one of my earlier posts, I mentioned the idea of Value Added, the basic concept of taking some product or substance and doing something with it that makes it of greater value to the consumer (see my post on Value Added here). It’s a critical way of differentiating a commodity product, as well as a very clever way of making more money using marketing savvy. There are two problems associated with the concept, however: spending so much on adding value to your product that you can’t make money on it any longer, and offering a product that is not, in fact, of any tangible increased value. In either case, your efforts are not likely to prosper.

Fortunately, the first problem rarely comes up in business, because most people are capable of realizing that it you are making less on a product than your cost to produce it, you will not be able to make up the shortfall on volume. The exceptions here are found in add-on sales (as with a computer system, where most of the profit is actually made on the peripherals and software) and loss leaders (where the profit is to be made by getting people into the store and selling them anything else). Some of the popular video game systems (Xbox is a good example) essentially do both; the base units are actually sold at a loss because customers will then be more likely to purchase additional game cartridges, which is where the real profit is made.

It’s the second problem where things get a bit peculiar. A while back, Wired ran a piece about what they called the “Lamest ‘Value-Added’ Products,” including such winners as Ice Rocks - a tray of ready-to-be-frozen ice cubes, just add refrigeration, and my personal favorite, Bling H2O -- spring water marketed in really swanky bottles at a 4,000% markup. Yes, you read that right; 40 times what a bottle of the same water would cost you without the packaging or hype. None of these products offer the consumer any real value, not even the advantages of superior flavor or mineral content.

Of course, some analysts would point out that Status is a form of added value in itself, but here I must caution the reader that it is very rarely enough to compensate for products that are not an inherently good value. When the legendary quality of Mercedes-Benz vehicles began to slip, so did the company’s sales, to take only the obvious example. People still acknowledged that these cars had high name recognition and pleasing aesthetics, but so did many other luxury cars, some of which also had better mechanical reliability and lower maintenance costs – hence, better value for the money. In recent years the company has been spending huge amounts of money on advertising campaigns trying to re-establish their reputation of technical superiority, and (more to the point) plowing R & D money into actually making better vehicles.

If your business is based on a Value Added strategy, it is vital that you continuously monitor not only whether your product offers a good value to the consumer, but also whether your competition has started offering a better one. And if you are not using Value Added to increase your consumer appeal – maybe you should look into it. I’d be careful to avoid the two problems, of course…

Public Health and Ethics

There has been a lot of ink spilled lately about the preparation of flu shots for the upcoming flu season, with many agencies in the United States advocating that anyone from an at-risk group (e.g. small children and the elderly) be immunized, and since this year it looks as if there will be enough vaccine to go around, anybody else who is likely to be exposed to the flu get vaccinated as well. Some companies and agencies are offering flu shots essentially at cost; a number of retail establishments have been using them as “loss leaders” – merchandise offered at below cost as a measure to bring people into the store, where they will, presumably, make additional purchases at regular price. Other sources are offering the shots at a reasonable markup, and many insurance companies cover these vaccinations through regular health care providers.

It seems like a good idea, if you consider the statistics. The World Health Organization estimates that there are 25 to 50 million cases of influenza in the United States each year, resulting in 150,000 people being hospitalized and 30,000 to 40,000 dying. On a global scale, WHO estimates somewhere between 3 and 5 million people will be ill enough to require hospitalization (whether they get it or not) and as many as 500,000 will die. Historically, there were about 1.5 million deaths in the 1957 flu season (the so-called Asian Flu), and about 40 million in the 1918-1920 Spanish Flu epidemic – more than the total number of soldiers killed in both World Wars combined. In fact, the WHO estimates that more people have died in the last hundred years from the flu than perished in the Black Plague outbreaks.

So why is this an ethical question?

The problem here is that the people who are advocating that the public all get flu shots, advertising the effectiveness of flu shots, and lobbying politicians at various levels to support influenza immunization programs are the same companies who are making the flu vaccines in the first place – and that none of these companies are nonprofit organizations. Here’s a typical example: the website about influenza paid for by Sanofi Pasteur. The wide availability of these vaccines, and the large number of potential sources for them, helps keep the price down, but these companies are still urging the public to make use of a product on which they make money, for the public good.

It doesn’t sound like a big problem; influenza is a genuine risk to public health, and the vaccines really do help to prevent it. But this is a slippery slope argument; it’s one very small step from there to advocating that any product your company makes that could prevent illness or improve overall public health be universally purchased, and only a slightly larger step from there to arguing that any product or service that serves the public good (anti-missile defense units, oil wells in sensitive public lands, hidden surveillance cameras build into all public places) be made available as a public service. The debate over socialized medicine is full of these sorts of questions, and I don’t propose to settle or even raise that issue here; my question is much simpler: Is it ethically sound to permit people to advocate an action that will earn them a large profit as being for the public good? Even if it really IS for the public good? And if so, where do we draw the line on companies charging money (often very large amounts of money) to relieve human suffering? It’s not as simple as it looks…

Learning As You Go

In my last post, I mentioned that the single most important skill for any manager to develop is the ability to learn from other members of the company, even though this will inevitably require the manager to make greater efforts to expand his or her own knowledge and overcome his or her own biases than any subordinate worker. It seems a bit counter-intuitive, doesn’t it? Especially since I’m already on record admonishing managers to see things from their subordinates’ point of view, and reminding them that the people who work for them are really not that different. How can I square this contradiction, I hear some of you asking.

The truth is that managers, even those who obtain professional degrees in Business Administration and devote their lives to its practice, ARE just ordinary people, like any of those reporting to them. They are just as subject to flights of common fallacy, such as judging the entire world according to one’s own tastes and dislikes, or believing that anything they don’t understand can’t be that complicated. My point here is that people do not stop using “famous last words” phrases like “How hard can it be?” just because they are promoted into management. My point here is that they have to.

When you accept the promotion into any supervisory position, regardless of level, you have become part of the management team, and therefore at least partially responsible for the success or failure of the company. On your shoulders now rests at least some tiny amount of responsibility for the lives of the employees, the fortunes of the stockholders, the welfare of the customers, the economy of your community and your country, and the careers of all of the people who report to you. And this responsibility will only grow greater as you advance into higher and higher levels of management.

Assuming that anything you don’t understand must be simple – dismissing the complexity of the task, undervaluing the importance of the knowledge, and denigrating those who have the skills and knowledge that you lack – is merely stupid, arrogant and condescending in a line worker. Annoying personality traits, and not the sort of thing that will get you made captain of the department’s softball team, but hardly tragic. In a supervisor, however, these same character flaws could undermine the performance of an entire work group; in a CEO they could easily destroy the entire company. If the guy in the next cubicle believes that since he doesn’t like Country music it can’t be popular, that’s just insulting to anyone who likes the art form; if the Director of Marketing does it you could easily lose all of your customers who listen to Country and Western radio stations.

The simple fact is that more IS expected of managers, at every level, than of the ordinary employees. Along with the power, the perks, and the higher salaries comes responsibility. It is sometimes said that in any company, any given employee can expect the CEO to be working even harder than he or she is, but this is not always the case. It only works that way in the companies that are being managed correctly…

Ignorance

“How can you possibly be expected to manage a group of people if you don’t understand how to do the jobs they are doing?” someone asked me the other day. It’s a good question. Ideally, of course, you would like to have every member of the management team learn how to do every job within the entire organization, or at least within the part of it that they manage, but the simple truth is that this won’t always be possible. Any large and complex organization is likely to have more individual jobs in it than any person could learn to do in one working lifetime, and as I noted in my post about Institutional Memory, just knowing how to do that type of job may not be enough to handle the specific requirements of a particular job.

In most cases, except for the foreman or team leader of a group who began as one of the workers in that group and has received promotion since, taking over any business unit is going to mean that there are people reporting to you who have jobs (or at least tasks) that you do not fully understand. If you are a senior manager, this will almost certainly be the case; the CEO of an oil company is probably not qualified as a research chemist, an IT manager, a CPA, a drilling team manager, a transportation unit foreman, or the captain of an oil tanker in addition to his or her expertise as a strategist and a businessperson, for example. The CEO may not even have experience in other aspects of business itself; he or she may not be a marketer, a finance expert, or even particularly good with numbers.

The key skill that our hypothetical CEO must have, and all of us who practice the profession of management should aspire to, is the ability to learn the essential issues of getting the job done. The CEO does not need to understand how to operate an 80,000 ton ship in dangerous waters, but he or she needs to understand how long it will take to get the ship where it needs to go, what the costs of doing so will be, and why the safety precautions required by corporate policy and Federal law are important. Similarly, the CEO doesn’t really need to know how to create a new computer system to handle order capture, inventory management and billing operations so much as what resources will be required to do so, how long it will take to properly test and de-bug the software, and how much time and effort (and money) it will take to re-train the product replenishment and billing personnel to use the new system.

The key to finding out these things – and therefore the cornerstone of this absolutely critical managerial skill – is to avoid the fallacy common to all too many people that anything you don’t understand must be simple. This simple logical disconnect, a combination of ignorance and arrogance, kills off more good companies and ideas than every other management blunder put together. And the worst part is, it is 100% preventable. As a very wise man once told me, “Stupidity is forever, but ignorance is curable.”

To avoid making this mistake, all you have to do is learn things. Make sure that you understand all of the requirements to achieve a specific goal, and if you don’t, keep having people break it down for you into simpler and simpler pieces until you do. This will require the commitment of time, and a significant amount of work on your part, which is why so many managers avoid doing it, but the long-term effects are worth the effort. In addition to curtailing stupid management mistakes, this procedure will help you to avoid resentment in your subordinates by not undervaluing their expertise or ordering them to do things that are stupid, wasteful or time consuming (as they see it). In fact, you can even use it to raise morale and make your people feel appreciated (thus appealing to their Security, Recognition and Self-Actualization needs).

Of course this does require more from the management team than most people realize – but that’s going to be my next topic…

Image

Two different news stories hit the business section today that I think illustrate just how hard it is to maintain corporate image today, especially when you live in a country in which just about everyone seems to be offended by just about everything. I thought they made a nice contrast, in that they’re completely different problems that lead to similar headaches for management.

The first one regards the ongoing controversy over crime on cruise ships. There are hearings going on this week before Congress (here’s the USA Today story about them) concerning the growing problem of crime on cruise ships. People who have been victims of various crimes are demanding that our government pass laws that will force the cruise companies to prevent these crimes, a process complicated by the fact that most cruise ships operating from the United States are flagged under other countries’ flags in order to avoid various obscure US laws that would prevent them from operating. More to the point, most (if not all) of the crimes under discussion occurred when the ships were in International waters, where US law does not apply in the first place.

Now, I don’t want to understate the seriousness of these offenses, or downplay the rights of customers to enjoy safe vacation travel. Certainly, if you were robbed or assaulted on an airplane or a train you would demand that the government do something about it, no matter where the conveyance happened to be at the time of the incident. The point I am driving at here is that even if every one of the claims made by the victims’ rights groups are valid, there is still an instance of less than 0.01% over the whole of cruise ship passengers (as reported by the Los Angeles Times this date). Fewer than one passenger in 10,000 is reporting any crime. Not a very high instance, compared to the crime statistics from any major city, for example.

Yet there are hearings before Congress, headlines in the paper, stories on the Internet and on television news programs, web sites, advocate groups, and a lot more, all going on as if your chances of being robbed, raped or murdered onboard a cruise ship were extremely high – or at least better than 1 in 10,000, anyway. It emphasizes just how hard it is to maintain your image (or even your industry’s image) in a world where ANY event will be over the Internet in seconds, and before Congress a few days later. The fact that so few people trust corporate leadership any longer – that most readers and viewers will expect the cruise companies to downplay and underreport these incidents – just makes it that much worse.

Also in today’s paper is another article about the fallout from CKE’s latest television commercials, advertising the patty melt sandwich available at Carl’s Jr. and Hardees locations around the country. The commercials featured two young men performing a rap song about ”flat buns” in a high school classroom, while their teacher (a young woman) performed a suggestive and not entirely unobscene dance on top of her desk. These commercials were, of course, immediately flamed by teachers’ unions and parent groups all over the country, and eventually had to be edited to remove the “teacher” from them.

Keep in mind that there is nothing about this commercial that violates any state or Federal anti-obscenity laws; there’s nothing going on that can’t be shown on television, or that viewers of all ages can’t see somewhere else on TV. Keep in mind also that the primary target demographic for these ads is Males, 18-36, for whom the idea of an attractive young woman doing something suggestive is certainly not inappropriate, or at least, not unusual. The rap song itself bears a passing similarity to a song that received heavy rotation on rock and rap radio stations just a few years ago, and it should be noted that there was no outcry over the original whatsoever.

In this writer’s opinion you’d almost have to be a humorless idiot to take offense at a hamburger commercial in the first place, let alone one as harmless as this one. It’s quite obvious that the company did not intend to insult, demean or denigrate anyone, only to sell a few specialty sandwiches. No one could possibly consider this a policy statement by the company or a political or social statement intended to influence the viewers. Yet all over the country, people are reacting as if they are doing something criminal.

Of course, CKE brought this on themselves, while the various cruise companies are simply being plagued by opportunistic crimes, a problem that affects nearly all companies that deal with the public. Still, it does illustrate how difficult it is to build a good corporate image – and how little it takes to destroy one…

Pound-Foolish

Remember when you were a kid, and your grandmother or great aunt or whomever you got your truisms from told you something was “pennywise and pound-foolish?” It’s funny how often the failures in management I see in my daily life are caused by people who were never taught that saying, or at least, don’t understand what it means. One very common mistake is blindly adhering to a general rule that does not fit the current circumstances, such as insisting that a bunch of minor alterations to the same garment have to be billed separately at full price – an example I have referenced in an earlier post called “Rules Are Rules!”. You will also see people adhering to procedures that they know are not applicable, such as operations that are appropriate to the date but not to the actual weather, or to the hour but not the circumstances (e.g. closing routines when the establishment is not in fact closing at the time).

Mostly there are just people who are either too lazy to respond to actual conditions, too afraid (rightly or wrongly) of higher management to risk making an independent decision, or too stupid to realize that winning an argument is a poor compensation for losing a customer by doing so. But the other day I encountered a literal example of the old truism; a decision that was almost literally wise in considering the cost of materials by the penny, but foolish in the number of pounds the business will not be able to sell. Strangely enough, it came up over lunch.

Around the corner from my house there’s a little Mexican restaurant – basically just a range top, a grill, a drink machine and a seating area. It’s one of those places that makes its own salsa fresh every day, and has large bowls of different flavors set out on the counter so you can have as much as you like for your food, with your chips, or whatever. I really like the fresh, mild, chunky salsa; they use crisp onions, fresh tomatoes, potent cilantro, and so on, all made fresh. I like to go there for lunch sometimes, usually after the lunch crowd has dissipated and it’s quiet. I’ll order something with grilled steak that comes with chips, and sit and eat them with the fresh salsa.

The other day when I went by, however, I noticed that the salsa wasn’t its usual quality. It’s not that it was off (I checked very carefully), it’s just that the tomatoes were a bit too squishy when they were chopped. As a result, instead of a mixture of distinct vegetables, what you had was a mass of mashed tomato with bits of other things sticking out of it. It didn’t taste as good as it usually does, either. I still enjoyed my lunch, but it was not as good as the usual experience.

You can tell what happened, can’t you? That morning, when they went to make the salsa, the tomatoes on hand were not as fresh as you’d like, and whoever was in charge decided to go ahead and use them anyway. After all, that was probably $5 or $10 worth of tomatoes, and you wouldn’t want to waste them. I’ve seen people from their corporate office (it’s a small chain with a half-dozen locations) coming through the place lately, waving clipboards and asking lots of questions about waste and costs – probably because this location is a bit out of the way, and it doesn’t get as much traffic as some of the others. So I’m sure someone decided to make the bean counters at corporate happy and save $5 on ingredients.

Except they may not have. I’ll probably go back and give them another try, because I really like their food when they’re on their game. But anyone who came in for the first time that day probably won’t bother – there are at least five other chains in that market segment, and ALL of them have locations with a couple of miles of this one. Even I may stop coming back there if they continue to fail to meet my (admittedly rather modest) needs.

The point is, my lunch alone – one lunch, one time – costs more than the $5 or $10 they saved on tomatoes that morning; losing my business altogether could easily cost them $1,000 per year. If I tell all of my friends (or mention the establishment by name in this space) the effect could easily be ten times that. Sure, they saved $10, but they could easily have lost $10,000. I’d have to call that pennywise and pound-foolish…

Cross Training

This is another one of those business school terms that is actually more complicated than it sounds. It’s also a much more powerful tool than it appears to be at first glance, with the potential to improve morale, increase employee retention, lower headcount and/or salary costs, and even preserve institutional memory. Unfortunately, it also has the potential to degenerate into a complete unholy mess if done incorrectly. Let’s take a closer look at the concept.

The basic idea of Cross Training is simple: each of the people who work for us should know how to do at least one job task beyond their own job description. Ideally, of course, everyone within the organization would know how to do every job within the organization, but this is rarely possible on a large scale, particularly where professionals or other highly-trained employees are involved. Most cross training programs will have to settle for teaching each employee how to perform the job tasks of an individual from another part of the company (e.g. another work group, department or division).

The effects on morale are fairly obvious: the cross training assignment helps to break up an employee’s routine and make their work more interesting; it also demonstrates that the company has an interest in keeping the employee around and thinks highly enough of him or her to believe that he or she can master a second job in addition to their own. This can fulfill the employee’s need for both recognition (the company thinks well of them) and self-actualization (the chance to learn new things and develop new skills), and possibly even security (the company is less likely to fire someone who can do multiple jobs for them), thus increasing job satisfaction and lowering turnover.

The effect on headcount and salary is also apparent: cross-trained personnel can cover for each other during breaks, meal periods, sick days, vacations, or other forms of leave, thus eliminating the need for an overage of personnel to cover this down time. In addition, if all of your employees know how to complete a specific task, the loss of one employee will not impact that task; someone else can handle the function until a replacement can be recruited and hired, and any of the cross-trained personnel can in turn instruct the replacement on how to do that task. Thus, this program spreads both expertise and institutional memory among many employees instead of entrusting it to a single individual.

A good example of what happens when you don’t cross train came up in conversation a few weeks back. The executor of an estate was trying to close out the investment accounts of the deceased so that he could distribute the funds to the heirs. Unfortunately, the investment company (which I won’t name) told him that they had only one person who dealt with this contingency procedure, and she was on vacation. The executor was stunned, and so was I when I heard the story. This was a company with thousands of employees, billions (or possibly hundreds of billions) in assets, television ads that run during major sporting events and on prime-time network shows, billboards, bus benches and heaven only knows what else, and they employ only ONE person who can process closing out an account in the event of the account holder’s death?

Even worse, that one person is an idiot; when she finally returned from vacation she managed to waste another week of the executor’s time by repeatedly losing documents, misplacing faxes, and so on. But that’s not really the point. They are violating the Second Rule of Business by annoying their customers (the executor had his own accounts with them) and their heirs (none of the heirs is ever likely to forget this outrage), but that’s not the point, either. The point is that unless the procedures in question are unbelievably complex and the investment company is critically understaffed, they could have avoided the entire situation with a program that would have cost them nothing more than the time of the person or persons being cross-trained.

Of course, a cross training program still has to be set up and managed intelligently in order to have proper effect; people will probably be limited to learning jobs appropriate to their own level of education and training (you can’t train the ditch-diggers to cover for the electrical engineers, and I wouldn’t suggest using one of the engineers to dig ditches), and they probably won’t be able to back up employees located in other time zones (unless all of the work in question is Internet-based). But within those limits there are very few management programs that have more potential upside for less cost…

Ethics in Conflict

Sometimes being a manager means having to deal with conflicting directives, whether that means orders from different superiors that contradict each other, or when your instructions are impossible under the budget, the company’s operating policies, the laws of the city, county, state or country, or in worst-case scenarios, the laws of physics. People have told me about supervisors who were unable to understand that a bank deposit can not be made on a bank holiday, and I once had a boss give me an assignment and order me to complete it by a deadline that had already passed. But sometimes it is our very responsibilities as managers that come into conflict.

Take, for example, the case of a large retail firm I used to work for. Our company’s policies stated that if anyone running a cash register – anyone, from a part-time seasonal temp hired yesterday to a store manager with 30 years on the job – was off by more than ¼ of 1 percent on their cash drawer at the end of a shift they received a written reprimand; three of these in your permanent record and you were fired. Even one would prevent your being promoted or even getting a raise for years to come. Keep in mind that this equates to 25 cents on every $100 of transactions. Unfortunately, almost no one can meet that standard on a consistent basis; certainly not in a high-volume general merchandise store during a busy time of the year.

If I’d obeyed that rule, I’d have been writing someone up every shift – and firing someone every week. There is no way our store could have kept up with hiring and training new personnel to replace those being fired; within a month or two we’d have been unable to operate at all. Which would, I imagine, have resulted in every member of our management team being fired. If every manager in every store in the chain had done this, the entire company would have been bankrupt in less than a year. What a lot of us did was fudge the system just enough; if someone was 26 cents off at the end of a shift when they could only be off by 25 and keep their job, I’d add a penny out of my own pocket to their total before I counted it into the safe. Cost me a penny, saved the company the cost of firing, recruiting, hiring and training a replacement (anywhere from $200 to $2,000 at the time, depending on a number of variables).

Now here’s the point: Clearly, I had a responsibility to the company to maintain discipline and enforce their internal regulations. But as a manager, I also had a responsibility to run my unit efficiently, bring in the highest possible gross and net profit, and provide the most value to our shareholders. One could certainly argue that I had a responsibility not to let the company be utterly destroyed by unrealistic, arbitrary (and stupid) performance standards written by people who had not the first clue as to what working conditions were like in the field. And I felt that I had a duty to my people; that it was my responsibility to reward their loyalty as much as to punish them for their infractions. I do not intend to lecture anyone on the subject of justice, but firing someone for a penny’s infraction did not seem just to me. It still doesn’t.

What makes this issue so complicated is that it is, without question, a slippery slope argument. Covering for an employee who misplaced a penny (or even 26 of them) won’t matter very much in the scheme of things, although as a manager it is also my responsibility to teach my people to carefully count back change so as to avoid the problem. But on the other side of the issue, if one of my employees is committing a series of major felonies (drug dealing, child molesting, torture and criminal conspiracy) there is no excuse for me or my company to cover up such crimes, even if sports leagues, major religions or Federal agencies do exactly the same thing every day. Where do we draw the line, and who gets to draw it? Can we take even the first step onto that slope and not effectively condone the worst crimes at its bottom? By the same token, if we blindly follow the rules and destroy the company, put thousands of people out of work, and bankrupt at least some of our shareholders, have we really fulfilled our obligations to our employers?

Of course, the simple answer would be to just enforce every rule, punish every violator to the fullest extent, and quit any position where you are not comfortable doing so. But there won’t be a lot of drug stores still operating if everybody does that…

Job Descriptions and Procedures Manual

In my last post, I mentioned the idea that Institutional Memory can be captured in permanent records outside of the employees themselves. Two of the common methods for doing so are humble documents you’ve probably seen around the office before, and never thought much of: Job Descriptions and Procedures Manuals. Like many other business school staples (mission statements, operating philosophies, business plans, etc.) these two documents are often seen as some kind of magic bullet, as in “All we have to do is document all of our procedures, and everything will be perfect!”

Unfortunately, it’s not that simple. Very few documents can effect real change in an organization just by existing, or even through the act of being created. In this case, job descriptions are often treated as mere busywork by line personnel – something that Human Resources requires us to write down for some reason of their own, probably because they are too lazy to do it. Quite often people will recycle the same description of a job for years, rather than update it to reflect the responsibilities of the position as it currently exists. Procedures manuals are even worse – too often, line personnel will be insulted at the very idea of creating a set of instructions for their jobs, as if this implies that they don’t know what they are supposed to be doing or are so disloyal and/or flighty that they might quit at any moment, without warning.

The truth is a bit less dramatic. A typical Job Description is simply a catalog of the tasks, functions and responsibilities of the job, along with an overview of anyone the position supervises and who the position reports to, salary and benefits offered, and so on. A well-written description will also include occasional and back-up duties, the positions backed up and supported by the position, and the minimum qualifications needed to do the job. If any of these things are not obvious, it is possible to add information to the job description or create additional/supplementary text to explain why a given position backs up someone in another department, or why a rather mundane accounting position requires CPA or MBA credentials, a background in auditing, and certification as a Level I Hazardous Materials Responder, for example.

Similarly, a procedures manual needs to document what the members of a work group actually do on a daily, weekly, monthly and quarterly basis, not just what senior management would have them do. If there is a chance (however unlikely) that all of the Accountants II will have to put on coveralls and respirators and go outside to mop up a toxic chemical spill at some point, then the procedures manual needs to explain how the unit goes about completing this task, and what the more junior accountants and bookkeepers are supposed to do while the Accountants II are occupied with the chemical spill. If a given team member has to fill out all of the office supply requisitions, then that individual’s job description should reflect that duty and the procedures manual should reference getting all office supply requests to that person before the deadline for each week’s order, whether this is an official job duty or not.

Ultimately, of course, there is no way to record all of the minutiae of a job in any written description; to really get all of the nuances of the position across you will need a more advanced and comprehensive way of transferring the experience…

But that’s our next topic…

Institutional Memory

One of the technical terms you hear B-school types throwing around sometimes is “institutional memory,” which refers to the knowledge accumulated by all of the people who work for a given organization during the time they are employed. Some experts will include all of the working experience and job skills accumulated by the employees in the definition as well, but the term is more commonly applied to the facts, concepts and non-task experiences that the people working in a given group accumulate. Thus, a given retail employee may know everything you could ask for about inventory control, customer service, store maintenance, shipping and receiving, and running a cash register, but only someone who has actually worked in the Sav-on (now CVS) store in Silverlake California knows that you have to shift loads going up the conveyor belt to the storage attic to the left so they don’t fall off going around the turns.

That may not sound important in itself, unless you’ve ever had to clean up a few cases worth of corned beef brine from the floor after the cases fell and the cans shattered. Or, worse yet, had to fill out the accident report and the Worker’s Compensation forms after a case falls off and lands on someone’s head. Since it would cost more than the store’s net income for several years to have the conveyor system ripped out and replaced with something more functional, however, new employees being assigned to that unit will probably have to learn how to avoid this type of product spill for many years to come. It’s something that someone who has worked in that location would know, and could easily pass along to new employees, but which someone who has never worked in that unit would not know, regardless of how knowledgeable or how experienced they happen to be.

All right, it’s a rather slapstick way of making a serious point. In any business unit, whether it’s a low-end retail store or an elite University department, there are going to be odd bits of knowledge that can not be contained in any job description or procedures manual; that can only be obtained from actually doing the job and having the experiences that come with it. Maybe it’s how to keep the computers running; maybe it’s who to call in Payroll when the checks aren’t on time; maybe it’s what part of the day the office will be the least busy (best time to schedule tours, interviews, staff meetings, etc). It’s why experienced personnel will always out-perform new personnel, regardless of relative levels of training or ability, at least until the learning curve catches up to the level of the more experience workers.

It’s also the main reason why employee retention is so important. Certainly, the costs associated with recruiting and hiring new personnel can be huge, as can the costs of certification and/or formal training. But the biggest single drawback to new personnel is just learning curve – how long it takes the new people to learn the nuances of the job. This is just as true for management personnel as it is for the rank and file, by the way; General George S. Patton once said that it took at least five years for an Army officer to learn enough to begin earning his pay – and that some of them never did. Of course, there will always be those cases where an employee is costing the company more to retain than the cost to replace them, just as there will always be employees who receive job offers with salaries the company can’t match. But any Human Resources policy that does not take into consideration the learning curve and institutional memory factors is just (there’s no nice word for it) stupid.

Of course, the ideal situation would be to capture the institutional memory of a work group in some permanent form external to the workers themselves, so that it can be retained no matter how the employees come and go…

But that’s my next topic…

Leadership and Self-Awareness

In one of my early posts, called “What is Management”, I define Leadership as the art of getting other people to do what you want them to do. I also noted that not all managers can do this successfully. For reasons that continue to elude me, even people who have studied the science of management seem to fall into the habit of thinking that the people who report to them are somehow different from management personnel. So different, in fact, that being treated abusively by their supervisors will improve their work performance, rather than lowering morale and propagating resentment. The technical term for this is “crap”, and it makes me very “irritated” because these people should know better. In fact, so should anyone; ask any six-year-old child at random what is wrong with this practice and see if he or she can’t explain it to you perfectly.

Of course, depending on their relative levels of experience, education, training and salary, the people who report to you probably ARE different from you, at least in some respects. Wages you would consider insulting might be a huge raise to some of your subordinates; working conditions you would never accept might be an enormous improvement from the ones they have labored under in the past; perks of the job or benefits that you consider routine might change their whole lives for the better. What far too many management personnel fail to consider is that these differences do not change the basic human needs, or the hierarchy in which they are arranged. Just because someone’s salary is a quarter of yours does not mean they can or will tolerate being paid late, any more than you can, and just because someone has assumed a certain level of risk in order to earn a living does not mean that they are oblivious to increased risk or unsafe working conditions.

Most importantly of all, the fact that they are lower-level personnel, doing jobs you would never take for wages you would never consider, does not mean that they are willing to tolerate abusive, offensive, hostile or demeaning working conditions. Too many supervisory personnel seem to believe that they can go around acting like petty tyrants and bullying their subordinates without any consequences whatsoever. In the long term, however, this is nothing but a blueprint for complete failure.

As management professionals, one of our most important duties will always be to examine the directions we are giving from the point of view found on the other side of the desk, and to remember that behavior that would anger or annoy us will probably anger and annoy the workers, as well. This goes for motivational techniques and team-building exercises too, by the way. If it wouldn’t work on you, don’t assume that it would work on your subordinates. On the other hand, if you read the description of a program or activity and think about how great that would have been for you, when you were just one of the line workers, there’s a good chance there might be something to it.

Of course, when all else fails, there’s an easy way to find out if the people reporting to you would like to take part in an activity, receive a new (or different) benefit, or change the flow of work to include a new procedure: ask them. Just the way you would like your superiors to ask you before instituting a change in your work environment, in fact. And where the change is being driven down from higher management and you have no choice but to accept it, you can always call your people together and explain to them why this is happening, what higher-level idiot is behind it, and how you intend to keep the effects from making their lives any more difficult.

Just the way you would want your supervisor to do…

Seeing it From the Other Side of the Desk

In any human enterprise, it is always be difficult to see things from the other person’s point of view, whatever that might be. There is a natural tendency to approach any interaction with a clear view of what you want and why the other person should be willing to give it to you; sometimes it will seem like this is the only rational course of action possible under the circumstances. Unfortunately, most of the time the other person will not have access to your internal logic, and will pursue their own choice based on their own rationale. This is one place where a lot of projects will fail before they begin.

When I teach grant writing or business plan writing, one of the things I always tell my students to do is try to see the issue from the other side of the desk – from the other person’s point of view. You already know that the non-profit venture you need funding to launch will change the lives of thousands of deserving people and make the community (and eventually the entire world) a better place; you may even know for a fact that your venture will help more people at lower cost than any similar project ever attempted. What the Program Officer you are applying to knows is that several thousand proposals hit his or her desk every year, and that every one of them purports to change the world for the better – and that 90% or more of them are nothing more than well-meaning nonsense.

The situation is exactly the same for a Loan Officer at a bank, or at a venture capital firm. Anyone who has money to invest will be deluged with requests for loans in order to start ventures described at “The Next Big Thing” by hoards of people, most of whom literally have no idea of what they are doing. As a business consultant working with start-up companies (and entrepreneurs who wanted to start up a company) I was constantly amazed by how many of them expected to be able to walk into a bank with no business plan, no multi-year projections, no budget, no idea at all of what they would spend the money on, and have some friendly banker extend them a low-interest loan because they were such swell folks.

My first question in both cases was usually to ask the client if they would extend a loan (or a grant) of their own money to someone on the basis of the information they had given me – and when they admitted they wouldn’t, to then ask why in Heaven’s name they expected anyone else to? The truth is, the person on the other side of that desk is probably not that different from you. Program officers at major grant-making organizations are generally just as committed to making the world a better place as you are, and most bankers and venture capitalists are every bit as fond of profit as the wildest wildcat entrepreneur. An argument that would not convince you will not convince them – but a proposal you might fund out of your own pocket just might work.

Of course, this same principle applies to many other aspects of management, including leading and motivating the workforce…

But that’s my next topic…

Mockery

I was actually going to call this post “iMockery” but that’s already a web site, and I don’t want to confuse anyone. No, what I am referring to this time is a follow-up to my recent post about the Apple Computer iPhone fracas, which I had called Current Events. This morning the Internet was buzzing about an article that supposedly reported that Apple was also going to settle another old score – refunding the money wasted by anyone who purchased a Lisa computer back in 1983.

For anyone who does not remember, the Lisa was the first home computer to hit the market with a Graphical User Interface (or GUI). Despite the claims and counterclaims made at the time, neither Apple nor Microsoft invented the idea; the GUI was a Xerox invention from about five years earlier. You can read about the controversy and developments here if you like. As is often the case, the Lisa failed badly – as much because there was no software for it to run that made use of its unique abilities as for the legions of bugs still lurking in the operating system. Of course, the $10,000 price tag did not help; back in 1983 that was enough money to buy a car. A nice car, in fact.

I was almost ready to believe the “article” when I noticed the dollar figure this gesture was expected to cost Apple at the end. The author is talking about a $70,000 cost, and since the difference in price between the Lisa and the first Mackintosh computer (released a few months later) is about $7,500, that would imply that they only sold 10 or fewer Lisa units. Here’s the link to this journalistic hoax. Sure enough, a visit to the Apple site reveals nothing about any Lisa refund ever being considered.

I think the point being made here is that Steve Jobs was correct in his original remarks about the drop in price for the iPhone: technology DOES always drop in price within a year or less, and everybody knows it. Certainly, the $7,500 (in 1983 dollars, no less) that people lost buying a Lisa when what they wanted was a Mac was far more egregious than the $200 they paid for being the first people to have an iPhone. Yet there was no public outcry at the time. And, since the Internet was still known only to a handful of technology wonks, there was obviously no flame war, either.

I’m not sure if all of this reflects an increasingly touchy society hung up on its perceived entitlements (show me where in the Constitution it says that you can’t make money on the gullible – or even on the Early Adopters) or the fact that email and an electronically interconnected world allow everyone to express their outrage about the least little thing whenever and however they like, or both. I just know that all of the people who flamed Apple, Steve Jobs, or anyone else over the iPhone price reduction are being mocked – and that they richly deserve to be…

Respect

Don’t worry; I’m not going to break into song. It’s just that over the weekend I remembered something an old boss of mine had said, just before I decided he was a complete nincompoop and quit the company. One of my co-workers was a fairly serious martial artist, and the Boss had introduced him to an acquaintance who was a high-level master of some martial arts form or other; it might even have been the same one my co-worker practiced. My co-worker (who had been studying the martial arts all of his life and had a fairly high ranking of his own) was polite and respectful during the meeting, but when pressed about it later, had told our Boss that he intended to continue with his own studies and the teachers who had gotten him this far. When pressured, he said that despite the “master’s” qualifications, he didn’t think it was a good fit for him; he could learn more the way he was going.

Well, needless to say, the Boss was outraged. This was The Master of Whatever (I’m sorry; I can’t remember the name 17 years later) and my co-worker was just some pissant who could not understand the honor he was being offered. The Boss ranted (to me – and I was not in management in this company, I was just another pissant) about how disrespectful this was, of this friend, The Master of Whatever, and of the Boss himself. From then on, my co-worker was unable to do anything right, at least as far as the Boss was concerned, and soon left the company, despite having been one of our best producers for the three previous years.

I call this to your attention for two reasons. One, of course, is the old line about “Respect is not given; it is earned.” You can earn respect from your employees in many ways, but yelling at them, belittling them in front of their co-workers, or finding fault with their work because they refuse to kiss your ass (or that of someone you designate) are all so counterproductive that I can’t even think of a bad metaphor for how counterproductive they are. Stupid isn’t even the word. It was bad enough that the Boss couldn’t grasp that one of his employees might have a different view of the world from his own; the fact that said employee was an expert in this subject (a 3rd degree black belt, if I remember correctly) and the Boss was not (he was a big, fat, overdeveloped man who had been a professional baseball player twenty years and eighty pounds earlier. I could have taken him with a Q-tip) just made it worse.

But the fact that he then decided to make management decisions based on this difference of opinion was infinitely worse. In the end, his insistence that my co-worker kiss ass on command cost our company between $350,000 and $500,000 per year – and back then, that was a lot of money. In the long run, in fact, this same behavior cost the company a lot more – since I left shortly thereafter, as did most of the unit’s best people. Basically, everyone who had an ounce of self-respect and/or integrity packed it in and left, costing the company of at least a few million dollars per year, and shortly thereafter costing the Boss his job, as well.

The problem in this situation wasn’t that our Boss needed to be a better manager – he knew the profession quite well, in fact. The problem was that he needed to be a better man – and they don’t teach you how to do that in business school…

“Free” Market Ethics

I thought it might be interesting to have a regular post about business ethics in this space; I’m going to start posting about this topic on Sundays until there is some reason to stop. Given the nature of a free-market economy, the chances of ever running out of topics to discuss is essentially nil. So let’s start with one of the big ones:

In my last post, I mentioned that if the “Bigger Idiot” effect takes hold of a nation’s economy, it is quite possible for a downturn in the market to set off a chain reaction that can lead to a national (or even global) catastrophe, as in the case of the sub-prime lending crisis going on right now. An actual collapse of the U.S. housing market, not just a temporary correction, could force dozens of companies out of business, throw tens of thousands of people out of work, and force millions of people from their homes. This will, in turn, eliminate all of the collateral businesses (in this case, everything from home furnishings to food) that would have serviced both the homeowners and the mortgage company employees, which will in turn deprive all of the companies servicing those companies and their employees of income, and so on.

Clearly, this is a situation that our society should avoid. But how are we to do so? Laws preventing sub-prime lending would prevent real estate speculators from purchasing many properties they can’t possibly afford in the hopes of “flipping” them before the lenders can foreclose, but it would also deny millions of people who can afford the payments on a single house but don’t have the credit rating to get a prime mortgage the chance to own a home. And since home ownership is one of the best ways of developing real net worth, this will condemn millions of these so-called “marginal” customers to never escaping from their poverty.

By the same token, a bailout by the Federal government for those people with sub-prime mortgages who are facing foreclosure would definitely save a lot of people from losing their homes. But this would also enable many of those would-be real estate moguls to continue to milk the system, creating their personal fortunes at the expense of the taxpayer. I can’t speak for everyone, but I personally resent the government taking my money and giving it to someone who they think deserves it more than I do; I find the idea of the government taking my money and using it to prop up some wildcat entrepreneur absolutely intolerable.

Even worse, the Federal bailout being proposed would prop up the artificially inflated real estate market, thus barring more and more middle-class buyers from ever entering the market without taking insane risks with their mortgage – effectively perpetuating the sub-prime industry and the current crisis indefinitely. Laws that would eliminate predatory lending practices (offering people loans with misleading terms, or outright falsifications about costs and penalties) would help, but the real problem with the real estate bubble, as with all “Bigger Idiot” situations, is greed on the part of the speculators. There is no way to legislate against greed, and as attractive as the idea of passing the Being Bloody Stupid Act of 2007 is, if we put everyone gullible enough to believe they can make a fortune in real estate with no money of their own in prison, we’d run out of land to build anything else.

In the final analysis, all the government can really do is attempt to eliminate the outright fraud through closer industry regulation and increase the availability of capital as much as possible without causing unmanageable inflation. The actual price corrections within the real estate market must come from within, and will doubtless result in a lot of otherwise innocent people getting hurt. Unfortunately, anything else will constitute attempting to control people’s lives for their own good – an idea as useless as it is unethical. If we believe in a free-market economy (and having seen the results of large-scale Communist and Socialist economies, it’s hard not to), then we must support the rights of the individual to spend money how and where they like, even if what they like is stupid, greedy, self-destructive and against the public good.

Because the only known alternatives are worse…

Current Events

We interrupt your regularly scheduled rant to ask: Did you catch the fracas that broke out at Apple yesterday?

For anybody who may have missed it, Apple announced yesterday that they were dropping the price on the iPhone by $200 (or roughly 33%). No one is sure exactly why; most analysts are blaming it on the entry of competing products into the market, and the fact that the original price was a bit steep for the casual user. Granted that an iPhone replaces a cell phone, PDA and iPod all in one discrete package, not that many people are going to need to replace all three of these functions at the same time, and even if they do, they can acquire a low-end PDA for under $100 and a quite good cell phone for even less with a two-year plan. Add in $149 for an iPod Nano, and you’re still not half as expensive as the iPhone.

Personally, I doubt both reasons were decisive. There is nothing on the market that can really compete with the iPhone, and even if there were, it would lack the utter “coolness” factor that appeals to the technophiles. The price on the iPod has never really dropped; Apple has introduced cheaper models of the device, but they’ve never really offered lower prices – except when a new generation or new product was in the wings. Maybe there’s a new gismo coming; maybe the 2nd generation iPhone has cleared beta testing faster than expected.

In either case, the people who had acquired iPhones at the original price went ballistic when the news was announced. They started bombarding Apple (and Steve Jobs specifically) with irate emails and flaming both the company and the executive everywhere they could. The company’s initial reaction was complete indifference, with Jobs actually telling the early purchasers that this is just what happens with new technology. However, once news of that crack hit the Internet, the flame war turned into a complete conflagration.

Later in the day, Steve Jobs called a press conference where he spoke about the importance of taking care of Apple’s loyal customers, and offered everyone who had bought a iPhone at the original price $100 worth of free iPhone services. The flames began to die down almost at once.

Now, granted that Apple should have led with that offer and avoided the flame war, it’s still an act of genius. All of the people who waited until the fall to purchase an iPhone get to feel really smug about waiting, all of the people who want to give one as a present this holiday season have a new incentive (lower price), all of the people waiting for the second generation iPhone release will be able to get one – and the people who bought one early get a benefit that COSTS APPLE EFFECTIVELY NOTHING! It’s even possible that the entire flame war was a calculated effect; it certainly got everyone talking about the iPhone without actually costing Apple a dime.

Genius. Merely genius…

Idiots and Ethics

After I posted the “Bigger Idiot” entry, several people asked me if this principle could ever have an impact on society in general, and not just on the handful of speculators (the “Idiots” of my post) who would purchase items on the hope of the price going higher still. Granted that millions of people own stock, isn’t this sort of irresponsible speculation a self-correcting problem, limited to those people with more dollars than sense? I regret to say that while the more exotic manifestations of this syndrome (Beanie Babies, tulip bulbs, and so on) are limited by the size of the market, the basic principle can be found everywhere in our society, and its effects are sadly not limited just to those who speculate. A good case in point is the so-called real estate bubble, and the current sub-prime mortgage crisis.

If you don’t follow such things, a sub-prime lender is simply anyone who loans money to people who can not qualify for loans from mainstream lenders, most often because they have poor credit. Until recently, many of these sub-prime lenders were actually divisions of mainstream mortgage companies operating under different names. A sub-prime mortgage works just like any other, except it is much more expensive (usually in interest rate and other costs as well), making it much harder to pay off the loan than it would be for someone with an ordinary loan.

The basic concept is that since the lender is extending credit to someone who is more likely to default on the loan, they are charging a higher interest rate to compensate for the increased risk. In fact, many companies went into the sub-prime market believing that there was very little actual risk; if their debtors defaulted on their loans, the companies could foreclose on the properties, take possession of them, and then sell them to someone else. As long as the housing market stayed strong, there was almost no down side. And as long as the market stayed strong, the sub-prime customers could always just sell the property again if they couldn’t make the payments, suffering no great loss and possibly even netting a profit, if they could sell for more than their original purchase price.

Thousands (possibly millions) of investors did just that, in fact, jumping into the runaway housing market on the assumption that they could become real estate moguls using someone else’s money, and that even if they failed, they could just default on the loans and walk away, no harm done. This had the effect of driving many buyers, including some prime borrowers (who were not willing to take this kind of risk) out of the market altogether, and forcing many others (often young couples and families) to pay prices, take out loans and accept risks that they would normally have avoided.

The situation has been made even worse by what are called predatory lenders – unscrupulous lenders offering consumers loans on terms that no one could possibly handle with an eye towards acquiring defaulted property (or at least huge fees and bloated payments) and without regard for the effect on their “customers”. Although the exact impact of these practices (and, for that matter, their legal definition) remains in dispute, it is difficult to deny that the housing market has been filled with opportunists throughout the “bubble” of recent years.

The problem is that, just as with the Beanie Babies and tulip bulbs, this sort of speculation is only possible if the market continues to run away and grow. If the market stops growing, or even cools off a bit, the entire thing will come crashing down. Regrettably, this means that ethical companies as well as predatory ones, and honest consumers as well as wildcat speculators, will all suffer from the effects of the market downturn, which would appear to be setting off a global financial crisis. As more large companies suffer huge losses (and some go under completely) jobs will be lost, fortunes will be destroyed, families will lose their means of support, and more homes will be lost to payments that can not be made.

Clearly, then, speculation of this type can have catastrophic effects on our society, and will almost certainly draw the worst sort of con artists and profiteers. The question is, do we have the right, in a free-market economy, to intervene in these situations? And if we do, how are we going to accomplish that intervention? But that’s going to be my next post…

When the Customer Isn’t Right

I know I often come across as the world’s leading advocate for better customer service and the importance of the public-contact personnel being properly trained, equipped, supported and compensated. Because, as we all know by now, the customer is the single most important part of any business that intends to make a profit (and most that do not). Without customers coming to us and giving us money to do what we do, most business units will not merely fail; they will have no purpose whatsoever. But what about those individuals who want our business to do something it can’t do, regardless of the cost or the other consequences to us? When that circumstance comes up, is the customer still always right?

In my last post, I mentioned the concept of someone who wants service that our company is not equipped to provide, as in the case of a customer who wants a relatively small restaurant to cater a relatively large event. It may be possible for the restaurant to work with an event planning company to put on such an event, or even create a new business unit (a catering business) to serve the customer’s needs – if the price of doing so is acceptable to the customer. But what this customer really wants is a caterer, not a small restaurant. Complaining because your favorite corner bistro can’t handle a party for 900 guests is like walking into the corner drug store and expecting to purchase enriched uranium, or complaining because your favorite supermarket does not sell tuxedoes.

Despite what both the customer and the owner of the restaurant think, this individual isn’t really a customer in this context, because the business he or she is attempting to engage is not the one he or she actually wants. In a very real sense, the customer is asking the owner to invest thousands or tens of thousands of dollars in equipment, transportation, personnel, and possibly seating and furnishings as well, all so that the customer can make use of this capability one time. If the customer is willing to pay all of that expense, preposterous as that would be, then they at least still attempting to do business with the restaurant; otherwise, they are simply asking the owner to immolate his or her company for their amusement/enjoyment/convenience.

In more extreme cases, we have individuals who may be attempting to get a refund for goods they never purchased (stolen goods, promotional giveaways, etc.) or even for goods they have already consumed (this happened to me repeatedly in my retail days). One case I remember fondly is the man who wanted a refund for a six-pack of beer that he had already drunk – on the grounds that it wasn’t very good beer. These individuals are not customers, they are thieves, plain and simple. Losing their business will not cost the company anything, because they are not bringing in any business in the first place.

One case that turned up on the Internet the other day was the story of a DJ who told about working a wedding back in the pre-CD days, and having one of his records skip briefly at the start of a song. The parents of the bride (who had hired him) descended upon the poor man, screaming that this half-second skip had “ruined” the entire wedding, and demanding that he pay for the entire cost; all $16,000 of it. They were not mollified by his offer to refund his own modest fee and work the event (about five hours work plus travel costs) for free; they wanted $16,000 cash RIGHT THAT SECOND! When asked if this was an isolated case, the DJ replied that scams like this one had happened to him with some frequency, and the resultant heartburn had helped to convince him to get into another line of work.

Unfortunately, there really isn’t anything we can do about such people. Business will always depend on providing the customer with products and/or services at the best available price. But the answer to our riddle is simple: When is the customer not always right? When they’re not really a customer…

The First Rule Revisited

It has been pointed out to me lately that the First Rule of Business (see my post for June 1, 2007) is rather more complicated than I may have made it sound. To review, I have often stated that the first rule of Business can be summed up in the humorous phrase, “When someone comes to you and says ‘Hello, I would like to give you a lot of money now,’ you say, YES!” However, it is only fair to admit that this isn’t always possible.

Take the obvious case of a business that is not open when you go to purchase something from them. This may, at first, seem like a clear First Rule violation, but is it really? Suppose that the business is a restaurant, and that between labor, electricity, heating and cooling, and whatnot, it costs $300 per hour to keep the doors open. If you are the only customer who shows up during that hour, and your meal will only net the establishment $25 (once the material costs are taken out), then keeping the place open in order to get your business will cost the owner $275. It’s possible, of course, that you were scouting the place for a business dinner, are now affronted enough to take your banquet elsewhere, and will therefore end up costing the restaurant more money than they saved by not being open for that hour, but this is hardly likely.

On the other hand, if you were one of a dozen people who arrived during that hour when the business was closed, the decision to be closed at that time was probably not a good one; the restaurant would have broken even for that hour and the chance of losing future business from one of the customers has just increased by a factor of 12. Even worse, there is a real possibility that additional people who were passing by might have noticed the 12 hungry diners enjoying their meal and come in as well, at least assuming the establishment has walk-in traffic in the first place. And if you were one of 20 or 30 people turned away, then the decision to be closed is simply idiocy.

Then there’s the case of someone wanting to give you money to do something you are not able to do. Asking a restaurant to cater an event at your home may seem reasonable enough, but if the business lacks the equipment, transportation, and personnel to handle such a commission, they may not be able to comply. Moreover, if there are a large number of catering businesses in the area and this particular restaurant lacks the resources (space, equipment, personnel, or most of all, financial) to expand into catering, it may be a very poor business decision for them to attempt to accommodate you. A good manager may offer to pack food for you to take out, or offer to work with an event planning company (who can handle your non-food event needs) in order to make a go of the event, but they can not in reason be expected to re-engineer their entire company simply to accommodate one customer, even if you are a very good customer.

Of course, many business analysts will tell you that you should never tell a customer “no” when they are offering you money to do something (provided the something is legal and ethical, anyway). The theory goes that you should, instead, tell the customer “Sure, we can do that. But it will cost you…” In fact, entire corporations have been launched simply because one wealthy customer was willing to pay an outrageous fee in order to have a business created for their specific use. Even if your customer does not want to fund the start-up of your new business unit, at least this way you are not rejecting them; you are merely telling them that what they want is too expensive to be practical. You are then working from the excellent position of trying to find a way to do business that will suit both their needs and your abilities.

Then we have the case of “customers” who want your business to accommodate them even when doing so will destroy your company. In much the same sense that people who want you to destroy yourself for their amusement are not your friends, people who want you to immolate the company to suit them are not your customers. Or, at least, they shouldn’t be…